• 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 and services, and our operating results;

• Our expectation that we will record a total of approximately $6.6 million in amortization of intangibles in cost of sales in the remaining nine months of 2009;

• Our expectation that we will record a total of approximately $3.5 million in amortization of intangibles in operating expenses in the remaining nine months of 2009;

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

• Our expectations regarding the benefits of the Scopus acquisition;

• Our expectations regarding tax rates in foreign jurisdictions as compared to U.S. tax rates and regarding the impact of California tax laws;

• 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, broadcast 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 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 arising 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. 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 $62.4 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 integrated receivers/decoders ("IRD"), intelligent video gateways ("IVG"), and encoders. In addition, the Company markets multiplexers, network management systems ("NMS"), 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 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. Results of operations for the Scopus acquisition are reflected in the accompanying Harmonic financial data from the effective date of the acquisition, which was March 12, 2009. Sales of Scopus product are primarily reported within the video processing product line.
In the first quarter of 2009, Harmonic's net sales of $67.8 million decreased 22% compared to the first quarter of 2008. The decrease in sales in the first quarter of 2009 compared to the corresponding period in 2008 was primarily due to weaker demand from our domestic satellite and worldwide cable customers for products and solutions related to VOD and HDTV. Gross margins decreased in the first quarter of 2009 compared to the corresponding period in 2008 due to lower sales volumes 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. 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. In the first quarter of 2009, sales to Comcast accounted for 16% of net sales. In the first quarter of 2008, sales to EchoStar and Comcast accounted for 21% and 17% of net sales, respectively.
Sales to customers outside of the U.S. in the first quarter of 2009 represented 53% of net sales, compared to 39% for the comparable period 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 5% in the first three months of 2009 compared to 3% 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. Adverse economic conditions in markets in which we operate and into which we sell our products can harm our business. Recently, economic conditions in the countries in which we operate and sell products have become increasingly negative, and global financial markets have experienced a severe downturn stemming from a multitude of factors, including adverse credit conditions impacted by the subprime-mortgage crisis, 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 quarter 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 could 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 well throughout 2009. 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 would reduce our revenues and could adversely affect our gross margin.

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.
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 month period ended April 3, 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 first quarter of 2009 and the first quarter of 2008 as a percentage of net
sales, are as follows:

                                                     Three Months Ended
                                                 ---------------------------
                                                   April 3,       March 28,
                                                     2009           2008
                                                 ------------    -----------
           Product sales                               88 %             92 %
           Service revenue                             12                8
                                                    -----            -----

           Net sales                                  100              100

           Product cost of sales                       57               49
           Service cost of sales                        6                3
                                                    -----            -----

           Cost of sales                               63               52
                                                    -----            -----

           Gross profit                                37               48
           Operating expenses:
           Research and development                    21               15
           Selling, general and administrative         31               20
           Amortization of intangibles                  1                ¾
                                                    -----            -----

           Total operating expenses                    53               35
                                                    -----            -----

           Income (loss) from operations              (16 )             13
           Interest income, net                         2                3
           Other expense, net                          (1 )              ¾
                                                    -----            -----

           Income (loss) before income taxes          (15 )             16
           Provision for income taxes                  13                1
                                                    -----            -----

           Net income (loss)                          (28 )%            15 %
                                                    -----            -----

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

                                                     Three Months Ended
                                                 --------------------------
                                                   April 3,      March 28,
            (In thousands, except percentages)       2009          2008
            ----------------------------------   ------------   -----------
            Revenue Data:
            Video Processing                     $  30,521       $ 34,786
            Edge and Access                         23,553         39,665
            Service and Support                      7,849          7,128
            Software and Other                       5,833          5,698
                                                   -------         ------

            Net sales                            $  67,756       $ 87,277

            Video Processing decrease            $  (4,265 )
            Edge and Access decrease               (16,112 )
            Service and Support increase               721
            Software and Other increase                135
                                                   -------

            Total decrease                       $ (19,521 )

            Video Processing percent change          (12.3 )%
            Edge and Access percent change           (40.6 )%
            Service and Support percent change        10.1 %
            Software and Other percent change          2.4 %
            Total percent change                     (22.4 )%

Net sales decreased in the first quarter of 2009 compared to the same period of 2008 principally due to weaker demand from our domestic satellite and worldwide cable customers for VOD and HDTV deployments. Sales of video processing products were lower in the first quarter of 2009 compared to the same period in the prior year due to lower spending from domestic satellite customers. The decrease in sales of products of the edge and access products line in the first quarter of 2009 compared to the same period in 2008 was primarily due to a decrease in sales of access products and our Narrowcast Services Gateway product, which is used for VOD, switched digital and Cable Modem Termination System, or CMTS deployments, to domestic and international cable operators. Net Sales - Geographic
Harmonic's domestic and international net sales in the first quarter of 2009 compared with the corresponding period 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 first quarter of 2009 compared with the corresponding period in 2008.

                                                     Three Months Ended
                                                 --------------------------
                                                   April 3,      March 28,
            (In thousands, except percentages)       2009          2008
            ----------------------------------   ------------   -----------
            Geographic Sales Data:
            U.S.                                 $  32,118       $ 53,593
            International                           35,638         33,684
                                                   -------         ------

            Net sales                            $  67,756       $ 87,277

            U.S. decrease                        $ (21,475 )
            International increase                   1,954
                                                   -------

            Total decrease                       $ (19,521 )

            U.S. percent change                      (40.1 )%
            International percent change               5.8 %
            Total percent change                     (22.4 )%

The decreased U.S. sales in the first quarter of 2009 compared to the corresponding period in 2008 was principally due to weaker demand from our domestic satellite and cable customers for products used in VOD and HDTV deployments.

International sales in the first quarter of 2009 increased compared to the corresponding period in 2008 primarily due to revenue generated from products acquired in the Scopus acquisition and increased revenue from several international satellite projects. 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 first quarter of 2009 as compared with the corresponding period of 2008 are presented in the table below. Also presented are the related dollar and percentage change in gross profit in the first quarter of 2009 as compared with the corresponding period of 2008.

                                                     Three Months Ended
                                                 --------------------------
                                                   April 3,      March 28,
            (In thousands, except percentages)       2009          2008
            ----------------------------------   ------------   -----------
            Gross profit                         $  25,385       $ 42,279
            As a % of net sales                       37.5 %         48.4 %

            Decrease                             $ (16,894 )
            Percent change                           (40.0 )%

The decrease in gross profit in the first quarter of 2009 as compared to the corresponding period of 2008 was primarily due to lower sales of $19.5 million and provisions totaling $6.3 million primarily for excess and obsolete inventories associated with the discontinuance of certain Scopus products and employee severance costs principally related to the integration of Scopus into Harmonic. The decreased gross margin percentage of 37.5% in the first quarter of 2009 compared to 48.4% in the first quarter of 2008 was lower mainly due to the aforementioned provisions for excess and obsolete inventories as a result of the discontinuance of certain Scopus products and severance costs related to terminated employees. Additionally, the Company paid severance costs to terminated employees in its California operations during the quarter ended April 3, 2009 which were also included in cost of sales.
In the first quarter of 2009, $1.5 million of amortization of intangibles was included in cost of sales compared to $1.4 million in the first quarter of 2008. The higher amortization of intangible expense in the first quarter of 2009 was due to the amortization of intangibles arising from the Scopus acquisition which was completed in March 2009. We expect to record approximately $6.6 million in amortization of intangibles expenses in cost of sales in the remaining nine months of 2009 due to the acquisitions of Entone, Rhozet and Scopus. Research and Development
Harmonic's research and development expense and the expense as a percentage of consolidated net sales in the first quarter of 2009, as compared with the corresponding period of 2008, are presented in the table below. Also presented are the related dollar and percentage change in research and development expense in the first quarter of 2009 as compared with the corresponding period of 2008.

                                                     Three Months Ended
                                                  -------------------------
                                                   April 3,      March 28,
             (In thousands, except percentages)      2009          2008
             ----------------------------------   -----------   -----------
             Research and development expense      $ 14,496      $ 13,193
             As a % of net sales                       21.4 %        15.1 %

             Increase                              $  1,303
             Percent change                             9.9 %

The increase in research and development expense in the first quarter of 2009 compared to the corresponding period in 2008 was primarily the result of increased compensation of $1.0 million and increased stock-based compensation expense of $0.3 million. The increased compensation expense is primarily due to increased headcount from the Scopus acquisition and severance costs of $0.6 million related to terminated Scopus employees.

Selling, General and Administrative
Harmonic's selling, general and administrative expense and the expense as a
percentage of consolidated net sales in the first quarter of 2009, as compared
with the corresponding period of 2008, are presented in the table below. Also
presented are the related dollar and percentage change in selling, general and
administrative expense in the first quarter of 2009 as compared with the
corresponding period of 2008.

                                                         Three Months Ended
                                                      -------------------------
                                                       April 3,      March 28,
            (In thousands, except percentages)           2009          2008
        -------------------------------------------   -----------   -----------
        Selling, general and administrative expense    $ 21,290      $ 17,448
        As a % of net sales                                31.4 %        20.0 %

        Increase                                       $  3,842
        Percent change                                     22.0 %

The increase in selling, general and administrative expense in the first quarter of 2009 compared to the corresponding period in 2008 was primarily a result of acquisition-related expenses of $3.4 million associated with the purchase of Scopus during the first quarter of 2009 and increased stock-based compensation expense of $0.4 million. As a result of adoption of SFAS 141(R), the Company is now required to expense acquisition-related costs in its selling, general and . . .