• Our expectation that international sales will continue to account for a significant portion of our net sales for the foreseeable future;

• Our belief that adverse economic conditions and tight credit markets may reduce capital spending by our customers, which could have a material and adverse affect on sales of our products;

• Our expectation that we will record a total of approximately $2.2 million in amortization of intangible assets expense in cost of sales in the remaining three months of 2009;

• Our expectation that we will record a total of approximately $0.5 million in amortization of intangible assets expense in operating expenses in the remaining three months of 2009;

• Our expectation that our capital expenditures will be in the range of $7 million to $8 million during 2009;

• Our belief that the net proceeds from our previously completed public offering of common stock will be used for general corporate purposes, including payment of existing liabilities, research and development, the development or acquisition of new products or technologies, equipment acquisitions, strategic acquisitions of businesses, general working capital and operating expenses;

• Our belief that our existing liquidity sources, including our bank line of credit facility, will satisfy our requirements for at least the next twelve months;

• Our belief that near-term changes in exchange rates will not have a material impact on our operating results, financial position and liquidity;

• Our expectation that sales to cable television, satellite and telecommunications operators will constitute a significant portion of net sales for the foreseeable future;

• Our expectation that we will make acquisitions in the future;

• Our expectation that sales to distributors, value-added resellers and systems integrators will continue to generate a substantial percentage of our net sales in the future, and that our future success is highly dependent upon establishing and maintaining successful relationships with a variety of such customers;

• Our expectations regarding the impact that new accounting guidance will have on our consolidated financial statements;

• Our expectation that our operations will be affected by new environmental laws and regulations on an ongoing basis;

• Our expectation that an increasing percentage of our consolidated, pre-tax income will be derived from and reinvested in our international operations and our expectations regarding the associated tax rates;

• Our expectation that any ultimate liability of Harmonic with respect to certain litigation that has arisen in the normal course of business will not, in the aggregate, have a material adverse effect on us or our operating results, financial position or cash flows; and

• Our expectation that operating results are likely to fluctuate in the future.

These statements involve risks and uncertainties as well as assumptions that, if they were to never materialize or prove incorrect, could cause actual results to differ materially from those projected, expressed or implied in the forward-looking statements. These risks and uncertainties include those set forth under "Risk Factors" below and elsewhere in this Quarterly Report on Form 10-Q and that are otherwise described from time to time in Harmonic's filings with the Securities and Exchange Commission. Overview
Harmonic designs, manufactures and sells versatile and high performance video products and system solutions that enable service providers to efficiently deliver the next generation of broadcast and on-demand services, including high-definition television, or HDTV, video-on-demand, or VOD, network personal video recording and time-shifted TV. Historically, the majority of our sales have been derived from sales of video processing solutions and edge and access systems to cable television operators and from sales of video processing solutions to direct-to-home satellite operators. We also provide our video processing solutions to telecommunications companies, or telcos, broadcasters and Internet companies that offer video services to their customers. In the third quarter and first nine months of 2009, Harmonic's net sales were $83.9 million and $232.9 million, respectively, representing decreases of 8% and 13% compared to the third quarter and first nine months of 2008, respectively. The decrease in sales in the third quarter of 2009 compared to the corresponding period in 2008 was primarily due to weaker demand from our domestic cable and satellite customers for edge products and solutions primarily related to VOD, switched digital video, modular Cable Modem Termination System, or M-CMTS deployments, and HDTV. Gross margins decreased in the third quarter of 2009 compared to the corresponding period in 2008 primarily due to lower sales volumes, manufacturing overhead costs associated with Scopus operations, increased provisions for excess and obsolete inventory, lower gross margins on sales of edge and access products and increased amortization of intangible assets. The decrease in sales in the first nine months of 2009 compared to the corresponding period in 2008 was primarily due to weaker demand from our domestic and international cable, satellite and telco customers for edge products and solutions primarily related to VOD, switched digital video, M-CMTS deployments, and HDTV. Gross margins decreased in the first nine months of 2009 compared to the corresponding period in 2008 due to lower sales volumes, lower gross margins on sales of edge and access products and, in addition, from provisions for excess and obsolete inventory resulting from the discontinuance of certain Scopus products and employee severance costs.
Historically, a majority of our net sales have been to relatively few customers, and due in part to the consolidation of ownership of cable television and direct broadcast satellite systems we expect this customer concentration to continue for the foreseeable future. For the three and nine months ended October 2, 2009, sales to Comcast accounted for 15% and 17% of net sales, respectively. For the three months ended September 26, 2008, sales to Comcast and EchoStar accounted for 24% and 10% of net sales, respectively. For the nine months ended September 26, 2008, sales to Comcast and EchoStar accounted for 20% and 12% of net sales, respectively.
Sales to customers outside of the U.S. in the third quarter and first nine months of 2009 represented 52% and 49% of net sales, respectively, compared to 39% and 43%, respectively, for the comparable periods in 2008. A significant

portion of international sales are made to distributors and system integrators, which are generally responsible for importing the products and providing installation and technical support and service to customers within their territory. Sales denominated in foreign currencies were approximately 7% in the first nine months of 2009 compared to 5% for the comparable period of 2008. We expect international sales to continue to account for a significant portion of our net sales for the foreseeable future.
Harmonic often recognizes a significant portion, or the majority, of its revenues in the last month of the quarter. Harmonic establishes its expenditure levels for product development and other operating expenses based on projected sales levels, and expenses are relatively fixed in the short term. Accordingly, variations in timing of sales can cause significant fluctuations in operating results. Harmonic's expenses for any given quarter are typically based on expected sales and if sales are below expectations, our operating results may be adversely impacted by our inability to adjust spending to compensate for the shortfall. In addition, because a significant portion of Harmonic's business is derived from orders placed by a limited number of large customers, the timing of such orders can also cause significant fluctuations in our operating results. On March 12, 2009, Harmonic completed the acquisition of Scopus Video Networks Ltd., or Scopus, a publicly traded company based in Israel. The purchase price, net of $23.3 million of cash acquired, was $63.1 million, which was paid from existing cash balances. Scopus engages in the development and support of digital video networking products that allow network operators to transmit, process, and manage digital video content. Scopus' primary products include encoders for broadcast contribution and distribution applications, integrated receivers/decoders and intelligent video gateways. In addition, Scopus markets multiplexers, network management systems, and other ancillary technology to its customers. The acquisition of Scopus strengthens Harmonic's technology and market leadership, particularly in the broadcast contribution and distribution markets. The acquisition also extends Harmonic's diversification strategy, providing it with an expanded international sales force and global customer base, particularly in video broadcast, contribution and distribution markets, as well as complementary video processing technology and expanded research and development capability.
On July 31, 2007, Harmonic completed its acquisition of Rhozet Corporation, pursuant to the terms of the Agreement and Plan of Merger, or Rhozet Agreement, dated July 25, 2007. Under the Rhozet Agreement, Harmonic paid or would pay an aggregate of approximately $15.5 million in total merger consideration, comprised of approximately $2.5 million in cash, 1,105,656 shares of Harmonic's common stock in exchange for all of the outstanding shares of capital stock of Rhozet, and approximately $2.8 million of cash which was paid in the first quarter of 2008, as provided in the Rhozet Agreement, to the holders of outstanding options to acquire Rhozet common stock. In addition, in connection with the acquisition, Harmonic incurred approximately $0.7 million in transaction costs. Pursuant to the Rhozet Agreement, approximately $2.3 million of the total merger consideration, consisting of cash and shares of Harmonic common stock, was being held back by Harmonic for at least 18 months following the closing of the acquisition to satisfy certain indemnification obligations of Rhozet's shareholders pursuant to the terms of the Rhozet Agreement. Harmonic issued 200,854 shares of common stock and paid approximately $0.5 million to former Rhozet shareholders in March 2009 and all holdback amounts have now been settled.
Adverse economic conditions in markets in which we operate and into which we sell our products have harmed and may in the future harm our business. Recently, economic conditions in the countries in which we operate and sell products have been very weak, and global financial markets have experienced a severe downturn stemming from a multitude of factors, including adverse credit conditions, slower economic activity, concerns about inflation and deflation, increased energy costs, decreased consumer confidence, rapid changes in foreign exchange rates, reduced corporate profits and capital spending, adverse business conditions and liquidity concerns and other factors. Economic growth in the U.S. and in many other countries slowed in the fourth quarter of 2007, remained slow during 2008 and the first nine months of 2009, and is expected to continue to be slow for the remainder of 2009 and perhaps longer in the U.S. and internationally. During challenging economic times, and in tight credit markets, many customers may delay or reduce capital expenditures. This has resulted and may in the future result in reductions in sales of our products, longer sales cycles, difficulties in collection of accounts receivable, excess and obsolete inventory, gross margin deterioration, slower adoption of new technologies, increased price competition and supplier difficulties. For example, we believe that the recent global economic slowdown caused certain customers to reduce or delay capital spending plans in the fourth quarter of 2008 and particularly in the first quarter of 2009, and we expect that these conditions could persist throughout the remainder of 2009 and beyond. In addition, during

challenging economic times, we are likely to experience increased price-based competition from our competitors, which may result in our losing sales or force us to reduce the prices of our products, which could reduce our revenues and adversely affect our gross margin.
During the second quarter of 2009, we recorded a charge in selling, general and administrative expenses for excess facilities of $0.3 million from the closure of Scopus' New Jersey office. During the second quarter of 2008, we recorded a charge in selling, general and administrative expenses for excess facilities of $1.2 million from a revised estimate of expected sublease income of a Sunnyvale building. The lease for such building terminates in September 2010 and all sublease income has been eliminated from the estimated liability. During the third quarter of 2008, we recorded a charge in selling, general and administrative expenses for excess facilities of $0.2 million from a revised estimate of expected sublease income of two buildings in the United Kingdom. The leases for these buildings terminate in October 2010 and all sublease income has been eliminated from the estimated liability.
We are in the process of expanding our international operations and staff to better support our expansion into international markets. This expansion includes the implementation of an international structure that includes, among other things, an international support center in Europe, a research and development cost-sharing arrangement, certain licenses and other contractual arrangements by and among the Company and its wholly-owned domestic and foreign subsidiaries. Our foreign subsidiaries have acquired certain rights to sell our existing intellectual property and intellectual property that will be developed or licensed in the future. As a result of these changes and an expanding customer base internationally, we expect that an increasing percentage of our consolidated pre-tax income will be derived from, and reinvested in, our international operations. We anticipate that this pre-tax income will be subject to foreign tax at relatively lower tax rates when compared to the United States federal statutory tax rate in future periods. However, the current administration has begun to put forward proposals that may, if enacted, limit the ability of U.S. companies to continue to defer U.S. income taxes on foreign earnings.
Critical Accounting Policies, Judgments and Estimates The preparation of financial statements and related disclosures requires Harmonic to make judgments, assumptions and estimates that affect the reported amounts of assets and liabilities, the disclosure of contingencies and the reported amounts of revenue and expenses in the financial statements and accompanying notes. Material differences may result in the amount and timing of revenue and expenses if different judgments or different estimates were made. Our significant accounting policies are described in Note 1 to the annual consolidated financial statements as of and for the year ended December 31, 2008, included in our Annual Report on Form 10-K filed with the SEC on March 2, 2009 and the notes to the condensed consolidated financial statements as of and for the three and nine month periods ended October 2, 2009, included herein. Our most critical accounting policies have not changed since December 31, 2008 and include the following:
• Revenue recognition;

• Allowances for doubtful accounts, returns and discounts;

• Valuation of inventories;

• Impairment of long-lived assets;

• Restructuring costs and accruals for excess facilities;

• Assessment of the probability of the outcome of litigation;

• Accounting for income taxes, and

• Stock-based compensation.

Results of Operations
Harmonic's historical condensed consolidated statements of operations data for
the third quarter and first nine months of 2009 and the corresponding periods of
2008 as a percentage of net sales, are as follows:

                                              Three Months Ended                         Nine Months Ended
                                      -----------------------------------        ----------------------------------
                                       October 2,         September 26,           October 2,        September 26,
                                          2009                2008                   2009                2008
                                      ------------      -----------------        ------------      ----------------
Product sales                                87                     91                 87                    92
Service revenue                              13                      9                 13                     8

                                          -----              ---------              -----              --------
Net sales                                   100                    100                100                   100

Product cost of sales                        53                     49                 54                    48
Service cost of sales                         4                      3                  5                     4

                                          -----              ---------              -----              --------
Cost of sales                                57                     52                 59                    52


                                          -----              ---------              -----              --------
Gross profit                                 43                     48                 41                    48
Operating expenses:
Research and development                     19                     15                 20                    15
Selling, general and
administrative                               23                     21                 27                    21
Amortization of intangibles                   2                      -                  1                     -

                                          -----              ---------              -----              --------
Total operating expenses                     44                     36                 48                    36

Income (loss) from operations                (1 )                   12                 (7 )                  12
Interest income, net                          1                      3                  1                     3
Other expense, net                            -                     (2 )                -                    (1 )

                                          -----              ---------              -----              --------
Income (loss) before income
taxes                                         -                     13                 (6 )                  14
Provision for (benefit from)
income taxes                                 (3 )                    -                  4                    (5 )

                                          -----              ---------              -----              --------
Net income (loss)                             3 %                   13 %              (10 )%                 19 %

                                          -----              ---------              -----              --------

Net Sales - Consolidated
Harmonic's consolidated net sales in the third quarter and first nine months of
2009 compared with the corresponding periods in 2008 are presented in the table
below. Also presented are the related dollar and percentage change in
consolidated net sales in the third quarter and first nine months of 2009
compared with the corresponding periods in 2008.

                                      Three Months Ended                       Nine Months Ended
                              ----------------------------------      -----------------------------------
                               October 2,         September 26,        October 2,         September 26,
      Sales Data:                 2009                2008                2009                 2008
------------------------      -------------      ---------------      -------------      ----------------
Video Processing               $  33,014          $     32,284         $  95,246          $     101,152
Edge and Access                   32,678                43,029            88,447                124,191
Service and Support               11,308                 8,190            29,937                 22,250
Software and Other                 6,861                 7,952            19,279                 20,478

                                 -------            ----------           -------            -----------
Net sales                      $  83,861          $     91,455         $ 232,909          $     268,071

Video Processing
increase (decrease)            $     730                               $  (5,906 )
Edge and Access decrease         (10,351 )                               (35,744 )
Service and Support
decrease                           3,118                                   7,687
Software and Other
increase                          (1,091 )                                (1,199 )

                                 -------                                 -------
Total decrease                 $  (7,594 )                             $ (35,162 )

Video Processing percent
change                               2.3 %                                  (5.8 )%
Edge and Access percent
change                             (24.1 )%                                (28.8 )%
Service and Support
percent change                      38.1 %                                  34.5 %
Software and Other
percent change                     (13.7 )%                                 (5.9 )%
Total percent change                (8.3 )%                                (13.1 )%

Net sales decreased in the third quarter of 2009 compared to the same period of 2008 principally due to weaker demand from our domestic cable and satellite customers. Sales of video processing products were slightly higher in the third quarter of 2009 compared to the same period in the prior year due to revenue of $6.9 million from sales of Scopus products, which was partially offset by lower spending from domestic cable and satellite customers. The decrease in sales of the edge products line in the third quarter of 2009 compared to the same period in 2008 was primarily due to a decrease in sales of our Narrowcast Services Gateway, or NSG, product, which is used for VOD, switched digital video and M-CMTS deployments, to cable operators. The service and support revenue increase in the third quarter of 2009 compared to the same period of 2008 was primarily due to increased maintenance support contract revenue as a result of a larger customer and equipment base and the timing of renewals.
Net sales decreased in the first nine months of 2009 compared to the same period of 2008 principally due to weaker demand from our domestic cable, satellite and telco customers. Sales of video processing products were lower in the first nine months of 2009 compared to the same period in the prior year due to lower spending from domestic cable and satellite customers. The decrease in sales of the edge products line in the first nine months of 2009 compared to the same period in 2008 was primarily due to a decrease in sales of our NSG product, which is used for VOD, switched digital video and M-CMTS deployments to domestic and international cable operators. The service and support revenue increase in the first nine months of 2009 compared to the same period of 2008 was primarily due to increased maintenance support contract revenue as a result of a larger customer and equipment base and the timing of renewals. Net Sales - Geographic
Harmonic's domestic and international net sales in the third quarter and first nine months of 2009 compared with the corresponding periods in 2008 are presented in the table below. Also presented are the related dollar and percentage change in domestic and international net sales in the third quarter and first nine months of 2009 compared with the corresponding periods in 2008.

                                      Three Months Ended                       Nine Months Ended
                              ----------------------------------      -----------------------------------
                               October 2,         September 26,        October 2,         September 26,
                                  2009                2008                2009                 2008
                              -------------      ---------------      -------------      ----------------
Geographic Sales Data:
U.S.                           $  40,282          $     55,669         $ 118,932          $     153,565
International                     43,579                35,786           113,977                114,506

                                 -------            ----------           -------            -----------
Net sales                      $  83,861          $     91,455         $ 232,909          $     268,071

U.S. decrease                  $ (15,387 )                             $ (34,633 )
International increase
(decrease)                         7,793                                    (529 )

                                 -------                                 -------
Total decrease                 $  (7,594 )                             $ (35,162 )

U.S. percent change                (27.6 )%                                (22.6 )%
International percent
change                              21.8 %                                  (0.5 )%
Total percent change                (8.3 )%                                (13.1 )%

The decreased U.S. sales in the third quarter of 2009 compared to the corresponding period in 2008 was principally due to weaker demand from our domestic cable and satellite customers. The decreased U.S. sales in the first nine months of 2009 compared to the corresponding period in 2008 was principally due to weaker demand from our domestic cable, satellite and telco customers. International sales in the third quarter of 2009 increased compared to the corresponding period in 2008 primarily due to increased demand in all international regions and throughout our international customer segments. International sales in the first nine months of 2009 were relatively flat compared to the corresponding periods in 2008. We expect that international sales will continue to account for a significant portion of our net sales for the foreseeable future.
Gross Profit
Harmonic's gross profit and gross profit as a percentage of consolidated net sales in the third quarter and first nine months of 2009 as compared with the corresponding periods of 2008 are presented in the table below. Also

presented are the related dollar and percentage change in gross profit in the . . .