<SUBMISSION>
<ACCESSION-NUMBER>0000891618-02-002337
<TYPE>10-Q
<PUBLIC-DOCUMENT-COUNT>1
<PERIOD>20020329
<FILING-DATE>20020513
<FILER>
<COMPANY-DATA>
<CONFORMED-NAME>HARMONIC INC
<CIK>0000851310
<ASSIGNED-SIC>3663
<IRS-NUMBER>770201147
<STATE-OF-INCORPORATION>DE
<FISCAL-YEAR-END>1231
</COMPANY-DATA>
<FILING-VALUES>
<FORM-TYPE>10-Q
<ACT>34
<FILE-NUMBER>000-25826
<FILM-NUMBER>02644058
</FILING-VALUES>
<BUSINESS-ADDRESS>
<STREET1>549 BALTIC WAY
<CITY>SUNNYVALE
<STATE>CA
<ZIP>94089
<PHONE>4085422500
</BUSINESS-ADDRESS>
<FORMER-COMPANY>
<FORMER-CONFORMED-NAME>HARMONIC LIGHTWAVES INC
<DATE-CHANGED>19950404
</FORMER-COMPANY>
</FILER>
<DOCUMENT>
<TYPE>10-Q
<SEQUENCE>1
<FILENAME>f81243e10-q.htm
<DESCRIPTION>FORM 10-Q
<TEXT>
<HTML>
<HEAD>
<TITLE>Harmonic, Inc., Form 10-Q dated 3-29-2002</TITLE>
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<H5 align="left" style="page-break-before:always"><A HREF="#toc">Table of Contents</A></H5><P>

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<P align="center"><FONT size="2">UNITED STATES<BR>
SECURITIES AND EXCHANGE COMMISSION<BR>
Washington, D.C. 20549</FONT>

<P align="center"><FONT size="4"><B>FORM 10-Q</B></FONT>

<P><FONT size="2">(Mark One)
</FONT>
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<TR valign="bottom">
        <TD valign="top"><FONT size="2">&#091; X &#093;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="left" valign="top"><FONT size="2">
Quarterly report pursuant to Section&nbsp;13 or 15(d) of the Securities Exchange Act of 1934<br>
For the quarterly period ended March&nbsp;29, 2002</FONT></TD>
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</TABLE>
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<P align="center"><FONT size="2">OR</FONT>

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<TR valign="bottom">
        <TD valign="top"><FONT size="2">&#091;&nbsp;&nbsp;&nbsp;&#093;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="left" valign="top"><FONT size="2">
Transition report pursuant to Section&nbsp;13 or 15(d) of the Securities Exchange Act of 1934<br>
For the transition period from __________ to __________</FONT></TD>
</TR>
</TABLE>
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<P><FONT size="2">Commission File No.&nbsp;0-25826
</FONT>
<P align="center"><FONT size="5"><B>HARMONIC INC.</B></FONT>

<DIV align="center"><FONT size="2">(formerly Harmonic Lightwaves, Inc.)</FONT></DIV>

<P align="center"><FONT size="2">(Exact name of Registrant as specified in its charter)</FONT>

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        <TD align="center" valign="top"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2"><B>Delaware</B><BR>
(State of incorporation)</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="center" valign="top"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">
<B>77-0201147</B><BR>
(I.R.S. Employer Identification No.)</FONT></DIV></TD>
</TR>
</TABLE>
</CENTER>
<P align="center"><FONT size="2">549 Baltic Way<BR>
Sunnyvale, CA 94089<BR>
(408)&nbsp;542-2500</FONT>

<P align="center"><FONT size="2">(Address, including zip code, and telephone number,<BR>
including area code, of Registrant&#146;s principal executive offices)</FONT>

<P align="center"><HR size="1" width="15%" noshade>

<P><FONT size="2">Indicate by check mark whether the Registrant (1)&nbsp;has filed all reports
required to be filed by Section&nbsp;13 or 15 (d)&nbsp;of the Securities Exchange Act of
1934 during the preceding 12&nbsp;months (or for shorter period that the Registrant
was required to file such reports), and (2)&nbsp;has been subject to such filing
requirements for the past 90&nbsp;days.
</FONT>
<P align="center"><FONT size="2">Yes&nbsp;&nbsp; &#091;X&#093;&nbsp;&nbsp;&nbsp; No&nbsp;&nbsp; &#091;&nbsp;&nbsp;&#093;</FONT>

<P><FONT size="2">As of April&nbsp;26, 2002 there were 59,546,961 shares of the Registrant&#146;s Common
Stock outstanding.
</FONT>
<P>
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<P align="center"><FONT size="2">&nbsp;
</FONT>

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<!-- TOC -->
<A name="toc"><DIV align="CENTER" style="page-break-before:always"><U><B>TABLE OF CONTENTS</B></U></DIV></A>

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	<TD width="76%"></TD>
</TR>
<TR><TD colspan="9"><A HREF="#000">PART I &#151; FINANCIAL INFORMATION</A></TD></TR>
<TR><TD></TD><TD colspan="8"><A HREF="#001">ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS</A></TD></TR>
<TR><TD></TD><TD></TD><TD colspan="7"><A HREF="#002"> CONDENSED CONSOLIDATED BALANCE SHEETS</A></TD></TR>
<TR><TD></TD><TD></TD><TD colspan="7"><A HREF="#003"> CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS</A></TD></TR>
<TR><TD></TD><TD></TD><TD colspan="7"><A HREF="#004"> CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS</A></TD></TR>
<TR><TD></TD><TD></TD><TD colspan="7"><A HREF="#005"> NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS</A></TD></TR>
<TR><TD></TD><TD colspan="8"><A HREF="#006">ITEM 2. MANAGEMENT&#146;S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS</A></TD></TR>
<TR><TD></TD><TD colspan="8"><A HREF="#007">ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK</A></TD></TR>
<TR><TD colspan="9"><A HREF="#008">PART II</A></TD></TR>
<TR><TD></TD><TD colspan="8"><A HREF="#009">ITEM 1. LEGAL PROCEEDINGS</A></TD></TR>
<TR><TD></TD><TD colspan="8"><A HREF="#010">ITEM 6. EXHIBITS AND REPORTS ON FORM&nbsp;8-K</A></TD></TR>
<TR><TD colspan="9"><A HREF="#011">SIGNATURE</A></TD></TR>
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<H5 align="left" style="page-break-before:always"><A HREF="#toc">Table of Contents</A></H5><P>

<P align="center"><FONT size="2">HARMONIC INC.<BR>
<BR>
INDEX</FONT>

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        <TD width="5%">&nbsp;</TD>
        <TD width="1%">&nbsp;</TD>
        <TD width="84%">&nbsp;</TD>
        <TD width="3%">&nbsp;</TD>
        <TD width="3%">&nbsp;</TD>
</TR>
<TR valign="bottom">
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center"><FONT size="1"><B>Page</B></FONT></TD>
</TR>
<TR valign="bottom">
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center"><HR size="1" noshade></TD>
</TR>
<TR valign="bottom" bgcolor="#eeeeee">
        <TD colspan="3" valign="top"><FONT size="2"><B>PART I &#151; FINANCIAL INFORMATION</B></FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="left" valign="top"><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR><TD>&nbsp;</TD></TR>
<TR valign="bottom">
        <TD valign="top"><FONT size="2">Item&nbsp;1.</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="left" valign="top"><FONT size="2">
Condensed Consolidated Financial Statements:</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="left" valign="top"><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR><TD>&nbsp;</TD></TR>
<TR valign="bottom" bgcolor="#eeeeee">
        <TD valign="top"><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="left" valign="top"><FONT size="2">
Condensed Consolidated Balance Sheets at March&nbsp;29, 2002 (Unaudited) and December&nbsp;31, 2001
</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="center" valign="top"><FONT size="2">3</FONT></TD>
</TR>
<TR><TD>&nbsp;</TD></TR>
<TR valign="bottom">
        <TD valign="top"><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="left" valign="top"><FONT size="2">
Condensed Consolidated Statements of Operations for the Three Months Ended March&nbsp;29,
2002 and March&nbsp;30, 2001 (Unaudited)
</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="center" valign="top"><FONT size="2">4</FONT></TD>
</TR>
<TR><TD>&nbsp;</TD></TR>
<TR valign="bottom" bgcolor="#eeeeee">
        <TD valign="top"><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="left" valign="top"><FONT size="2">
Condensed Consolidated Statements of Cash Flows for the Three Months Ended March&nbsp;29,
2002 and March&nbsp;30, 2001 (Unaudited)
</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="center" valign="top"><FONT size="2">5</FONT></TD>
</TR>
<TR><TD>&nbsp;</TD></TR>
<TR valign="bottom">
        <TD valign="top"><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="left" valign="top"><FONT size="2">
Notes to Condensed Consolidated Financial Statements (Unaudited)
</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="center" valign="top"><FONT size="2">6</FONT></TD>
</TR>
<TR><TD>&nbsp;</TD></TR>
<TR valign="bottom" bgcolor="#eeeeee">
        <TD valign="top"><FONT size="2">Item&nbsp;2.</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="left" valign="top"><FONT size="2">
Management&#146;s Discussion and Analysis of Financial Condition and Results of Operations
</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="center" valign="top"><FONT size="2">11</FONT></TD>
</TR>
<TR><TD>&nbsp;</TD></TR>
<TR valign="bottom">
        <TD valign="top"><FONT size="2">Item&nbsp;3.</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="left" valign="top"><FONT size="2">
Quantitative and Qualitative Disclosures About Market Risk
</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="center" valign="top"><FONT size="2">17</FONT></TD>
</TR>
<TR><TD>&nbsp;</TD></TR>
<TR valign="bottom" bgcolor="#eeeeee">
        <TD colspan="3" valign="top"><FONT size="2"><B>PART II &#151; OTHER INFORMATION</B></FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="left" valign="top"><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR><TD>&nbsp;</TD></TR>
<TR valign="bottom">
        <TD valign="top"><FONT size="2">Item&nbsp;1.</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="left" valign="top"><FONT size="2">
Legal Proceedings
</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="center" valign="top"><FONT size="2">29</FONT></TD>
</TR>
<TR><TD>&nbsp;</TD></TR>
<TR valign="bottom" bgcolor="#eeeeee">
        <TD valign="top"><FONT size="2">Item&nbsp;6.</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="left" valign="top"><FONT size="2">
Exhibits and Reports on Form 8-K</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="center" valign="top"><FONT size="2">29</FONT></TD>
</TR>


</TABLE>
</CENTER>
<P align="center"><FONT size="2">2
</FONT>

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<H5 align="left" style="page-break-before:always"><A HREF="#toc">Table of Contents</A></H5><P>
<!-- link1 "PART I &#151; FINANCIAL INFORMATION" -->
<DIV align="left"><A NAME="000"></A></DIV>
<P align="left"><FONT size="2"><B>PART I &#151; FINANCIAL INFORMATION</B></FONT>

<!-- link2 "ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS" -->
<DIV align="left"><A NAME="001"></A></DIV>
<P align="left"><FONT size="2"><B>ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS</B></FONT>

<!-- link3 " CONDENSED CONSOLIDATED BALANCE SHEETS" -->
<DIV align="left"><A NAME="002"></A></DIV>
<P align="center"><FONT size="2">HARMONIC INC.<BR>
CONDENSED CONSOLIDATED BALANCE SHEETS<BR>
(IN THOUSANDS, EXCEPT PAR VALUE AMOUNTS)</FONT>

<CENTER>
<TABLE cellspacing="0" border="0" cellpadding="0" width="75%">
<TR valign="bottom">
        <TD width="5%">&nbsp;</TD>
        <TD width="5%">&nbsp;</TD>
        <TD width="52%">&nbsp;</TD>
        <TD width="5%">&nbsp;</TD>
        <TD width="6%">&nbsp;</TD>
        <TD width="1%">&nbsp;</TD>
        <TD width="7%">&nbsp;</TD>
        <TD width="5%">&nbsp;</TD>
        <TD width="6%">&nbsp;</TD>
        <TD width="1%">&nbsp;</TD>
        <TD width="7%">&nbsp;</TD>
</TR>
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        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="3"><FONT size="1"><B>MARCH 29,</B></FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="3"><FONT size="1"><B>DECEMBER 31,</B></FONT></TD>
</TR>
<TR valign="bottom">
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="3"><FONT size="1"><B>2002</B></FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="3"><FONT size="1"><B>2001</B></FONT></TD>
</TR>
<TR valign="bottom">
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD colspan="3"><HR size="1" noshade></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD colspan="3"><HR size="1" noshade></TD>
</TR>
<TR valign="bottom">
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="3"><FONT size="1"><B>(UNAUDITED)</B></FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
</TR>
<TR valign="bottom" bgcolor="#eeeeee">
        <TD colspan="3"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">ASSETS</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
        <TD colspan="3"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Current assets:</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Cash and cash equivalents</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">37,274</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">36,005</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Short-term investments</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">14,678</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">18,272</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Accounts receivable, net</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">45,602</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">34,402</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Inventories</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">26,126</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">30,944</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Deferred income taxes</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">7,019</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">9,065</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Prepaid expenses and other assets</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">7,049</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">9,775</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR>
        <TD colspan="3"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="bottom" bgcolor="#eeeeee">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Total current assets</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">137,748</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">138,463</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<tr><Td>&nbsp;</td></tr>
<TR valign="bottom">
        <TD colspan="3"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Property and equipment, net</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">42,073</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">45,755</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
        <TD colspan="3"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Goodwill, intangibles and other assets</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">47,942</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">53,838</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR>
        <TD colspan="3"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="bottom">
        <TD colspan="3"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">227,763</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">238,056</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR>
        <TD colspan="3"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="4" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="4" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="bottom" bgcolor="#eeeeee">
        <TD colspan="3"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">LIABILITIES AND STOCKHOLDERS&#146; EQUITY</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
        <TD colspan="3"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Current liabilities:</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Current portion of long-term debt</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">1,424</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">1,281</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Accounts payable</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">10,629</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">10,296</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Income taxes payable</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">6,064</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">2,804</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Accrued liabilities</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">57,905</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">57,474</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR>
        <TD colspan="3"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="bottom" bgcolor="#eeeeee">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Total current liabilities</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">76,022</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">71,855</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR>
        <TD colspan="3"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="bottom">
        <TD colspan="3"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Long-term debt, less current portion</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">1,385</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">1,465</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
        <TD colspan="3"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Deferred income taxes</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">7,019</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">9,065</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
        <TD colspan="3"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Accrued excess facility costs</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">18,619</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">19,563</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
        <TD colspan="3"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Other non-current liabilities</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">1,196</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">1,054</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR>
        <TD colspan="3"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="bottom">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Total liabilities</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">104,241</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">103,002</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR>
        <TD colspan="3"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="bottom" bgcolor="#eeeeee">
        <TD colspan="3"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Stockholders&#146; equity:</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Preferred stock, $.001 par value, 5,000
shares authorized; no shares issued or
outstanding</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">&#151;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">&#151;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Common Stock, $.001 par value, 150,000
shares authorized; 59,492 and 59,063 shares
issued and outstanding</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">59</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">59</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Capital in excess of par value</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">1,961,539</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">1,959,043</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Accumulated deficit</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">(1,838,219</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">(1,824,207</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR valign="bottom">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Accumulated other comprehensive income</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">143</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">159</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR>
        <TD colspan="3"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="bottom" bgcolor="#eeeeee">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Total stockholders&#146; equity</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">123,522</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">135,054</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR>
        <TD colspan="3"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="bottom">
        <TD colspan="3"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">227,763</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">238,056</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR>
        <TD colspan="3"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="4" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="4" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
</TABLE>
</CENTER>
<P align="center"><FONT size="2">The accompanying notes are an integral part of these condensed consolidated financial statements.</FONT>

<P align="center"><FONT size="2">3
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#toc">Table of Contents</A></H5><P>


<!-- link3 " CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS" -->
<DIV align="left"><A NAME="003"></A></DIV>
<P align="center"><FONT size="2">HARMONIC INC.<BR>
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS<BR>
(IN THOUSANDS, EXCEPT PER SHARE DATA)<BR>
(UNAUDITED)</FONT>

<CENTER>
<TABLE cellspacing="0" border="0" cellpadding="0" width="75%">
<TR valign="bottom">
        <TD width="5%">&nbsp;</TD>
        <TD width="65%">&nbsp;</TD>
        <TD width="5%">&nbsp;</TD>
        <TD width="4%">&nbsp;</TD>
        <TD width="1%">&nbsp;</TD>
        <TD width="5%">&nbsp;</TD>
        <TD width="5%">&nbsp;</TD>
        <TD width="4%">&nbsp;</TD>
        <TD width="1%">&nbsp;</TD>
        <TD width="5%">&nbsp;</TD>
</TR>
<TR valign="bottom">
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="7"><FONT size="1"><B>THREE MONTHS ENDED</B></FONT></TD>
</TR>
<TR valign="bottom">
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD colspan="7"><HR size="1" noshade></TD>
</TR>
<TR valign="bottom">
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="3"><FONT size="1"><B>MARCH 29,</B></FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="3"><FONT size="1"><B>MARCH 30,</B></FONT></TD>
</TR>
<TR valign="bottom">
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="3"><FONT size="1"><B>2002</B></FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="3"><FONT size="1"><B>2001</B></FONT></TD>
</TR>
<TR valign="bottom">
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD colspan="3"><HR size="1" noshade></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD colspan="3"><HR size="1" noshade></TD>
</TR>
<TR valign="bottom" bgcolor="#eeeeee">
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Net sales</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">54,032</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">40,274</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Cost of sales</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">38,269</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">51,034</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR>
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>


<TR valign="bottom" bgcolor="#eeeeee">
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Gross profit (loss)</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">15,763</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">(10,760</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="bottom">
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Operating expenses:</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Research and development</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">11,119</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">15,502</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Selling, general and administrative</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">15,321</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">21,682</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Amortization of intangibles</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">2,828</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">3,096</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR>
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="bottom">
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Total operating expenses</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">29,268</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">40,280</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR>
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="bottom" bgcolor="#eeeeee">
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Loss from operations</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">(13,505</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">(51,040</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR><TD>&nbsp;</TD></TR>

<TR valign="bottom">
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Interest and other income (expense), net</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">(7</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">1,556</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR>
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="bottom" bgcolor="#eeeeee">
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Loss before income taxes</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">(13,512</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">(49,484</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR><TD>&nbsp;</TD></TR>

<TR valign="bottom">
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">
Provision for (benefit from) income taxes</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">500</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">(819</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
</TR>
<TR>
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="bottom" bgcolor="#eeeeee">
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Net loss</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">(14,012</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">(48,665</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
</TR>
<TR>
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="4" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="4" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="bottom">
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Net loss per share<br>
Basic and Diluted</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">(0.24</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">(0.84</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
</TR>
<TR>
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="4" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="4" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="bottom" bgcolor="#eeeeee">
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Weighted average shares<br>
Basic and Diluted</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">59,476</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">58,161</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR>
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="4" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="4" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
</TABLE>
</CENTER>
<P align="center"><FONT size="2">The accompanying notes are an integral part of these condensed consolidated financial statements.</FONT>

<P align="center"><FONT size="2">4
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#toc">Table of Contents</A></H5><P>


<!-- link3 " CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS" -->
<DIV align="left"><A NAME="004"></A></DIV>
<P align="center"><FONT size="2">HARMONIC INC.<BR>
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS<BR>
(IN THOUSANDS)<BR>
(UNAUDITED)</FONT>

<CENTER>
<TABLE cellspacing="0" border="0" cellpadding="0" width="85%">
<TR valign="bottom">
        <TD width="3%">&nbsp;</TD>
        <TD width="3%">&nbsp;</TD>
        <TD width="3%">&nbsp;</TD>
        <TD width="65%">&nbsp;</TD>
        <TD width="3%">&nbsp;</TD>
        <TD width="4%">&nbsp;</TD>
        <TD width="1%">&nbsp;</TD>
        <TD width="5%">&nbsp;</TD>
        <TD width="3%">&nbsp;</TD>
        <TD width="4%">&nbsp;</TD>
        <TD width="1%">&nbsp;</TD>
        <TD width="5%">&nbsp;</TD>
</TR>
<TR valign="bottom">
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="7"><FONT size="1"><B>THREE MONTHS ENDED</B></FONT></TD>
</TR>
<TR valign="bottom">
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD colspan="7"><HR size="1" noshade></TD>
</TR>
<TR valign="bottom">
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="3"><FONT size="1"><B>MARCH 29,</B></FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="3"><FONT size="1"><B>MARCH 30,</B></FONT></TD>
</TR>
<TR valign="bottom">
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="3"><FONT size="1"><B>2002</B></FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="3"><FONT size="1"><B>2001</B></FONT></TD>
</TR>
<TR valign="bottom">
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD colspan="3"><HR size="1" noshade></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD colspan="3"><HR size="1" noshade></TD>
</TR>
<TR valign="bottom" bgcolor="#eeeeee">
        <TD colspan="4"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Cash flows from operating activities:</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD colspan="3"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Net loss</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">(14,012</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">(48,665</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD colspan="3"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Adjustments to reconcile net loss to cash provided by
(used in) operating activities:</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
<TR valign="bottom">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Amortization of intangibles</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">5,850</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">5,109</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Depreciation</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">4,172</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">4,237</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>

<TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Impairment
and loss on disposal of fixed assets</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">624</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">1,432</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Deferred income taxes</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">155</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">(1,319</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
</TR>
<TR valign="bottom">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD colspan="3"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Changes in assets and liabilities:</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Accounts receivable</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">(11,201</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">26,502</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Inventories</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">4,817</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">16,167</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Prepaid expenses and other assets</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">2,620</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">2,440</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>


<TR valign="bottom">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Accounts payable</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">333</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">(6,032</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Income taxes payable</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">3,267</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">7,802</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Accrued excess facility costs</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">(943</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">&#151;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Accrued and other liabilities</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">573</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">7,630</FONT></TD>
        <TD nowrap><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR>
        <TD colspan="4"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="bottom">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Net cash provided by (used in) operating activities</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">(3,745</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">15,303</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR>
        <TD colspan="4"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR>
        <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" bgcolor="#eeeeee">
        <TD colspan="4"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Cash flows from investing activities:</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
<TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Acquisition of property and equipment</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">(1,114</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">(16,682</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
<TD><FONT size="2">&nbsp;</FONT></TD>
 <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Proceeds from sale of investments</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">5,803</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">66,893</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
<TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Purchases of investments</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">(2,232</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">(38,386</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
</TR>
<TR>
        <TD colspan="4"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="bottom" bgcolor="#eeeeee">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Net cash provided by investing activities</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">2,457</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">11,825</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR>
        <TD colspan="4"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom">
        <TD colspan="4"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Cash flows from financing activities:</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Borrowings under bank line of credit</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">346</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">&#151;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Repayments under bank line of credit</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">(283</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">&#151;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Proceeds from issuance of common stock, net</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">2,496</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">1,862</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR>
        <TD colspan="4"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="bottom">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Net cash provided by financing activities</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">2,559</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">1,862</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR>
        <TD colspan="4"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>
<TR valign="bottom" bgcolor="#eeeeee">
        <TD colspan="4"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Effect of exchange rate changes on cash and cash equivalents</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">(2</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">(169</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
</TR>
<TR>
        <TD colspan="4"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="bottom">
        <TD colspan="4"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Net increase in cash and cash equivalents</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">1,269</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">28,821</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
        <TD colspan="4"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Cash and cash equivalents at beginning of period</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">36,005</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">13,505</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR>
        <TD colspan="4"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="bottom">
        <TD colspan="4"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Cash and cash equivalents at end of period</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">37,274</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">42,326</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR>
        <TD colspan="4"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="4" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="4" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="bottom" bgcolor="#eeeeee">
        <TD colspan="4"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Supplemental disclosure of cash flow information:</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD colspan="3"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Interest expense</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">87</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">&#151;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
        <TD><FONT size="2">&nbsp;</FONT></TD>

<TD colspan="3"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Income
tax refunds, net</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">(3,046</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">(20,472</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
</TR>
</TABLE>
</CENTER>
<P align="center"><FONT size="2">The accompanying notes are an integral part of these condensed consolidated financial statements.</FONT>

<P align="center"><FONT size="2">5
</FONT>

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<H5 align="left" style="page-break-before:always"><A HREF="#toc">Table of Contents</A></H5><P>


<P align="center"><FONT size="2">HARMONIC INC.</FONT>

<!-- link3 " NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS" -->
<DIV align="left"><A NAME="005"></A></DIV>
<P align="center"><FONT size="2">NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS</FONT>

<P align="left"><FONT size="2">NOTE 1 &#151; BASIS OF PRESENTATION</FONT>

<P><FONT size="2">The accompanying unaudited condensed consolidated financial statements include
all adjustments (consisting only of normal recurring adjustments) which
Harmonic Inc. (the &#147;Company&#148;) considers necessary for a fair presentation of
the results of operations for the unaudited interim periods covered and the
consolidated financial condition of the Company at the date of the balance
sheets. The quarterly financial information is unaudited. This Quarterly Report
on Form&nbsp;10-Q should be read in conjunction with the Company&#146;s audited
consolidated financial statements contained in the Company&#146;s Annual Report on
Form&nbsp;10-K which was filed with the Securities and Exchange Commission on March
18, 2002. The interim results presented herein are not necessarily indicative
of the results of operations that may be expected for the full fiscal year
ending December&nbsp;31, 2002, or any other future period. The Company&#146;s fiscal
quarters end on the Friday nearest the calendar quarter end, except
for the fourth quarter which ends on December&nbsp;31.
</FONT>
<P align="left"><FONT size="2">NOTE 2 &#151; NEW ACCOUNTING PRONOUNCEMENTS</FONT>

<P><FONT size="2">On January&nbsp;1, 2002, the Company adopted SFAS No.&nbsp;144, &#147;Accounting for the Impairment or Disposal of
Long-Lived Assets&#148;, which addresses financial accounting and reporting for the
impairment or disposal of long-lived assets. This Statement
supersedes SFAS No.&nbsp;121, &#147;Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of&#148;, and the accounting and reporting
provisions of APB Opinion No.&nbsp;30, &#147;Reporting the Results of
Operations-Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions&#148; for
the disposal of a segment of a business. The adoption of SFAS No.&nbsp;144 had no effect on the Company&#146;s results
of operations or its financial position.
</FONT>
<P align="left"><FONT size="2">NOTE 3 &#151; CASH EQUIVALENTS AND INVESTMENTS</FONT>

<P><FONT size="2">Cash equivalents are comprised of highly liquid investment-grade investments
with original maturities of three months or less at the date of purchase.
Investments are comprised of state, municipal and county obligations and
corporate debt securities with lives ranging from three months to two years.
The Company classifies its investments as available for sale in accordance with
SFAS No.&nbsp;115, &#147;Accounting for Certain Investments in Debt and Equity
Securities,&#148; and states its investments at estimated fair value, with material
unrealized gains and losses reported in other comprehensive income. The
specific identification method is used to determine the cost of securities
disposed of, with realized gains and losses reflected in other income and
expense. Investments are anticipated to be used for current operations and are,
therefore, classified as current assets, even though maturities may extend
beyond one year. At March&nbsp;29, 2002 all short-term investments
mature in less than one year. At December&nbsp;31, 2001, short-term
investments of $0.5&nbsp;million had maturities greater than one year.
</FONT>
<P align="left"><FONT size="2">NOTE 4 &#151; DERIVATIVE FINANCIAL INSTRUMENTS</FONT>

<P align="center"><FONT size="2">6
</FONT>

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<H5 align="left" style="page-break-before:always"><A HREF="#toc">Table of Contents</A></H5><P>

<P><FONT size="2">The Company enters into foreign currency forward
exchange contracts (&#147;forward contracts&#148;) to manage exposure related to accounts
receivable denominated in foreign currencies. The Company does not enter into
derivative financial instruments for trading purposes. The Company had
outstanding forward contracts totaling approximately $0.5&nbsp;million at March&nbsp;29,
2002. The open contracts mature at various dates through May&nbsp;22, 2002 and hedge
certain foreign currency transaction exposures in the British Pound Sterling
and the Euro. The unrealized gains and losses on the forward contracts at March
29, 2002 were negligible.
</FONT>
<P align="left"><FONT size="2">NOTE 5 &#151; INVENTORIES</FONT>

<CENTER>
<TABLE cellspacing="0" border="0" cellpadding="0" width="55%">
<TR valign="bottom">
        <TD width="52%">&nbsp;</TD>
        <TD width="5%">&nbsp;</TD>
        <TD width="9%">&nbsp;</TD>
        <TD width="1%">&nbsp;</TD>
        <TD width="9%">&nbsp;</TD>
        <TD width="5%">&nbsp;</TD>
        <TD width="9%">&nbsp;</TD>
        <TD width="1%">&nbsp;</TD>
        <TD width="9%">&nbsp;</TD>
</TR>
<TR valign="bottom">
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="3"><FONT size="1"><B>MARCH 29,</B></FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="3"><FONT size="1"><B>DECEMBER 31,</B></FONT></TD>
</TR>
<TR valign="bottom">
        <TD nowrap align="left"><FONT size="1"><B>In Thousands</B></FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="3"><FONT size="1"><B>2002</B></FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="3"><FONT size="1"><B>2001</B></FONT></TD>
</TR>
<TR valign="bottom">
        <TD nowrap align="center"><HR size="1" noshade></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD colspan="3"><HR size="1" noshade></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD colspan="3"><HR size="1" noshade></TD>
</TR>
<TR valign="bottom">
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="3"><FONT size="1"><B>(Unaudited)</B></FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
</TR>
<TR valign="bottom" bgcolor="#eeeeee">
        <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Raw materials</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">14,490</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">12,302</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
        <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Work-in-process</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">2,813</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">3,920</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
        <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Finished goods</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">8,823</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">14,722</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR>
        <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="bottom">
        <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">26,126</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">30,944</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR>
        <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="4" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="4" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
</TABLE>
</CENTER>
<P align="left"><FONT size="2">NOTE 6 &#151; GOODWILL AND OTHER INTANGIBLES</FONT>

<P><FONT size="2">As of January&nbsp;1, 2002, Harmonic adopted SFAS No.&nbsp;142, &#147;Goodwill and Other
Intangible Assets&#148;, which requires, among other things, that goodwill and
intangible assets with indefinite useful lives no longer be amortized. In
addition, the standard includes provisions for the reclassification of certain
existing recognized intangibles as goodwill, reassessment of the useful lives
of existing recognized intangibles, and the testing for impairment of existing
goodwill and other intangibles at least annually. In accordance with this
statement, the Company reassessed the classification of its goodwill and
intangible assets, and reclassified $0.2&nbsp;million of assembled workforce, net of accumulated
amortization and tax effects, to goodwill. As of January&nbsp;1, 2002, the Company
ceased the amortization of goodwill.
</FONT>
<P><FONT size="2">The Company has two operating segments, Broadband
Access Networks, or BAN, and
Convergent Systems, or CS. Management believes these operating segments represent the
Company&#146;s reporting units for purposes of applying SFAS&nbsp;No.&nbsp;142. CS is the only
reporting unit with goodwill and intangible assets. During the quarter ended
March&nbsp;29, 2002, the Company performed the transitional goodwill impairment test for the CS reporting unit. The fair value of
CS, which was based on the operation&#146;s
future discounted cash flows, exceeded its carrying amount, including goodwill, and therefore, the goodwill
was determined not to be impaired.
</FONT>
<P><FONT size="2">The following is a summary of reported net loss and loss per share as adjusted
to exclude amortization of goodwill and assembled workforce for the three month
periods ended March&nbsp;29, 2002 and March&nbsp;30, 2001:
</FONT>
<CENTER>
<TABLE cellspacing="0" border="0" cellpadding="0" width="65%">
<TR valign="bottom">
        <TD width="64%">&nbsp;</TD>
        <TD width="5%">&nbsp;</TD>
        <TD width="6%">&nbsp;</TD>
        <TD width="1%">&nbsp;</TD>
        <TD width="6%">&nbsp;</TD>
        <TD width="5%">&nbsp;</TD>
        <TD width="6%">&nbsp;</TD>
        <TD width="1%">&nbsp;</TD>
        <TD width="6%">&nbsp;</TD>
</TR>
<TR valign="bottom">
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="7"><FONT size="1"><B>THREE MONTHS ENDED</B></FONT></TD>
</TR>
<TR valign="bottom">
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD colspan="7"><HR size="1" noshade></TD>
</TR>
<TR valign="bottom">
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="3"><FONT size="1"><B>MARCH 29,</B></FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="3"><FONT size="1"><B>MARCH 30,</B></FONT></TD>
</TR>
<TR valign="bottom">
        <TD nowrap align="left"><FONT size="1"><B>In Thousands (Unaudited)</B></FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="3"><FONT size="1"><B>2002</B></FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="3"><FONT size="1"><B>2001</B></FONT></TD>
</TR>
<TR valign="bottom">
        <TD nowrap align="center"><HR size="1" noshade></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD colspan="3"><HR size="1" noshade></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD colspan="3"><HR size="1" noshade></TD>
</TR>
<TR valign="bottom" bgcolor="#eeeeee">
        <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Reported net loss</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">(14,012</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">(48,665</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR valign="bottom">
        <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Goodwill amortization</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">&#151;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">187</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
        <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Assembled workforce amortization</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">&#151;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">463</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR>
        <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="bottom">
        <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Adjusted net loss</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">(14,012</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">(48,015</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
</TR>
<TR>
        <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="4" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="4" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="bottom" bgcolor="#eeeeee">

<TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Basic
and diluted net loss per share:</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
        <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Reported net loss</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">(0.24</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">(0.84</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
        <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Goodwill amortization</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">&#151;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">&#151;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
        <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Assembled workforce amortization</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">&#151;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">.01</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
</TABLE>
</CENTER>
<P align="center"><FONT size="2">7
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#toc">Table of Contents</A></H5><P>
<CENTER>
<TABLE cellspacing="0" border="0" cellpadding="0" width="65%">
<TR valign="bottom">
        <TD width="64%">&nbsp;</TD>
        <TD width="5%">&nbsp;</TD>
        <TD width="6%">&nbsp;</TD>
        <TD width="1%">&nbsp;</TD>
        <TD width="6%">&nbsp;</TD>
        <TD width="5%">&nbsp;</TD>
        <TD width="6%">&nbsp;</TD>
        <TD width="1%">&nbsp;</TD>
        <TD width="6%">&nbsp;</TD>
</TR>
<TR valign="bottom">
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="7"><FONT size="1"><B>THREE MONTHS ENDED</B></FONT></TD>
</TR>
<TR valign="bottom">
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD colspan="7"><HR size="1" noshade></TD>
</TR>
<TR valign="bottom">
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="3"><FONT size="1"><B>MARCH 29,</B></FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="3"><FONT size="1"><B>MARCH 30,</B></FONT></TD>
</TR>
<TR valign="bottom">
        <TD nowrap align="left"><FONT size="1"><B>In Thousands (Unaudited)</B></FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="3"><FONT size="1"><B>2002</B></FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="3"><FONT size="1"><B>2001</B></FONT></TD>
</TR>
<TR valign="bottom">
        <TD nowrap align="center"><HR size="1" noshade></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD colspan="3"><HR size="1" noshade></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD colspan="3"><HR size="1" noshade></TD>
</TR>

<TR valign="bottom">

<TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Adjusted
net loss per share</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">(0.24</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">(0.83</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
</TR>
<TR>
        <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="4" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="4" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
</TABLE>
</CENTER>
<P><FONT size="2">The following is a summary of goodwill and intangible assets as of March&nbsp;29,
2002 and December&nbsp;31, 2001:
</FONT>
<CENTER>
<TABLE cellspacing="0" border="0" cellpadding="0" width="95%">
<TR valign="bottom">
        <TD width="3%">&nbsp;</TD>
        <TD width="31%">&nbsp;</TD>
        <TD width="3%">&nbsp;</TD>
        <TD width="3%">&nbsp;</TD>
        <TD width="1%">&nbsp;</TD>
        <TD width="3%">&nbsp;</TD>
        <TD width="3%">&nbsp;</TD>
        <TD width="4%">&nbsp;</TD>
        <TD width="1%">&nbsp;</TD>
        <TD width="5%">&nbsp;</TD>
        <TD width="3%">&nbsp;</TD>
        <TD width="3%">&nbsp;</TD>
        <TD width="1%">&nbsp;</TD>
        <TD width="3%">&nbsp;</TD>
        <TD width="3%">&nbsp;</TD>
        <TD width="3%">&nbsp;</TD>
        <TD width="1%">&nbsp;</TD>
        <TD width="3%">&nbsp;</TD>
        <TD width="3%">&nbsp;</TD>
        <TD width="4%">&nbsp;</TD>
        <TD width="1%">&nbsp;</TD>
        <TD width="5%">&nbsp;</TD>
        <TD width="3%">&nbsp;</TD>
        <TD width="3%">&nbsp;</TD>
        <TD width="1%">&nbsp;</TD>
        <TD width="3%">&nbsp;</TD>
</TR>
<TR valign="bottom">
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="11"><FONT size="1"><B>MARCH 29, 2002</B></FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
</TR>
<TR valign="bottom">
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="11"><FONT size="1"><B>(Unaudited)</B></FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="11"><FONT size="1"><B>DECEMBER 31, 2001</B></FONT></TD>
</TR>
<TR valign="bottom">
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD colspan="11"><HR size="1" noshade></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD colspan="11"><HR size="1" noshade></TD>
</TR>
<TR valign="bottom">
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="3"><FONT size="1"><B>Gross Carrying</B></FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="3"><FONT size="1"><B>Accumulated</B></FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="3"><FONT size="1"><B>Net Carrying</B></FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="3"><FONT size="1"><B>Gross Carrying</B></FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="3"><FONT size="1"><B>Accumulated</B></FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="3"><FONT size="1"><B>Net Carrying</B></FONT></TD>
</TR>
<TR valign="bottom">
        <TD nowrap align="left" colspan="2"><FONT size="1"><B>In Thousands</B></FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="3"><FONT size="1"><B>Amount</B></FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="3"><FONT size="1"><B>Amortization</B></FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="3"><FONT size="1"><B>Amount</B></FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="3"><FONT size="1"><B>Amount</B></FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="3"><FONT size="1"><B>Amortization</B></FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="3"><FONT size="1"><B>Amount</B></FONT></TD>
</TR>
<TR valign="bottom">
        <TD colspan="2"><HR size="1" noshade></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD colspan="3"><HR size="1" noshade></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD colspan="3"><HR size="1" noshade></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD colspan="3"><HR size="1" noshade></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD colspan="3"><HR size="1" noshade></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD colspan="3"><HR size="1" noshade></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD colspan="3"><HR size="1" noshade></TD>
</TR>
<TR valign="bottom" bgcolor="#eeeeee">
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Identified intangibles:</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Developed core technology</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">29,059</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">(10,638</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">18,421</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">29,059</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">(7,849</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">21,210</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Customer base</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">33,295</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">(11,260</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">22,035</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">33,295</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">(8,738</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">24,557</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Trademark and tradename</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">4,076</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">(1,374</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">2,702</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">4,076</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">(1,068</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">3,008</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Assembled workforce</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">&#151;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">&#151;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">&#151;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">2,285</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">(1,907</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">378</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Supply agreement</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">3,107</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">(1,048</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">2,059</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">3,107</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">(815</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">2,292</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR>
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="bottom" bgcolor="#eeeeee">
        <TD><FONT size="2">&nbsp;</FONT></TD>
<TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Subtotal
of identified intangibles</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">69,537</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">(24,320</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">45,217</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">71,822</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">(20,377</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">51,445</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR>
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">

<TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Goodwill:</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>


<TR valign="bottom" bgcolor="#eeeeee">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Goodwill</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">2,225</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">(668</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">1,557</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">2,225</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">(668</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">1,557</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="bottom">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Assembled workforce reclassified</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">2,130</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">(1,907</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">223</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">&#151;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">&#151;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">&#151;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR>
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="bottom" bgcolor="#eeeeee">
        <TD><FONT size="2">&nbsp;</FONT></TD>
<TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Subtotal
of goodwill</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">4,355</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">(2,575</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">1,780</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">2,225</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">(668</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">1,557</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR>
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="bottom">
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Total goodwill and other
intangibles</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">73,892</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">(26,895</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">46,997</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">74,047</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">(21,045</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">53,002</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR>
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="4" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="4" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="4" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="4" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="4" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="4" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
</TABLE>
</CENTER>
<P align="left"><FONT size="2">NOTE 7 &#151; CREDIT FACILITIES AND LONG-TERM DEBT</FONT>

<P><FONT size="2">Harmonic has a bank line of credit facility, which provides for borrowings up
to $10.0&nbsp;million with a $6.0&nbsp;million secured equipment term loan sub-limit. The
facility, which is available until April 2003, contains certain financial and
other covenants, with which Harmonic was in compliance at March&nbsp;29, 2002.
Borrowings pursuant to the line bear interest at the bank&#146;s prime rate (prime
rate plus 2.0% &#151; 3.0% under the equipment term loan), are payable monthly,
and are secured by Harmonic&#146;s assets. As of March&nbsp;29, 2002, the Company had
outstanding borrowings of $2.8&nbsp;million under its equipment term loan, of which
$0.3&nbsp;million was borrowed during the first quarter of 2002. The term loan bears
interest at 7.75% to 10.0% annually on outstanding
borrowings which mature at various dates through September 2004. Harmonic also
has a bank facility, which provides for the sale of trade receivables
on a non-recourse basis up to $12.5&nbsp;million and expires in April 2003. Trade
receivables sold under the facility are discounted based on the bank&#146;s prime
rate plus 1.5% for North American customers and 2.0% for all other customers.
At March&nbsp;29, 2002, and December&nbsp;31, 2001,
$12.5&nbsp;million and $5.7&nbsp;million, respectively, were available under the trade receivable facility.
</FONT>

<P align="left"><FONT size="2">NOTE 8 &#151; NET LOSS PER SHARE</FONT>

<P><FONT size="2">The basic net loss per share is computed by dividing the net loss attributable
to common stockholders for the period by the weighted average number of
common shares outstanding during the period. The diluted net loss per share is
the same as the basic net loss per share for the three months ended March&nbsp;29,
2002 and March&nbsp;30, 2001 because common shares issuable upon the exercise of stock options
are only considered when their effect would be dilutive. During
the three month periods ended March&nbsp;29, 2002 and March&nbsp;30, 2001, 4.3&nbsp;million
and 7.6&nbsp;million of weighted average options,
respectively, were excluded from the net loss per
share computations because their effect was antidilutive.
</FONT>

<P align="left"><FONT size="2">NOTE 9 &#151; EMPLOYEE STOCK PURCHASE PLAN</FONT>

<P><FONT size="2">Harmonic believes that it had insufficient shares
reserved for issuance under its 1995 Employee Stock Purchase Plan (the &#147;1995
ESPP&#148;) to cover all forecasted purchases under offering periods that have
commenced and which continue through June 2003. In March 2002, the
Harmonic board of
directors adopted the 2002
</FONT>
<P align="center"><FONT size="2">8
</FONT>

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<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#toc">Table of Contents</A></H5><P>

<P><FONT size="2">Employee Stock Purchase Plan (the &#147;2002 ESPP&#148;), subject to stockholder
approval, which is intended to replace the 1995 ESPP. If the 2002
ESPP is approved by stockholders, the 1995 ESPP will be
terminated on or before July&nbsp;1, 2002. The board of directors
adopted the 2002 ESPP because the approval of additional shares for
the 1995 ESPP could have resulted in future non-cash
compensation charges which, depending on the future market price per share of
the Company&#146;s common stock, could have been significant.
</FONT>
<P align="left"><FONT size="2">NOTE 10 &#151; COMPREHENSIVE LOSS</FONT>

<P><FONT size="2">The Company&#146;s total comprehensive loss was as follows:
</FONT>
<CENTER>
<TABLE cellspacing="0" border="0" cellpadding="0" width="65%">
<TR valign="bottom">
        <TD width="62%">&nbsp;</TD>
        <TD width="5%">&nbsp;</TD>
        <TD width="6%">&nbsp;</TD>
        <TD width="1%">&nbsp;</TD>
        <TD width="7%">&nbsp;</TD>
        <TD width="5%">&nbsp;</TD>
        <TD width="6%">&nbsp;</TD>
        <TD width="1%">&nbsp;</TD>
        <TD width="7%">&nbsp;</TD>
</TR>
<TR valign="bottom">
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="7"><FONT size="1"><B>THREE MONTHS ENDED</B></FONT></TD>
</TR>
<TR valign="bottom">
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD colspan="7"><HR size="1" noshade></TD>
</TR>
<TR valign="bottom">
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="3"><FONT size="1"><B>MARCH 29,</B></FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="3"><FONT size="1"><B>MARCH 30,</B></FONT></TD>
</TR>
<TR valign="bottom">
        <TD nowrap align="left"><FONT size="1"><B>In Thousands (Unaudited)</B></FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="3"><FONT size="1"><B>2002</B></FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="3"><FONT size="1"><B>2001</B></FONT></TD>
</TR>
<TR valign="bottom">
        <TD nowrap align="center"><HR size="1" noshade></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD colspan="3"><HR size="1" noshade></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD colspan="3"><HR size="1" noshade></TD>
</TR>
<TR valign="bottom" bgcolor="#eeeeee">
        <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Net loss</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">(14,012</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">(48,665</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR valign="bottom">

<TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Change in unrealized loss on investments, net</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">(14</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">(111</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">

<TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Foreign currency translation</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">(2</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">(169</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
</TR>
<TR>
        <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="bottom">
        <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Total comprehensive loss</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">(14,028</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">(48,945</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
</TR>
<TR>
        <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="4" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="4" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
</TABLE>
</CENTER>
<P align="left"><FONT size="2">NOTE 11 &#151; RESTRUCTURING AND EXCESS FACILITIES</FONT>

<P><FONT size="2">In response to a significant reduction in customer
capital spending, principally weak cable
spending on transmission upgrades, and the resulting adverse impact on
Harmonic&#146;s operating results, the Company implemented a series of cost control
measures to improve operating efficiencies during 2001. These
measures included
a plan to exit additional excess facilities and
to consolidate operations, principally on Harmonic&#146;s Sunnyvale, California
campus. In 2001, a total excess facilities charge of $30.1&nbsp;million was
recorded to operating expenses for facilities that Harmonic does not intend to
occupy, has exited or plans to exit in 2002 and does not expect to reoccupy.
</FONT>
<P><FONT size="2">As of March&nbsp;29, 2002, accrued excess facility
costs totaled $21.9
million. The cash outlay in the first quarter of 2002 was $0.9&nbsp;million, net of
sublease income. The Company anticipates a cash outlay of
approximately $3.0&nbsp;million for the remainder of 2002, net of estimated sublease income, and to pay the
remaining $18.9&nbsp;million, net of estimated sublease income, over the next nine
years. Harmonic reassesses this liability on a quarterly basis based on
changes in the timing and amounts of expected sublease rental income.
</FONT>
<P align="left"><FONT size="2">NOTE 12 &#151; SEGMENT REPORTING</FONT>

<P><FONT size="2">Operating segments are defined as components of an enterprise that engage in
business activities for which separate financial information is available and
evaluated by the chief operating decision maker. Harmonic is organized as two
operating segments, Broadband Access Networks, or BAN, for fiber optic systems,
and Convergent Systems, or CS, for digital headend systems. Each of these
operating segments require their own development and marketing strategies and
therefore have separate management teams, with a worldwide sales and
professional services and systems support organization supporting both
divisions.
</FONT>
<P><FONT size="2">The results of the reportable segments are derived directly from the Company&#146;s
management reporting system. These results reported below are based on
Harmonic&#146;s method of internal reporting and are not necessarily in conformity
with generally accepted accounting principles. Management measures performance
of each segment
</FONT>
<P align="center"><FONT size="2">9
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#toc">Table of Contents</A></H5><P>

<P><FONT size="2">based on several metrics, including revenue, and income or loss from
operations. These results are used, in part, to evaluate the performance of,
and allocate resources to each of the segments. Net income or loss, and assets
and liabilities are not internally reported by business segment.
</FONT>
<CENTER>
<TABLE cellspacing="0" border="0" cellpadding="0" width="75%">
<TR valign="bottom">
        <TD width="5%">&nbsp;</TD>
        <TD width="67%">&nbsp;</TD>
        <TD width="5%">&nbsp;</TD>
        <TD width="4%">&nbsp;</TD>
        <TD width="1%">&nbsp;</TD>
        <TD width="4%">&nbsp;</TD>
        <TD width="5%">&nbsp;</TD>
        <TD width="4%">&nbsp;</TD>
        <TD width="1%">&nbsp;</TD>
        <TD width="4%">&nbsp;</TD>
</TR>
<TR valign="bottom">
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="7"><FONT size="1"><B>THREE MONTHS ENDED</B></FONT></TD>
</TR>
<TR valign="bottom">
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD colspan="7"><HR size="1" noshade></TD>
</TR>
<TR valign="bottom">
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="3"><FONT size="1"><B>MARCH 29,</B></FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="3"><FONT size="1"><B>MARCH 30,</B></FONT></TD>
</TR>
<TR valign="bottom">
        <TD nowrap align="left" colspan="2"><FONT size="1"><B>In Thousands (Unaudited)</B></FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="3"><FONT size="1"><B>2002</B></FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="3"><FONT size="1"><B>2001</B></FONT></TD>
</TR>
<TR valign="bottom">
        <TD colspan="2"><HR size="1" noshade></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD colspan="3"><HR size="1" noshade></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD colspan="3"><HR size="1" noshade></TD>
</TR>
<TR valign="bottom" bgcolor="#eeeeee">
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Net sales:</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Broadband Access Networks</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">21,812</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">18,805</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Convergent Systems</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">32,220</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">21,469</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR>
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="bottom">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Total net sales</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">54,032</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">40,274</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR>
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="4" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="4" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="bottom" bgcolor="#eeeeee">

<TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Loss
from segment operations:</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Broadband Access Networks</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">(941</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">(22,775</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Convergent Systems</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">(2,962</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">(17,284</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
</TR>
<TR>
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="bottom">

<TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Loss from segment operations</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">(3,903</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">(40,059</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Amortization of goodwill and other intangibles</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">(5,850</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">(5,109</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR valign="bottom">
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Interest and other income (expense), net</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">(7</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">1,556</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Corporate and unallocated costs, and eliminations</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">(3,752</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">(5,872</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
</TR>
<TR>
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="bottom">
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Loss before income taxes</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">(13,512</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">(49,484</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
</TR>
<TR>
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="4" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="4" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
</TABLE>
</CENTER>
<P align="left"><FONT size="2">NOTE 13 &#151; LEGAL PROCEEDINGS</FONT>

<P align="left"><FONT size="2"><I>Securities Litigation</I></FONT>

<P><FONT size="2">On May&nbsp;3, 2000 Harmonic completed the
acquisition of C-Cube Microsystems, Inc., or C-Cube, for approximately $1.8&nbsp;billion in common stock.
Between June&nbsp;28 and August&nbsp;25, 2000, several actions alleging violations of the
federal securities laws by Harmonic and certain of its current and
former officers and directors
were filed in or removed to the
United States District Court for the Northern District of California. The
actions subsequently were consolidated.
</FONT>
<P><FONT size="2">A consolidated complaint, filed on December&nbsp;7, 2000, was brought on behalf of a
purported class of persons who purchased Harmonic&#146;s publicly traded securities
between January&nbsp;19 and June&nbsp;26, 2000. The complaint also alleged claims on
behalf of a purported subclass of persons who purchased C-Cube securities
between January&nbsp;19 and May&nbsp;3, 2000. In addition to Harmonic and certain of its
officers and directors, the complaint also named C-Cube and
several of its officers and directors as defendants. The complaint alleged
that, by making false or misleading statements regarding
Harmonic&#146;s prospects
and customers and its acquisition of C-Cube, certain defendants violated
sections 10(b) and 20(a) of the Securities Exchange Act of 1934. The complaint
also alleged that certain defendants violated section 14(a) of the Exchange Act
and sections 11, 12(a)(2), and 15 of the Securities Act of 1933 by filing a
false or misleading registration statement, prospectus, and joint proxy in
connection with the C-Cube acquisition.
</FONT>
<P><FONT size="2">On July&nbsp;3, 2001, the Court dismissed the consolidated complaint with leave to
amend. An amended complaint alleging the same claims against the same
defendants was filed on August&nbsp;13, 2001. Defendants moved to dismiss the
amended complaint on September&nbsp;24, 2001. Pursuant to the
Court&#146;s July&nbsp;3, 2001
order, no hearing on the motions will be held unless the Court sets one.
</FONT>
<P><FONT size="2">A derivative action purporting to be on behalf of Harmonic was filed against
its then-current directors in the Superior Court for the County of Santa Clara
on September&nbsp;5, 2000. Harmonic also was named as a nominal defendant. The
complaint is based on allegations similar to those found in the securities
class actions and claims that the defendants breached their fiduciary duties
by, among other things, causing Harmonic to violate federal securities laws.
The derivative action was removed to the United States District Court for the
Northern District of California on September&nbsp;20, 2000. All deadlines in this
action have been stayed pending resolution of the motions to dismiss the
securities actions. At an April&nbsp;5, 2002 case management conference, the court
continued the conference until June&nbsp;7, 2002. The court stated that the parties
need not appear if no decision on the motions to dismiss the securities action
had been issued by that date.
</FONT>
<P align="center"><FONT size="2">10
</FONT>

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<P><FONT size="2">Based on its review of the complaints filed in the securities class action,
Harmonic believes that it has meritorious defenses and intends to defend itself
vigorously. There can be no assurance, however, that Harmonic will prevail. An
unfavorable outcome of this litigation could have a material adverse effect on
Harmonic&#146;s business, operating results, financial position and liquidity.
</FONT>
<P><FONT size="2">In November 2001, Harmonic was sued in Tennessee state court by a company
alleging breach of contract and breach of a Tennessee statute relating to
retailers and suppliers. The suit has a claim for $2.5&nbsp;million
and other
unspecified damages, lost profits and attorneys&#146; fees. The suit has since been
removed to Federal Court and a trial date has been set for June 2003. Harmonic
believes that it has meritorious defenses and will defend the suit vigorously.
However, Harmonic cannot assure you that an unfavorable outcome will not
adversely impact its business, operating results, financial position and
liquidity.
</FONT>
<!-- link2 "ITEM 2. MANAGEMENT&#146;S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" -->
<DIV align="left"><A NAME="006"></A></DIV>
<P align="left"><FONT size="2"><B>ITEM 2. MANAGEMENT&#146;S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS</B></FONT>

<P><FONT size="2">This Quarterly Report on Form&nbsp;10-Q contains forward-looking statements within
the meaning of Section&nbsp;27A of the Securities Act of 1933 and Section&nbsp;21E of the
Securities Exchange Act of 1934, including statements regarding future results,
future revenue, gross margins and profits, and expense levels, future capital
expenditures, future cash flows, future interest income, future tax provisions,
future borrowing capability and future liquidity. Actual results could differ materially from
those projected in the forward-looking statements as a result of a number of
factors, including those set forth under &#147;Factors That May Affect Future
Results of Operations&#148; below and elsewhere in this Form&nbsp;10-Q.
</FONT>
<P align="left"><FONT size="2"><B>Overview</B></FONT>

<P><FONT size="2">Harmonic designs, manufactures and sells a variety of broadband solutions that
allow communications service providers around the world to deliver video, voice
and data to their subscribers. Harmonic&#146;s technically advanced fiber optic,
digital video and data delivery systems enable network operators to provide a
range of interactive and advanced digital services that include digital video,
high-speed Internet access, telephony, HDTV, video and audio streaming, and
video-on-demand.
</FONT>
<P><FONT size="2">Historically, almost all of our sales were derived directly or indirectly from
sales of fiber optic transmission systems to cable television operators. With
the introduction of digital headend products beginning in 1997, we have
broadened our product offering to enable delivery of digital video, voice and
data over satellite and wireless networks and cable systems.
</FONT>
<P><FONT size="2">In order to further expand our digital systems capability, Harmonic completed
its merger with C-Cube Microsystems Inc. in May 2000, pursuant to the terms of
a merger agreement dated October&nbsp;27, 1999. Under the terms of the merger
agreement, C-Cube spun off its semiconductor business as a separate publicly
traded company, which was subsequently acquired by LSI Logic in June
2001. C-Cube merged into Harmonic and Harmonic therefore
acquired C-Cube&#146;s DiviCom business, which provides MPEG-2 encoding products and
systems for digital television.
</FONT>
<P><FONT size="2">The merger closed on May&nbsp;3, 2000, and Harmonic has consolidated the results of
the DiviCom business in its financial statements from that date forward. The
merged company has been organized into two operating divisions, Broadband
Access Networks, or BAN, for fiber optic systems and Convergent Systems, or CS,
for digital headend systems. While the two divisions have been organized
generally around the pre-merger Harmonic fiber optics systems and the DiviCom
digital headend systems, respectively, these divisions do not correspond to the
pre-merger companies in significant ways. For example, some of Harmonic&#146;s
product lines are now part of the CS division.
</FONT>
<P><FONT size="2">Harmonic&#146;s net sales increased 34% in the first quarter of 2002 compared to the
first quarter of 2001 reflecting increased sales in each division. CS division
sales increased 50% in the first quarter of 2002 compared to the first quarter
of 2001 principally due to sales of new next-generation digital products
including the MV50 encoder and Narrowcast Services Gateway, or NSG,
which
commenced volume shipment in the second quarter of 2001. BAN
</FONT>
<P align="center"><FONT size="2">11
</FONT>

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<P><FONT size="2">division sales increased 16% in the first quarter of 2002 compared to the first
quarter of 2001 due to higher spending on network upgrades by certain domestic
cable operators.
</FONT>
<P><FONT size="2">While sales increased significantly in the first quarter of 2002, sales remain
below levels achieved by Harmonic and DiviCom in 1999 and early 2000 as
industry capital spending generally remains weak, particularly for BAN
products. BAN division sales have decreased significantly from the third
quarter of 2000 and were 57% lower in 2001 than in 2000. This was due to weak
cable industry spending on transmission upgrades, particularly reduced spending
by AT&#038;T Broadband and RCN. These two customers accounted for a total of 23% of
sales in 2000 compared to a combined total of less than 5% of sales in 2001 and
the first quarter of 2002. CS division sales from the second quarter of 2000
through the first quarter of 2001, consisting principally of DiviCom products,
were below DiviCom&#146;s sales levels in 1999 and the first quarter of 2000. The
lower CS sales were attributable principally to reduced spending by satellite
operators.
</FONT>
<P><FONT size="2">In order to reduce operating losses, Harmonic implemented a series of measures
to control costs and improve operating efficiencies during 2001 including a 30%
reduction in our work force. The operating results in 2001 included charges of
$75.6&nbsp;million, consisting of $39.2&nbsp;million for excess and obsolete inventories,
$30.1&nbsp;million for excess facility costs, $3.3&nbsp;million for fixed asset
impairment, and $3.0&nbsp;million for severance and other costs. Harmonic expects to
report a loss, excluding amortization of intangibles, at least through the second quarter of 2002 due to challenging
market conditions and uncertainty of the capital spending plans of our
customers, particularly domestic satellite and certain European customers.
</FONT>
<P><FONT size="2">The provisions for excess and obsolete inventories resulted from significant
reductions in the demand for our products, principally BAN division products;
in accordance with our policy we established provisions for inventory levels in
excess of our demand forecasts. We recorded excess facility charges for
facilities that we no longer occupy, do not intend to occupy, or will vacate
during 2002. We plan to sublease these facilities and have estimated the
associated loss based on the expected timing and amount of sublease income.
</FONT>
<P><FONT size="2">Due to lower than expected sales during each quarter from the second quarter of
2000 through the first quarter of 2001, Harmonic failed to meet the
expectations of securities analysts, and the price of our common stock declined
significantly. See &#147;Factors That May Affect Our Future Operations &#151; Our
Operating Results Are Likely To Fluctuate Significantly And May Fail To Meet Or
Exceed The Expectations Of Securities Analysts Or Investors, Causing Our Stock
Price To Decline.&#148;
</FONT>
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<P align="left"><FONT size="2"><B>Results of Operations</B></FONT>

<P align="left"><FONT size="2"><I>Net Sales</I></FONT>

<P><FONT size="2">Harmonic&#146;s net sales increased 34% from $40.3&nbsp;million in the first quarter of
2001 to $54.0&nbsp;million in the first quarter of 2002. The increase
reflected higher sales in
each division. CS division sales increased 50% in the first quarter of 2002
compared to the first quarter of 2001 principally due to sales of new
next-generation digital products including the MV50 encoder and Narrowcast
Services Gateway, or NSG, which commenced volume shipment in the second quarter
of 2001. BAN division sales increased 16% in the first quarter of 2002 compared
to the first quarter of 2001 due to higher spending on network upgrades by
certain domestic cable operators. Harmonic&#146;s domestic sales represented 69% of
net sales for the first quarter of 2002 compared to 44% for the first quarter
of 2001 and 60% for all of 2001. The higher percentage of domestic sales in the
first quarter of 2002 compared to the first quarter of 2001 was due to
shipments of the new digital products being concentrated in the United States,
increased purchases of BAN products by domestic operators and generally weaker
business conditions outside of the United States than a year ago.
</FONT>
<P align="left"><FONT size="2"><I>Gross Profit</I></FONT>

<P><FONT size="2">Gross profit increased from a gross loss of $10.8&nbsp;million (-27% of net sales)
in the first quarter of 2001 to a gross profit of $15.8&nbsp;million (29% of net
sales) in the first quarter of 2002. The increase in gross profit was primarily
due to increased sales and associated higher fixed cost absorption as a result
of higher production levels. In addition, approximately
$19&nbsp;million of the increase in gross profit was attributable to the recording
of inventory provisions in the first quarter of 2001, of which approximately $11
million related to streamlining of product lines and reducing the number of
products with low margins or volumes. Gross margins, excluding special charges and
amortization of intangibles, increased from 8% in the first quarter
of 2001 to 35% in the first quarter of 2002, and have increased
sequentially over the past four quarters.
</FONT>
<P align="center"><FONT size="2">14
</FONT>

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<P><FONT size="2">Harmonic believes that further improvements in gross margins will depend
upon higher sales volumes or the possible sale of excess and obsolete inventories for
which the cost basis was previously written down.
</FONT>
<P align="left"><FONT size="2"><I>Research and Development</I></FONT>

<P><FONT size="2">Research and development expenses decreased from $15.5&nbsp;million (38% of net
sales) in the first quarter of 2001 to $11.1&nbsp;million (21% of net sales) in the
first quarter of 2002. The decreases were primarily due to a reduction in
headcount associated with the cost control measures which were implemented in 2001. The decrease in research and
development as a percentage of sales was also attributable to increased net
sales. Harmonic anticipates that research and development expenses will not
change significantly in absolute dollars in 2002, although they may vary as a
percentage of net sales.
</FONT>
<P align="left"><FONT size="2"><I>Selling, General and Administrative</I></FONT>

<P><FONT size="2">Selling, general and administrative expenses decreased from $21.7&nbsp;million (54%
of net sales) in the first quarter of 2001 to $15.3&nbsp;million (28% of net sales)
in the first quarter of 2002. The decreases were primarily due to a reduction
in headcount associated with the 2001 work force reductions and lower
promotional expenses. The decrease in selling, general and administrative
expenses as a percentage of sales was also attributable to increased net sales.
Harmonic anticipates that selling, general and administrative expenses will not
change significantly in absolute dollars in 2002, although they may vary as a
percentage of net sales.
</FONT>
<P align="left"><FONT size="2"><I>Goodwill and Other Intangibles</I></FONT>

<P><FONT size="2">During
the first quarter of 2001, the Company recorded $3.1&nbsp;million of amortization
expense related to goodwill and other intangibles. Amortization
expense decreased to $2.8&nbsp;million in the first quarter of 2002 following
adoption, effective January&nbsp;1, 2002 of Statement of Financial Accounting
Standards, or SFAS No.&nbsp;142 &#147;Goodwill and Other Intangible Assets,&#148; which
requires, among other things, the discontinuance of goodwill amortization. See
Note 6 to the notes to Unaudited Condensed Financial Statements for the quarter
ended March&nbsp;29, 2002.
</FONT>
<P align="left"><FONT size="2"><I>Stock-Based Compensation</I></FONT>

<P><FONT size="2">Harmonic believes that it has insufficient shares
reserved for issuance under its 1995 Employee Stock Purchase Plan (the &#147;1995
ESPP&#148;) to cover all forecasted purchases under offering periods that have
commenced and which run through June 2003. In March 2002, the Harmonic board of
directors adopted the 2002 Employee Stock Purchase Plan (the &#147;2002 ESPP&#148;),
subject to stockholder approval, which is intended to replace the 1995 ESPP.
If the 2002 ESPP is approved by stockholders, the 1995 ESPP will be terminated on or before July&nbsp;1,
2002. The board of directors adopted the 2002 ESPP because the approval of additional shares for the 1995 ESPP could have
resulted in
future non-cash compensation charges which, depending on the future market
price per share of the Company&#146;s common stock, could have
been significant.
</FONT>
<P align="left"><FONT size="2"><I>Interest and Other Income, Net</I></FONT>

<P><FONT size="2">Interest and other income, net, decreased from $1.6&nbsp;million in the first
quarter of 2001 to a nominal expense in the first quarter of 2002. The decrease
was due primarily to lower interest income resulting from a reduction of
approximately 48% in average cash and short-term investment balances and lower
interest rates. In addition, the Company had interest expenses in the first
quarter of 2002 on borrowings under its equipment term loan and trade
receivable facility which offset
interest income. The Company had no interest expense in the first quarter of
2001.
</FONT>
<P align="left"><FONT size="2"><I>Income Taxes</I></FONT>

<P align="center"><FONT size="2">15
</FONT>

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<P><FONT size="2">A provision for income tax expense of $0.5&nbsp;million was recorded for the first quarter of
2002 principally due to establishment of a valuation allowance for
deferred tax assets and foreign taxes. For the first quarter of 2001 the
Company recorded a benefit from income taxes because of non-deductible goodwill
and intangible amortization, which was partially offset by a provision for
foreign taxes. In 2002, the Company expects to have an annual tax provision of
approximately $2&nbsp;million due to foreign income taxes.
</FONT>
<P align="left"><FONT size="2"><B>Liquidity and Capital Resources</B></FONT>

<P><FONT size="2">As of March&nbsp;29, 2002, cash and cash equivalents and short term investments
totaled $52.0&nbsp;million compared to $54.3&nbsp;million as of December&nbsp;31, 2001. Cash
used in operations was $3.7&nbsp;million in the first quarter of 2002 compared to
cash provided by operations of $15.3&nbsp;million in the first quarter of 2001. The
increase in cash used in operations, despite a significantly reduced net loss,
was primarily due to an increase in accounts receivable in the first quarter of
2002 compared to a substantial decrease in the first quarter of 2001, a smaller
decrease in inventory in the first quarter of 2002 than in the comparable
quarter of 2001 and an increase in accrued
liabilities in the first
quarter of 2001. The increase in accrued liabilities related to income
tax refunds of $22.4&nbsp;million which were received during the
first quarter of 2001 and which were partially offset by a decrease in other accrued
liabilities. Under the terms of the merger agreement with
C-Cube, Harmonic is generally liable for C-Cube&#146;s pre-merger tax liabilities.
Approximately $21&nbsp;million of pre-merger tax liabilities remain outstanding and
Harmonic expects final settlement, and payment, of these obligations to a
variety of taxing authorities and LSI Logic during 2002.
</FONT>
<P><FONT size="2">Additions to property, plant and equipment were $16.7&nbsp;million and $1.1&nbsp;million
in the first quarters of 2001 and 2002, respectively. The decrease from 2001
was due principally to expenditures during the first quarter of 2001 for
leasehold improvements and related furniture, fixtures and equipment in
connection with relocation of former DiviCom employees to new facilities in
Sunnyvale, and the implementation of a new enterprise resource planning (ERP)
software system. Harmonic expects capital expenditures to be approximately $10
million during 2002.
</FONT>
<P><FONT size="2">Harmonic has a bank line of credit facility, which provides for borrowings up
to $10.0&nbsp;million with a $6.0&nbsp;million secured equipment term loan sub-limit. The
facility, which is available until April 2003, contains certain
financial and other covenants, with which Harmonic was
in compliance at March&nbsp;29, 2002. Borrowings pursuant to the line bear
interest at the bank&#146;s prime rate (prime rate plus 2.0%-3.0% under the
equipment term loan), are payable monthly, and are secured by Harmonic&#146;s
assets. As of
March&nbsp;29, 2002, the Harmonic had outstanding borrowings of
$2.8&nbsp;million under its equipment term loan, of which
$0.3&nbsp;million was borrowed during the first quarter of 2002. The term loan bears interest at 7.75% to 10.0% annually on
outstanding borrowings which mature at various dates through September 2004.
Harmonic also has a facility which provides for the sale of trade receivables
on a non-recourse basis up to $12.5&nbsp;million and expires in April 2003. Trade
receivables sold under the facility are discounted based on the bank&#146;s prime
rate plus 1.5% for North American customers and 2.0% for all other customers.
At March&nbsp;29, 2002 and December&nbsp;31, 2001, $12.5&nbsp;million
and $5.7&nbsp;million, respectively, were available under the trade
receivable facility.
</FONT>

<P><FONT size="2">While Harmonic expects to report a loss, excluding
amortization of intangibles, at least through the second quarter of
2002, we believe that our existing liquidity sources, including our bank line
of credit and trade receivable sale facilities, will satisfy our requirements
for at least the next twelve months. We may need to raise additional funds if
our estimates change or prove inaccurate or in order for us to take advantage of
unanticipated opportunities or to strengthen our financial position. On March&nbsp;18, 2002, Harmonic filed a registration
statement on Form&nbsp;S-3 with the Securities and Exchange
Commission, or SEC. This shelf registration statement, which was
declared effective by the SEC in April 2002, will allow Harmonic to
issue various types of securities, including common stock, preferred
stock, debt securities and warrants to purchase common stock from
time to time, up to an aggregate of $150&nbsp;million, subject to
market conditions and our capital needs.
</FONT>
<P><FONT size="2">Our ability to raise funds may be adversely affected by a number of factors
relating to Harmonic, as well as factors beyond our control, including
increased market uncertainty following the terrorist attacks of September&nbsp;11,
2001 and the ongoing U.S. war on terrorism as well as conditions in
capital markets. There can be no assurance that any
financing will be available on terms acceptable to us, if at all. See Factors
That May Affect Future Results of Operations, &#147;Risk Factors &#151; We May Need
Additional Capital In The Future And May Not Be Able To Secure Adequate Funds
On Terms Acceptable To Us.&#148;
</FONT>
<P align="center"><FONT size="2">16
</FONT>

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<!-- link2 "ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK" -->
<DIV align="left"><A NAME="007"></A></DIV>
<P align="left"><FONT size="2"><B>ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK</B></FONT>

<P><FONT size="2">Market risk represents the risk of loss that may impact the operating results,
financial position or liquidity of Harmonic due to adverse changes in market
prices and rates. Harmonic is exposed to market risk because of changes in
interest rates and foreign currency exchange rates as measured against the U.S.
Dollar and currencies of Harmonic&#146;s subsidiaries.
</FONT>

<P align="left"><FONT size="2"><i>Foreign Currency Exchange Risk</i></FONT>

<P><FONT size="2">Harmonic has a number of international subsidiaries each of whose sales are
generally denominated in U.S. dollars. Following implementation of the Euro in January 2002, we expect a higher proportion of
our European business to be denominated in Euros which may subject us to
increased foreign currency exchange risk. In addition, the Company has various
international branch offices, which provide sales support and systems
integration services. While Harmonic does not anticipate that near-term changes
in exchange rates will have a material impact on future operating results,
financial position and liquidity, Harmonic cannot assure you that a sudden and
significant change in the value of local currencies would not harm Harmonic&#146;s
operating results, financial position and liquidity.
</FONT>

<P align="left"><FONT size="2"><i>Interest Rate Risk</i></FONT>

<P><FONT size="2">Exposure to market risk for changes in interest rates relate primarily to
Harmonic&#146;s investment portfolio of marketable debt securities of various
issuers, types and maturities, and to Harmonic&#146;s borrowings under its bank line
of credit facility. Harmonic does not use derivative instruments in its
investment portfolio, and its investment portfolio only includes highly liquid
instruments with an original maturity of less than two years. These investments
are classified as available for sale and are carried at estimated fair value,
with material unrealized gains and losses reported in other comprehensive
income. There is risk that losses could be incurred if the Company were to sell
any of its securities prior to stated maturity.
</FONT>
<P align="left"><FONT size="2"><B>FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS</B></FONT>

<P><FONT size="2"><I>We Depend On Cable And Satellite Industry Capital Spending For A Substantial
Portion Of Our Revenue And Any Decrease Or Delay In Capital Spending In These
Industries Would Negatively Impact Our Resources, Operating Results And
Financial Condition.</I>
</FONT>
<P><FONT size="2">Prior to the merger with C-Cube, almost all of Harmonic&#146;s historic sales had
been derived from sales to cable television operators and we expect these sales
to constitute a significant portion of net sales for the foreseeable future.
Almost all of the DiviCom business&#146; historic sales had been derived from sales
to satellite operators, telephone companies and cable operators. Demand for our products will depend on the magnitude and timing of capital
spending by cable television operators, satellite operators, broadcasters and
telephone companies for constructing and upgrading of their systems.
</FONT>
<P><FONT size="2">These capital spending patterns are dependent on a variety of factors,
including:
</FONT>
<P>
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">
<TR valign="top">
        <TD width="1%" align="left" nowrap><FONT size="2">&#149;</FONT></TD>
        <TD width="1%" nowrap><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD>
        <TD width="98%"><FONT size="2">access to financing;</FONT></TD>
</TR>
<TR>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="top">
        <TD width="1%" align="left" nowrap><FONT size="2">&#149;</FONT></TD>
        <TD width="1%" nowrap><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD>
        <TD width="98%"><FONT size="2">annual budget cycles;</FONT></TD>
</TR>
<TR>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="top">
        <TD width="1%" align="left" nowrap><FONT size="2">&#149;</FONT></TD>
        <TD width="1%" nowrap><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD>
        <TD width="98%"><FONT size="2">the impact of industry consolidation;</FONT></TD>
</TR>
<TR>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="top">
        <TD width="1%" align="left" nowrap><FONT size="2">&#149;</FONT></TD>
        <TD width="1%" nowrap><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD>
        <TD width="98%"><FONT size="2">the status of federal, local and foreign government regulation of telecommunications and
television broadcasting;</FONT></TD>
</TR>
<TR>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="top">
        <TD width="1%" align="left" nowrap><FONT size="2">&#149;</FONT></TD>
        <TD width="1%" nowrap><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD>
        <TD width="98%"><FONT size="2">overall demand for communication services and the acceptance of new video, voice and data services;</FONT></TD>
</TR>
<TR>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="top">
        <TD width="1%" align="left" nowrap><FONT size="2">&#149;</FONT></TD>
        <TD width="1%" nowrap><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD>
        <TD width="98%"><FONT size="2">evolving industry standards and network architectures;</FONT></TD>
</TR>
</TABLE>
<P align="center"><FONT size="2">17
</FONT>

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<P>
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">
<TR valign="top">
        <TD width="1%" align="left" nowrap><FONT size="2">&#149;</FONT></TD>
        <TD width="1%" nowrap><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD>
        <TD width="98%"><FONT size="2">competitive pressures;</FONT></TD>
</TR>
<TR>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="top">
        <TD width="1%" align="left" nowrap><FONT size="2">&#149;</FONT></TD>
        <TD width="1%" nowrap><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD>
        <TD width="98%"><FONT size="2">discretionary customer spending patterns;</FONT></TD>
</TR>
<TR>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="top">
        <TD width="1%" align="left" nowrap><FONT size="2">&#149;</FONT></TD>
        <TD width="1%" nowrap><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD>
        <TD width="98%"><FONT size="2">general economic conditions.</FONT></TD>
</TR>
</TABLE>
<P><FONT size="2">In the past, specific factors contributing to reduced capital spending have included:
</FONT>
<P>
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">
<TR valign="top">
        <TD width="1%" align="left" nowrap><FONT size="2">&#149;</FONT></TD>
        <TD width="1%" nowrap><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD>
        <TD width="98%"><FONT size="2">uncertainty related to development of digital video and cable modem industry standards;</FONT></TD>
</TR>
<TR>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="top">
        <TD width="1%" align="left" nowrap><FONT size="2">&#149;</FONT></TD>
        <TD width="1%" nowrap><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD>
        <TD width="98%"><FONT size="2">delays associated with the evaluation of new services and system architectures by many cable
television operators;</FONT></TD>
</TR>
<TR>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="top">
        <TD width="1%" align="left" nowrap><FONT size="2">&#149;</FONT></TD>
        <TD width="1%" nowrap><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD>
        <TD width="98%"><FONT size="2">emphasis on generating revenue from existing customers by cable television operators instead of
new construction or network upgrades; and</FONT></TD>
</TR>
<TR>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="top">
        <TD width="1%" align="left" nowrap><FONT size="2">&#149;</FONT></TD>
        <TD width="1%" nowrap><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD>
        <TD width="98%"><FONT size="2">general economic conditions in domestic and international markets.</FONT></TD>
</TR>
</TABLE>
<P><FONT size="2">Developments in capital markets over the past two years have reduced
access to funding for new and existing customers, causing delays in the timing
and scale of deployments of our equipment, as well as the postponement or cancellation
of certain projects by our customers. In addition, during this same period Harmonic and
other vendors received notification from several customers that they were canceling
new projects, or delaying new orders to allow them to reduce inventory levels which
were in excess of their current deployment requirements.
</FONT>
<P><FONT size="2">Certain of our domestic and international customers have accumulated
significant levels of debt and have recently announced, or are expected to announce,
reorganizations and financial restructurings, including bankruptcy filings. Even if these
restructurings are completed, we cannot assure you that these customers will be in a position
to purchase new equipment at levels we have seen in the past. In addition, concerns over recent
disclosures of off-balance sheet financing by Adelphia Communications have pressured the
market values of domestic cable operators and may further restrict their access to capital.
Adelphia accounted for less than 5% of our revenues in 2001 and approximately
5% of revenues in the first quarter of 2002.
</FONT>
<P><FONT size="2">The timing of deployment of our equipment can be subject to a number of other
risks, including the availability of skilled engineering and technical
personnel, the availability of other equipment such as digital set top boxes, and
the need for local zoning and licensing approvals. We believe that changes in
our customers&#146; deployment plans have in recent quarters delayed, and may in the
future delay, the receipt of new orders or the release of existing backlog.
Since the majority of our sales have been to relatively few customers, a delay
in equipment deployment at any one customer has in the past and could have a
material adverse effect on our sales in a particular quarter. In this regard,
the Company&#146;s sales decreased each quarter from the second quarter of 2000
through the first quarter of 2001 and were below our expectations in the BAN
and CS divisions as well as the expectations of securities analysts, and the
price of our Common Stock declined significantly.
</FONT>
<P><FONT size="2">Cable television capital spending can be subject to the effects of seasonality,
with fewer construction and upgrade projects typically occurring in winter
months and otherwise being affected by inclement weather.
</FONT>
<P><FONT size="2">BAN division sales have decreased significantly from the third quarter of 2000
and were 57% lower in 2001 than in 2000. This was due to weak cable industry
spending on transmission upgrades, particularly reduced spending by AT&#038;T
Broadband and RCN. These two customers accounted for a total of 23% of sales in
2000 compared to a combined total of less than 5% of sales in 2001 and the first quarter of 2002. CS division
sales from the second quarter of 2000 through the first quarter of 2001,
consisting principally of DiviCom products, were below DiviCom&#146;s sales levels
in 1999 and the first quarter of 2000, and were significantly below our
expectations at the time the DiviCom merger was announced in October 1999. The
lower CS sales were attributable principally to reduced spending by satellite
operators. For a more detailed discussion regarding risks related to
AT&#38;T Broadband, Charter Communication, DirecTv and other major customers, see &#147;Our
Customer Base Is Concentrated And The Loss Of One Or More Of Our Key Customers
Would Harm Our Business. The Loss Of Any Key Customer Would Have A Negative
Effect On Our Business.&#148;
</FONT>
<P><FONT size="2">CS division sales have increased significantly during the past four quarters
and were 50% higher in the first quarter of 2002 than in the first quarter of
2001 due principally to demand for our next-generation digital systems such as the
Narrowcast Services Gateway, or NSG, and the MV50 encoder. CS sales of the MV50
encoder have benefited over
</FONT>
<P align="center"><FONT size="2">18
</FONT>

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<P><FONT size="2">the past year from the expansion of local channel offerings and compliance with
FCC &#147;must carry&#148; regulations by domestic direct broadcast satellite, or DBS,
operators. We anticipate that, in light of the announced merger of EchoStar and
DirecTV and expectations that operators will add fewer local markets in 2002, our
revenue from domestic DBS operators is likely to decline in 2002.
</FONT>
<P><FONT size="2">Due to challenging market conditions and uncertainty of the capital spending
plans of our customers, particularly domestic satellite and certain European customers,
Harmonic expects to report a loss, excluding amortization of
intangibles, at least through the second quarter of 2002.
</FONT>
<P><FONT size="2"><I>Our Customer Base Is Concentrated And The Loss Of One Or More Of Our Key
Customers Would Harm Our Business. The Loss Of Any Key Customer Would Have A
Negative Effect On Our Business.</I>
</FONT>
<P><FONT size="2">Historically, a majority of our sales and sales of DiviCom 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 in the foreseeable future. Sales to our ten
largest customers in 2000, 2001, and the first quarter of 2002 accounted for
approximately 52%, 49% and 65% of net sales, respectively. Although we are
attempting to broaden our customer base by penetrating new markets such as the
telco and broadcast markets, we expect to see continuing industry consolidation
and customer concentration due in part to the significant capital costs of
constructing broadband networks. For example, Comcast and AT&#038;T Broadband, and
EchoStar and DirecTV have announced plans to merge. Both combinations are
subject to regulatory and shareholder approvals, among other conditions. In the
first quarter of 2002, sales to Charter Communications and Cablevision
accounted for 16% and 14% of net sales, respectively, compared to l2% and less
than 5% of net sales, respectively, for each of these customers in the first
quarter of 2001. The loss of Charter Communications, Cablevision, DirecTV or
any other significant customer or any reduction in orders by Charter
Communications, Cablevision, DirecTV or any significant customer, or our
failure to qualify our products with a significant customer could adversely
affect our business, operating results and liquidity. We cannot currently
predict the impact of the acquisitions of DirecTV by EchoStar, if approved, on
our future sales nor can we predict the impact of the AT&#038;T Broadband merger
with Comcast, if approved, on our future sales. Our sales are made on a
purchase order or system contract basis, and none of our customers has entered
into a long-term agreement requiring it to purchase our products. The loss of,
or any reduction in orders from, a significant customer would harm our
business.
</FONT>
<P><FONT size="2"><I>Our Operating Results Are Likely To Fluctuate Significantly And May Fail To
Meet Or Exceed The Expectations Of Securities Analysts Or Investors, Causing
Our Stock Price To Decline.</I>
</FONT>
<P><FONT size="2">Our operating results have fluctuated in the past and are likely to continue to
fluctuate in the future, on an annual and a quarterly basis, as a result of
several factors, many of which are outside of our control. Some of the factors
that may cause these fluctuations include:
</FONT>
<P>
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">
<TR valign="top">
        <TD width="1%" align="left" nowrap><FONT size="2">&#149;</FONT></TD>
        <TD width="1%" nowrap><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD>
        <TD width="98%"><FONT size="2">the level and timing of capital spending of our customers, both in the U.S. and in foreign markets;</FONT></TD>
</TR>
<TR>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="top">
        <TD width="1%" align="left" nowrap><FONT size="2">&#149;</FONT></TD>
        <TD width="1%" nowrap><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD>
        <TD width="98%"><FONT size="2">changes in market demand;</FONT></TD>
</TR>
<TR>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="top">
        <TD width="1%" align="left" nowrap><FONT size="2">&#149;</FONT></TD>
        <TD width="1%" nowrap><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD>
        <TD width="98%"><FONT size="2">the timing and amount of customer orders;</FONT></TD>
</TR>
<TR>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="top">
        <TD width="1%" align="left" nowrap><FONT size="2">&#149;</FONT></TD>
        <TD width="1%" nowrap><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD>
        <TD width="98%"><FONT size="2">the timing of revenue from systems contracts which may span several quarters;</FONT></TD>
</TR>
<TR>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="top">
        <TD width="1%" align="left" nowrap><FONT size="2">&#149;</FONT></TD>
        <TD width="1%" nowrap><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD>
        <TD width="98%"><FONT size="2">competitive market conditions;</FONT></TD>
</TR>
<TR>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="top">
        <TD width="1%" align="left" nowrap><FONT size="2">&#149;</FONT></TD>
        <TD width="1%" nowrap><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD>
        <TD width="98%"><FONT size="2">our unpredictable sales cycles;</FONT></TD>
</TR>
<TR>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="top">
        <TD width="1%" align="left" nowrap><FONT size="2">&#149;</FONT></TD>
        <TD width="1%" nowrap><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD>
        <TD width="98%"><FONT size="2">new product introductions by our competitors or by us;</FONT></TD>
</TR>
<TR>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="top">
        <TD width="1%" align="left" nowrap><FONT size="2">&#149;</FONT></TD>
        <TD width="1%" nowrap><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD>
        <TD width="98%"><FONT size="2">changes in domestic and international regulatory environments;</FONT></TD>
</TR>
<TR>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="top">
        <TD width="1%" align="left" nowrap><FONT size="2">&#149;</FONT></TD>
        <TD width="1%" nowrap><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD>
        <TD width="98%"><FONT size="2">market acceptance of new or existing products;</FONT></TD>
</TR>
</TABLE>
<P align="center"><FONT size="2">19
</FONT>

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<P>
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">
<TR valign="top">
        <TD width="1%" align="left" nowrap><FONT size="2">&#149;</FONT></TD>
        <TD width="1%" nowrap><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD>
        <TD width="98%"><FONT size="2">the cost and availability of components, subassemblies and modules;</FONT></TD>
</TR>
<TR>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="top">
        <TD width="1%" align="left" nowrap><FONT size="2">&#149;</FONT></TD>
        <TD width="1%" nowrap><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD>
        <TD width="98%"><FONT size="2">the mix of our customer base and sales channels;</FONT></TD>
</TR>
<TR>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="top">
        <TD width="1%" align="left" nowrap><FONT size="2">&#149;</FONT></TD>
        <TD width="1%" nowrap><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD>
        <TD width="98%"><FONT size="2">the mix of our products sold;</FONT></TD>
</TR>
<TR>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="top">
        <TD width="1%" align="left" nowrap><FONT size="2">&#149;</FONT></TD>
        <TD width="1%" nowrap><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD>
        <TD width="98%"><FONT size="2">our development of custom products and software;</FONT></TD>
</TR>
<TR>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="top">
        <TD width="1%" align="left" nowrap><FONT size="2">&#149;</FONT></TD>
        <TD width="1%" nowrap><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD>
        <TD width="98%"><FONT size="2">the level of international sales; and</FONT></TD>
</TR>
<TR>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="top">
        <TD width="1%" align="left" nowrap><FONT size="2">&#149;</FONT></TD>
        <TD width="1%" nowrap><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD>
        <TD width="98%"><FONT size="2">economic conditions specific to the cable and satellite industries, and general economic conditions.</FONT></TD>
</TR>
</TABLE>
<P><FONT size="2">In addition, we often recognize a substantial portion of our revenues in the
last month of the quarter. We establish our 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. In
addition, because a significant portion of our 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. Our 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. As a result of all these
factors, our operating results in one or more future periods may fail to meet
or exceed the expectations of securities analysts or investors. In that event,
the trading price of our common stock would likely decline. In this regard, due
to lower than expected sales in each quarter from the second quarter of 2000
through the first quarter of 2001, we failed to meet our internal expectations,
as well as the expectations of securities analysts and investors, and the price
of our common stock declined significantly.
</FONT>
<P><FONT size="2">Following the September&nbsp;11, 2001 terrorist attacks in New York City and
Washington, D.C., the United States and global economies have weakened and may
continue to deteriorate, which may impair our ability to ship our products
within the United States and internationally, and may result in further
decreases in our revenues and cause our stock price to decline. In addition, it
is anticipated that in the wake of these events, the United States and global
capital markets will experience a period of continuing volatility. These events
may have a negative impact on our business as a result of the cautious
purchasing behavior of customers.
</FONT>
<P><FONT size="2"><I>We May Need Additional Capital In The Future And May Not Be Able To Secure
Adequate Funds On Terms Acceptable To Us.</I>
</FONT>
<P><FONT size="2">While we expect to report a loss, excluding
amortization of intangibles, at least through the second quarter of 2002,
we currently believe that our existing liquidity sources, including bank line
of credit and trade receivable
sale facilities, will satisfy our requirements for at least
the next twelve months. We may need to raise additional funds if our estimates
change or prove inaccurate or in order for us to take advantage of unanticipated
opportunities or to strengthen our financial position. On March&nbsp;18, 2002, Harmonic filed a registration
statement on Form&nbsp;S-3 with the Securities and Exchange
Commission, or SEC. This shelf registration statement, which was
declared effective by the SEC in April 2002, will allow Harmonic to
issue various types of securities, including common stock, preferred
stock, debt securities and warrants to purchase common stock from
time to time, up to an aggregate of $150&nbsp;million, subject to market conditions and our capital needs. Our ability to raise funds may be adversely affected
by a number of factors relating to Harmonic, as well as factors beyond our
control, including increased market uncertainty following the events of
September&nbsp;11, 2001 and the ongoing U.S. war on terrorism as well
as conditions in capital markets. There can be no
assurance that such financing will be available on terms acceptable to us, if
at all.
</FONT>
<P><FONT size="2">In addition, we may review other potential acquisitions that would complement
our existing product offerings, enhance our technical capabilities or expand
our marketing and sales presence. While we have no current agreements or
negotiations underway with respect to any potential acquisition, any future
transaction of this nature could require potentially significant amounts of
capital. If adequate funds are not available, or are not available on
acceptable terms, we may not be able to take advantage of market opportunities,
to develop new products or to otherwise respond to competitive pressures.
</FONT>
<P align="center"><FONT size="2">20
</FONT>

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<P><FONT size="2"><I>We Depend On Our International Sales And Are Subject To The Risks Associated
With International Operations, Which May Negatively Affect Our Operating
Results.</I>
</FONT>
<P><FONT size="2">Sales to customers outside of the United States in 1999, 2000 and the first
quarter of 2002 represented 36%, 40% and 31%, of net sales, respectively, and
we expect that international sales will continue to represent a substantial
portion of our net sales for the foreseeable future. Our international
operations are subject to a number of risks, including:
</FONT>
<P>
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">
<TR valign="top">
        <TD width="1%" align="left" nowrap><FONT size="2">&#149;</FONT></TD>
        <TD width="1%" nowrap><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD>
        <TD width="98%"><FONT size="2">changes in foreign government regulations and telecommunications standards;</FONT></TD>
</TR>
<TR>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="top">
        <TD width="1%" align="left" nowrap><FONT size="2">&#149;</FONT></TD>
        <TD width="1%" nowrap><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD>
        <TD width="98%"><FONT size="2">import and export license requirements, tariffs, taxes and other trade barriers;</FONT></TD>
</TR>
<TR>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="top">
        <TD width="1%" align="left" nowrap><FONT size="2">&#149;</FONT></TD>
        <TD width="1%" nowrap><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD>
        <TD width="98%"><FONT size="2">fluctuations in currency exchange rates;</FONT></TD>
</TR>
<TR>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="top">
        <TD width="1%" align="left" nowrap><FONT size="2">&#149;</FONT></TD>
        <TD width="1%" nowrap><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD>
        <TD width="98%"><FONT size="2">difficulty in collecting accounts receivable;</FONT></TD>
</TR>
<TR>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="top">
        <TD width="1%" align="left" nowrap><FONT size="2">&#149;</FONT></TD>
        <TD width="1%" nowrap><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD>
        <TD width="98%"><FONT size="2">the burden of complying with a wide variety of foreign laws, treaties and technical standards;</FONT></TD>
</TR>
<TR>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="top">
        <TD width="1%" align="left" nowrap><FONT size="2">&#149;</FONT></TD>
        <TD width="1%" nowrap><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD>
        <TD width="98%"><FONT size="2">difficulty in staffing and managing foreign operations; and</FONT></TD>
</TR>
<TR>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="top">
        <TD width="1%" align="left" nowrap><FONT size="2">&#149;</FONT></TD>
        <TD width="1%" nowrap><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD>
        <TD width="98%"><FONT size="2">political and economic instability.</FONT></TD>
</TR>
</TABLE>


<P><FONT size="2">Certain of our domestic and international customers have accumulated
significant levels of debt and have recently announced, or are expected to announce,
reorganizations and financial restructurings, including bankruptcy filings. Even if these
restructurings are completed, we cannot assure you that these customers will be in a position
to purchase new equipment at levels we have seen in the past.
</FONT>


<P><FONT size="2">While our international sales have typically been denominated in U.S. dollars,
fluctuations in currency exchange rates could cause our products to become
relatively more expensive to customers in a particular country, leading to a
reduction in sales or profitability in that country. Following implementation
of the Euro in January 2002, we expect
a higher portion of our European business to be denominated in Euros which may
subject us to increased foreign currency risk. Gains and losses on the
conversion to U.S. dollars of accounts receivable, accounts payable and other
monetary assets and liabilities arising from international operations may
contribute to fluctuations in operating results. Furthermore, payment cycles
for international customers are typically longer than those for customers in
the United States. Unpredictable sales cycles could cause us to fail to meet or
exceed the expectations of security analysts and investors for any given
period. In addition, foreign markets may not develop in the future.
</FONT>
<P><FONT size="2"><I>We Face Risks Associated With Having Important Facilities And Resources Located In Israel.</I>
</FONT>
<P><FONT size="2">Harmonic maintains two facilities in the State of Israel with a total of
approximately 75 employees. The personnel at these facilities represent a
significant portion of our research and development operations. Accordingly, we
are directly influenced by the political, economic and military conditions
affecting Israel, and any major hostilities involving Israel or the
interruption or curtailment of trade between Israel and its present trading
partners could significantly harm our business. The September terrorist
attacks, the ongoing U.S. war on terrorism and the escalation of terrorist
attacks and hostilities within Israel have heightened these risks. We cannot
assure you that the protraction or escalation of current tensions in the Middle
East will not adversely affect our business and results of operations.
</FONT>
<P><FONT size="2">In addition, most of our employees in Israel are currently obligated to perform
annual reserve duty in the Israel Defense Forces and several have been
called for active military duty in recent weeks. We cannot predict the effect of
these obligations on Harmonic in the future.
</FONT>

<P><FONT size="2"><I>We Must Be Able To Manage Expenses And Inventory Risks Associated With Meeting
The Demand Of Our Customers.</I>
</FONT>
<P><FONT size="2">From time to time, we receive indications from our customers as to their future
plans and requirements to ensure that we will be prepared to meet their demand
for our products. If actual orders differ materially from these indications,
our ability to manage inventory and expenses may be affected. In addition, if
we fail to meet customers&#146; supply expectations, we may lose business from such
customers. If we enter into purchase commitments to acquire materials, or
expend resources to manufacture products and such products are not purchased by
our customers, our business and operating results could suffer. In this regard,
our gross margins and operating results for the fourth quarter of
2000 and in 2001 were
adversely affected by provisions for excess and obsolete inventories of
approximately $49&nbsp;million.
</FONT>
<P><FONT size="2"><I>The Markets In Which We Operate Are Intensely Competitive And Many Of Our
Competitors Are Larger And More Established.</I>
</FONT>
<P><FONT size="2">The markets for cable television fiber optics systems and digital video
broadcasting systems are extremely competitive and have been characterized by
rapid technological change and declining average selling prices.
</FONT>
<P><FONT size="2">Harmonic&#146;s competitors in the cable television fiber optics systems business
include corporations such as Arris (a company owned in part by Nortel and
Liberty Media), C-Cor.net, Motorola, Philips and Scientific-Atlanta.
</FONT>
<P align="center"><FONT size="2">21
</FONT>

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<P><FONT size="2">In the digital and video broadcasting systems business, we compete broadly with
vertically integrated system suppliers including Motorola, Scientific-Atlanta,
Tandberg, Thomson Multimedia and Philips, and in certain product lines with
Cisco and Terayon and a number of smaller companies.
</FONT>
<P><FONT size="2">Most of our competitors are substantially larger and have greater financial,
technical, marketing and other resources than Harmonic. Many of these large
organizations are in a better position to withstand any significant reduction
in capital spending by customers in these markets. They often have broader
product lines and market focus and will therefore not be as susceptible to
downturns in a particular market. In addition, many of our competitors have
been in operation longer than we have and therefore have more long standing and
established relationships with domestic and foreign customers. We may not be
able to compete successfully in the future and competition may harm our
business.
</FONT>
<P><FONT size="2">If any of our competitors&#146; products or technologies were to become the industry
standard, our business could be seriously harmed. For example, U.S. cable
operators have to date mostly purchased proprietary digital systems from
Motorola and Scientific-Atlanta. While certain operators have made limited
purchases of the &#147;open&#148; systems provided by Harmonic, we cannot assure you that
our digital products will find broad market acceptance with U.S. cable
operators. In addition, companies that have historically not had a large
presence in the broadband communications equipment market have begun recently
to expand their market share through mergers and acquisitions. The continued
consolidation of our competitors could have a significant negative impact on
us. Further, our competitors, particularly competitors of our digital and video
broadcasting systems&#146; business, may bundle their products or incorporate
functionality into existing products in a manner that discourages users from
purchasing our products or which may require us to lower our selling prices
resulting in lower gross margins.
</FONT>
<P><FONT size="2"><I>Broadband Communications Markets Are Relatively Immature And Characterized By
Rapid Technological Change.</I>
</FONT>
<P><FONT size="2">Broadband communications markets are relatively immature, making it difficult
to accurately predict the markets&#146; future growth rates, sizes or technological
directions. In view of the evolving nature of these markets, it is possible
that cable television operators, telephone companies or other suppliers of
broadband wireless and satellite services will decide to adopt alternative
architectures or technologies that are incompatible with our current or future
products. If we are unable to design, develop, manufacture and sell products
that incorporate or are compatible with these new architectures or
technologies, our business will suffer.
</FONT>
<P><FONT size="2"><I>We Need To Develop And Introduce New And Enhanced Products In A Timely Manner
To Remain Competitive.</I>
</FONT>
<P><FONT size="2">Broadband communications markets are characterized by continuing technological
advancement, changes in customer requirements and evolving industry standards.
To compete successfully, we must design, develop, manufacture and sell new or
enhanced products that provide increasingly higher levels of performance and
reliability. However, we may not be able to successfully develop or introduce
these products, if our products:
</FONT>
<P>
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">
<TR valign="top">
        <TD width="1%" align="left" nowrap><FONT size="2">&#149;</FONT></TD>
        <TD width="1%" nowrap><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD>
        <TD width="98%"><FONT size="2">are not cost effective,</FONT></TD>
</TR>
<TR>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="top">
        <TD width="1%" align="left" nowrap><FONT size="2">&#149;</FONT></TD>
        <TD width="1%" nowrap><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD>
        <TD width="98%"><FONT size="2">are not brought to market in a timely manner,</FONT></TD>
</TR>
<TR>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="top">
        <TD width="1%" align="left" nowrap><FONT size="2">&#149;</FONT></TD>
        <TD width="1%" nowrap><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD>
        <TD width="98%"><FONT size="2">are not in accordance with evolving industry standards and architectures, or</FONT></TD>
</TR>
<TR>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="top">
        <TD width="1%" align="left" nowrap><FONT size="2">&#149;</FONT></TD>
        <TD width="1%" nowrap><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD>
        <TD width="98%"><FONT size="2">fail to achieve market acceptance.</FONT></TD>
</TR>
</TABLE>
<P><FONT size="2">In addition, to successfully develop and market our planned products, we must
retain and continue to attract personnel with appropriate experience and
expertise. Competition for qualified personnel is intense. We may not be
successful in retaining and attracting qualified personnel.
</FONT>
<P><FONT size="2">Also, to successfully develop and market certain of our planned products for
digital applications, we may be required to enter into technology development
or licensing agreements with third parties. We cannot assure you that we will
be able to enter into any necessary technology development or licensing
agreement on terms acceptable to us, or at all. The failure to enter into
technology development or licensing agreements when necessary could limit
</FONT>
<P align="center"><FONT size="2">22
</FONT>

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<P><FONT size="2">our ability to develop and market new products and, accordingly, could
materially and adversely affect our business and operating results.
</FONT>
<P><FONT size="2"><I>We Need To Effectively Manage Our Operations And The Cyclical Nature Of Our Business.</I>
</FONT>
<P><FONT size="2">The growth of our operations and cyclical nature of our business has placed,
and is expected to continue to place, a significant strain on our personnel,
management and other resources. This strain has been exacerbated by the
acquisition of DiviCom and the subsequent loss of numerous employees, including
senior management. In addition, we reduced our work force by approximately 30%
during 2001 due to reduced industry spending and demand for our products. Our
ability to manage our business effectively in the future, including any future
growth, will require us to train, motivate and manage our employees
successfully, to attract and integrate new employees into our overall
operations, to retain key employees and to continue to improve our operational,
financial and management systems. In particular, in April 2001 we implemented a
new management information system. We believe this new system significantly
affects many aspects of our business, including accounting, manufacturing
operations, purchasing, sales and marketing functions. The successful operation
of this system is critical to our business.
</FONT>
<P><FONT size="2"><I>Competition For Qualified Personnel Is Intense, And We May Not Be Successful In Attracting And Retaining Personnel.</I>
</FONT>
<P><FONT size="2">Our future success will depend, to a significant extent, on the ability of our
management to operate effectively, both individually and as a group. We are
dependent on our ability to retain and motivate high caliber personnel, in
addition to attracting new personnel. In spite of the current worldwide
economic slowdown, competition for qualified technical and other personnel
remains intense, particularly in the San Francisco Bay Area and Israel, and we
may not be successful in attracting and retaining such personnel.
</FONT>
<P><FONT size="2">Competitors and others have in the past and may in the future attempt to
recruit our employees. While our employees are required to sign standard
agreements concerning confidentiality and ownership of inventions, we generally
do not have employment contracts or noncompetition agreements with any of our
personnel. The loss of the services of any of our key personnel, the inability
to attract or retain qualified personnel in the future or delays in hiring
required personnel, particularly engineers and other technical personnel, could
negatively affect our business.
</FONT>
<P><FONT size="2"><I>We Are Liable For C-Cube&#146;s Pre-Merger Tax Liabilities, Including Tax
Liabilities Resulting From The Spin-Off Of Its Semiconductor Business.</I>
</FONT>
<P><FONT size="2">The spin-off of C-Cube&#146;s semiconductor business gave rise to a significant tax
liability of approximately $320&nbsp;million based on a valuation of the
semiconductor business of $1.1&nbsp;billion. The estimated liability was paid in
2000. Under state law, Harmonic generally is liable for all of C-Cube&#146;s debts,
including C-Cube&#146;s liability for taxes resulting from the spin-off and other
pre-merger tax liabilities. C-Cube retained and transferred to Harmonic in the
merger an amount of cash and other consideration sufficient to pay this
liability as well as all other tax liabilities of C-Cube and its subsidiaries
for periods prior to the merger. The merger agreement stipulates that Harmonic
will be indemnified by the spun-off semiconductor business if the cash reserves
are not sufficient to satisfy all of C-Cube&#146;s tax liabilities for periods prior
to the merger. If for any reason, the spun-off semiconductor business does not
have sufficient cash to pay such taxes, or if there are additional taxes due
with respect to the non-semiconductor business and Harmonic cannot be
indemnified by C-Cube, Harmonic generally will remain liable, and such
liability could have a material adverse effect on Harmonic. The spun-off
semiconductor business was acquired by LSI Logic in June 2001, which assumed
these obligations to Harmonic.
</FONT>
<P><FONT size="2"><I>Due To The Structure Of The Merger Transaction, Harmonic Is Liable For C-Cube&#146;s
General Pre-Merger Liabilities And Any Liabilities Relating To C-Cube&#146;s
Semiconductor Business For Which The Spun-off Semiconductor Business Is Unable
To Indemnify Harmonic.</I>
</FONT>

<P align="center"><FONT size="2">23
</FONT>

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<P><FONT size="2">The merger of C-Cube into Harmonic, with Harmonic as the surviving entity,
resulted in our assuming all of the liabilities of C-Cube at the time of the
merger. Pursuant to the merger agreement, Harmonic is indemnified by the
spun-off semiconductor business for liabilities associated with C-Cube&#146;s
historic semiconductor business. However, if LSI Logic is unable to fulfill its
indemnification obligations to Harmonic or if general liability claims not
specifically associated with C-Cube&#146;s historic semiconductor business are
asserted, we would have to assume such obligations. Those obligations could
adversely affect our financial condition.
</FONT>
<P><FONT size="2"><I>We May Be Subject To Risks Associated With Other Acquisitions.</I>
</FONT>
<P><FONT size="2">We have made and may make investments in complementary companies, products or
technologies. If we make acquisitions, we could have difficulty assimilating or
retaining the acquired companies&#146; personnel and operations or integrating the
acquired technology or products into ours. These difficulties could disrupt our
ongoing business, distract our management and employees and increase our
expenses. Moreover, our operating results may suffer because of
acquisition-related expenses, amortization of intangible assets and impairment
of acquired goodwill or intangible assets. Furthermore, we may have to incur
debt or issue equity securities to pay for any future acquisitions, the
issuance of which could be dilutive to our existing shareholders. If we are
unable to successfully address any of these risks, our business, financial
condition and operating results could be harmed.
</FONT>
<P><FONT size="2"><I>Difficulties In The Development And Production Of Video Encoding Chips By
C-Cube&#146;s Spun-off Semiconductor Business May Adversely Impact Us.</I>
</FONT>
<P><FONT size="2">The DiviCom business and C-Cube semiconductor business collaborated on the
production and development of two video encoding microelectronic chips prior to
the merger. In connection with the merger, Harmonic and the spun-off
semiconductor business entered into a contractual relationship under which
Harmonic will have access to certain of the spun-off semiconductor business
technologies and products which the DiviCom business previously depended on for
its product and service offerings.
</FONT>
<P><FONT size="2">However, under the contractual relationships between Harmonic and the spun-off
semiconductor business, which was acquired by LSI Logic in June 2001, the
semiconductor business does not have a firm commitment to continue the
development of video encoding microelectronic chips. As a result, the
semiconductor business may choose not to continue future development of the
chips for any reason. The semiconductor business may also encounter in the
future technological difficulties in the production and development of the
chips. If the spun-off semiconductor business is not able to or does not
sustain its development and production efforts in this area, we may not be able
to fully recognize the benefits of the acquisition. See &#147;Supply, License and
Development Agreement&#148; at page 60 of the joint proxy statement filed with the
Securities and Exchange Commission on March&nbsp;23, 2000, for further details of
Harmonic&#146;s business relationship with the spun-off semiconductor business after
the merger.
</FONT>
<P><FONT size="2"><I>If Sales Forecasted For A Particular Period Are Not Realized In That Period Due
To The Unpredictable Sales Cycles Of Our Products, Our Operating Results For
That Period Will Be Harmed.</I>
</FONT>
<P><FONT size="2">The sales cycles of many of our products, particularly our newer products and
products sold internationally, are typically unpredictable and usually involve:
</FONT>
<P>
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">
<TR valign="top">
        <TD width="1%" align="left" nowrap><FONT size="2">&#149;</FONT></TD>
        <TD width="1%" nowrap><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD>
        <TD width="98%"><FONT size="2">a significant technical evaluation;</FONT></TD>
</TR>
<TR>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="top">
        <TD width="1%" align="left" nowrap><FONT size="2">&#149;</FONT></TD>
        <TD width="1%" nowrap><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD>
        <TD width="98%"><FONT size="2">a commitment of capital and other resources by cable, satellite, and other network operators;</FONT></TD>
</TR>
<TR>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="top">
        <TD width="1%" align="left" nowrap><FONT size="2">&#149;</FONT></TD>
        <TD width="1%" nowrap><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD>
        <TD width="98%"><FONT size="2">capital expenditures;</FONT></TD>
</TR>
<TR>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="top">
        <TD width="1%" align="left" nowrap><FONT size="2">&#149;</FONT></TD>
        <TD width="1%" nowrap><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD>
        <TD width="98%"><FONT size="2">time required to engineer the deployment of new technologies or services within broadband networks; and</FONT></TD>
</TR>
<TR>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="top">
        <TD width="1%" align="left" nowrap><FONT size="2">&#149;</FONT></TD>
        <TD width="1%" nowrap><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD>
        <TD width="98%"><FONT size="2">testing and acceptance of new technologies that affect key operations.</FONT></TD>
</TR>
</TABLE>
<P><FONT size="2">For these and other reasons, our sales cycles generally last three to six
months, but can last up to 12&nbsp;months. If orders forecasted for a specific
customer for a particular quarter do not occur in that quarter, our operating
results for that quarter could be substantially lower than anticipated.
</FONT>
<P align="center"><FONT size="2">24
</FONT>

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<P><FONT size="2">As a result of the merger, a significant portion of our revenue is derived from
solution contracts. A substantial portion of CS division revenues are from
solution contracts that include a combination of product sales as well as
design, installation and integration services. Revenue forecasts for solution
contracts are based on the estimated timing of the design, installation and
integration of projects. Because the solution contracts generally span several
quarters and revenue recognition is based on progress under the contract, the
timing of revenue is difficult to predict and could result in lower than
expected revenue in any particular quarter.
</FONT>
<P><FONT size="2"><I>Our Failure To Adequately Protect Our Proprietary Rights May Adversely Affect Us.</I>
</FONT>
<P><FONT size="2">We currently hold 39 issued United States patents and 8 issued foreign patents,
and have a number of patent applications pending. Although we attempt to
protect our intellectual property rights through patents, trademarks,
copyrights, licensing arrangements, maintaining certain technology as trade
secrets and other measures, we cannot assure you that any patent, trademark,
copyright or other intellectual property rights owned by us will not be
invalidated, circumvented or challenged, that such intellectual property rights
will provide competitive advantages to us or that any of our pending or future
patent applications will be issued with the scope of the claims sought by us,
if at all. We cannot assure you that others will not develop technologies that
are similar or superior to our technology, duplicate our technology or design
around the patents that we own. In addition, effective patent, copyright and
trade secret protection may be unavailable or limited in certain foreign
countries in which we do business or may do business in the future.
</FONT>
<P><FONT size="2">We believe that the future success of our business will depend on our ability
to translate the technological expertise and innovation of our personnel into
new and enhanced products. We generally enter into confidentiality or license
agreements with our employees, consultants, vendors and customers as needed,
and generally limit access to and distribution of our proprietary information.
Nevertheless, we cannot assure you that the steps taken by us will prevent
misappropriation of our technology. In addition, we have taken in the past, and
may take in the future, legal action to enforce our patents and other
intellectual property rights, to protect our trade secrets, to determine the
validity and scope of the proprietary rights of others, or to defend against
claims of infringement or invalidity. Such litigation could result in
substantial costs and diversion of resources and could negatively effect our
business, operating results, financial position and liquidity.
</FONT>
<P><FONT size="2">In order to successfully develop and market certain of our planned products for
digital applications, we may be required to enter into technology development
or licensing agreements with third parties. Although many companies are often
willing to enter into such technology development or licensing agreements, we
cannot assure you that such agreements will be negotiated on terms acceptable
to us, or at all. The failure to enter into technology development or licensing
agreements, when necessary, could limit our ability to develop and market new
products and could cause our business to suffer.
</FONT>
<P><FONT size="2">Harmonic&#146;s industry is characterized by the existence of a large number of
patents and frequent claims and related litigation regarding patent and other
intellectual property rights. In particular, leading companies in the
telecommunications industry have extensive patent portfolios. From time to
time, third parties, including these leading companies, have asserted and may
assert exclusive patent, copyright, trademark and other intellectual property
rights against us or our customers. Indeed, a number of third parties,
including leading companies, have asserted patent rights to technologies that
are important to us. We expect to increasingly be subject to infringement
claims asserted by third parties as the numbers of products and competitors in
the telecommunications industry grow. In this regard, since December 2000, we
have been in communication with several of Harmonic&#146;s customers who have been
contacted by one of these leading companies that believes certain of our
products require a license under a number of their patents. We currently are
reviewing the identified patents to examine whether we consider a license
necessary. While it is our understanding that the third party is willing to
grant our customers a non-exclusive license under the identified patents, there
can be no assurance that the terms of any offered license would be acceptable
to our customers or that failure to obtain a license or the costs associated
with any license would not cause our operating results to be materially
adversely affected.
</FONT>
<P><FONT size="2"><I>We Purchase Several Key Components, Subassemblies And Modules Used In The
Manufacture Or Integration Of Our Products From Sole Or Limited Sources, And We
Are Increasingly Dependent On Contract Manufacturers.</I>
</FONT>

<P align="center"><FONT size="2">25
</FONT>

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<P><FONT size="2">Many components, subassemblies and modules necessary for the manufacture or
integration of our products are obtained from a sole supplier or a limited
group of suppliers. Our reliance on sole or limited suppliers, particularly
foreign suppliers, and our increased reliance on subcontractors since the
merger with C-Cube involves several risks, including a potential inability to
obtain an adequate supply of required components, subassemblies or modules and
reduced control over pricing, quality and timely delivery of components,
subassemblies or modules. In particular, certain optical components have in the
past been in short supply and are available only from a small number of
suppliers, including sole source suppliers. While we expend considerable
efforts to qualify additional optical component sources, consolidation of
suppliers in the industry and the small number of viable alternatives have
limited the results of these efforts. We do not generally maintain long-term
agreements with any of our suppliers or subcontractors. An inability to obtain
adequate deliveries or any other circumstance that would require us to seek
alternative sources of supply could affect our ability to ship our products on
a timely basis, which could damage relationships with current and prospective
customers and harm our business. We attempt to limit this risk by maintaining
safety stocks of these components, subassemblies and modules. As a result of
this investment in inventories, we have in the past and in the future may be
subject to risk of excess and obsolete inventories, which could harm our
business. In this regard, our gross margins and operating results for
the fourth quarter of 2000 and 2001 were adversely affected by excess and obsolete inventory charges
of approximately $49&nbsp;million.
</FONT>
<P><FONT size="2"><I>We Are The Subject Of Securities Class&nbsp;Action Claims And Other Litigation
Which, If Adversely Determined, Could Harm Our Business And Operating Results.</I>
</FONT>
<P><FONT size="2">On May&nbsp;3, 2000, Harmonic completed the
acquisition of C-Cube for approximately $1.8&nbsp;billion in common
stock. Between June&nbsp;28 and August&nbsp;25, 2000, several actions alleging violations of the
federal securities laws by Harmonic and certain of its current and former officers and directors were filed in or removed to the
United States District Court for the Northern District of California. The
actions subsequently were consolidated.
</FONT>
<P><FONT size="2">A consolidated complaint, filed on December&nbsp;7, 2000, was brought on behalf of a
purported class of persons who purchased Harmonic&#146;s publicly traded securities
between January&nbsp;19 and June&nbsp;26, 2000. The complaint also alleged claims on
behalf of a purported subclass of persons who purchased C-Cube securities
between January&nbsp;19 and May&nbsp;3, 2000. In addition to Harmonic and certain of its
officers and directors, the complaint also named C-Cube Microsystems Inc. and
several of its officers and directors as defendants. The complaint alleged
that, by making false or misleading statements regarding Harmonic&#146;s prospects
and customers and its acquisition of C-Cube, certain defendants violated
sections 10(b) and 20(a) of the Securities Exchange Act of 1934. The complaint
also alleged that certain defendants violated section 14(a) of the Exchange Act
and sections 11, 12(a)(2), and 15 of the Securities Act of 1933 by filing a
false or misleading registration statement, prospectus, and joint proxy in
connection with the C-Cube acquisition.
</FONT>
<P><FONT size="2">On July&nbsp;3, 2001, the Court dismissed the consolidated complaint with leave to
amend. An amended complaint alleging the same claims against the same
defendants was filed on August&nbsp;13, 2001. Defendants moved to dismiss the
amended complaint on September&nbsp;24, 2001. Pursuant to the Court&#146;s July&nbsp;3, 2001
order, no hearing on the motions will be held unless the Court sets one.
</FONT>
<P align="center"><FONT size="2">26
</FONT>

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<P><FONT size="2">A derivative action purporting to be on behalf of Harmonic was filed against
its then-current directors in the Superior Court for the County of Santa Clara
on September&nbsp;5, 2000. Harmonic also was named as a nominal defendant. The
complaint is based on allegations similar to those found in the securities
class actions and claims that the defendants breached their fiduciary duties
by, among other things, causing Harmonic to violate federal securities laws.
The derivative action was removed to the United States District Court for the
Northern District of California on September&nbsp;20, 2000. All deadlines in this
action have been stayed pending resolution of the motions to dismiss the
securities actions. At an April&nbsp;5, 2002 case management conference,
the court continued the conference until June&nbsp;7, 2002. The court
stated that the parties need not appear if no decision on the
motions to dismiss the securities action had been issued by that date.
</FONT>
<P><FONT size="2">Based on its review of the complaints filed in the securities class action,
Harmonic believes that it has meritorious defenses and intends to defend itself
vigorously. There can be no assurance, however, that Harmonic will prevail. An
unfavorable outcome of this litigation could have a material adverse effect on
Harmonic&#146;s business, operating results, financial position and liquidity.
</FONT>
<P><FONT size="2">In November 2001, we were sued in Tennessee state court by a company alleging
breach of contract and breach of a Tennessee statute relating to retailers and
suppliers. The suit has a claim for $2.5&nbsp;million and other unspecified damages,
lost profits and attorneys&#146; fees. The suit has since been removed to Federal
Court and a trial date has been set for June 2003. Harmonic believes that it
has meritorious defenses and will defend the suit vigorously. However, we
cannot assure you that an unfavorable outcome will not adversely impact our
business, operating results, financial position and liquidity.
</FONT>
<P><FONT size="2"><I>Our Stock Price May Be Volatile.</I>
</FONT>
<P><FONT size="2">The market price of our common stock has fluctuated significantly in the past,
particularly in recent years, and is likely to fluctuate in the future. In
addition, the securities markets have experienced significant price and volume
fluctuations and the market prices of the securities of technology companies
have been especially volatile. Investors may be unable to resell their shares
of our common stock at or above their purchase price. In the past, companies
that have experienced volatility in the market price of their stock have been
the object of securities class action litigation.
</FONT>
<P><FONT size="2"><I>We Rely On A Continuous Power Supply To Conduct Our Operations, And
Any Electrical And Natural Gas Crisis Could Disrupt Our
Operations And Increase Our Expenses.</I>
</FONT>
<P><FONT size="2">We rely on a continuous power supply for manufacturing and to conduct our
business operations. Interruptions in electrical power supplies in California
in the early part of 2001 could recur in the future. In addition, the cost
of electricity and natural gas has risen significantly. Power outages could
disrupt our manufacturing and business operations and those of many of our
suppliers, and could cause us to fail to meet production schedules and
commitments to customers and other third parties. Any disruption to our
operations or those of our suppliers could result in damage to our current and
prospective business relationships and could result in lost revenue and
additional expenses, thereby harming our business and operating results.
</FONT>
<P><FONT size="2"><I>Our Certificate Of Incorporation And Bylaws And Delaware Law Contain Provisions
That Could Discourage A Takeover.</I>
</FONT>
<P><FONT size="2">Provisions of our Amended and Restated Certificate of Incorporation, Bylaws,
and Delaware law could make it more difficult for a third party to acquire us,
even if doing so would be beneficial to our stockholders.
</FONT>

<P align="center"><FONT size="2">27
</FONT>

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<P align="center"><FONT size="2">PART II</FONT>

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<P align="left"><FONT size="2"><B>ITEM 1. LEGAL PROCEEDINGS</B></FONT>

<P><FONT size="2">On May&nbsp;3, 2000, Harmonic completed the
acquisition of C-Cube Microsystems, Inc., or C-Cube, for approximately $1.8&nbsp;billion in common stock. Between June&nbsp;28 and August&nbsp;25, 2000, several actions alleging violations of the
federal securities laws by Harmonic and certain of its current and
former officers and directors were filed in or removed to the
United States District Court for the Northern District of California. The
actions subsequently were consolidated.
</FONT>
<P><FONT size="2">A consolidated complaint, filed on December&nbsp;7, 2000, was brought on behalf of a
purported class of persons who purchased Harmonic&#146;s publicly traded securities
between January&nbsp;19 and June&nbsp;26, 2000. The complaint also alleged claims on
behalf of a purported subclass of persons who purchased C-Cube securities
between January&nbsp;19 and May&nbsp;3, 2000. In addition to Harmonic and certain of its
officers and directors, the complaint also named C-Cube and
several of its officers and directors as defendants. The complaint alleged
that, by making false or misleading statements regarding
Harmonic&#146;s prospects
and customers and its acquisition of C-Cube, certain defendants violated
sections 10(b) and 20(a) of the Securities Exchange Act of 1934. The complaint
also alleged that certain defendants violated section 14(a) of the Exchange Act
and sections 11, 12(a)(2), and 15 of the Securities Act of 1933 by filing a
false or misleading registration statement, prospectus, and joint proxy in
connection with the C-Cube acquisition.
</FONT>
<P><FONT size="2">On July&nbsp;3, 2001, the Court dismissed the consolidated complaint with leave to
amend. An amended complaint alleging the same claims against the same
defendants was filed on August&nbsp;13, 2001. Defendants moved to dismiss the
amended complaint on September&nbsp;24, 2001. Pursuant to the
Court&#146;s July&nbsp;3, 2001
order, no hearing on the motions will be held unless the Court sets one.
</FONT>
<P><FONT size="2">A derivative action purporting to be on behalf of Harmonic was filed against
its then-current directors in the Superior Court for the County of Santa Clara
on September&nbsp;5, 2000. Harmonic also was named as a nominal defendant. The
complaint is based on allegations similar to those found in the securities
class actions and claims that the defendants breached their fiduciary duties
by, among other things, causing Harmonic to violate federal securities laws.
The derivative action was removed to the United States District Court for the
Northern District of California on September&nbsp;20, 2000. All deadlines in this
action have been stayed pending resolution of the motions to dismiss the
securities actions. At an April&nbsp;5, 2002 case management conference, the court
continued the conference until June&nbsp;7, 2002. The court stated that the parties
need not appear if no decision on the motions to dismiss the securities action
had been issued by that date.
</FONT>
<P><FONT size="2">Based on its review of the complaints filed in the securities class action,
Harmonic believes that it has meritorious defenses and intends to defend itself
vigorously. There can be no assurance, however, that Harmonic will prevail. An
unfavorable outcome of this litigation could have a material adverse effect on
Harmonic&#146;s business, operating results, financial position and liquidity.
</FONT>
<P><FONT size="2">In November 2001, Harmonic was sued in Tennessee state court by a company
alleging breach of contract and breach of a Tennessee statute relating to
retailers and suppliers. The suit has a claim for $2.5&nbsp;million and other
unspecified damages, lost profits and attorneys&#146; fees. The suit has since been
removed to Federal Court and a trial date has been set for June 2003. Harmonic
believes that it has meritorious defenses and will defend the suit vigorously.
However, Harmonic cannot assure you that an unfavorable outcome will not
adversely impact the business, operating results, financial position and
liquidity.
</FONT>

<!-- link2 "ITEM 6. EXHIBITS AND REPORTS ON FORM&nbsp;8-K" -->
<DIV align="left"><A NAME="010"></A></DIV>

<P align="left"><FONT size="2"><B>ITEM 6. EXHIBITS AND REPORTS ON
FORM&nbsp;8-K</B></FONT>

<CENTER>
<TABLE cellspacing="0" border="0" cellpadding="0" width="100%">
<TR valign="bottom">
        <TD width="3%">&nbsp;</TD>
        <TD width="1%">&nbsp;</TD>
        <TD width="96%">&nbsp;</TD>
</TR>
<TR valign="bottom">
        <TD><FONT size="2">a)</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="left"><FONT size="2">Exhibits.</FONT></TD>
</TR>

<TR><TD>&nbsp;</TD></TR>

<TR valign="bottom">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="left"><FONT size="2">None</FONT></TD>
</TR>

<TR><TD>&nbsp;</TD></TR>

<TR valign="bottom">
        <TD><FONT size="2">b)</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="left"><FONT size="2">Reports on Form&nbsp;8-K</FONT></TD>
</TR>
<TR><TD>&nbsp;</TD></TR>

<TR valign="bottom">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="left"><FONT size="2">A current report on
Form 8-K (File No. 000-25826) was filed pursuant to the Securities
and Exchange Act of 1934, as amended, on March&nbsp;18, 2002, to
comply with the requirements of Rule&nbsp;3-05 of Regulation S-X.
Consolidated financial statements of net income of the DiviCom
business (an operating unit of C-Cube Microsystems Inc.), as of
December&nbsp;31, 1998 and December&nbsp;31, 1999, and the related
consolidated income statements, statements of changes in net
investment and cash flows for each of the three years in the period
ended December&nbsp;31, 1999, were filed with such current report.</FONT></TD>
</TR>

</TABLE>
</CENTER>

<P align="center"><FONT size="2">29
</FONT>

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<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#toc">Table of Contents</A></H5><P>
<!-- link1 "SIGNATURE" -->
<DIV align="left"><A NAME="011"></A></DIV>
<P align="center"><FONT size="2">SIGNATURE</FONT>

<P><FONT size="2">Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
</FONT>
<TABLE cellspacing="0" border="0" cellpadding="0" width="100%">
<TR>
        <TD width="50%">&nbsp;</TD>
        <TD width="1%">&nbsp;</TD>
        <TD width="49%">&nbsp;</TD>
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<TR valign="top">
        <TD><FONT size="2">Dated: May&nbsp;13, 2002</FONT></TD>
        <TD colspan="2"><FONT size="2">HARMONIC INC.<br>(Registrant)</FONT></TD>
</TR>

<TR><TD>&nbsp;<BR>&nbsp;</TD></TR>
<TR valign="top">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">By:&nbsp;</FONT></TD>
        <TD align="left"><FONT size="2">/s/ Robin N. Dickson</FONT></TD>
</TR>
<TR>
        <TD colspan="2"><FONT size="1">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade color="#000000"></TD>
</TR>
<TR valign="top">
        <TD colspan="2">&nbsp;</TD>
        <TD><FONT size="2">Robin N. Dickson<br>
Chief Financial Officer<br>
(Principal Financial and Accounting Officer)</FONT></TD>
</TR>
</TABLE>


<P align="center"><FONT size="2">30</FONT>

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