<SUBMISSION>
<ACCESSION-NUMBER>0000950134-04-003156
<TYPE>10-K
<PUBLIC-DOCUMENT-COUNT>10
<PERIOD>20031231
<FILING-DATE>20040309
<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-K
<ACT>34
<FILE-NUMBER>000-25826
<FILM-NUMBER>04658034
</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-K
<SEQUENCE>1
<FILENAME>f96175e10vk.htm
<DESCRIPTION>FORM 10-K
<TEXT>
<HTML>
<HEAD>
<TITLE>e10vk</TITLE>
</HEAD>
<BODY bgcolor="#FFFFFF">
<!-- PAGEBREAK -->
<H5 align="left" style="page-break-before:always"><A HREF="#toc">Table of Contents</A></H5><P>

<DIV align="left">
<FONT size="2"> <HR size="1" width="100%" align="left" noshade>
</FONT>
</DIV>

<DIV align="left">
<HR size="1" width="100%" align="left" noshade>
</DIV>

<DIV align="center">
<FONT size="4">UNITED STATES
</FONT>
</DIV>

<DIV align="center">
<FONT size="4">SECURITIES AND EXCHANGE COMMISSION
</FONT>
</DIV>

<DIV align="center">
<FONT size="2">Washington, D.C. 20549
</FONT>
</DIV>

<P align="center">
<HR size="1" width="52%" align="center" noshade>

<DIV align="center">
<FONT size="4">FORM 10-K
</FONT>
</DIV>

<DIV align="center">
<HR size="1" width="52%" align="center" noshade>
</DIV>

<P align="left">
<FONT size="2">(Mark One)
</FONT>

<P align="left">
<FONT size="2">[X]&nbsp;&nbsp;&nbsp;&nbsp;ANNUAL REPORT PURSUANT
TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
</FONT>

<P align="center">
<FONT size="2">For the Fiscal Year Ended December&nbsp;31, 2003
</FONT>

<P align="left">
<FONT size="2">[&nbsp;]&nbsp;&nbsp;&nbsp;&nbsp;TRANSITION REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
</FONT>

<P align="center">
<FONT size="2">Commission File No.&nbsp;0-25826
</FONT>

<P align="center">
<FONT size="4">HARMONIC INC.
</FONT>

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

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="48%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="49%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="center" valign="top">
    <FONT size="2">Delaware<BR>
    <HR size="1" noshade>(State or other jurisdiction of
    incorporation<BR>
    or organization)
    </FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="center" valign="top">
    <FONT size="2">77-0201147<BR>
    <HR size="1" noshade>(I.R.S. Employer Identification Number)
    </FONT></TD>
</TR>

</TABLE>
</CENTER>

<P align="center">
<FONT size="2">549 Baltic Way
</FONT>

<DIV align="center">
<FONT size="2">Sunnyvale, CA 94089
</FONT>
</DIV>

<DIV align="center">
<FONT size="2">(408)&nbsp;542-2500
</FONT>
</DIV>

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

<P align="center">
<FONT size="2">Securities registered pursuant to section 12(b)
of the Act:
</FONT>

<DIV align="center">
<FONT size="2">None
</FONT>
</DIV>

<P align="center">
<FONT size="2">Securities registered pursuant to section 12(g)
of the Act:
</FONT>

<DIV align="center">
<FONT size="2">Common Stock, par value $.001 per share
</FONT>
</DIV>

<DIV align="center">
<FONT size="2">Preferred Share Purchase Rights
</FONT>
</DIV>

<P align="left">
<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) 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;[<FONT face="wingdings">&#252;</FONT>]&nbsp;No&nbsp;[&nbsp;&nbsp;&nbsp;&nbsp;]
</FONT>

<P align="left">
<FONT size="2">Indicate by check mark if disclosure of
delinquent filers pursuant to Item&nbsp;405 of
Regulation&nbsp;S-K is not contained herein, and will not be
contained, to the best of the Registrant&#146;s knowledge, in
definitive proxy or information statements incorporated by
reference in Part III of this Form&nbsp;10-K or any amendment to
this Form&nbsp;10-K.
</FONT>

<P align="center">
<FONT size="2">Yes&nbsp;[<FONT face="wingdings">&#252;</FONT>]&nbsp;No&nbsp;[&nbsp;&nbsp;&nbsp;&nbsp;]
</FONT>

<P align="left">
<FONT size="2">Indicate by check mark whether the Registrant is
an accelerated filer (as defined in Rule&nbsp;12b-2 of the
Exchange Act).
</FONT>

<P align="center">
<FONT size="2">Yes&nbsp;[<FONT face="wingdings">&#252;</FONT>]&nbsp;No&nbsp;[&nbsp;&nbsp;&nbsp;&nbsp;]
</FONT>

<P align="left">
<FONT size="2">Based on the closing sale price of the Common
Stock on the NASDAQ National Market System on June&nbsp;27,
2003, the aggregate market value of the voting Common Stock held
by non-affiliates of the Registrant was $224,520,293. Shares of
Common Stock held by each officer and director and by each
person who owns 5% or more of the outstanding Common Stock have
been excluded in that such persons may be deemed to be
affiliates. This determination of affiliate status is not
necessarily a conclusive determination for other purposes.
</FONT>

<P align="left">
<FONT size="2">The number of shares outstanding of the
Registrant&#146;s Common Stock, $.001 par value, was 71,782,051
on February&nbsp;27, 2004.
</FONT>

<P align="center">
<FONT size="2">DOCUMENTS INCORPORATED BY REFERENCE
</FONT>

<P align="left">
<FONT size="2">Portions of the Proxy Statement for the
Registrant&#146;s 2004 Annual Meeting of Stockholders (which
will be filed with the Securities and Exchange Commission within
120&nbsp;days of the end of the fiscal year ended
December&nbsp;31, 2003) are incorporated by reference in
Part&nbsp;II and Part&nbsp;III of this Form&nbsp;10-K.
</FONT>

<P align="left">
<HR size="1" width="100%" align="left" noshade>

<DIV align="left">
<HR size="1" width="100%" align="left" noshade>
</DIV>
<!-- PAGEBREAK -->
<P><HR noshade><P>

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

<P><CENTER>
<TABLE border="0" width="90%" cellpadding="0" cellspacing="0">
<TR>
	<TD width="3%"></TD>
	<TD width="3%"></TD>
	<TD width="3%"></TD>
	<TD width="3%"></TD>
	<TD width="3%"></TD>
	<TD width="3%"></TD>
	<TD width="3%"></TD>
	<TD width="3%"></TD>
	<TD width="76%"></TD>
</TR>
<TR><TD colspan="9"><A HREF="#000"><FONT size="2">PART I</FONT></A></TD></TR>
<TR><TD></TD><TD colspan="8"><A HREF="#001"><FONT size="2">Item 1. Business</FONT></A></TD></TR>
<TR><TD></TD><TD colspan="8"><A HREF="#002"><FONT size="2">Item 2. Properties</FONT></A></TD></TR>
<TR><TD></TD><TD colspan="8"><A HREF="#003"><FONT size="2">Item 3. Legal Proceedings</FONT></A></TD></TR>
<TR><TD></TD><TD colspan="8"><A HREF="#004"><FONT size="2">Item 4. Submission of Matters to a Vote of Security Holders</FONT></A></TD></TR>
<TR><TD colspan="9"><A HREF="#005"><FONT size="2">PART II</FONT></A></TD></TR>
<TR><TD></TD><TD colspan="8"><A HREF="#006"><FONT size="2">Item 5. Market for the Registrant&#146;s Common Stock and Related Security Holder Matters</FONT></A></TD></TR>
<TR><TD></TD><TD colspan="8"><A HREF="#007"><FONT size="2">Item 6. Selected Financial Data</FONT></A></TD></TR>
<TR><TD></TD><TD colspan="8"><A HREF="#008"><FONT size="2">Item 7. Management&#146;s Discussion and Analysis of Financial Condition and Results of Operations</FONT></A></TD></TR>
<TR><TD></TD><TD colspan="8"><A HREF="#009"><FONT size="2">Item 7A. Quantitative and Qualitative Disclosures About Market Risk</FONT></A></TD></TR>
<TR><TD></TD><TD colspan="8"><A HREF="#010"><FONT size="2">Item 8. Financial Statements and Supplementary Data</FONT></A></TD></TR>
<TR><TD></TD><TD colspan="8"><A HREF="#011"><FONT size="2">Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure</FONT></A></TD></TR>
<TR><TD></TD><TD colspan="8"><A HREF="#012"><FONT size="2">Item 9A. Controls and Procedures</FONT></A></TD></TR>
<TR><TD colspan="9"><A HREF="#013"><FONT size="2">PART III</FONT></A></TD></TR>
<TR><TD></TD><TD colspan="8"><A HREF="#014"><FONT size="2">Item 10. Directors and Executive Officers of Registrant</FONT></A></TD></TR>
<TR><TD></TD><TD colspan="8"><A HREF="#015"><FONT size="2">Item 11. Executive Compensation</FONT></A></TD></TR>
<TR><TD></TD><TD colspan="8"><A HREF="#016"><FONT size="2">Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters</FONT></A></TD></TR>
<TR><TD></TD><TD colspan="8"><A HREF="#017"><FONT size="2">Item 13. Certain Relationships and Related Transactions</FONT></A></TD></TR>
<TR><TD></TD><TD colspan="8"><A HREF="#018"><FONT size="2">Item 14. Principal Accounting Fees and Services</FONT></A></TD></TR>
<TR><TD colspan="9"><A HREF="#019"><FONT size="2">PART IV</FONT></A></TD></TR>
<TR><TD></TD><TD colspan="8"><A HREF="#020"><FONT size="2">Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K</FONT></A></TD></TR>
<TR><TD colspan="9"><A HREF="#021"><FONT size="2">SIGNATURES</FONT></A></TD></TR>
<TR><TD colspan="9"><A HREF="#022"><FONT size="2">EXHIBIT INDEX</FONT></A></TD></TR>
<TR><TD colspan="9"><A HREF="f96175exv10w9.txt">EXHIBIT 10.9</A></TD></TR>
<TR><TD colspan="9"><A HREF="f96175exv10w10.txt">EXHIBIT 10.10</A></TD></TR>
<TR><TD colspan="9"><A HREF="f96175exv10w25.txt">EXHIBIT 10.25</A></TD></TR>
<TR><TD colspan="9"><A HREF="f96175exv21w1.txt">EXHIBIT 21.1</A></TD></TR>
<TR><TD colspan="9"><A HREF="f96175exv23w1.txt">EXHIBIT 23.1</A></TD></TR>
<TR><TD colspan="9"><A HREF="f96175exv31w1.txt">EXHIBIT 31.1</A></TD></TR>
<TR><TD colspan="9"><A HREF="f96175exv31w2.txt">EXHIBIT 31.2</A></TD></TR>
<TR><TD colspan="9"><A HREF="f96175exv32w1.txt">EXHIBIT 32.1</A></TD></TR>
<TR><TD colspan="9"><A HREF="f96175exv32w2.txt">EXHIBIT 32.2</A></TD></TR>
</TABLE>
</CENTER>
<!-- /TOC -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#toc">Table of Contents</A></H5><P>

<!-- link1 "<FONT size="2">PART I</FONT>" -->
<DIV align="left"><A NAME="000"></A></DIV>

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

<!-- link2 "<FONT size="2">Item 1. Business</FONT>" -->
<DIV align="left"><A NAME="001"></A></DIV>

<P align="left">
<FONT size="2">Item&nbsp;1. <I>Business</I>
</FONT>

<P align="left">
<FONT size="2">OVERVIEW
</FONT>

<P align="left">
<FONT size="2">We design, manufacture and sell digital video
systems and fiber optic systems that enable network operators to
provide a range of interactive and advanced digital services
that include digital video, video-on-demand (VOD), high
definition television, high-speed Internet access and telephony.
Historically, most of our sales have been derived from sales of
digital headend products and fiber optic transmission systems to
cable television and satellite operators. We also derive a small
portion of our sales from telephone companies that offer video
services to their customers.
</FONT>

<P align="left">
<FONT size="2">Harmonic was initially incorporated in California
in June 1988 and reincorporated into Delaware in May 1995. Our
principal executive offices are located at 549&nbsp;Baltic Way,
Sunnyvale, California&nbsp;94089. Our telephone number is
(408)&nbsp;542-2500. Harmonic is organized as two operating
divisions, Convergent Systems, or CS, for digital video systems,
and Broadband Access Networks, or BAN, for fiber optic systems.
Each division has its own management team directing its product
development and marketing strategies and its customer service
requirements. A separate sales force generally supports both
divisions with appropriate product and market specialization as
required.
</FONT>

<P align="left">
<FONT size="2">INDUSTRY OVERVIEW
</FONT>

<P align="left">
<FONT size="2">Demand for broadband services
</FONT>

<P align="left">
<FONT size="2">The demand for broadband services has increased
significantly in recent years due in large part to the dramatic
growth of the Internet, which has facilitated commercial
applications such as telecommuting and electronic commerce as
well as its widespread use for communicating and accessing
information. Rapid growth in the number of Internet users and
the demand for more bandwidth-intensive video, voice and data
content has strained existing communications networks and
created bottlenecks, especially in the &#147;last mile&#148; of
the communications infrastructure where homes connect to the
local network. In addition, changes in the broadcast television
industry have led to a proliferation of new television channels,
including high definition channels, and to the development of
interactive and on-demand television services which have begun
to be provided on an individual, as opposed to a broadcast
basis. The delivery to subscribers of television programming and
Internet-based information and communication services is
converging, driven in part by advances in technology and in part
by changes in the regulatory and competitive environment.
</FONT>

<P align="left">
<FONT size="2">Competition and deregulation
</FONT>

<P align="left">
<FONT size="2">Recent and proposed regulatory reform has spurred
competition among communication service providers worldwide to
offer combinations of video, voice and data services.
Historically, US long distance carriers and regional Bell
operating companies, or RBOCs, provided only telephony services
in the residential market. Cable television multiple system
operators, or MSOs, provided video programming. Direct broadcast
satellite, or DBS, services, which became available in the
United States in the early nineties, also provided only video
programming and were initially further restricted by regulation
from making local television channels available in local
markets. As a result, none of these operators had networks
conducive to providing high-speed data services to residential
subscribers, or any other services that they had not been
previously allowed to provide. The Telecommunications Act of
1996, however, generally permitted service operators to enter
each other&#146;s markets and to provide a variety of voice,
video and data services. As a result, most cable companies have
begun to offer broadband services, including broadcast digital
video, VOD, internet access and telephony, over their cable
systems in the last few years. Similarly, telephone companies,
or telcos, are deploying various digital subscriber line, or
DSL, technologies for high-speed data services over their
existing copper networks. A small number of telcos also have
deployed alternative delivery systems such as hybrid fiber coax,
or HFC, fiber to the premises, or FTTP, and broadband wireless
for data and video transmission, and a few have also deployed
video services over their DSL networks. Following regulatory
changes, including the &#147;must-carry&#148; regulations, DBS
operators have now introduced local channels in a substantial
number of markets and have also deployed, on a limited basis,
Internet services to the home
</FONT>

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

<DIV align="left">
<FONT size="2">and small businesses. Additionally, in many major
metropolitan areas, new carriers have entered the communications
services market, although many have scaled back or halted
network construction because of funding limitations caused by
conditions in capital markets.
</FONT>
</DIV>

<P align="left">
<FONT size="2">Similar deregulation of telecommunications and
broadcasting abroad has fostered substantial growth and
competition in foreign communications markets. Many countries
have liberalized the provision of broadcast television and
abolished or exposed to competition incumbent broadcast and
telecom monopolies. Several have encouraged digital broadcasting
in order to provide more channel capacity, higher quality video,
and the provision of other digital services, such as data and
voice. These developments have led to the establishment of new
cable television networks, the launch of new DBS services and
the introduction of broadband wireless services, the latter two
particularly in countries with little wired infrastructure, or
large remote areas where wired networks are not economical.
</FONT>

<P align="left">
<FONT size="2">Our cable market
</FONT>

<P align="left">
<FONT size="2">To address increasing competition and demand for
high-speed broadband services, cable operators are introducing
digital video, voice and data services in addition to
traditional analog video. By offering bundled packages of
broadband services, cable operators are seeking to obtain a
competitive advantage over telephone companies and DBS providers
and to create additional revenue streams. In order to provide
high-speed Internet service, cable operators are deploying cable
modems in an increasing number of their systems. According to
the National Cable &#38; Telecommunications Association, there
were an estimated 15.0&nbsp;million cable modem subscribers in
the United States as of September&nbsp;30, 2003. Similarly,
cable operators have been upgrading and rebuilding their
networks to offer digital video, which enables cable operators
to provide more channels and better picture quality than analog
video, allowing them to better compete against the increasing
penetration of DBS services. In many areas, cable operators have
rolled out new interactive services such as video-on-demand, or
VOD, as well as high-definition television (HDTV) on their
digital platforms. VOD allows subscribers to order, start, pause
and stop selected movies and other content at their own
discretion. Some cable operators are also upgrading and building
out their networks to provide telephony services. These
operators have rolled out telephone services in a number of
major markets and some have also targeted certain business
markets for the delivery of high-bandwidth services.
</FONT>

<P align="left">
<FONT size="2">The ability of cable operators to deliver digital
video, voice and high-speed data services on a broad scale,
however, was constrained by the design of their legacy networks.
These networks, which reach more than 90% of US&nbsp;homes with
televisions, were built initially for one-way broadcast analog
television and have required substantial upgrades to make them
capable of reliably supporting two-way digital services, such as
high-speed Internet access and telephony. Major US&nbsp;cable
operators have indicated that the imminent completion of major
network upgrades, which involve significant labor and
construction costs, will lead to lower capital expenditures in
the future. However, in addition to upgrading and extending
network infrastructure with fiber optics, in order to provide
new services it is necessary for cable operators to invest in
digital headend equipment that can receive, process and
distribute content from a variety of sources in increasingly
complex headends. For example, VOD services require video
storage equipment and servers, complemented by devices capable
of routing, multiplexing and modulation for delivering signals
to individual subscribers over an HFC network. Additionally, the
provision of HDTV channels requires significantly more bandwidth
than the equivalent number of standard definition channels. As
these new services continue to attract increasing numbers of
subscribers, we believe that cable operators will be required to
continue upgrades of headends and the transmission network to
handle the greater volume and complexity of traffic. We expect
that, although total US cable capital expenditures may decline,
operators will continue to invest capital to more effectively
manage available bandwidth in the headend as well as make
further network upgrades, such as node segmentation which is the
support of fewer homes on a single optical node.
</FONT>

<P align="left">
<FONT size="2">Our satellite market
</FONT>

<P align="left">
<FONT size="2">Satellite operators around the world have
established digital television services serving millions of
subscribers. These services, which are capable of providing up
to several hundred channels of high quality video, have become
popular with consumers who want a wider choice of programming
than has been typically available from traditional cable or
broadcast television. The increasing availability of digital set
top boxes and small low cost receiving dishes for
subscribers&#146; homes has facilitated the rollout of DBS
services. DBS services, however, operate mostly in a one-way
environment. Signals are
</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>

<DIV align="left">
<FONT size="2">transmitted from an uplink center to a satellite
and then beamed to dishes located at subscribers&#146; homes.
This method is suited to the delivery of broadcast television,
but does not lend itself easily to two-way services, such as
Internet access.
</FONT>
</DIV>

<P align="left">
<FONT size="2">As cable operators expand the number of channels
offered and introduce services such as VOD and HDTV, DBS
providers are seeking to protect and expand their subscriber
base in a number of ways. DBS operators now have the right to
provide local channels to local markets in the United States and
have made available local channels in most of the largest
metropolitan markets. In the United States,
&#147;must-carry&#148; regulations generally require DBS
operators to transmit all local channels in any markets they
serve, thereby adding constraints on channel capacity. Advances
in digital compression technology allow DBS operators to
cost-effectively add these new channels and to further expand
their video entertainment offerings.
</FONT>

<P align="left">
<FONT size="2">Other markets
</FONT>

<P align="left">
<FONT size="2">Telcos are also facing increasing competition and
demand for high-speed residential broadband services. To date,
their offerings in residential markets have been aimed mostly at
providing Internet access in addition to traditional voice
services. This is being accomplished principally by the
deployment of DSL technology. Like the cable networks, the
telcos&#146; legacy networks are not well equipped to offer new
services. The substantial bandwidth and distance limitations of
the copper-based &#147;last mile&#148; have limited DSL
deployment and present an even greater barrier to providing
video services. Although cable companies and certain new
broadband service providers have networks equipped to deliver
video and are moving to capture data and voice customers, few
telcos have to date offered video services as a competitive
response. Video delivered over DSL lines has major bandwidth
limitations, but the use of video compression technology at very
low bit rates has allowed certain operators to introduce video
services. The major RBOCs have also announced recently plans to
build FTTP networks to offer bundled video, voice and data
services. In the terrestrial broadcasting market, operators in
many countries are now being required by regulation to convert
from analog to digital transmission in order to free up
broadcast spectrum. The conversion to digital often provides the
opportunity to deliver new services, such as HDTV and data
transmission. These broadcasters are faced with similar
requirements to cable and satellite providers in that they need
to convert analog signals to digital prior to transmission and
must also effectively manage the available bandwidth to maximize
their revenue streams.
</FONT>

<P align="left">
<FONT size="2">The market opportunity
</FONT>

<P align="left">
<FONT size="2">The construction of new networks or the upgrade
and extension of existing networks to facilitate high-speed
broadband video, voice and data services requires substantial
expenditure and often the replacement of significant portions of
the existing infrastructure. The economic success of incumbent
and new operators will depend to a large extent on their ability
to offer a choice of attractively priced packages of voice,
video and data services to consumers, and to do so with high
reliability and easy access to their network. As PC penetration
continues to increase, we believe that interchanges of video and
data via the Internet will increase. Personalized video
services, such as video-on-demand, and the availability of TV
sets equipped for HDTV, will require increasing amounts of
bandwidth to the home in order to deliver maximum choice and
flexibility. Compression of video and data to utilize
effectively the available bandwidth, cost-effective transport of
digital traffic within networks, and the construction of robust
&#147;fat pipes&#148; for distribution of content to and from
the home are all essential elements in operators&#146; ability
to maximize revenue and minimize capital and operating costs.
</FONT>

<P align="left">
<FONT size="2">Current industry conditions
</FONT>

<P align="left">
<FONT size="2">The telecommunications industry has been
particularly impacted by the prolonged economic recession,
adverse conditions in capital markets and financial difficulties
in both the service and equipment sectors, including
bankruptcies. Although large telecommunications service
providers, such as WorldCom, now MCI, and the many troubled data
and voice-oriented start-ups, have not been traditional
customers of Harmonic, the cable, satellite and broadcast
sectors have experienced significant financial problems. Many of
our domestic and international customers have accumulated
significant levels of debt and have begun or completed
reorganizations and financial restructurings, including
bankruptcies. In particular, Adelphia Communications, a major
domestic cable operator, declared bankruptcy in June 2002. The
stock prices of other domestic cable companies came under
pressure following the Adelphia bankruptcy due to concerns about
debt levels and
</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>

<DIV align="left">
<FONT size="2">capital expenditure requirements for new and
expanded services, thereby making the raising of capital more
difficult and expensive. In Europe, rapid consolidation of the
cable industry through acquisition also led to significant
levels of debt at the major MSOs, and companies such as NTL and
UPC commenced bankruptcy proceedings. European digital
broadcasters, such as ITV Digital, Kirsch and Quiero, have also
filed for protection from creditors. We believe that the
financial condition of many of our customers has stabilized or
improved, but industry spending levels have not returned to
historic levels. Furthermore, it is likely that further industry
restructuring will take place via mergers or spin-offs, such as
the Comcast acquisition of AT&#38;T Broadband and its recent bid
for The Walt Disney Company, the proposed spin-off of
Time-Warner Cable from Time-Warner and the recent acquisition by
The News Corporation Ltd. of an indirect controlling interest in
Hughes Electronics, the parent company of DIRECTV. Regulatory
issues, financial concerns and business combinations among our
customers are likely to significantly affect the industry,
capital spending plans, and our business for the foreseeable
future.
</FONT>
</DIV>

<P align="left">
<FONT size="2">PRODUCTS
</FONT>

<P align="left">
<FONT size="2">Harmonic&#146;s products are organized in two
principal groups, Convergent Systems and Broadband Access
Networks. In addition, Harmonic provides technical support
services to its customers worldwide.
</FONT>

<P align="left">
<FONT size="2">Our digital video products provide broadband
operators with the ability to accept a variety of signals from
different sources, in different protocols, and to organize,
manage and distribute this content to maximize use of the
available bandwidth. Our encoders, multiplexers and modulators
allow our customers to convert analog video to digital and to
process this output into a stream which can be delivered over a
fiber or wireless network to subscribers. Our edge device, or
gateway, products enable operators to deliver customized
broadcast or narrowcast on-demand services to their subscribers.
</FONT>

<P align="left">
<FONT size="2">Our optical transmission products, node platforms
and return path products, and element management hardware and
software allow cable operators to deliver traditional broadcast
video services while supporting the roll-out of emerging
interactive services and managing the fiber network. Various
types of optical transmitters enable cable operators to design
network architectures which address the service and technical
requirements of their systems. Our optical nodes are designed to
incorporate a variety of modules which provide the operator with
network flexibility and scalability to support increases in
subscribers and the introduction of new services.
</FONT>

<P align="left">
<FONT size="2">Convergent Systems products
</FONT>

<P align="left">
<FONT size="2">The Convergent Systems division develops
standards-based solutions that enable operators to increase the
capacity of their broadband networks with advanced compression
and stream processing technology. Our CS division&#146;s
advanced digital video solutions enable satellite, cable, telco,
broadcast, and wireless operators around the world to offer
digital video services to their customers. As video, data and
voice services continue to converge, effectively managing and
processing these bandwidth-intensive applications becomes
critical to the long-term viability of an operator&#146;s
network.
</FONT>

<P align="left">
<I><FONT size="2">Compression products</FONT></I>

<P align="left">
<I><FONT size="2">DiviCom encoders.
</FONT></I><FONT size="2">This is a complete line of high
performance encoders, which provide compression of video, audio
and data channels. Using sophisticated signal pre-processing,
noise reduction and encoding algorithms, these encoders produce
high-quality video and audio at low data rates. Their compliance
with widely adopted standards enables interoperability with
other products and systems. The MV100 encoder, introduced in the
fall of 2003, has the highest compression efficiency of our
encoder family, while the MV450 is designed for encoding of high
definition television signals.
</FONT>

<P align="left">
<I><FONT size="2">Edge devices</FONT></I>

<P align="left">
<I><FONT size="2">Narrowcast Services Gateway.
</FONT></I><FONT size="2">Our Narrowcast Services Gateway, or
NSG, is a fully integrated server gateway, which interfaces with
the output from a video server and integrates routing,
multiplexing and modulation into a single package for the
delivery of VOD services to subscribers over cable networks. The
NSG is usually supplied with Gigabit Ethernet
</FONT>

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

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

<DIV align="left">
<FONT size="2">inputs, allowing the operator to use bandwidth
efficiently by delivering IP signals from the headend to the
edge of the network for subsequent modulation on to the HFC
network.
</FONT>
</DIV>

<P align="left">
<I><FONT size="2">Stream processing products</FONT></I>

<P align="left">
<I><FONT size="2">Media Node. </FONT></I><FONT size="2">Media
Node is a flexible MPEG-2 networking, switching and multiplexing
platform. In a broadcast facility, the video, audio and data
streams must be combined or multiplexed into a single stream
prior to transmission. Our multiplexing platform combines
compressed streams from various sources into a single transport
stream. Sources may include Harmonic encoders or third-party
devices such as video servers.
</FONT>

<P align="left">
<I><FONT size="2">Broadcast Network Gateway.
</FONT></I><FONT size="2">Our Broadcast Network Gateway, or BNG,
provides digital turnaround and remote modulation capability
with a variety of flexible input and output options. The BNG
allows operators to manage a variety of digital streams without
expensive decoding and re-encoding.
</FONT>

<P align="left">
<I><FONT size="2">Digital turnaround systems.
</FONT></I><FONT size="2">Our digital turnaround system is a
flexible, modular platform incorporating various cards for
grooming, multiplexing and scrambling digital signals prior to
transmission over broadband networks. It is especially well
suited to &#147;grooming&#148; applications where a local
operator wants to change a line-up of pre-packaged channels or
content received from a regional or national feed. We also
provide the Terayon &#147;CherryPicker&#148; digital stream
management system under a reseller agreement with Terayon
Communications.
</FONT>

<P align="left">
<I><FONT size="2">Control and automation products</FONT></I>

<P align="left">
<FONT size="2">Modern digital networks are a diverse array of
hardware and software components from a variety of vendors,
using a number of network protocols and standards. Network
management is a key tool that lets service providers monitor and
control their networks. Our expertise in digital video, audio
and data helps service providers with their network management
requirements. Our product line includes a full range of software
products, such as our NMX Digital Service Manager, that give
service providers the ability to visually monitor their digital
video infrastructure at an aggregate level, rather than just
discrete pieces of hardware, reducing their operational costs.
</FONT>

<P align="left">
<FONT size="2">Broadband Access Networks products
</FONT>

<P align="left">
<FONT size="2">The Broadband Access Networks division applies
its strengths in optics and electronics, including expertise
with lasers, modulators, and radio frequency technology, to
develop products which provide enhanced network reliability and
allow broadband service providers to deliver advanced services,
including two-way interactive services. We provide the operator
with end-to-end capability in the fiber portion of the network.
</FONT>

<P align="left">
<I><FONT size="2">Optical transmission systems</FONT></I>

<P align="left">
<FONT size="2">We offer MAXLink transmitters and optical
amplifiers, PWRLink transmitters and DWDM systems for a wide
range of optical transmission requirements.
</FONT>

<P align="left">
<I><FONT size="2">MAXLink transmitters and optical amplifiers.
</FONT></I><FONT size="2">The MAXLink transmitters and optical
amplifiers operate at a wavelength of 1550&nbsp;nm and serve
long-haul applications and fiber dense architectures that are
beyond the capability of shorter range 1310&nbsp;nm
transmitters. This system is suited to evolving cable networks
employing such features as redundant rings, hub interconnects
and broadcast layer transmission. The recently introduced
MAXLink Plus further increases the channel capacity of cable and
other networks and can transmit over distances in excess of 200
kilometers.
</FONT>

<P align="left">
<I><FONT size="2">PWRLink transmitters.
</FONT></I><FONT size="2">The PWRLink series of optical
transmitters provides optical transmission primarily for use at
a headend or hub for local distribution to optical nodes and for
narrowcasting, which is the transmission of programming to a
select set of subscribers.
</FONT>

<P align="left">
<I><FONT size="2">METROLink system.
</FONT></I><FONT size="2">Our METROLink DWDM system allows
operators to expand the capacity of a single strand of fiber and
also to provide narrowcast services directly from the headend to
nodes. This ability can significantly reduce the size
</FONT>

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

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

<DIV align="left">
<FONT size="2">of hubs and the associated building and equipment
maintenance costs. By increasing the downstream and upstream
capacity of existing optical fiber, METROLink can also eliminate
the significant expense of laying additional fiber.
</FONT>
</DIV>

<P align="left">
<I><FONT size="2">GIGALight. </FONT></I><FONT size="2">Our
GIGALight is a DWDM system for the transport of Gigabit Ethernet
traffic. It allows high-bandwidth services, such as VOD, to be
carried on a single fiber and targeted to particular segments of
the network by optical wavelength.
</FONT>

<P align="left">
<I><FONT size="2">Optical nodes and return path
products</FONT></I>

<P align="left">
<FONT size="2">We offer a number of optical nodes, return path
transmitters and receivers to provide two-way transmission
capability. Optical nodes are designed to allow the customer to
add capacity and scale as the number of subscribers grows and
new services are provided.
</FONT>

<P align="left">
<I><FONT size="2">PWRBlazer optical nodes.
</FONT></I><FONT size="2">Our family of PWRBlazer optical nodes
supports network architectures which meet the varying demands
for bandwidth delivered to a service area. By the addition of
modules providing functions such as return path transmission and
DWDM, our configurable nodes are easily segmented to handle
increasing two-way traffic over a fiber network without major
plant reconstruction.
</FONT>

<P align="left">
<I><FONT size="2">Return path transmitters and receivers.
</FONT></I><FONT size="2">Our return path transmitters support
two-way transmission capabilities by sending video, voice and
data signals from the optical node back to the headend. These
transmitters are available for either analog or digital
transport.
</FONT>

<P align="left">
<I><FONT size="2">Network management</FONT></I>

<P align="left">
<I><FONT size="2">NETWatch Management System.
</FONT></I><FONT size="2">Our NETWatch management system
consists of transponders and network management software. The
transponders operate in broadband networks to capture
measurement data and our software enables the broadband service
operator to monitor and control the HFC transmission network
from a master headend or remote locations. Our NETWatch software
is designed to be integrated into larger network management
systems through the use of simple network management protocol,
or SNMP.
</FONT>

<P align="left">
<FONT size="2">Technical services
</FONT>

<P align="left">
<FONT size="2">We provide consulting, implementation and
maintenance services to our customers worldwide, principally
those which purchase CS division products or solutions. We draw
upon our expertise in broadcast television, communications
networking and compression technology to design, integrate and
install complete solutions. We offer a broad range of services
and support including program management, budget analysis,
technical design and planning, parts inventory management,
building and site preparation, integration and equipment
installation, end-to-end system testing, comprehensive training
and ongoing maintenance. Harmonic also has extensive experience
in integrating our products with numerous third-party products
and services.
</FONT>

<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>

<P align="left">
<FONT size="2">CUSTOMERS
</FONT>

<P align="left">
<FONT size="2">We sell our products to a variety of broadband
communications companies. Set forth below is a representative
list of our significant end-user and integrator/distributor
customers based on net sales during 2003.
</FONT>

<CENTER>
<TABLE width="50%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="48%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="49%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="center" nowrap><FONT size="1">United States</FONT></TD>
    <TD></TD>
    <TD align="center" nowrap><B><FONT size="1">International</FONT></B></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
</TR>

<TR>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Adelphia Communications
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Bell Express Vu
    </FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Cablevision
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Canal Plus
    </FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Charter Communications
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Hong Kong Cable Television
    </FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Comcast
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">NTL
    </FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Cox
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Orbit Communications
    </FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">DIRECTV
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Siemens
    </FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">EchoStar
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Sumitomo/ BNMux
    </FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Fox Sports
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Telef&#243;nica
    </FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Insight Communications
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Telegeneve
    </FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">RCN
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Telewest
    </FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Sinclair Broadcasting
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Thales
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Time Warner Cable
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

</TABLE>
</CENTER>

<P align="left">
<FONT size="2">Historically, a majority of our sales have been
to relatively few customers, and due in part to the
consolidation of ownership of cable television and direct
broadcast satellite systems, we expect this customer
concentration to continue in the foreseeable future. Net sales
to our ten largest customers in 2003, 2002 and 2001 accounted
for approximately 65%, 61% and 49% of net sales, respectively.
In 2003, net sales to Comcast accounted for 32% of net sales. In
2002, net sales to Charter and Comcast accounted for 18% and 10%
of net sales, respectively. If Comcast, which acquired AT&#38;T
Broadband in November 2002, and AT&#38;T Broadband had been
combined for all of 2002, total net sales to the combined
company would have been 17% of net sales. In 2001, net sales to
DIRECTV and Charter Communications represented 13% and 11% of
net sales. 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
acquired AT&#38;T Broadband in November 2002, thereby creating
the largest US cable operator, reaching approximately
22&nbsp;million subscribers. In the DBS segment, The News
Corporation Ltd. recently acquired an indirect controlling
interest in Hughes Electronics, the parent company of DIRECTV.
In addition, financial restructurings of companies such as
Adelphia Communications and several European operators may lead
to further industry consolidation. See &#147;Factors That May
Affect Our Future Results of Operations&nbsp;&#151; 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 align="left">
<FONT size="2">Sales to customers outside of the United States
in 2003, 2002, and 2001 represented 29%, 29%, and 40% of net
sales, respectively. We expect international sales to continue
to account for a substantial portion of our net sales for the
foreseeable future. International sales are subject to a number
of risks, including changes in foreign government regulations
and telecommunications standards, import and export license
requirements, tariffs, taxes and other trade barriers,
fluctuations in foreign currency exchange rates, difficulty in
collecting accounts receivable, difficulty in staffing and
managing foreign operations, managing distributor relations and
political and economic instability. In addition, certain of our
international customers have accumulated significant levels of
debt and have recently announced, or are expected to announce,
reorganizations and financial restructurings, including
bankruptcy filings. International markets may not develop and we
may not receive future orders to supply our products in
international markets at rates equal to or greater than those
experienced in recent periods. See &#147; Factors That May
Affect Our Future Results of Operations&nbsp;&#151; We Depend On
Our International Sales And Are Subject To The Risks Associated
With International Operations, Which May Negatively Affect Our
Operating Results.&#148;
</FONT>

<P align="center"><FONT size="2">8
</FONT>
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#toc">Table of Contents</A></H5><P>

<P align="left">
<FONT size="2">SALES AND MARKETING
</FONT>

<P align="left">
<FONT size="2">In the United States we sell our products
principally through our own direct sales force which is
organized geographically and by major customer and market to
support customer requirements. We sell to international
customers through our own direct sales force as well as
independent distributors and integrators. Principal sales
offices outside of the United States are located in the United
Kingdom, France, and China. International distributors are
generally responsible for importing the products and providing
certain installation, technical support and other services to
customers in their territory. Our direct sales force and
distributors are supported by a highly trained technical staff
including application engineers who work closely with operators
to develop technical proposals and design systems to optimize
system performance and economic benefits to operators. Technical
support provides a customized set of services, as required, for
ongoing maintenance, support-on-demand and training for our
customers and distributors both in our facilities and on-site.
</FONT>

<P align="left">
<FONT size="2">Our marketing organizations develop strategies
for product lines and, in conjunction with our sales force,
identify evolving technical and application needs of customers
so that our product development resources can be most
effectively and efficiently deployed to meet anticipated product
requirements. Our marketing organizations are also responsible
for setting price levels, demand forecasting and general support
of the sales force, particularly at major accounts. We have many
programs in place to heighten industry awareness of Harmonic and
our products, including participation in technical conferences,
publication of articles in industry journals and exhibiting at
trade shows.
</FONT>

<P align="left">
<FONT size="2">MANUFACTURING AND SUPPLIERS
</FONT>

<P align="left">
<FONT size="2">We use third party contract manufacturers to
assemble a substantial majority of subassemblies and modules for
our products. Increasingly we are using such manufacturers to
supply full turnkey products and we expect to subcontract an
increasing number of tasks to third parties in the future. Our
increasing reliance on subcontractors involves several risks,
and we may not be able to obtain an adequate supply of
components, subassemblies, modules and turnkey systems on a
timely basis. In late 2003, we entered into a three-year
agreement with Plexus Services Corp. as our primary contract
manufacturer. The transition of our manufacturing requirements
from certain current contract manufacturers to Plexus is in
progress. We plan to complete the transition during the second
quarter of 2004. Difficulties in managing relationships with
current contract manufacturers, or problems encountered by
Plexus or Harmonic in completing the transition, could impede
our ability to meet our customers&#146; requirements and
adversely affect our operating results.
</FONT>

<P align="left">
<FONT size="2">Our manufacturing operations consist primarily of
final assembly and test of fiber optic systems for our BAN
division. These processes are performed by highly trained
personnel employing technologically advanced electronic
equipment and proprietary test programs. The manufacturing of
our products and subassemblies is a complex process and we
cannot assure you that we will not experience production
problems or manufacturing delays in the future. Because we
utilize our own manufacturing facilities for the final assembly
and test of our BAN division fiber optic systems, and because
such manufacturing capabilities are not readily available from
third parties, any interruption in our own or our contract
manufacturers operations could materially and adversely affect
our business, operating results, financial position and
liquidity.
</FONT>

<P align="left">
<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, 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, although the agreement
with Plexus is for a term of three years. Managing our supplier
relationships is particularly difficult during time periods in
which we introduce new products and during time periods in which
demand for our products is increasing, especially if demand
increases more quickly than we expect. 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
</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>

<DIV align="left">
<FONT size="2">our business. We attempt to limit this risk by
maintaining safety stocks of certain 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,
operating results, financial position and liquidity. In this
regard, our gross margins and operating results from the fourth
quarter of 2000 through the third quarter of 2001 were adversely
affected by excess and obsolete inventory charges of
approximately $49&nbsp;million.
</FONT>
</DIV>

<P align="left">
<FONT size="2">INTELLECTUAL PROPERTY
</FONT>

<P align="left">
<FONT size="2">We currently hold 44 issued United States patents
and 16 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 align="left">
<FONT size="2">We believe that patents and patent applications
are not currently significant to our business, and investors
therefore should not rely on our patent portfolio to give us a
competitive advantage over others in our industry. 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 affect our business, operating
results, financial position and cash flows.
</FONT>

<P align="left">
<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 align="left">
<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 certain of these
leading companies, have asserted and may assert exclusive
patent, copyright, trademark and other intellectual property
rights against us or our customers. Since December 2000, we have
been in communication with several of our customers who have
been contacted by one of these leading companies that believes
certain of Harmonic&#146;s 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 business, operating results,
financial position and cash flows to be materially adversely
affected. Also, you should read &#147;Factors That May Affect
Our Future Results of Operations&nbsp;&#151; We Or Our Customers
May Face Intellectual Property Infringement Claims From Third
Parties&#148; and &#147;Legal Proceedings&#148; for a
description of the claim against us by Stanford University and
Litton Systems.
</FONT>

<P align="center"><FONT size="2">10
</FONT>
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#toc">Table of Contents</A></H5><P>

<P align="left">
<FONT size="2">BACKLOG
</FONT>

<P align="left">
<FONT size="2">We schedule production of our systems based upon
our backlog, open contracts, informal commitments from customers
and sales projections. Our backlog consists of firm purchase
orders by customers for delivery within the next twelve months
as well as deferred revenue which is expected to be recognized
within the next twelve months. At December&nbsp;31, 2003,
backlog, including deferred revenue, amounted to
$45.8&nbsp;million, compared to $23.1&nbsp;million at
December&nbsp;31, 2002. Anticipated orders from customers may
fail to materialize and delivery schedules may be deferred or
canceled for a number of reasons, including reductions in
capital spending by cable, satellite and other operators or
changes in specific customer requirements. In addition, due to
weather-related seasonal factors and annual capital spending
budget cycles at many major end-users, our backlog at
December&nbsp;31, 2003 or any other date, is not necessarily
indicative of actual sales for any succeeding period.
</FONT>

<P align="left">
<FONT size="2">COMPETITION
</FONT>

<P align="left">
<FONT size="2">The markets for cable television fiber optics
systems and digital video systems are extremely competitive and
have been characterized by rapid technological change and
declining average selling prices. Harmonic&#146;s competitors in
the cable television fiber optics systems business include
corporations such as C-Cor.net, Motorola and Scientific-Atlanta.
In the digital video systems business, we compete broadly with
vertically integrated system suppliers including Motorola,
Scientific-Atlanta, Tandberg Television and Thomson Multimedia,
and in certain product lines with Cisco and a number of smaller
companies.
</FONT>

<P align="left">
<FONT size="2">Many 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, operating results, financial position and
cash flows.
</FONT>

<P align="left">
<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, US&nbsp;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 many of our digital
products will find broad market acceptance with US&nbsp;cable
operators. In addition, companies that have historically not had
a large presence in the broadband communications equipment
market have expanded their market presence through mergers and
acquisitions. The continued consolidation of our competitors
could have a significant negative impact on us. In the cable
television fiber optics segment, C-Cor.net has acquired certain
assets from Philips, and Scientific-Atlanta has acquired certain
assets from Arris. 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 align="left">
<FONT size="2">RESEARCH AND DEVELOPMENT
</FONT>

<P align="left">
<FONT size="2">We have historically devoted a significant amount
of our resources to research and development. Research and
development expenses in 2003, 2002, and 2001 were
$35.1&nbsp;million, $40.8&nbsp;million and $51.3&nbsp;million,
respectively.
</FONT>

<P align="left">
<FONT size="2">Our research and development program is primarily
focused on developing new products and systems, and adding new
features to existing products and systems. Our development
strategy is to identify features, products and systems for both
software and hardware that are, or expected to be, needed by our
customers. Our current research and development efforts in the
CS division are focused on video compression systems in MPEG2
and the newly introduced compression standards (MPEG4 or AVC and
Microsoft WM9), MPEG over Internet Protocol (IP), VOD and
switched broadcast and stream management software. The BAN
division research and development efforts are focused in
broadband optical and RF products that enable the transmission
of video over fiber optic networks.
</FONT>

<P align="center"><FONT size="2">11
</FONT>

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

<P align="left">
<FONT size="2">Our success in designing, developing,
manufacturing and selling new or enhanced products will depend
on a variety of factors, including the identification of market
demand for new products, product selection, timely
implementation of product design and development, product
performance, effective manufacturing and assembly processes and
sales and marketing. Because of the complexity inherent in such
research and development efforts, we cannot assure you that we
will successfully develop new products, or that new products
developed by us will achieve market acceptance. Our failure to
successfully develop and introduce new products could harm our
business and operating results.
</FONT>

<P align="left">
<FONT size="2">EMPLOYEES
</FONT>

<P align="left">
<FONT size="2">As of December&nbsp;31, 2003, we employed a total
of 557 people, including 197 in sales, service and marketing,
160 in research and development, 104 in manufacturing operations
and 96 in a general and administrative capacity. There are 444
employees in the U.S. and 113 employees in foreign countries who
are located in the Middle East, Europe and Asia. We also employ
a number of temporary employees and consultants on a contract
basis. During the last three years we have reduced our work
force by approximately 44% primarily in response to a
significant slowing of industry spending and the consequent
adverse impact on our operating results. None of our employees
is represented by a labor union with respect to his or her
employment by Harmonic. We have not experienced any work
stoppages and we consider our relations with our employees to be
good. Our future success will depend, in part, upon our ability
to attract and retain qualified personnel. Competition for
qualified personnel in the broadband communications industry and
in our immediate geographic area remains strong, and we cannot
assure you that we will be successful in retaining our key
employees or that we will be able to attract skilled personnel
in the future.
</FONT>

<P align="left">
<FONT size="2">Executive Officers of Registrant
</FONT>

<P align="left">
<FONT size="2">The following table sets forth certain
information regarding the executive officers of Harmonic and
their ages as of February&nbsp;27, 2004:
</FONT>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="30%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="60%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="center" nowrap><FONT size="1">Name</FONT></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Age</FONT></B></TD>
    <TD></TD>
    <TD align="center" nowrap><B><FONT size="1">Position</FONT></B></TD>
</TR>

<TR>
    <TD align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Anthony J. Ley
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">65</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="bottom">
    <FONT size="2">Chairman of the Board of Directors, President
    &#38; Chief Executive Officer
    </FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Robin N. Dickson
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">56</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="bottom">
    <FONT size="2">Chief Financial Officer
    </FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Patrick Harshman
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">39</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="bottom">
    <FONT size="2">President, Broadband Access Networks
    </FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Yaron Simler
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">45</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="bottom">
    <FONT size="2">President, Convergent Systems
    </FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Israel Levi
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">64</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="bottom">
    <FONT size="2">Senior Vice President, Operations and Quality
    </FONT></TD>
</TR>

</TABLE>
</CENTER>

<P align="left">
<I><FONT size="2">Anthony J. Ley </FONT></I><FONT size="2">has
served as Harmonic&#146;s President and Chief Executive Officer
since November 1988. Mr.&nbsp;Ley was elected Chairman of the
Board of Directors in February 1995. From 1963 to 1987,
Mr.&nbsp;Ley was employed at Schlumberger, Limited both in
Europe and the United States, holding various senior business
management and research and development positions, most recently
as Vice President, Research and Engineering at Fairchild
Semiconductor/ Schlumberger in Palo Alto, California.
Mr.&nbsp;Ley holds an M.A. in mechanical sciences from the
University of Cambridge and an S.M.E.E. from the Massachusetts
Institute of Technology. He is also named as an inventor in 29
patents, is a Fellow of the I.E.E.E. (U.K.) and a senior member
of the I.E.E.E.
</FONT>

<P align="left">
<I><FONT size="2">Robin N. Dickson
</FONT></I><FONT size="2">joined Harmonic in April 1992 as Chief
Financial Officer. From 1989 to March 1992, Mr.&nbsp;Dickson was
corporate controller of Vitelic Corporation, a semiconductor
manufacturer. From 1976 to 1989, Mr.&nbsp;Dickson held various
positions at Raychem Corporation, a materials science company,
including regional financial officer of the Asia-Pacific
Division of the International Group. Mr.&nbsp;Dickson holds a
Bachelor of Laws from the University of Edinburgh and is a
member of the Institute of Chartered Accountants of Scotland.
</FONT>

<P align="left">
<I><FONT size="2">Patrick Harshman
</FONT></I><FONT size="2">joined Harmonic in 1993 and has served
as President of Broadband Access Networks Division since January
2001. Over the last nine years, Dr.&nbsp;Harshman has had
management responsibilities for Harmonic&#146;s digital video
and fiber optic transmission product lines and most recently
served as Vice President of Marketing. Dr.&nbsp;Harshman
received a Ph.D. in Electrical Engineering from the University
of California, Berkeley, where his graduate research focused on
nonlinear optical phenomena in optical communication systems.
</FONT>

<P align="center"><FONT size="2">12
</FONT>
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#toc">Table of Contents</A></H5><P>

<P align="left">
<I><FONT size="2">Yaron Simler </FONT></I><FONT size="2">joined
Harmonic in 1992 and has served as President of Convergent
Systems Division (CS) since February 2001. Previously,
Dr.&nbsp;Simler served as Vice President of Marketing for the CS
Division. Over the last 10&nbsp;years, Dr.&nbsp;Simler has held
several different positions within Harmonic, including Engineer,
Technical Marketing Manager, Product Manager, Applications
Engineer, International Sales Manager and Director of
Applications and Technology. Dr.&nbsp;Simler received a Ph.D. in
Electrical Engineering from the University of California,
Berkeley with a focus in optical communications. He is also
named as an inventor in 1 patent.
</FONT>

<P align="left">
<I><FONT size="2">Israel Levi </FONT></I><FONT size="2">joined
Harmonic in July 1989 and was appointed Senior Vice President of
Operations and Quality in November 2002. Between January 2001
and October 2002, Mr.&nbsp;Levi served as the Senior Vice
President of Systems and Technology. From May 1996 through
December 2000, he was Vice President of Research&nbsp;&#38;
Development. Prior to joining Harmonic, Mr.&nbsp;Levi served in
management of product development at DSC, a telecommunications
systems company. From 1984 to 1988, Mr.&nbsp;Levi served as
Director of CATV Products Division at Catel Communications, a
telecommunications equipment manufacturer. Mr.&nbsp;Levi holds
an M.S. in Electrical Engineering from Carleton University,
Ottawa, Canada and a B.S. in Electrical Engineering from
Technion-Israel Institute of Technology. He is also named as an
inventor in 5 patents.
</FONT>

<P align="left">
<FONT size="2">Available Information
</FONT>

<P align="left">
<FONT size="2">Harmonic makes available free of charge on the
Harmonic website the Company&#146;s annual report on
Form&nbsp;10-K, quarterly reports on Form&nbsp;10-Q, current
reports on Form&nbsp;8-K, and amendments to those reports filed
or furnished pursuant to Section&nbsp;13(a) or 15(d) of the
Exchange Act as soon as reasonably practicable after Harmonic
files such material with, or furnishes it to, the Securities and
Exchange Commission. The address of the Harmonic website is
<U>http://www.harmonicinc.com</U>.
</FONT>

<DIV>&nbsp;</DIV>

<!-- link2 "<FONT size="2">Item 2. Properties</FONT>" -->
<DIV align="left"><A NAME="002"></A></DIV>

<DIV align="left">
<FONT size="2">Item&nbsp;2. <I>Properties</I>
</FONT>
</DIV>

<P align="left">
<FONT size="2">Our principal operations and corporate
headquarters are located in Sunnyvale, California. During the
second quarter of 2001 we completed the relocation of the former
DiviCom employees from facilities in Milpitas, California to the
Sunnyvale campus. We also have a research and development center
in Colorado, several sales offices in the United States, sales
and support centers in the United Kingdom, France, and China,
and a research and development center in Israel. Harmonic has
entered into leases worldwide for approximately 500,000 square
feet of space which expire at various dates through September
2010. Of the 440,000 square feet under lease, approximately
160,000 square feet is in excess of our requirements and we no
longer occupy, do not intend to occupy, and plan to sublease.
The estimated loss on subleases has been included in the excess
facilities charges recorded in 2001 and 2002.
</FONT>

<DIV>&nbsp;</DIV>

<!-- link2 "<FONT size="2">Item 3. Legal Proceedings</FONT>" -->
<DIV align="left"><A NAME="003"></A></DIV>

<DIV align="left">
<FONT size="2">Item&nbsp;3. <I>Legal Proceedings</I>
</FONT>
</DIV>

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

<P align="left">
<FONT size="2">Between June&nbsp;28 and August&nbsp;25, 2000,
several actions alleging violations of the federal securities
laws by Harmonic and certain of its officers and directors (some
of whom are no longer with Harmonic) were filed in or removed to
the United States District Court for the Northern District of
California. The actions subsequently were consolidated.
</FONT>

<P align="left">
<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&nbsp;10(b) and 20(a) of the
Securities Exchange Act of 1934. The complaint also alleged that
certain defendants violated section&nbsp;14(a) of the Exchange
Act and sections&nbsp;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 align="center"><FONT size="2">13
</FONT>

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

<P align="left">
<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. On November&nbsp;13, 2002,
the Court issued an opinion granting the motions to dismiss the
amended complaint without leave to amend. Judgment for
defendants was entered on December&nbsp;2, 2002. On
December&nbsp;12, 2002, plaintiffs filed a motion to amend the
judgment and for leave to file an amended complaint pursuant to
Rules&nbsp;59(e) and 15(a) of the Federal Rules of Civil
Procedure. On June&nbsp;6, 2003, the Court denied
plaintiffs&#146; motion to amend the judgment and for leave to
file an amended complaint. Plaintiffs filed a notice of appeal
on July&nbsp;1, 2003. Plaintiffs filed their opening brief on
December&nbsp;3, 2003. Defendants filed their answering briefs
on March&nbsp;2, 2004. Plaintiffs&#146; optional reply brief is
due fourteen days from service of the answering briefs. No
hearing has been scheduled yet.
</FONT>

<P align="left">
<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 action 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 were
stayed pending resolution of the motions to dismiss the
securities class action. On July&nbsp;29, 2003, the Court
approved the parties&#146; stipulation to dismiss this
derivative action without prejudice and to toll the applicable
limitations period. The limitations period is tolled until
fourteen days after (1)&nbsp;defendants provide plaintiff with a
copy of the mandate issued by the Ninth Court in the securities
action or (2)&nbsp;either party provides written notice of
termination of the tolling period, whichever is first.
</FONT>

<P align="left">
<FONT size="2">A second derivative action purporting to be on
behalf of Harmonic was filed in the Superior Court for the
County of Santa Clara on May&nbsp;15, 2003. It alleges facts
similar to those previously alleged in the securities class
action and the federal derivative action. The complaint names as
defendants former and current Harmonic officers and directors,
along with former officers and directors of C-Cube Microsystems,
Inc., who were named in the securities class action. The
complaint also names Harmonic as a nominal defendant. The
complaint alleges claims for abuse of control, gross
mismanagement, and waste of corporate assets against the
Harmonic defendants, and claims for breach of fiduciary duty,
unjust enrichment, and negligent misrepresentation against all
defendants. On July&nbsp;22, 2003, the Court approved the
parties&#146; stipulation to stay the case pending resolution of
the appeal in the securities class action. Although the parties
initially agreed in principle to a dismissal without prejudice
on similar terms as in the federal derivative action, after
further discussion, the parties decided that the stay currently
in place suffices to protect their respective interests.
</FONT>

<P align="left">
<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.
No estimate can be made of the possible range of loss associated
with the resolution of this contingency and accordingly,
Harmonic has not recorded a liability. An unfavorable outcome of
this litigation could have a material adverse effect on
Harmonic&#146;s business, operating results, financial position
and cash flows.
</FONT>

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

<P align="left">
<FONT size="2">On July&nbsp;3, 2003, Stanford University and
Litton Systems filed a complaint in U.S.&nbsp;District Court for
the Central District of California alleging that optical fiber
amplifiers incorporated into certain of Harmonic&#146;s products
infringe U.S. Patent No.&nbsp;4,859,016. This patent expired in
September 2003. The complaint seeks injunctive relief, royalties
and damages. Harmonic has not been served in the case. Harmonic
is currently evaluating its position with respect to this patent
and has engaged in discussions with the plaintiff regarding
potential settlement of the matter. At this time, we are unable
to determine whether we will be able to settle this litigation
on reasonable terms or at all, nor can we predict the impact of
an adverse outcome of this litigation if we elect to defend
against it. No estimate can be made of the possible range of
loss associated with the resolution of this contingency and
accordingly, we have not recorded a liability associated with
the outcome of a negotiated settlement or an unfavorable verdict
in litigation. An unfavorable outcome of this matter could have
a material adverse effect on Harmonic&#146;s business, operating
results, financial position and cash flows.
</FONT>

<P align="center"><FONT size="2">14
</FONT>

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

<DIV>&nbsp;</DIV>

<!-- link2 "<FONT size="2">Item 4. Submission of Matters to a Vote of Security Holders</FONT>" -->
<DIV align="left"><A NAME="004"></A></DIV>

<DIV align="left">
<FONT size="2">Item&nbsp;4.&nbsp;<I>Submission of Matters to a
Vote of Security Holders</I>
</FONT>
</DIV>

<P align="left">
<FONT size="2">No matters were submitted to a vote of
stockholders during the fourth quarter of the year ended
December&nbsp;31, 2003.
</FONT>

<DIV>&nbsp;</DIV>

<!-- link1 "<FONT size="2">PART II</FONT>" -->
<DIV align="left"><A NAME="005"></A></DIV>

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

<DIV>&nbsp;</DIV>

<!-- link2 "<FONT size="2">Item 5. Market for the Registrant&#146;s Common Stock and Related Security Holder Matters</FONT>" -->
<DIV align="left"><A NAME="006"></A></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="5%"></TD>
    <TD width="95%"></TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">Item&nbsp;5.&nbsp;</FONT></TD>
    <TD>
    <I><FONT size="2">Market for the Registrant&#146;s Common Stock
    and Related Security Holder Matters</FONT></I></TD>
</TR>

</TABLE>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="4%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">(a)</FONT></TD>
    <TD align="left">
    <FONT size="2">Harmonic&#146;s Common Stock has been quoted on
    the Nasdaq National Market under the symbol HLIT since
    Harmonic&#146;s initial public offering on May&nbsp;22, 1995.
    The following table sets forth, for the periods indicated, the
    high and low sales price per share of the Common Stock as
    reported on the Nasdaq National Market:
    </FONT></TD>
</TR>

</TABLE>

<CENTER>
<TABLE width="80%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="71%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="7%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="7%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">High</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Low</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">2002
    </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>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">First quarter
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">14.15</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">9.38</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Second quarter
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">12.20</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" valign="bottom" nowrap><FONT size="2">2.60</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Third quarter
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3.62</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" valign="bottom" nowrap><FONT size="2">1.10</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Fourth quarter
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3.52</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" valign="bottom" nowrap><FONT size="2">1.01</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">2003
    </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 align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">First quarter
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">4.66</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2.30</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Second quarter
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">5.43</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" valign="bottom" nowrap><FONT size="2">3.27</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Third quarter
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">6.85</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" valign="bottom" nowrap><FONT size="2">3.18</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Fourth quarter
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">9.35</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" valign="bottom" nowrap><FONT size="2">5.44</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

</TABLE>
</CENTER>

<P align="left">
<HR size="1" width="18%" align="left" noshade>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="4%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">(b)</FONT></TD>
    <TD align="left">
    <I><FONT size="2">Holders of record:</FONT></I><FONT size="2">
    At February&nbsp;27, 2004 there were 521 stockholders of record
    of Harmonic&#146;s Common Stock.
    </FONT></TD>
</TR>

</TABLE>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="4%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">(c)</FONT></TD>
    <TD align="left">
    <I><FONT size="2">Dividends:</FONT></I><FONT size="2"> Harmonic
    has never declared or paid any dividends on its capital stock.
    Harmonic currently expects to retain future earnings, if any,
    for the use in the operation and expansion of its business and
    does not anticipate paying any cash dividends in the foreseeable
    future. Harmonic&#146;s line of credit includes covenants
    prohibiting the payment of dividends.
    </FONT></TD>
</TR>

</TABLE>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="4%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">(d)</FONT></TD>
    <TD align="left">
    <FONT size="2">The disclosure required by Item&nbsp;201(d) of
    Regulation&nbsp;S-K is set forth in the 2004 Proxy Statement
    under the caption &#147;Equity Plan Information&#148; and is
    incorporated herein by reference.
    </FONT></TD>
</TR>

</TABLE>

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

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

<DIV>&nbsp;</DIV>

<!-- link2 "<FONT size="2">Item 6. Selected Financial Data</FONT>" -->
<DIV align="left"><A NAME="007"></A></DIV>

<DIV align="left">
<FONT size="2">Item&nbsp;6. <I>Selected Financial Data</I>
</FONT>
</DIV>

<P align="left">
<FONT size="2">The data set forth below are qualified in their
entirety by reference to, and should be read in conjunction
with, &#147;Management&#146;s Discussion and Analysis of
Financial Condition and Results of Operations&#148; and the
Consolidated Financial Statements and related notes included
elsewhere in this Annual Report on Form&nbsp;10-K.
</FONT>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="38%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="19"></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="19" align="center" nowrap><B><FONT size="1">Year Ended December 31,</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="19"></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="19" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2003</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2002</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2001</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2000</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">1999</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="19"></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="19" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="11"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><B><FONT size="1">(In thousands, except per share data)</FONT></B></TD>
    <TD></TD>
    <TD colspan="3"></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Consolidated Statement of Operations Data
    </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>
</TR>

<TR>
    <TD align="left" valign="top">
    <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" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">182,276</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">186,632</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">203,810</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">263,046</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">184,075</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Gross profit(1)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">60,603</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" valign="bottom" nowrap><FONT size="2">54,429</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" valign="bottom" nowrap><FONT size="2">1,555</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" valign="bottom" nowrap><FONT size="2">75,171</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" valign="bottom" nowrap><FONT size="2">80,605</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Income (loss)&nbsp;from operations(1)(2)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(30,545</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(77,349</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(168,787</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(1,683,035</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">29,017</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Net income (loss)(1)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(29,433</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(76,918</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(166,407</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(1,654,008</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">23,680</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Basic net income (loss)&nbsp;per share
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(0.47</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(1.29</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(2.84</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(34.06</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">0.84</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Diluted net income (loss)&nbsp;per share
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(0.47</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(1.29</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(2.84</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(34.06</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">0.76</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Consolidated Balance Sheet Data
    </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>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Cash, cash equivalents and short-term investments
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">112,597</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">49,158</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">54,277</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">99,669</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">89,699</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Working capital
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">95,389</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" valign="bottom" nowrap><FONT size="2">31,246</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" valign="bottom" nowrap><FONT size="2">66,608</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" valign="bottom" nowrap><FONT size="2">194,618</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" valign="bottom" nowrap><FONT size="2">129,416</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Total assets
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">224,726</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" valign="bottom" nowrap><FONT size="2">173,754</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" valign="bottom" nowrap><FONT size="2">238,056</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" valign="bottom" nowrap><FONT size="2">425,944</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" valign="bottom" nowrap><FONT size="2">185,693</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Long term debt, including current portion
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,656</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" valign="bottom" nowrap><FONT size="2">2,572</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" valign="bottom" nowrap><FONT size="2">2,746</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" valign="bottom" nowrap><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" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <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 align="right" valign="bottom" nowrap><FONT size="2">106,161</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" valign="bottom" nowrap><FONT size="2">62,183</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" valign="bottom" nowrap><FONT size="2">135,054</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" valign="bottom" nowrap><FONT size="2">295,702</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" valign="bottom" nowrap><FONT size="2">144,888</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

</TABLE>
</CENTER>

<P align="left">
<HR size="1" width="18%" align="left" noshade>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="4%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">(1)</FONT></TD>
    <TD align="left">
    <FONT size="2">The 2003 gross profit, loss from operations and
    net loss included credits of $4.7&nbsp;million for products sold
    during the year which had been written down in prior years.
    Operating expenses included credits of $2.2&nbsp;million from
    the sale of our bankruptcy claims in Adelphia Communications
    resulting in the reversal of previously recorded bad debt
    provisions, and a litigation settlement charge of
    $2.7&nbsp;million related to Power and Telephone Supply.
    </FONT></TD>
</TR>

</TABLE>

<P align="left">
<FONT size="2">The 2002 gross profit, loss from operations and
net loss included special charges to cost of sales totaling
$0.8&nbsp;million for severance and other costs, and credits of
$6.9&nbsp;million for product sold during the year which had
been written down in prior years. Special charges to operating
expenses totaled $22.5&nbsp;million for excess facilities costs,
a bad debt provision of $2.7&nbsp;million for probable losses on
receivables from Adelphia Communications, and severance and
other costs of $0.9&nbsp;million.
</FONT>

<P align="left">
<FONT size="2">The 2001 gross profit, loss from operations and
net loss included special charges to cost of sales totaling
$40.0&nbsp;million for inventory and fixed asset write-downs and
$0.9&nbsp;million for severance and other costs. Special charges
to operating expenses include $30.1&nbsp;million for excess
facilities costs, $2.4&nbsp;million for fixed asset provisions
and $1.6&nbsp;million for severance and other costs and special
charges of $0.6&nbsp;million to other income and expense.
</FONT>

<P align="left">
<FONT size="2">The 2000 loss from operations and net loss
included special charges to operating expenses of approximately
$1.42&nbsp;billion, consisting of $1.38&nbsp;billion for
impairment of goodwill and other intangible assets and
$39.8&nbsp;million for acquired in-process technology. Special
charges to cost of sales totaled $10.0&nbsp;million for excess
and obsolete inventories.
</FONT>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="4%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">(2)</FONT></TD>
    <TD align="left">
    <FONT size="2">Loss from operations for 2003, 2002, 2001 and
    2000 included amortization of intangible assets of
    $13.9&nbsp;million, $18.7&nbsp;million, $20.7&nbsp;million and
    $234.2&nbsp;million, respectively.
    </FONT></TD>
</TR>

</TABLE>

<P align="left">
<FONT size="2">See Notes 3 and 4 of Notes to Consolidated
Financial Statements.
</FONT>

<P align="center"><FONT size="2">16
</FONT>

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

<DIV>&nbsp;</DIV>

<!-- link2 "<FONT size="2">Item 7. Management&#146;s Discussion and Analysis of Financial Condition and Results of Operations</FONT>" -->
<DIV align="left"><A NAME="008"></A></DIV>

<DIV align="left">
<FONT size="2">Item&nbsp;7. <I>Management&#146;s Discussion and
Analysis of Financial Condition and Results of Operations</I>
</FONT>
</DIV>

<P align="left">
<FONT size="2">Overview
</FONT>

<P align="left">
<FONT size="2">Harmonic designs, manufactures and sells digital
video systems and fiber optic systems that enable network
operators to provide a range of interactive and advanced digital
services that include digital video, VOD, high definition
television, high-speed Internet access and telephony.
Historically, most of our sales have been derived from sales of
digital headend products and fiber optic transmission systems to
cable television and satellite operators. We also derive a small
portion of our sales from telephone companies that offer video
services to their customers.
</FONT>

<P align="left">
<FONT size="2">Before 1997, almost all of our sales were derived
directly or indirectly from sales of fiber optic transmission
systems to cable television operators. We also offer digital
headend products to enable delivery of digital video, voice and
data over satellite and wireless networks and cable systems.
</FONT>

<P align="left">
<FONT size="2">In order to further expand our digital systems
capability, Harmonic acquired 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 acquired by LSI Logic in June
2001. C-Cube merged into Harmonic and Harmonic therefore
acquired C-Cube&#146;s DiviCom business, which provides encoding
products and systems for digital television. Harmonic 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.
</FONT>

<P align="left">
<FONT size="2">Harmonic&#146;s net sales decreased 2% in 2003,
8% in 2002 and 23% in 2001. Although industry capital spending
has been and continues to be generally weak as compared to the
pre-merger levels achieved by Harmonic and Divicom in 1999 and
early 2000, we believe that the sequential quarterly sales
increases in 2003 reflected a firmer industry capital spending
environment worldwide which favorably impacted Harmonic. We
believe that the improved environment was reflected by an
increase of 36% in Harmonic&#146;s net sales in the second half
of 2003 as compared with the second half of 2002. We believe
that this improvement in the industry capital spending
environment is, in part, a result of the intensifying
competition between cable and satellite operators to offer more
channels of digital video and new services, such as VOD and
high-definition television, and an overall improvement in the
cable industry capital market. Also, we believe that the
improvement in the industry capital spending environment is a
result of the completion of previously announced pending
business combinations, financial restructurings and regulatory
issues. In particular, Aldelphia Communications, which had
declared bankruptcy in June 2002, has obtained
debtor-in-possession financing of $1.5&nbsp;billion, allowing it
to resume certain capital expenditure programs.
</FONT>

<P align="left">
<FONT size="2">In the fourth quarter of 2003, Harmonic issued
10,350,000 shares of common stock in a public offering at a
price of $7.40 per share. The net proceeds to Harmonic were
approximately $71.4&nbsp;million, which is net of
underwriters&#146; discounts and commissions of approximately
$4.2&nbsp;million and related legal, accounting, printing and
other expenses totaling approximately $0.9&nbsp;million. The net
proceeds from the offering are being used for general corporate
purposes, including payment of existing liabilities, research
and development, the development or acquisition of new products
or technologies, equipment acquisitions, general working capital
and operating expenses. The offering was made pursuant to our
Registration Statement on Form&nbsp;S-3 (File
No.&nbsp;333-84430) filed with the SEC on March&nbsp;18, 2002,
as amended on April&nbsp;16, 2002 and as declared effective on
April&nbsp;18, 2002, and the related prospectus supplement filed
with the SEC on October&nbsp;29, 2003.
</FONT>

<P align="left">
<FONT size="2">Our operating results for 2003 included a charge
to general and administrative expense of approximately
$2.7&nbsp;million related to the settlement of litigation with
Power and Telephone Supply (P&#38;T) in release of all
outstanding claims. These claims arose from the cancellation of
purchase orders on P&#38;T by one of its end-customers in 2000.
The settlement charge is net of the value of products returned
and other costs. Harmonic paid $1.0&nbsp;million of the
settlement on July&nbsp;24, 2003 and paid the balance of
$1.8&nbsp;million on January&nbsp;15, 2004. Our operating
results for 2003 also included credits to operating expenses in
2003 totaling approximately $2.2&nbsp;million from the sale of
our bankruptcy claims in Adelphia Communications resulting in
the reversal of previously recorded bad debt provisions, credits
of $4.7&nbsp;million for products sold during the year which had
been written down in prior years.
</FONT>

<P align="center"><FONT size="2">17
</FONT>

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

<P align="left">
<FONT size="2">During 2002, certain of our domestic and
international customers had accumulated significant levels of
debt and announced reorganizations and financial restructurings,
including bankruptcy filings. In particular, Adelphia
Communications declared bankruptcy in June 2002, and as a
result, we recorded only nominal revenue from Adelphia since the
first quarter of 2002 and established a $2.9&nbsp;million
provision in the second quarter of 2002 for probable losses on
receivables and deferred costs of sales determined to no longer
be recoverable. Adelphia accounted for less than 2% of net sales
in 2002. The stock prices of other domestic cable companies also
came under pressure following the Adelphia Communications
bankruptcy due to concerns about debt levels and capital
expenditure requirements for new and expanded services. We
believe that these capital market concerns about the cable
industry and the associated pressures on capital spending
contributed to the 31% decrease in sales during the second half
of 2002 compared to the first half of 2002. In addition,
spending by our domestic satellite customers and European
customers was weak in 2002, particularly in the second half of
2002. We believe that this was principally because of pending
business consolidations, financial restructurings and regulatory
issues. For example, we believe that the regulatory review of
the proposed acquisition of DIRECTV by Echostar depressed
spending in 2002, particularly in the second half of 2002.
During the fourth quarter of 2002 the companies ultimately
called off the proposed merger due to federal government
opposition, and in December 2003, The News Corporation Ltd.
acquired an indirect controlling interest in Hughes Electronics,
the parent of DIRECTV.
</FONT>

<P align="left">
<FONT size="2">As a result of uncertain market conditions and
lower sales during the second half of 2002, we implemented a
series of cost control measures that included workforce
reductions totaling approximately 120 employees during the
second half of 2002. Harmonic recorded severance charges of
$1.5&nbsp;million during the second half of 2002 related to the
work force reductions. This followed a workforce reduction of
approximately 30% during 2001 for which we recorded severance
and other costs of $2.5&nbsp;million at the time. These actions
reduced headcount from over 1000 at the end of 2000 to 587 at
the end of 2002.
</FONT>

<P align="left">
<FONT size="2">In light of our reduced headcount, difficult
business conditions, and a weak local commercial real estate
market, we reassessed our accrual for the costs of excess
facilities and recorded a charge of $22.5&nbsp;million during
the third quarter of 2002. We changed our estimates with regard
to the expected timing and amount of sublease income due to the
substantial and growing surplus of vacant space in the San
Francisco Bay Area. The excess facilities charge recorded during
the third quarter of 2002 was for facilities that we no longer
occupied, do not intend to occupy, plan to sublease, and
followed charges of $30.1&nbsp;million recorded for excess
facilities in 2001 when the initial accruals were established.
The review performed in the third quarter of 2003 resulted in
the excess facilities liability being decreased by
$3.3&nbsp;million due to a revision in the assumptions as to the
unoccupied portion of a building. This revision was offset by a
correction of straight-line rent expense of $2.3 million as a
result of a lease extension on another building. This lease
extension was a condition of leasing three additional buildings
at corporate headquarters and resulted in all leases terminating
in September 2010. Because the effect of the correction on any
quarter or year was not material to these results of operations
and financial position, the non-cash adjustment was recorded in
the current year. In the event we are unable to achieve expected
levels of sublease rental income, we will need to revise our
estimate of the liability, which could materially impact our
financial position, liquidity, cash flows and results of
operations.
</FONT>

<P align="left">
<FONT size="2">Our operating results in 2001 also included
charges of $39.2&nbsp;million for excess and obsolete
inventories and $3.3&nbsp;million for fixed asset impairment.
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 wrote down inventory levels in excess of our demand
forecasts.
</FONT>

<P align="left">
<FONT size="2">Historically, a majority of our net sales have
been to relatively few customers, and due in part to the
consolidation of ownership of cable television and direct
broadcast satellite systems, we expect this customer
concentration to continue for the foreseeable future. In 2003,
sales to Comcast accounted for 32% of net sales. In 2002, sales
to Charter Communications and Comcast accounted for 18% and 10%
of net sales, respectively. If Comcast, which acquired AT&#38;T
Broadband in November 2002, and AT&#38;T Broadband had been
combined for all of 2002, total revenues would have been 17% of
net sales. DIRECTV and Charter Communications represented 13%
and 11% of net sales in 2001.
</FONT>

<P align="left">
<FONT size="2">In 2003, 2002, and 2001, sales of BAN products
accounted for approximately 38%, 41%, and 37% of net sales,
respectively, while CS products accounted for approximately 62%,
59%, and 63% of net sales, respectively.
</FONT>

<P align="center"><FONT size="2">18
</FONT>

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

<P align="left">
<FONT size="2">Sales to customers outside of the United States
in 2003, 2002, and 2001 represented 29%, 29%, and 40% of net
sales, respectively. A significant portion of international
sales are made to distributors and system integrators, which are
generally responsible for importing the products and providing
installation and technical support and service to customers
within their territory. We expect international sales to
continue to account for a significant portion of our net sales
for the foreseeable future.
</FONT>

<P align="left">
<FONT size="2">Harmonic often recognizes a significant portion
of its revenues in the last month of the quarter. Harmonic
establishes its expenditure levels for product development and
other operating expenses based on projected sales levels, and
expenses are relatively fixed in the short term. Accordingly,
variations in timing of sales can cause significant fluctuations
in operating results. In addition, because a significant portion
of Harmonic&#146;s business is derived from orders placed by a
limited number of large customers, the timing of such orders can
also cause significant fluctuations in our operating results.
Harmonic&#146;s expenses for any given quarter are typically
based on expected sales and if sales are below expectations, our
operating results may be adversely impacted by our inability to
adjust spending to compensate for the shortfall.
</FONT>

<P align="left">
<FONT size="2">Critical Accounting Policies, Judgments and
Estimates
</FONT>

<P align="left">
<FONT size="2">The preparation of financial statements and
related disclosures requires Harmonic to make judgments,
assumptions and estimates that affect the reported amounts of
assets and liabilities, the disclosure of contingencies and the
reported amounts of revenue and expenses in the financial
statements and accompanying notes. Material differences may
result in the amount and timing of revenue and expenses if
different judgments or different estimates were made. See Note 1
of Notes to Consolidated Financial Statements for details of
Harmonic&#146;s accounting policies. Critical accounting
policies, judgments and estimates which we believe have the most
significant impact on Harmonic&#146;s financial statements are
set forth below:
</FONT>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD><FONT size="2"> &#149; </FONT></TD>
    <TD align="left">
    <FONT size="2">Revenue recognition;
    </FONT></TD>
</TR>

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

<TR valign="top">
    <TD><FONT size="2"> &#149; </FONT></TD>
    <TD align="left">
    <FONT size="2">Allowances for doubtful accounts, returns and
    discounts;
    </FONT></TD>
</TR>

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

<TR valign="top">
    <TD><FONT size="2"> &#149; </FONT></TD>
    <TD align="left">
    <FONT size="2">Valuation of inventories;
    </FONT></TD>
</TR>

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

<TR valign="top">
    <TD><FONT size="2"> &#149; </FONT></TD>
    <TD align="left">
    <FONT size="2">Impairment of long-lived assets;
    </FONT></TD>
</TR>

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

<TR valign="top">
    <TD><FONT size="2"> &#149; </FONT></TD>
    <TD align="left">
    <FONT size="2">Restructuring costs and accruals for excess
    facilities;
    </FONT></TD>
</TR>

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

<TR valign="top">
    <TD><FONT size="2"> &#149; </FONT></TD>
    <TD align="left">
    <FONT size="2">Assessment of the probability of the outcome of
    current litigation; and
    </FONT></TD>
</TR>

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

<TR valign="top">
    <TD><FONT size="2"> &#149; </FONT></TD>
    <TD align="left">
    <FONT size="2">Accounting for income taxes.
    </FONT></TD>
</TR>

</TABLE>

<P align="left">
<I><FONT size="2">Revenue Recognition</FONT></I>

<P align="left">
<FONT size="2">Harmonic&#146;s principal sources of revenue are
from product sales, solution sales, services and maintenance
contracts. Harmonic recognizes revenue when persuasive evidence
of an arrangement exists, delivery has occurred or services have
been provided, the sale price is fixed or determinable,
collectibility is reasonably assured, and risk of loss and title
have transferred to the customer.
</FONT>

<P align="left">
<FONT size="2">Revenue from product sales, excluding the revenue
generated from service-related solutions, which are discussed
below, is generally recognized upon shipment, or once all
applicable criteria have been met. Allowances are provided for
estimated returns and discounts. Such allowances are adjusted
periodically to reflect actual and anticipated experience.
</FONT>

<P align="left">
<FONT size="2">Revenue on solution sales, which principally
consist of and include the design, manufacture, test,
integration and installation of equipment to the specifications
of Harmonic&#146;s customers, or acquired from third parties to
be integrated
</FONT>

<P align="center"><FONT size="2">19
</FONT>

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

<DIV align="left">
<FONT size="2">with Harmonic&#146;s products, is generally
recognized using the percentage of completion method. Under the
percentage of completion method, revenue recognized reflects the
portion of the anticipated contract revenue that has been
earned, equal to the ratio of labor costs expended to date to
anticipated final labor costs, based on current estimates of
labor costs to complete the project. If the estimated costs to
complete a project exceed the total contract amount, indicating
a loss, the entire anticipated loss is recognized. Harmonic
records revenue that is earned and recognized in excess of
amounts invoiced on fixed price contracts as accounts
receivables-unbilled.
</FONT>
</DIV>

<P align="left">
<FONT size="2">Revenue from services, which is primarily from
maintenance agreements, is generally recognized ratably as the
services are performed or based on contractual terms. The costs
associated with services are recognized as incurred. Maintenance
services are recognized ratably over the maintenance term, which
is typically one year. The costs associated with these
maintenance services are recognized as incurred. The
unrecognized revenue portion of maintenance agreements billed is
recorded as deferred revenue.
</FONT>

<P align="left">
<FONT size="2">Deferred revenue includes billings in excess of
revenue recognized, net of deferred cost of sales, and invoiced
amounts remain deferred until applicable revenue recognition
criteria are met. Our total deferred revenue was
$11.7&nbsp;million and $9.0&nbsp;million as of December&nbsp;31,
2003 and 2002, respectively.
</FONT>

<P align="left">
<FONT size="2">Certain agreements also include multiple
deliverables or elements for products, software and/or services.
Harmonic recognizes revenue from these agreements based on the
relative fair value of the products and services as they are
delivered. The determination of the fair value of the elements
is based on a number of factors, including the amount charged to
other customers for products or services, price lists, or other
relevant information. If an undelivered element is essential to
the functionality of the delivered element or required under the
terms of the agreement to be delivered concurrently, we defer
the revenue on the delivered element until that undelivered
element is delivered. In the absence of fair value for an
undelivered element, the arrangement is accounted for as a
single unit of accounting, resulting in a deferral of revenue
recognition for the delivered elements until the undelivered
elements are fulfilled.
</FONT>

<P align="left">
<FONT size="2">For certain products where software is more than
an incidental, but less than essential component of the
hardware, or where software has been identified as a separate
element included in a multiple element arrangement, we recognize
software license revenue in accordance with Statement of
Position No.&nbsp;97-2, &#147;Software Revenue Recognition&#148;
(&#147;SOP&nbsp;97-2&#148;), as amended by Statement of Position
No.&nbsp;98-9, &#147;Software Revenue Recognition With Respect
To Certain Transactions&#148; (&#147;SOP&nbsp;98-9&#148;).
SOP&nbsp;98-9 requires recognition of revenue using the
&#147;residual method&#148; when (1)&nbsp;there is vendor
specific objective evidence of the fair values of all
undelivered elements in a multiple element arrangement that is
not accounted for using long-term contract accounting;
(2)&nbsp;vendor specific objective evidence of the fair value
does not exist for one or more of the delivered elements in the
arrangement; and (3)&nbsp;all revenue recognition criteria of
SOP 97-2, other than the requirement for vendor specific
objective evidence of the fair value of each delivered element
of the arrangement, are satisfied.
</FONT>

<P align="left">
<FONT size="2">Revenue recognition in each period is dependent
on our application of these accounting policies. If we believe
that any of the conditions to recognize revenue has not been
met, we defer revenue recognition. Our application of
percentage-of-completion accounting is subject to our estimates
of labor costs to complete each project. In the event that
actual results differ from these estimates or we adjust these
estimates in future periods, our operating results, financial
position and cash flows for a particular period could be
adversely affected.
</FONT>

<P align="left">
<I><FONT size="2">Allowances for Doubtful Accounts, Returns and
Discounts</FONT></I>

<P align="left">
<FONT size="2">We establish allowances for doubtful accounts,
returns and discounts based on credit profiles of our customers,
current economic trends, contractual terms and conditions and
historical payment, return and discount experience, as well as
for known or expected events. If there were to be a
deterioration of a major customer&#146;s creditworthiness or if
actual defaults, returns or discounts were higher than our
historical experience, our operating results, financial position
and cash flows could be adversely affected. At December&nbsp;31,
2003, our allowances for doubtful accounts, returns and
discounts totaled $5.3&nbsp;million.
</FONT>

<P align="center"><FONT size="2">20
</FONT>

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

<P align="left">
<I><FONT size="2">Valuation of Inventories</FONT></I>

<P align="left">
<FONT size="2">Harmonic states inventories at the lower of cost
or market. We establish provisions for excess and obsolete
inventories after evaluation of historical sales and future
demand and market conditions, expected product lifecycles and
current inventory levels. In the event that we adjust our
estimates, such as future demand and expected product
lifecycles, our operating results, financial position and cash
flows could be adversely affected.
</FONT>

<P align="left">
<I><FONT size="2">Impairment of Long-lived Assets</FONT></I>

<P align="left">
<FONT size="2">We perform an evaluation of the carrying value of
intangibles and long-lived assets whenever we become aware of an
event or change in circumstances that would indicate potential
impairment. We evaluate the recoverability of other intangible
assets and long-lived assets on the basis of undiscounted cash
flows from each asset group. If impairment is indicated,
provisions for impairment are determined based on fair value,
principally using discounted cash flows. Changes in industry and
market conditions or the strategic realignment of our resources
could result in an impairment of identified intangibles or
long-lived assets. There can be no assurance that future
impairment tests will not result in a charge to earnings. At
December&nbsp;31, 2003, our net balances for goodwill and
intangible assets totaled $1.8&nbsp;million and
$18.5&nbsp;million, respectively.
</FONT>

<P align="left">
<I><FONT size="2">Restructuring Costs and Accruals for Excess
Facilities</FONT></I>

<P align="left">
<FONT size="2">For restructuring activities initiated prior to
December&nbsp;31, 2002 we recorded restructuring costs when
Harmonic committed to an exit plan and significant changes to
the exit plan were not likely. To determine our excess facility
accruals we estimate expected sublease rental income on each
excess facility. In the event we are unable to achieve expected
levels of sublease rental income, we will need to revise our
estimate of the liability which could materially impact our
operating results, financial position and cash flows. For
restructuring activities initiated after December&nbsp;31, 2002
we follow Statement of Financial Accounting Standards, or SFAS
No.&nbsp;146, &#147;Accounting for Costs Associated with Exit or
Disposal Activities,&#148; as discussed under New Accounting
Pronouncements below. At December&nbsp;31, 2003, our balances
for restructuring costs and excess facilities totaled $34,000
and $34.7&nbsp;million, respectively.
</FONT>

<P align="left">
<I><FONT size="2">Assessment of the Probability of the Outcome
of Current Litigation</FONT></I>

<P align="left">
<FONT size="2">Harmonic records accruals for loss contingencies
when it is probable that a liability has been incurred and the
amount of loss can be reasonably estimated. Based on
Harmonic&#146;s review of the complaints filed in the securities
class action and other pending litigation, Harmonic believes
that it either has meritorious defenses with respect to those
actions and claims or is unable to predict the impact of an
adverse action and, accordingly, no loss contingencies have been
accrued. There can be no assurance, however, that we will
prevail. An unfavorable outcome of these legal proceedings could
have a material adverse effect on our business, financial
position, operating results and cash flows.
</FONT>

<P align="left">
<I><FONT size="2">Accounting for Income Taxes</FONT></I>

<P align="left">
<FONT size="2">In preparation of our financial statements, we
estimate our income taxes for each of the jurisdictions in which
we operate. This involves estimating our actual current tax
exposures and assessing temporary differences resulting from
differing treatment of items, such as reserves and accruals, for
tax and accounting purposes. These differences result in
deferred tax assets and liabilities, which are included within
our consolidated balance sheet. Based on our judgment that the
likelihood that our deferred tax assets will be recovered from
future taxable income is not assured, we established a valuation
allowance of $63.0&nbsp;million in 2001 which was increased to
$104.9&nbsp;million in 2002 and to $123.6&nbsp;million in 2003.
At December&nbsp;31, 2003 we have fully reserved for our net
deferred tax assets related to temporary differences, net
operating loss and tax credit carryforwards.
</FONT>

<P align="left">
<FONT size="2">Significant management judgment is required in
determining our provision for income taxes, our deferred tax
assets and liabilities and our future taxable income for
purposes of assessing our ability to realize any future benefit
from our deferred tax assets. In the event that actual results
differ from these estimates or we adjust these estimates in
future periods, our operating results and financial position
could be materially affected.
</FONT>

<P align="center"><FONT size="2">21
</FONT>

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

<P align="left">
<FONT size="2">Results of Operations
</FONT>

<P align="left">
<FONT size="2">Harmonic&#146;s historical consolidated
statements of operations data for each of the three years ended
December&nbsp;31, 2003, 2002, and 2001 as a percentage of net
sales, are as follows:
</FONT>

<CENTER>
<TABLE width="90%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="60%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="2%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="2%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="11"></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><B><FONT size="1">Fiscal Year Ended December 31,</FONT></B></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2003</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2002</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2001</FONT></B></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="11"></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="3" align="left" valign="top">
    <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 align="right" valign="bottom" nowrap><FONT size="2">100</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">100</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">100</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <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" valign="bottom" nowrap><FONT size="2">67</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" valign="bottom" nowrap><FONT size="2">71</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" valign="bottom" nowrap><FONT size="2">99</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="11" align="left"><HR size="1" noshade></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Gross profit
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">33</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" valign="bottom" nowrap><FONT size="2">29</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" valign="bottom" nowrap><FONT size="2">1</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <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>
    <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" align="left" valign="top">
    <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" valign="bottom" nowrap><FONT size="2">19</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" valign="bottom" nowrap><FONT size="2">22</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" valign="bottom" nowrap><FONT size="2">25</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <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" valign="bottom" nowrap><FONT size="2">27</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" valign="bottom" nowrap><FONT size="2">43</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" valign="bottom" nowrap><FONT size="2">53</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" align="left" valign="top">
    <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" valign="bottom" nowrap><FONT size="2">4</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" valign="bottom" nowrap><FONT size="2">5</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" valign="bottom" nowrap><FONT size="2">6</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <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" valign="bottom" nowrap><FONT size="2">50</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" valign="bottom" nowrap><FONT size="2">70</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" valign="bottom" nowrap><FONT size="2">84</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="3" align="left" valign="top">
    <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><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(17</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(41</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(83</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Interest and other income, net
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1</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" valign="bottom" nowrap><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" valign="bottom" nowrap><FONT size="2">1</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="11" align="left"><HR size="1" noshade></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="3" align="left" valign="top">
    <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><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(16</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(41</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(82</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <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" valign="bottom" nowrap><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" valign="bottom" nowrap><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" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="11" align="left"><HR size="1" noshade></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Net loss
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(16</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)%</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(41</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)%</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(82</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)%</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="11" align="left"><HR size="1" noshade></TD>

</TR>

</TABLE>
</CENTER>

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

<P align="left">
<FONT size="2">Harmonic&#146;s consolidated, segment and
international net sales as compared with the prior year, for
each of the three years ended December&nbsp;31, 2003, 2002, and
2001, is presented in the table below. Also presented is the
related dollar and percentage increase (decrease)&nbsp;in
consolidated, segment, and international net sales as compared
with the prior year, for each of the two years ended
December&nbsp;31, 2003 and 2002.
</FONT>

<CENTER>
<TABLE width="90%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="54%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="7%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="7%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="11"></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><B><FONT size="1">Fiscal Year Ended December&nbsp;31,</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><B><FONT size="1">(in thousands, except percentages)</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD align="center" nowrap><FONT size="1">Segmental Sales Data:</FONT></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2003</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2002</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2001</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="11"></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Convergent Systems
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">113,207</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">109,718</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">129,038</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <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><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">69,069</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" valign="bottom" nowrap><FONT size="2">76,914</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" valign="bottom" nowrap><FONT size="2">74,772</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="11" align="left"><HR size="1" noshade></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <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" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">182,276</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">186,632</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">203,810</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Convergent Systems Increase (decrease)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3,489</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(19,320</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</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 align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Broadband Access Networks Increase (decrease)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(7,845</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2,142</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>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="7" align="left"><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><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Total Increase (decrease)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(4,356</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(17,178</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</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 align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Convergent Systems Percent change
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3.2</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(15.0</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">%)</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>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Broadband Access Networks Percent change
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(10.2</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">%)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2.9</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">%</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 align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Total Percent change
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(2.3</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">%)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(8.4</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">%)</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>

</TABLE>
</CENTER>

<P align="left">
<FONT size="2">Net sales increased in the CS division in 2003
compared to 2002, principally due to stronger spending by
domestic cable operators in the second half of 2003 primarily
for the roll-out of new services, such as VOD. The decrease in
the BAN division net sales in 2003 compared to 2002 was due to
reduced capital spending by select cable operators, in
particular Charter Communications and Adelphia Communications,
during the first half of 2003. We believe this reduced spending
was caused by a tightening of the financial markets, and capital
markets concerns about the cable industry in the aftermath of
the Adelphia bankruptcy filing.
</FONT>

<P align="center"><FONT size="2">22
</FONT>

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

<P align="left">
<FONT size="2">The CS division decrease in 2002 compared to 2001
was principally attributable to significantly lower sales of
encoders to domestic satellite customers. We believe these lower
net sales were due, in part, to purchasing delays created by the
uncertainty caused by the regulatory review of the proposed
acquisition of DIRECTV by Echostar which was ultimately called
off in the fourth quarter of 2002. The lower sales to satellite
customers were partially offset by higher sales of the
Narrowcast Services Gateway, or NSG, for VOD deployments to
cable operators. The increase in BAN division net sales in 2002
compared to 2001 was due to higher sales of node products,
partially offset by lower transmitter sales, and generally
higher unit volumes offset by lower pricing.
</FONT>

<CENTER>
<TABLE width="90%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="54%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="7%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="7%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="11"></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><B><FONT size="1">Fiscal Year Ended December&nbsp;31,</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><B><FONT size="1">(in thousands, except percentages)</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD align="center" nowrap><FONT size="1">Geographic Sales Data:</FONT></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2003</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2002</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2001</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="11"></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">U.S.
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">130,226</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">133,222</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">121,479</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">International
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">52,050</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" valign="bottom" nowrap><FONT size="2">53,410</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" valign="bottom" nowrap><FONT size="2">82,331</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="11" align="left"><HR size="1" noshade></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <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" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">182,276</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">186,632</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">203,810</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">U.S. Increase (decrease)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(2,996</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">11,743</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 align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">International Increase (decrease)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(1,360</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(28,921</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</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>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="7" align="left"><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><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Total Increase (decrease)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(4,356</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(17,178</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</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 align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">U.S. Percent change
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(2.2%</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">9.7</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">%</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>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">International Percent change
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(2.5%</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(35.1</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">%)</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 align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Percent change
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(2.3%</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(8.4</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">%)</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>

</TABLE>
</CENTER>

<P align="left">
<FONT size="2">Net sales in the U.S. decreased in 2003 compared
to 2002 primarily due to lower BAN division sales, partially
offset by higher CS division sales. The BAN division sales
decrease in 2003 was due to reduced capital spending by select
cable operators, in particular Charter Communications and
Adelphia Communications, during the first half of 2003. The
higher CS division sales in 2003 was due to stronger spending by
domestic cable operators primarily for the roll-out of new
services, such as VOD. The international sales decrease in 2003
compared to 2002 reflects the continuing depressed market
conditions, which impacted both divisions.
</FONT>

<P align="left">
<FONT size="2">The increase in U.S. net sales in 2002 compared
to 2001 was primarily due to higher sales in both divisions. The
higher CS division sales were due to increases in product sales
of the Narrowcast Services Gateway, or NSG, for VOD deployments
to cable operators. The higher BAN division sales were due to
increased sales of node products, partially offset by lower
transmitter sales, and generally higher unit volumes, offset by
lower average selling prices. The significant decrease in
international sales in 2002 compared to 2001 was due principally
to depressed market conditions, particularly in Europe, which
impacted both divisions.
</FONT>

<P align="left">
<I><FONT size="2">Gross Profit</FONT></I>

<P align="left">
<FONT size="2">Harmonic&#146;s gross profit and gross profit as
a percentage of consolidated net sales, for each of the three
years ended December&nbsp;31, 2003, 2002, and 2001 are presented
in the table below. Also presented is the related dollar and
percentage increase (decrease)&nbsp;in gross profit as compared
with the prior year, for each of the two years ended
December&nbsp;31, 2003 and 2002.
</FONT>

<CENTER>
<TABLE width="90%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="58%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="11"></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><B><FONT size="1">Fiscal Year Ended December&nbsp;31,</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><B><FONT size="1">(in thousands, except percentages)</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2003</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2002</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2001</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="11"></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Gross profit
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">60,603</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">54,429</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,555</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">As a % of net sales
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">33.2</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">29.2</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">0.8</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Increase (decrease)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">6,174</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">52,874</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>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Percent change
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">11.3</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3,400.3</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">%</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>

</TABLE>
</CENTER>

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

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

<P align="left">
<FONT size="2">The increase in gross profit in 2003 compared to
2002 was primarily attributable to a change in the product mix
and improvements in factory efficiencies. Also contributing to
the higher gross profit in 2003 were cost control measures,
including the full year effect of reductions in headcount in the
factory and technical service and support organizations,
associated with work force reductions during the second half of
2002. These factors, which contributed to higher gross margins
in 2003 compared to 2002, were partially offset by lower average
selling prices and lower sales of $2.2&nbsp;million, from
$4.7&nbsp;million in 2003 compared to $6.9&nbsp;million in 2002,
related to products sold for which the costs basis had been
written down in prior years.
</FONT>

<P align="left">
<FONT size="2">The increase in gross profit in 2002 compared to
2001 was primarily attributable to special charges in 2001 of
$40.9&nbsp;million, principally for excess and obsolete
inventories, and credits in 2002 of $6.9&nbsp;million related to
products sold for which the cost basis had been written down in
prior years. Also contributing to the higher gross profit in
2002 were cost control measures, including a reduction in
headcount in the factory and technical service and support
organizations, associated with work force reductions throughout
2001 and during the second half of 2002. These factors, that
contributed to higher gross margins in 2002 compared to 2001,
partially offset by lower average selling prices and a higher
proportion of BAN division revenue which historically has
carried lower margins.
</FONT>

<P align="left">
<I><FONT size="2">Research and Development</FONT></I>

<P align="left">
<FONT size="2">Harmonic&#146;s research and development expense
and the expense as a percentage of consolidated net sales for
each of the three years ended December&nbsp;31, 2003, 2002, and
2001 are presented in the table below. Also presented is the
related dollar and percentage increase (decrease)&nbsp;in
research and development as compared with the prior year, for
each of the two years ended December&nbsp;31, 2003 and 2002.
</FONT>

<CENTER>
<TABLE width="90%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="56%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="7%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="11"></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><B><FONT size="1">Fiscal Year Ended December&nbsp;31,</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><B><FONT size="1">(in thousands, except percentages)</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2003</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2002</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2001</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="11"></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <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 align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">35,107</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">40,829</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">51,319</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">As a % of net sales
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">19.3</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">21.9</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">25.2</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Increase (decrease)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(5,722</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(10,490</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</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>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Percent change
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(14.0</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">%)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(20.4</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">%)</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>

</TABLE>
</CENTER>

<P align="left">
<FONT size="2">The decrease in research and development expense
in 2003 compared to 2002 was primarily due to the full year
effect of the reduction in headcount associated with the
workforce reductions in 2002 and ongoing cost control measures.
The major expenditures affected were payroll costs and
depreciation, although most expenses within research and
development have been reduced in the last two years.
</FONT>

<P align="left">
<FONT size="2">The decrease in research and development expense
in 2002 compared to 2001 was primarily due to a reduction in
headcount associated with the workforce reductions over the past
two years and ongoing cost control measures.
</FONT>

<P align="left">
<I><FONT size="2">Selling, General and Administrative</FONT></I>

<P align="left">
<FONT size="2">Harmonic&#146;s selling, general and
administrative expense and the expense as a percentage of
consolidated net sales, for each of the three years ended
December&nbsp;31, 2003, 2002, and 2001 are presented in the
table below. Also presented is the related dollar and percentage
increase (decrease)&nbsp;in selling, general and administrative
as compared with the prior year, for each of the two years ended
December&nbsp;31, 2003 and 2002.
</FONT>

<P align="center"><FONT size="2">24
</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 width="90%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="60%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="11"></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><B><FONT size="1">Fiscal Year Ended December&nbsp;31,</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><B><FONT size="1">(in thousands, except percentages)</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2003</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2002</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2001</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="11"></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <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 align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">48,309</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">81,427</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">106,340</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">As a % of net sales
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">26.5</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">43.6</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">52.2</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Increase (decrease)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(33,118</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(24,913</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</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>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Percent change
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(40.7</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">%)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(23.4</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">%)</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>

</TABLE>
</CENTER>

<P align="left">
<FONT size="2">The decrease in selling, general and
administrative expense in 2003 compared to 2002 was due to lower
bad debt expenses caused by the sale of our bankruptcy claims in
Adelphia Communications resulting in the reversal of previously
recorded bad debt provisions of approximately $2.2&nbsp;million
and the full year effect of work force reductions in 2002. In
addition, selling, general and administrative expense in 2002
included excess facilities charges of $22.5 million.
</FONT>

<P align="left">
<FONT size="2">The decrease in selling, general and
administrative expense in 2002 compared to 2001 was due
principally to work force reductions and to lower promotional
costs. In addition, selling, general and administrative expenses
in 2001 included excess facilities charges of $30.1&nbsp;million
compared to $22.5&nbsp;million in 2002.
</FONT>

<P align="left">
<I><FONT size="2">Amortization of Intangibles</FONT></I>

<P align="left">
<FONT size="2">Harmonic&#146;s amortization of intangibles
expense and the expense as a percentage of consolidated net
sales, for each of the three years ended December&nbsp;31, 2003,
2002, and 2001 are presented in the table below. Also presented
is the related dollar and percentage increase (decrease)&nbsp;in
amortization of intangibles as compared with the prior year, for
each of the two years ended December&nbsp;31, 2003 and 2002.
</FONT>

<CENTER>
<TABLE width="90%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="60%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="11"></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><B><FONT size="1">Fiscal Year Ended December&nbsp;31,</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><B><FONT size="1">(in thousands, except percentages)</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2003</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2002</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2001</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="11"></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <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 align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">7,732</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">9,522</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">12,683</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">As a % of net sales
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">4.2</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">5.1</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">6.2</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Increase (decrease)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(1,790</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(3,161</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</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>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Percent change
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(18.8</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">%)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(24.9</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">%)</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>

</TABLE>
</CENTER>

<P align="left">
<FONT size="2">The decrease in 2003 compared to 2002 was due
principally to the intangibles arising from the Cogent
acquisition becoming fully amortized. Harmonic expects to record
approximately $7.7&nbsp;million in amortization of intangibles
in operating expenses in 2004.
</FONT>

<P align="left">
<FONT size="2">The decrease in 2002 compared to 2001 was due
principally to cessation of goodwill amortization in accordance
with adoption of SFAS No.&nbsp;142 &#147;Goodwill and Other
Intangible Assets&#148; effective January&nbsp;1, 2002.
</FONT>

<P align="left">
<I><FONT size="2">Interest and Other Income, Net</FONT></I>

<P align="left">
<FONT size="2">Harmonic&#146;s interest and other income, net,
and interest and other income, net as a percentage of
consolidated net sales, for each of the three years ended
December&nbsp;31, 2003, 2002, and 2001 are presented in the
table below. Also presented is the related dollar and percentage
increase (decrease)&nbsp;in interest and other income, net as
compared with the prior year, for each of the two years ended
December&nbsp;31, 2003 and 2002.
</FONT>

<P align="center"><FONT size="2">25
</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 width="90%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="61%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="11"></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><B><FONT size="1">Fiscal Year Ended December&nbsp;31,</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><B><FONT size="1">(in thousands, except percentages)</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2003</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2002</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2001</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="11"></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Interest and other income, net
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,412</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">931</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,574</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">As a % of net sales
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">0.8</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">0.5</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">0.8</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Increase (decrease)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">481</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(643</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</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>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Percent change
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">51.7</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(40.9</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">%)</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>

</TABLE>
</CENTER>

<P align="left">
<FONT size="2">The increase in 2003 compared to 2002 was due
primarily to foreign exchange gains of $1.1&nbsp;million in 2003
compared to zero in 2002 as a result of a weaker dollar which
were partially offset by lower interest income of
$0.7&nbsp;million in 2003 compared to $1.4&nbsp;million in 2002.
</FONT>

<P align="left">
<FONT size="2">The decrease in 2002 compared to 2001 was due
principally to lower interest income, and to a lesser extent
higher interest expense on borrowings under Harmonic&#146;s
equipment term loan. The decrease in interest income was due to
lower average cash and short-term investment balances as well as
lower interest rates.
</FONT>

<P align="left">
<I><FONT size="2">Income Taxes</FONT></I>

<P align="left">
<FONT size="2">Harmonic&#146;s provision for (benefit from)
income taxes, and provision for (benefit from) income taxes as a
percentage of consolidated net sales, for each of the three
years ended December&nbsp;31, 2003, 2002, and 2001 are presented
in the table below. Also presented is the related dollar and
percentage increase (decrease)&nbsp;in provision for (benefit
from) income taxes as compared with the prior year, for each of
the two years ended December&nbsp;31, 2003 and 2002.
</FONT>

<CENTER>
<TABLE width="90%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="62%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="11"></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><B><FONT size="1">Fiscal Year Ended December&nbsp;31,</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><B><FONT size="1">(in thousands, except percentages)</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2003</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2002</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2001</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="11"></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <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 align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">300</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">500</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(806</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">As a % of net sales
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">0.2</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">0.3</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(0.4%</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Increase (decrease)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(200</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,306</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>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Percent change
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(40.0</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">%)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">162.0</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">%</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>

</TABLE>
</CENTER>

<P align="left">
<FONT size="2">Our effective rate was 1.0% in 2003, 0.7% in 2002
and (0.5%) in 2001. Harmonic recorded a provision for income
taxes of $0.3&nbsp;million in 2003 principally due to foreign
income taxes despite a loss before income taxes of
$29.1&nbsp;million. In 2002, Harmonic recorded a provision for
income taxes of $0.5&nbsp;million principally due to foreign
income taxes despite a loss before income taxes of
$76.4&nbsp;million. The valuation allowance was increased from
$63.0&nbsp;million in 2001 to $104.9&nbsp;million in 2002 and to
$123.6&nbsp;million in 2003. The valuation allowance is for the
full amount of the net deferred tax asset, because realization
of any future benefit from deductible temporary differences, net
operating losses and tax credit carry forwards was uncertain at
December&nbsp;31, 2003 and 2002. Harmonic recorded a benefit
from income taxes of only $0.8&nbsp;million despite a loss
before income taxes of $167.2&nbsp;million in 2001. This was
principally due to the establishment of the valuation allowance
for the full amount of Harmonic&#146;s net deferred tax assets
of $63.0&nbsp;million.
</FONT>

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

<P align="left">
<FONT size="2">Harmonic&#146;s management uses income or loss
from segment operations as its measure of segment profitability.
Income or loss from segment operations excludes intangible
amortization expense, corporate expenses, including excess
facilities charges, and interest and other income, net. See
Note&nbsp;12 of Notes to Consolidated Financial Statements.
</FONT>

<P align="left">
<FONT size="2">Fluctuations in net sales by operating segment
are discussed more extensively in the section above entitled,
<I>Net Sales</I>.
</FONT>

<P align="left">
<FONT size="2">Harmonic&#146;s loss from segment operations and
the loss as a percentage of consolidated net sales, for each of
the three years ended December&nbsp;31, 2003, 2002, and 2001 are
presented in the table below. Also presented is the related
dollar
</FONT>

<P align="center"><FONT size="2">26
</FONT>

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

<DIV align="left">
<FONT size="2">and percentage increase (decrease)&nbsp;in
segment operations results as compared with the prior year, for
each of the two years ended December&nbsp;31, 2003 and 2002.
</FONT>
</DIV>

<CENTER>
<TABLE width="90%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="61%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="11"></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><B><FONT size="1">Fiscal Year Ended December 31,</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><B><FONT size="1">(in thousands, except percentages)</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD align="center" nowrap><FONT size="1">Convergent Systems (CS)</FONT></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2003</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2002</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2001</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="11"></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <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 align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(4,398</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(15,649</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(36,254</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">As a % of segment net sales
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(3.9</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">%)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(14.3</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">%)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(28.1</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">%)</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Increase (decrease)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">11,251</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">20,605</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>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Percent change
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">71.9</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">56.8</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">%</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>

</TABLE>
</CENTER>

<P align="left">
<FONT size="2">The improved CS segment results in 2003 compared
to 2002 were due to a 3% increase in sales, higher gross margins
from changes in product mix and lower material costs, and lower
operating expenses, resulting primarily from lower headcount. CS
segment results included credits of $0.5&nbsp;million in 2003
related to products sold in 2003 for which the cost basis had
been written down in prior years. Despite a 15% decrease in CS
segment net sales in 2002, the loss from segment operations
decreased compared to 2001, principally due to lower headcount
and other cost control measures. In addition, CS results
included special charges for excess and obsolete inventories in
2001 of $10.6&nbsp;million and credits of $1.0&nbsp;million in
2002 related to products sold in 2002 for which the cost basis
had been written down in prior years.
</FONT>

<CENTER>
<TABLE width="90%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="60%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="11"></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><B><FONT size="1">Fiscal Year Ended December 31,</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><B><FONT size="1">(in thousands, except percentages)</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD align="center" nowrap><FONT size="1">Broadband Access Networks (BAN)</FONT></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2003</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2002</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2001</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="11"></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Income or (loss)&nbsp;from segment operations
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,102</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(4,033</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(60,103</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">As a % of segment net sales
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1.6</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(5.2</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">%)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(80.4</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">%)</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Increase (decrease)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">5,135</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">56,070</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>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Percent change
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">127.3</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">93.3</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">%</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>

</TABLE>
</CENTER>

<P align="left">
<FONT size="2">The improved BAN segment results in 2003 compared
to 2002 were due to higher gross margins from improved product
mix, improved factory absorption, and lower operating expenses
in all areas, resulting primarily from lower headcount. In
addition, BAN segment results included credits of
$4.2&nbsp;million in 2003 related to products sold in 2003 for
which the cost basis had been written down in prior years. The
improved results in 2002 compared to 2001 were due to a 3%
increase in sales, improved factory absorption and lower
operating expenses, resulting primarily from lower headcount. In
addition, BAN results included special charges in 2001 of
$28.6&nbsp;million for excess and obsolete inventories, and
credits of $5.9&nbsp;million in 2002 related to products sold in
2002 for which the cost basis had been written down in prior
years.
</FONT>

<P align="left">
<FONT size="2">Liquidity and Capital Resources
</FONT>

<CENTER>
<TABLE width="90%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="60%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="11"></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><B><FONT size="1">Fiscal Year Ended December 31,</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><B><FONT size="1">(in thousands, except percentages)</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2003</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2002</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2001</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="11"></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Cash, cash equivalents and short-term investments
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">112,597</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">49,158</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">54,277</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Net cash used in operating activities
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(5,559</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(5,404</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(24,768</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Net cash provided by (used in) investing
    activities
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(46,369</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(12,668</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">38,580</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <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 align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">72,335</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3,596</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">9,006</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

</TABLE>
</CENTER>

<P align="left">
<FONT size="2">As of December&nbsp;31, 2003, cash, cash
equivalents and short-term investments totaled
$112.6&nbsp;million, compared to $49.2&nbsp;million as of
December&nbsp;31, 2002. Cash used in operations was
$5.6&nbsp;million in 2003 compared to $5.4&nbsp;million in 2002.
The increased use of cash in operations in 2003 was primarily
due to increased accounts receivable, lower excess facilities
liabilities and reduced non-cash charges for depreciation and
amortization, which was substantially offset by a significantly
reduced net loss, higher accounts payable and other non-current
liabilities. Cash used in operations was $5.4&nbsp;million in
2002 compared to $24.8&nbsp;million in 2001. The reduced use of
cash in operations in 2002 was due to a significantly reduced
loss that was nearly offset by non-cash charges for depreciation
and amortization and net cash provided through improved working
capital management.
</FONT>

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

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

<P align="left">
<FONT size="2">On November&nbsp;3, 2003, Harmonic completed a
public offering of 9.0&nbsp;million shares of its common stock
at a price of $7.40&nbsp;per share. The net proceeds were
approximately $62.0&nbsp;million, which is net of
underwriters&#146; fees of $3.7&nbsp;million, and related legal,
accounting, printing and other expenses totaling approximately
$0.9&nbsp;million. In connection with this offering, the
underwriters exercised their option to purchase
1.35&nbsp;million additional shares of common stock at
$7.40&nbsp;per share on November&nbsp;12, 2003 to cover
over-allotments which resulted in additional net proceeds of
approximately $9.4&nbsp;million. The net proceeds from the
offering are being used for general corporate purposes,
including payment of existing liabilities, research and
development, the development or acquisition of new products or
technologies, equipment acquisitions, general working capital
and operating expenses.
</FONT>

<P align="left">
<FONT size="2">Under the terms of the merger agreement with
C-Cube, Harmonic is generally liable for C-Cube&#146;s
pre-merger tax liabilities. As of December&nbsp;31, 2003,
approximately $20.8&nbsp;million of pre-merger tax liabilities
remain outstanding and are included in accrued liabilities.
Harmonic expects to negotiate final settlement and make payment
of these obligations to a variety of taxing authorities or to
LSI Logic during 2004. To the extent that these obligations are
finally settled for less than the amount provided, Harmonic is
required, under the terms of the merger agreement, to refund the
difference to LSI Logic. Accordingly, we expect a significant
reduction in cash, cash equivalents and short-term investments
during 2004. In the event these liabilities are more than
$20.8&nbsp;million, LSI is obligated to indemnify Harmonic for
the additional amount.
</FONT>

<P align="left">
<FONT size="2">Additions to property, plant and equipment were
$3.4&nbsp;million during 2003 compared to $3.3&nbsp;million in
2002 and $29.1&nbsp;million in 2001. The increase in 2003 was
due primarily to the acquisition of test equipment. The decrease
in 2002 was due principally to expenditures during 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 software system. Harmonic
currently expects capital expenditures to be less than
$5&nbsp;million during 2004.
</FONT>

<P align="left">
<FONT size="2">Harmonic has a bank line of credit facility with
Silicon Valley Bank, which provides for borrowings of up to
$13.5&nbsp;million, including $3.5&nbsp;million for equipment
under a secured term loan. This facility, which was amended and
restated in December 2003, expires in December 2004, and
contains financial and other covenants including the requirement
for Harmonic to maintain unrestricted cash, cash equivalents and
short-term investments, net of credit extensions, of not less
than $65.0&nbsp;million. If Harmonic is unable to maintain this
cash, cash equivalents and short-term investments balance or
satisfy the additional affirmative covenant requirements,
Harmonic would be in noncompliance with the facility. In the
event of noncompliance by Harmonic with the covenants under the
facility, Silicon Valley Bank would be entitled to exercise its
remedies under the facility which include declaring all
obligations immediately due and payable, and disposing of the
collateral if obligations were not repaid. At December&nbsp;31,
2003, Harmonic was in compliance with the covenants under this
line of credit facility. The December 2003 amendment resulted in
the company paying a fee of approximately $8 thousand and
requiring payment of approximately $30 thousand of additional
fees if the company does not maintain an unrestricted deposit of
$25.0&nbsp;million with the bank. Future borrowings pursuant to
the line bear interest at the bank&#146;s prime rate (4.0%) or
prime plus 1.0% (prime rate plus 0.5%-1.5% for equipment
borrowings) depending upon the Company&#146;s total cash
position and previous six months&#146; revenue. Borrowings are
payable monthly and are collateralized by all of Harmonic&#146;s
assets. As of December&nbsp;31, 2003, $1.7&nbsp;million was
outstanding under the equipment term loan portion of this
facility of which $1.0&nbsp;million was borrowed during 2003.
The term loan is payable monthly, including principal and
interest at 4.0% per annum on outstanding borrowings as of
December&nbsp;31, 2003 and matures at various dates through
January 2007. Other than standby letters of credit and
guarantees, there were no other outstanding borrowings or
commitments under the line of credit facility as of
December&nbsp;31, 2003.
</FONT>

<P align="left">
<FONT size="2">As of December&nbsp;31, 2002, Harmonic&#146;s
bank line of credit facility contained financial and other
covenants including a minimum cash covenant established in the
November 2002 modification which required the Company to
maintain at least 35% of its cash, cash equivalents and
short-term investments with the bank.
</FONT>

<P align="center"><FONT size="2">28
</FONT>

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

<P align="left">
<FONT size="2">Future payments under contractual obligations,
and other commercial commitments, as of December&nbsp;31, 2003,
were as follows (in thousands):
</FONT>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="35%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="19"></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="19" align="center" nowrap><B><FONT size="1">Payments Due by Period</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="19" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Total Amounts</FONT></B></TD>
    <TD></TD>
    <TD colspan="15"></TD>
</TR>

<TR>
    <TD align="center" nowrap><FONT size="1">Contractual Obligations</FONT></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Committed</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">1 year or less</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2&#150;3 years</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">4&#150;5 years</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Over 5 years</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="19"></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="19" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Long-Term Debt
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,656</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,027</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">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" valign="bottom" nowrap><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" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">C-Cube Pre-Merger Tax Liabilities
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">20,800</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" valign="bottom" nowrap><FONT size="2">20,800</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" valign="bottom" nowrap><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" valign="bottom" nowrap><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" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Operating Leases(1)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">78,392</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" valign="bottom" nowrap><FONT size="2">10,053</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" valign="bottom" nowrap><FONT size="2">21,009</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" valign="bottom" nowrap><FONT size="2">24,921</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" valign="bottom" nowrap><FONT size="2">22,409</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Inventory Purchase Commitments
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">34,927</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" valign="bottom" nowrap><FONT size="2">34,927</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" valign="bottom" nowrap><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" valign="bottom" nowrap><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" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="19" align="left"><HR size="1" noshade></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Total Contractual Obligations
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">135,775</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">66,807</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">21,638</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">24,921</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">22,409</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

</TABLE>
</CENTER>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="35%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="2%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="2%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="19"></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="19" align="center" nowrap><B><FONT size="1">Amount of Commitment Expiration Per Period</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="19" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Total Amounts</FONT></B></TD>
    <TD></TD>
    <TD colspan="15"></TD>
</TR>

<TR>
    <TD align="center" nowrap><FONT size="1">Other Commercial Commitments</FONT></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Committed</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">1 year or less</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2&#150;3 years</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">4&#150;5 years</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Over 5 years</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="19"></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="19" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Standby Letters of Credit
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2,802</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2,802</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" valign="bottom" nowrap><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" valign="bottom" nowrap><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" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

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

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

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="19" align="left"><HR size="1" noshade></TD>

</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Total Commercial Commitments
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2,802</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2,802</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" valign="bottom" nowrap><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" valign="bottom" nowrap><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" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

</TABLE>
</CENTER>

<P align="left">
<HR size="1" width="18%" align="left" noshade>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="4%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">(1)</FONT></TD>
    <TD align="left">
    <FONT size="2">Operating lease commitments include
    $35.3&nbsp;million of accrued excess facilities costs.
    </FONT></TD>
</TR>

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

<TR valign="top">
    <TD><FONT size="2">(2)</FONT></TD>
    <TD align="left">
    <FONT size="2">Harmonic indemnifies some of its suppliers and
    customers for specified intellectual property rights pursuant to
    certain parameters and restrictions. The scope of these
    indemnities varies, but in some instances, includes
    indemnification for damages and expenses (including reasonable
    attorneys&#146; fees). There have been no claims for
    indemnification and, accordingly, no amounts have been accrued
    in respect of the indemnification provisions at
    December&nbsp;31, 2003.
    </FONT></TD>
</TR>

</TABLE>

<P align="left">
<FONT size="2">Harmonic&#146;s cash and investment balances
increased $78.3&nbsp;million in the fourth quarter of 2003 after
decreasing $14.9&nbsp;million through the first three quarters
of 2003. We currently believe that our existing liquidity
sources, including the proceeds from the stock offering we
completed in the fourth quarter of 2003, and our bank line of
credit will satisfy our requirements for at least the next
twelve months, including the final settlement and payment of
C-Cube&#146;s pre-merger tax liabilities. However, we may need
to raise additional funds if our expectations or estimates
change or prove inaccurate, or to take advantage of
unanticipated opportunities or to strengthen our financial
position. The completed stock offering in the fourth quarter of
2003 was part of a registration statement on Form&nbsp;S-3
declared effective by the SEC in April 2002. The Form&nbsp;S-3
registration statement remains effective and Harmonic continues
to have the ability to use the registration statement 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 approximately
$73&nbsp;million, subject to market conditions and our capital
needs.
</FONT>

<P align="left">
<FONT size="2">In addition, from time to time, we review
potential acquisitions that would complement our existing
product offerings, enhance our technical capabilities or expand
our marketing and sales presence. Any future transaction of this
nature could require potentially significant amounts of capital
or could require us to issue our stock and dilute existing
stockholders. 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="left">
<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 surrounding the ongoing U.S. war on terrorism, as
well as conditions in capital markets and the cable and
satellite industries. There can be no assurance that any
financing will be available on terms acceptable to us, if at all.
</FONT>

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

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

<P align="left">
<FONT size="2">New Accounting Pronouncements
</FONT>

<P align="left">
<FONT size="2">In November 2002, the Emerging Issues Task Force
(&#147;EITF&#148;) reached a consensus on Issue No.&nbsp;00-21,
&#147;Revenue Arrangements with Multiple Deliverables.&#148;
EITF Issue No.&nbsp;00-21 provides guidance on how to account
for arrangements that involve the delivery or performance of
multiple products, services and/or rights to use assets.
Harmonic adopted EITF Issue No.&nbsp;00-21 effective
June&nbsp;28, 2003, and the adoption did not have a significant
effect on the Company&#146;s financial position, results of
operations, or cash flows.
</FONT>

<P align="left">
<FONT size="2">In January 2003, the Financial Accounting
Standards Board (&#147;FASB&#148;) issued FASB Interpretation
No.&nbsp;46 (&#147;FIN&nbsp;46&#148;), &#147;Consolidation of
Variable Interest Entities&#148;, which addresses accounting for
the assets, liabilities and activities of another entity. Prior
to the issuance of FIN&nbsp;46, a company generally included
another entity in its consolidated financial statements only if
it controlled the entity through voting interests. FIN&nbsp;46
now requires a variable interest entity, as defined in
FIN&nbsp;46, to be consolidated by a company if that company is
subject to a majority of the risk of loss from the variable
interest entity activities or is entitled to receive a majority
of the entity&#146;s residual returns or both. FIN&nbsp;46 also
requires disclosures about variable interest entities that the
company is not required to consolidate but in which it has a
significant variable interest. The consolidation requirements of
FIN&nbsp;46 apply immediately to variable interest entities
created after January&nbsp;31, 2003 and to older entities in the
first fiscal year or interim period beginning after
June&nbsp;15, 2003, subsequently delayed to December&nbsp;31,
2003. Certain of the disclosure requirements apply to all
financial statements issued after January&nbsp;31, 2003,
regardless of when the variable interest entity was established.
The adoption of FIN&nbsp;46 had no effect on the Company&#146;s
financial position, results of operations, or cash flows.
</FONT>

<P align="left">
<FONT size="2">In April 2003, the FASB issued SFAS No.&nbsp;149,
&#147;Amendment of Statement&nbsp;133 on Derivative Instruments
and Hedging activities.&#148; SFAS No.&nbsp;149 amends and
clarifies the accounting for derivative instruments, including
certain derivative instruments embedded in other contracts, and
for hedging activities under SFAS No.&nbsp;133, &#147;Accounting
for Derivative Instruments and Hedging Activities.&#148;
Harmonic adopted SFAS No.&nbsp;149 effective June&nbsp;28, 2003,
and the adoption had no effect on the Company&#146;s financial
position, results of operations, or cash flows.
</FONT>

<P align="left">
<FONT size="2">In May 2003, the FASB issued SFAS No.&nbsp;150,
&#147;Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity.&#148; SFAS
No.&nbsp;150 requires that certain financial instruments, which
under previous guidance were accounted for as equity, must now
be accounted for as liabilities. The financial instruments
affected include mandatorily redeemable stock, certain financial
instruments that require or may require the issuer to buy back
some of its shares in exchange for cash or other assets and
certain obligations that can be settled with shares of stock.
Harmonic adopted SFAS No.&nbsp;150 effective June&nbsp;28, 2003,
and the adoption had no effect on the Company&#146;s financial
position, results of operations, or cash flows.
</FONT>

<P align="left">
<FONT size="2">In August 2003, the EITF reached a consensus on
Issue No.&nbsp;03-05, &#147;Applicability of SOP&nbsp;97-2 to
Non-Software Deliverables in an Arrangement Containing
More-Than-Incidental Software.&#148; EITF Issue No.&nbsp;03-05
provides guidance on accounting for arrangements that include
software and non-software deliverables. Software-related
elements include software products and services and non-software
deliverables for which the related software is essential to its
functionality. The Company adopted the provisions of EITF Issue
No.&nbsp;03-05 for revenue arrangements entered into after
August&nbsp;13, 2003. The adoption did not have a significant
impact on the Company&#146;s financial position, results of
operations, or cash flows.
</FONT>

<P align="left">
<FONT size="2">In December 2003, the Securities and Exchange
Commission (&#147;SEC&#148;) issued Staff Accounting Bulletin
No.&nbsp;104 (&#147;SAB&nbsp;104&#148;). SAB&nbsp;104 revises or
rescinds portions of the interpretative guidance included in
Topic&nbsp;13 of the codification of staff accounting bulletins.
The primary purpose of SAB&nbsp;104 was to remove multiple
element guidance in SAB&nbsp;101 that is superseded by and
potentially in conflict with EITF Issue No.&nbsp;00-21. The
Company adopted the provisions of SAB&nbsp;No.&nbsp;104
effective December&nbsp;17, 2003. The adoption did not have a
significant impact on the Company&#146;s financial position,
results of operations, or cash flows.
</FONT>

<P align="center"><FONT size="2">30
</FONT>
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#toc">Table of Contents</A></H5><P>

<P align="left">
<FONT size="2">Factors That May Affect Future Results of
Operations
</FONT>

<P align="left">
<I><FONT size="2">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 and Cash Flows.</FONT></I>

<P align="left">
<FONT size="2">Prior to the merger with C-Cube Microsystems
Inc., or C-Cube, in May 2000, 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 align="left">
<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>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD><FONT size="2"> &#149; </FONT></TD>
    <TD align="left">
    <FONT size="2">access to financing;
    </FONT></TD>
</TR>

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

<TR valign="top">
    <TD><FONT size="2"> &#149; </FONT></TD>
    <TD align="left">
    <FONT size="2">annual budget cycles;
    </FONT></TD>
</TR>

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

<TR valign="top">
    <TD><FONT size="2"> &#149; </FONT></TD>
    <TD align="left">
    <FONT size="2">the impact of industry consolidation;
    </FONT></TD>
</TR>

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

<TR valign="top">
    <TD><FONT size="2"> &#149; </FONT></TD>
    <TD align="left">
    <FONT size="2">the status of federal, local and foreign
    government regulation of telecommunications and television
    broadcasting;
    </FONT></TD>
</TR>

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

<TR valign="top">
    <TD><FONT size="2"> &#149; </FONT></TD>
    <TD align="left">
    <FONT size="2">overall demand for communication services and the
    acceptance of new video, voice and data services;
    </FONT></TD>
</TR>

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

<TR valign="top">
    <TD><FONT size="2"> &#149; </FONT></TD>
    <TD align="left">
    <FONT size="2">evolving industry standards and network
    architectures;
    </FONT></TD>
</TR>

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

<TR valign="top">
    <TD><FONT size="2"> &#149; </FONT></TD>
    <TD align="left">
    <FONT size="2">competitive pressures, including pricing
    pressures;
    </FONT></TD>
</TR>

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

<TR valign="top">
    <TD><FONT size="2"> &#149; </FONT></TD>
    <TD align="left">
    <FONT size="2">discretionary customer spending patterns; and
    </FONT></TD>
</TR>

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

<TR valign="top">
    <TD><FONT size="2"> &#149; </FONT></TD>
    <TD align="left">
    <FONT size="2">general economic conditions.
    </FONT></TD>
</TR>

</TABLE>

<P align="left">
<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>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD><FONT size="2"> &#149; </FONT></TD>
    <TD align="left">
    <FONT size="2">uncertainty related to development of digital
    video and cable modem industry standards;
    </FONT></TD>
</TR>

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

<TR valign="top">
    <TD><FONT size="2"> &#149; </FONT></TD>
    <TD align="left">
    <FONT size="2">delays associated with the evaluation of new
    services and system architectures by many cable television
    operators;
    </FONT></TD>
</TR>

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

<TR valign="top">
    <TD><FONT size="2"> &#149; </FONT></TD>
    <TD align="left">
    <FONT size="2">emphasis on generating revenue from existing
    customers by cable television operators instead of new
    construction or network upgrades;
    </FONT></TD>
</TR>

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

<TR valign="top">
    <TD><FONT size="2"> &#149; </FONT></TD>
    <TD align="left">
    <FONT size="2">proposed business combinations by our customers
    and regulatory review thereof;
    </FONT></TD>
</TR>

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

<TR valign="top">
    <TD><FONT size="2"> &#149; </FONT></TD>
    <TD align="left">
    <FONT size="2">economic and financial conditions in domestic and
    international markets; and
    </FONT></TD>
</TR>

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

<TR valign="top">
    <TD><FONT size="2"> &#149; </FONT></TD>
    <TD align="left">
    <FONT size="2">bankruptcies and financial restructuring of major
    customers.
    </FONT></TD>
</TR>

</TABLE>

<P align="left">
<FONT size="2">The prolonged economic recession, the financial
difficulties of certain of our customers and changes in our
customers&#146; deployment plans adversely affected our business
in the latter part of 2001, throughout 2002 and in the first
half of 2003. Two of our major domestic customers, Adelphia
Communications and Winfirst, declared bankruptcy during the
first half of 2002, while NTL, a major international customer,
emerged from bankruptcy in 2002. Furthermore, we believe that
our net sales to satellite customers were adversely affected by
the uncertainty related to the prolonged regulatory review of the
</FONT>

<P align="center"><FONT size="2">31
</FONT>

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

<DIV align="left">
<FONT size="2">proposed acquisition of DIRECTV by EchoStar in
2002. These events, coupled with uncertain and volatile capital
markets, also pressured the market values of domestic cable
operators and restricted their access to capital. This reduced
access to funding for new and existing customers caused delays
in the timing and scale of deployments of our equipment and also
resulted in the postponement or cancellation of certain projects
by our customers. Several customers also canceled new projects
or delayed new orders to allow them to reduce inventory levels
that were in excess of their deployment requirements. We believe
that these factors contributed to decreased net sales in both
our CS division and our BAN division during the second half of
2002 and the first half of 2003 compared to the first half of
2002.
</FONT>
</DIV>

<P align="left">
<FONT size="2">We believe that the financial condition of many
of our customers has stabilized or improved, and our net sales
increased sequentially in the second, third and fourth quarters
of 2003. However, despite the improvement, our quarterly net
sales during these quarters were lower than the first and second
quarters of 2002, and European spending remains generally weak.
Furthermore, another economic downturn or other factors could
cause additional financial difficulties among our customers, and
customers whose financial condition has stabilized may not
purchase new equipment at levels we have seen in the past.
Continued financial difficulties among our customers would
adversely affect our operating results and financial condition.
Also, The News Corporation Ltd. recently acquired an indirect
controlling interest in Hughes Electronics, the parent company
of DIRECTV. We cannot currently predict the impact of The News
Corporation Ltd.&#146;s control of DIRECTV on our future sales.
Furthermore, Comcast, our largest customer, recently announced a
bid for The Walt Disney Company, and we cannot predict the
impact of this bid on our net sales to Comcast. As a result, we
cannot assure you that our net sales growth will continue.
</FONT>

<P align="left">
<FONT size="2">Major US cable operators have indicated that the
imminent completion of major network upgrades, which involve
significant labor and construction costs, will lead to lower
capital expenditures in the future. If our product portfolio and
product development plans do not position us well to capture an
increased portion of the capital spending of US cable operators,
our revenue may decline and our operating results would be
adversely affected.
</FONT>

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

<P align="left">
<FONT size="2">Historically, a majority of our sales have been
to relatively few customers, and due in part to the
consolidation of ownership of cable television and direct
broadcast satellite systems, we expect this customer
concentration to continue in the foreseeable future. Sales to
our ten largest customers in 2003, 2002, and 2001 accounted for
approximately 65%, 61% and 49% of net sales, respectively.
Although we are attempting to broaden our customer base by
penetrating new markets such as the telecommunications and
broadcast markets and expand internationally, 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 acquired AT&#38;T
Broadband in November 2002, thereby creating the largest
U.S.&nbsp;cable operator, reaching approximately 22&nbsp;million
subscribers. In the DBS segment, The News Corporation Ltd.
recently acquired an indirect controlling interest in Hughes
Electronics, the parent company of DIRECTV. In addition,
financial restructurings of companies such as Adelphia
Communications and several European operators may lead to
further industry consolidation. In 2003, sales to Comcast
accounted for 32% of net sales. In 2002, sales to Charter
Communications and Comcast accounted for 18% and 10% of net
sales. If Comcast and AT&#38;T Broadband had been combined for
all of 2002, total revenues would have been 17% of net sales.
Comcast recently announced a bid for The Walt Disney Company,
and we cannot predict what effect this bid will have on our net
sales to Comcast. The loss of Comcast or any other significant
customer or any reduction in orders by Comcast or any
significant customer, or our failure to qualify our products
with a significant customer could adversely affect our business,
operating results and liquidity. In this regard sales to Charter
Communications were significantly lower in 2003 than in 2002,
both in absolute dollars and as a percentage of revenue, as they
have significantly reduced capital spending. The loss of, or any
reduction in orders from, a significant customer would harm our
business.
</FONT>

<P align="center"><FONT size="2">32
</FONT>

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

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

<P align="left">
<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>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD><FONT size="2"> &#149; </FONT></TD>
    <TD align="left">
    <FONT size="2">the level and timing of capital spending of our
    customers, both in the U.S.&nbsp;and in foreign markets;
    </FONT></TD>
</TR>

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

<TR valign="top">
    <TD><FONT size="2"> &#149; </FONT></TD>
    <TD align="left">
    <FONT size="2">changes in market demand;
    </FONT></TD>
</TR>

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

<TR valign="top">
    <TD><FONT size="2"> &#149; </FONT></TD>
    <TD align="left">
    <FONT size="2">the timing and amount of orders, especially from
    significant customers;
    </FONT></TD>
</TR>

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

<TR valign="top">
    <TD><FONT size="2"> &#149; </FONT></TD>
    <TD align="left">
    <FONT size="2">the timing of revenue from systems contracts
    which may span several quarters;
    </FONT></TD>
</TR>

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

<TR valign="top">
    <TD><FONT size="2"> &#149; </FONT></TD>
    <TD align="left">
    <FONT size="2">competitive market conditions, including pricing
    actions by our competitors;
    </FONT></TD>
</TR>

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

<TR valign="top">
    <TD><FONT size="2"> &#149; </FONT></TD>
    <TD align="left">
    <FONT size="2">seasonality, with fewer construction and upgrade
    projects typically occurring in winter months and otherwise
    being affected by inclement weather;
    </FONT></TD>
</TR>

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

<TR valign="top">
    <TD><FONT size="2"> &#149; </FONT></TD>
    <TD align="left">
    <FONT size="2">our unpredictable sales cycles;
    </FONT></TD>
</TR>

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

<TR valign="top">
    <TD><FONT size="2"> &#149; </FONT></TD>
    <TD align="left">
    <FONT size="2">new product introductions by our competitors or
    by us;
    </FONT></TD>
</TR>

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

<TR valign="top">
    <TD><FONT size="2"> &#149; </FONT></TD>
    <TD align="left">
    <FONT size="2">changes in domestic and international regulatory
    environments;
    </FONT></TD>
</TR>

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

<TR valign="top">
    <TD><FONT size="2"> &#149; </FONT></TD>
    <TD align="left">
    <FONT size="2">market acceptance of new or existing products;
    </FONT></TD>
</TR>

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

<TR valign="top">
    <TD><FONT size="2"> &#149; </FONT></TD>
    <TD align="left">
    <FONT size="2">the cost and availability of components,
    subassemblies and modules;
    </FONT></TD>
</TR>

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

<TR valign="top">
    <TD><FONT size="2"> &#149; </FONT></TD>
    <TD align="left">
    <FONT size="2">the mix of our customer base and sales channels;
    </FONT></TD>
</TR>

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

<TR valign="top">
    <TD><FONT size="2"> &#149; </FONT></TD>
    <TD align="left">
    <FONT size="2">the mix of our products sold;
    </FONT></TD>
</TR>

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

<TR valign="top">
    <TD><FONT size="2"> &#149; </FONT></TD>
    <TD align="left">
    <FONT size="2">our development of custom products and software;
    </FONT></TD>
</TR>

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

<TR valign="top">
    <TD><FONT size="2"> &#149; </FONT></TD>
    <TD align="left">
    <FONT size="2">the level of international sales; and
    </FONT></TD>
</TR>

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

<TR valign="top">
    <TD><FONT size="2"> &#149; </FONT></TD>
    <TD align="left">
    <FONT size="2">economic and financial conditions specific to the
    cable and satellite industries, and general economic conditions.
    </FONT></TD>
</TR>

</TABLE>

<P align="left">
<FONT size="2">For example, 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 franchise and licensing approvals.
</FONT>

<P align="left">
<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. 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 several quarters during 2000 and 2001, and during the third
quarter of 2002 and the first quarter of 2003, 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, in some cases significantly.
</FONT>

<P align="center"><FONT size="2">33
</FONT>

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

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

<P align="left">
<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>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD><FONT size="2"> &#149; </FONT></TD>
    <TD align="left">
    <FONT size="2">a significant technical evaluation;
    </FONT></TD>
</TR>

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

<TR valign="top">
    <TD><FONT size="2"> &#149; </FONT></TD>
    <TD align="left">
    <FONT size="2">a commitment of capital and other resources by
    cable, satellite, and other network operators;
    </FONT></TD>
</TR>

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

<TR valign="top">
    <TD><FONT size="2"> &#149; </FONT></TD>
    <TD align="left">
    <FONT size="2">time required to engineer the deployment of new
    technologies or new broadband services;
    </FONT></TD>
</TR>

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

<TR valign="top">
    <TD><FONT size="2"> &#149; </FONT></TD>
    <TD align="left">
    <FONT size="2">testing and acceptance of new technologies that
    affect key operations; and
    </FONT></TD>
</TR>

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

<TR valign="top">
    <TD><FONT size="2"> &#149; </FONT></TD>
    <TD align="left">
    <FONT size="2">test marketing of new services with subscribers.
    </FONT></TD>
</TR>

</TABLE>

<P align="left">
<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="left">
<FONT size="2">As a result of the merger with C-Cube, a
significant portion of our revenue is derived 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 align="left">
<I><FONT size="2">We Depend On Our International Sales And Are
Subject To The Risks Associated With International Operations,
Which May Negatively Affect Our Operating Results.</FONT></I>

<P align="left">
<FONT size="2">Sales to customers outside of the United States
in 2003, 2002 and 2001 represented 29%, 29% and 40%, of net
sales, respectively, and we expect that international sales will
continue to represent a meaningful portion of our net sales for
the foreseeable future. Furthermore, a substantial portion of
our contract manufacturing occurs overseas. Our international
operations, the international operations of our contract
manufacturer and our efforts to increase sales in international
markets, are subject to a number of risks, including:
</FONT>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD><FONT size="2"> &#149; </FONT></TD>
    <TD align="left">
    <FONT size="2">changes in foreign government regulations and
    telecommunications standards;
    </FONT></TD>
</TR>

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

<TR valign="top">
    <TD><FONT size="2"> &#149; </FONT></TD>
    <TD align="left">
    <FONT size="2">import and export license requirements, tariffs,
    taxes and other trade barriers;
    </FONT></TD>
</TR>

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

<TR valign="top">
    <TD><FONT size="2"> &#149; </FONT></TD>
    <TD align="left">
    <FONT size="2">fluctuations in currency exchange rates;
    </FONT></TD>
</TR>

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

<TR valign="top">
    <TD><FONT size="2"> &#149; </FONT></TD>
    <TD align="left">
    <FONT size="2">difficulty in collecting accounts receivable;
    </FONT></TD>
</TR>

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

<TR valign="top">
    <TD><FONT size="2"> &#149; </FONT></TD>
    <TD align="left">
    <FONT size="2">the burden of complying with a wide variety of
    foreign laws, treaties and technical standards;
    </FONT></TD>
</TR>

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

<TR valign="top">
    <TD><FONT size="2"> &#149; </FONT></TD>
    <TD align="left">
    <FONT size="2">difficulty in staffing and managing foreign
    operations; and
    </FONT></TD>
</TR>

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

<TR valign="top">
    <TD><FONT size="2"> &#149; </FONT></TD>
    <TD align="left">
    <FONT size="2">political and economic instability.
    </FONT></TD>
</TR>

</TABLE>

<P align="left">
<FONT size="2">Certain of our international customers have
accumulated significant levels of debt and have announced during
the past three years, 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 align="center"><FONT size="2">34
</FONT>

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

<P align="left">
<FONT size="2">While our international sales and operating
expenses have typically been denominated in U.S.&nbsp;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.
</FONT>

<P align="left">
<FONT size="2">Following implementation of the Euro in January
2002, a higher portion of our European business is denominated
in Euros, which may subject us to increased foreign currency
risk. Gains and losses on the conversion to U.S.&nbsp;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 align="left">
<I><FONT size="2">If Demand For Our Products Increases More
Quickly Than We Expect, We May Be Unable To Meet Our
Customers&#146; Requirements.</FONT></I>

<P align="left">
<FONT size="2">Our net sales increased sequentially in the
second, third and fourth quarters of 2003. If demand for our
products continues to increase, the difficulty of accurately
forecasting our customers&#146; requirements and meeting these
requirements will increase. Forecasting to meet customers&#146;
needs is particularly difficult in connection with newer
products. Our ability to meet customer demand depends
significantly on the availability of components and other
materials as well as the ability of our contract manufacturers
to scale their production. From time to time, we assess our
relationship with our contract manufacturers. Changes in these
relationships, or reallocating manufacturing to new or existing
contract manufacturers, could adversely affect our ability to
meet our customers&#146; requirements in a timely manner, if at
all, and could create operating inefficiencies. Furthermore, we
purchase several key components, subassemblies and modules used
in the manufacture or integration of our products from sole or
limited sources. Our ability to meet customer requirements
depends in part on our ability to obtain a sufficient number of
these materials in a timely fashion. Also, in recent years, in
response to lower net sales and the prolonged economic
recession, we significantly reduced our headcount and other
expenses. As a result, we may be unable to respond to customer
demand that increases more quickly than we expect. If we fail to
meet customers&#146; supply expectations, our net sales would be
adversely affected and we may lose business.
</FONT>

<P align="left">
<I><FONT size="2">Competition For Qualified Personnel,
Particularly Management Personnel, Can Be Intense. In Order to
Manage Our Growth, We Must Be Successful in Addressing
Management Succession Issues and Attracting and Retaining
Qualified Personnel.</FONT></I>

<P align="left">
<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 must successfully manage
transition and replacement issues that may result from the
departure or retirement of members of our senior management. We
are dependent on our ability to retain and motivate high caliber
personnel, in addition to attracting new personnel. Competition
for qualified management, technical and other personnel can be
intense, and we may not be successful in attracting and
retaining such personnel. 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 non-competition
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 senior management and engineers and
other technical personnel, could negatively affect our business.
</FONT>

<P align="left">
<I><FONT size="2">We Face Risks Associated With Having Important
Facilities And Resources Located In Israel.</FONT></I>

<P align="left">
<FONT size="2">Harmonic maintains a facility in Caesarea in the
State of Israel with a total of approximately 60 employees as of
December&nbsp;31, 2003, or approximately 11% of our workforce.
The employees at this facility consist principally of research
and development personnel involved in development of certain
products for the CS division. In addition, we have pilot
production capabilities at this facility consisting of
procurement of subassemblies and modules from Israeli
subcontractors and final assembly and test 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
</FONT>

<P align="center"><FONT size="2">35
</FONT>

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

<DIV align="left">
<FONT size="2">between Israel and its trading partners could
significantly harm our business. The September 2001 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>
</DIV>

<P align="left">
<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 recently. We cannot predict the effect of these obligations
on Harmonic in the future.
</FONT>

<P align="left">
<I><FONT size="2">Pending Business Combinations And Other
Financial And Regulatory Issues Among Our Customers Could
Adversely Affect Our Business.</FONT></I>

<P align="left">
<FONT size="2">The telecommunications industry has been
particularly impacted by the prolonged economic recession,
adverse conditions in capital markets and financial difficulties
in both the service and equipment sectors, including
bankruptcies. Although large telecommunications service
providers such as WorldCom (now MCI) and troubled data and
voice-oriented start-ups have not been traditional customers of
Harmonic, the cable, satellite and broadcast sectors have
experienced significant financial problems. Many of our domestic
and international customers have accumulated significant levels
of debt and have announced reorganizations and financial
restructurings during the past two years, including bankruptcy
filings. In particular, Adelphia Communications, a major
domestic cable operator, declared bankruptcy in June 2002. The
stock prices of other domestic cable companies came under
pressure following the Adelphia bankruptcy due to concerns about
debt levels and capital expenditure requirements for new and
expanded services, thereby making the raising of capital more
difficult and expensive. New operators, such as RCN and
WinFirst, also had difficulty in accessing capital markets.
WinFirst subsequently filed for bankruptcy. In Europe, rapid
consolidation of the cable industry through acquisition also led
to significant levels of debt at the major MSOs, and companies
such as NTL and UPC commenced bankruptcy proceedings. European
digital broadcasters, such as ITV Digital, Kirsch and Quiero,
have also filed for protection from creditors.
</FONT>

<P align="left">
<FONT size="2">While the capital market concerns about the
domestic cable industry have eased since the summer of 2002,
market conditions remain difficult and capital spending plans
are generally constrained. It is likely that further industry
restructuring will take place via mergers or spin-offs, such as
the completed Comcast/ AT&#38;T Broadband transaction and the
proposed spin-off of Time-Warner Cable from Time-Warner.
Comcast, our largest customer, recently announced a bid for The
Walt Disney Company, and we cannot predict the impact of this
bid on our net sales to Comcast. Also, The News Corporation
Ltd., in December 2003, acquired an indirect controlling
interest in Hughes Electronics, the parent company of DIRECTV.
This transaction followed regulatory opposition to the proposed
acquisition of DIRECTV by EchoStar. We cannot currently predict
the impact of The News Corporation Ltd. control of DIRECTV on
our future sales. We believe that uncertainty during 2002
regarding the proposed DIRECTV and EchoStar merger adversely
affected capital spending by both of these parties as well as
other customers. In addition, further business combinations may
occur in the satellite industry, and these further combinations
could adversely affect our business. Regulatory issues,
financial concerns and business combinations among our customers
are likely to significantly affect the industry, its capital
spending plans, and our levels of business for the foreseeable
future.
</FONT>

<P align="left">
<I><FONT size="2">We Must Be Able To Manage Expenses And
Inventory Risks Associated With Meeting The Demand Of Our
Customers.</FONT></I>

<P align="left">
<FONT size="2">If actual orders are materially lower than the
indications we receive from our customers, our ability to manage
inventory and expenses may be affected. 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 million.
</FONT>

<P align="center"><FONT size="2">36
</FONT>

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

<P align="left">
<I><FONT size="2">The Markets In Which We Operate Are Intensely
Competitive And Many Of Our Competitors Are Larger And More
Established.</FONT></I>

<P align="left">
<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. Pressure on average
selling prices has been particularly severe during the recent
economic downturn as equipment suppliers compete aggressively
for customers&#146; reduced capital spending. Harmonic&#146;s
competitors in the cable television fiber optics systems
business include corporations such as C-Cor.net, Motorola, and
Scientific-Atlanta. In the digital and video broadcasting
systems business, we compete broadly with vertically integrated
system suppliers including Motorola, Scientific-Atlanta,
Tandberg Television and Thomson Multimedia, and in certain
product lines with Cisco and a number of smaller companies.
</FONT>

<P align="left">
<FONT size="2">Many 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 may 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, which may harm our
business.
</FONT>

<P align="left">
<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 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 align="left">
<I><FONT size="2">Broadband Communications Markets Are
Characterized By Rapid Technological Change.</FONT></I>

<P align="left">
<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 align="left">
<I><FONT size="2">We Need To Develop And Introduce New And
Enhanced Products In A Timely Manner To Remain
Competitive.</FONT></I>

<P align="left">
<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>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD><FONT size="2"> &#149; </FONT></TD>
    <TD align="left">
    <FONT size="2">are not cost effective;
    </FONT></TD>
</TR>

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

<TR valign="top">
    <TD><FONT size="2"> &#149; </FONT></TD>
    <TD align="left">
    <FONT size="2">are not brought to market in a timely manner;
    </FONT></TD>
</TR>

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

<TR valign="top">
    <TD><FONT size="2"> &#149; </FONT></TD>
    <TD align="left">
    <FONT size="2">are not in accordance with evolving industry
    standards and architectures; or
    </FONT></TD>
</TR>

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

<TR valign="top">
    <TD><FONT size="2"> &#149; </FONT></TD>
    <TD align="left">
    <FONT size="2">fail to achieve market acceptance, or are ahead
    of the market.
    </FONT></TD>
</TR>

</TABLE>

<P align="center"><FONT size="2">37
</FONT>

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

<P align="left">
<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 our ability to develop and
market new products and, accordingly, could materially and
adversely affect our business and operating results.
</FONT>

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

<P align="left">
<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 resources 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.
Managing our supplier and contractor relationships is
particularly difficult during time periods in which we introduce
new products and during time periods in which demand for our
products is increasing, especially if demand increases more
quickly than we expect. Furthermore, from time to time we assess
our relationship with our contract manufacturers. In late 2003,
we entered into a three-year agreement with Plexus Services
Corp. as our primary contract manufacturer. The transition of
our manufacturing requirements from certain current contract
manufacturers to Plexus is in progress. We plan to complete the
transition during the second quarter of 2004. Difficulties in
managing relationships with current contract manufacturers, or
problems encountered by Plexus or Harmonic in completing the
transition, could impede our ability to meet our customers&#146;
requirements and adversely affect our operating results. 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 certain 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, operating results, financial position and
liquidity. In this regard, our gross margins and operating
results from the fourth quarter of 2000 through the third
quarter of 2001 were adversely affected by excess and obsolete
inventory charges of approximately $49&nbsp;million.
</FONT>

<P align="left">
<I><FONT size="2">We May Need Additional Capital In The Future
And May Not Be Able To Secure Adequate Funds On Terms Acceptable
To Us.</FONT></I>

<P align="left">
<FONT size="2">We have generated substantial operating losses
since we began operations in June 1988. The extent of our future
losses and the timing of potential profitability are highly
uncertain, and we may never achieve sustained profitable
operations. We have been engaged in the design, manufacture and
sale of a variety of broadband products since inception, which
has required, and will continue to require, significant research
and development expenditures. As of December&nbsp;31, 2003 we
had an accumulated deficit of $1.9&nbsp;billion. Although we
were profitable in the fourth quarter of 2003, we may not
sustain this profitability. These losses, among other things,
have had and may have an adverse effect on our
stockholders&#146; equity and working capital.
</FONT>

<P align="left">
<FONT size="2">We believe that the proceeds of the stock
offering we completed in November 2003, with our existing
liquidity sources, will satisfy our cash requirements for at
least the next twelve months, including the final settlement and
payment of C-Cube&#146;s pre-merger tax liabilities. However, we
may need to raise additional funds if our expectations are
incorrect, to fund our operations, to take advantage of
unanticipated opportunities or to strengthen our financial
position. The stock offering we completed in November 2003
related to a registration statement on Form&nbsp;S-3 declared
effective by the SEC in April 2002. This registration statement
will continue to 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 approximately $73&nbsp;million,
subject to market conditions and our capital needs. Our ability
to raise funds may
</FONT>

<P align="center"><FONT size="2">38
</FONT>

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

<DIV align="left">
<FONT size="2">be adversely affected by a number of factors
relating to Harmonic, as well as factors beyond our control,
including conditions in capital markets and the cable, telecom
and satellite industries. There can be no assurance that such
financing will be available on terms acceptable to us, if at all.
</FONT>
</DIV>

<P align="left">
<FONT size="2">In addition, from time to time, we review
potential acquisitions that would complement our existing
product offerings, enhance our technical capabilities or expand
our marketing and sales presence. Any future transaction of this
nature could require potentially significant amounts of capital
to finance the acquisition and related expenses as well as to
integrate operations following a transaction, and could require
us to issue our stock and dilute existing stockholders. 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="left">
<FONT size="2">We may raise additional financing through public
or private equity offerings, debt financings or additional
corporate collaboration and licensing arrangements. To the
extent we raise additional capital by issuing equity securities,
our stockholders may experience dilution. To the extent that we
raise additional funds through collaboration and licensing
arrangements, it may be necessary to relinquish some rights to
our technologies or products, or grant licenses on terms that
are not favorable to us. If adequate funds are not available, we
will not be able to continue developing our products.
</FONT>

<P align="left">
<I><FONT size="2">We Need To Effectively Manage Our Operations
And The Cyclical Nature Of Our Business.</FONT></I>

<P align="left">
<FONT size="2">The 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 44% between December&nbsp;31, 2000 and
December&nbsp;31, 2003 due to reduced industry spending and
demand for our products. If demand for products increases
significantly, we may need to increase our headcount. 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.
</FONT>

<P align="left">
<I><FONT size="2">We Are Incurring Additional Costs And Devoting
More Management Resources To Comply With Increasing
Regulation&nbsp;Of Corporate Governance And
Disclosure.</FONT></I>

<P align="left">
<FONT size="2">We are spending an increased amount of management
time and external resources to understand and comply with
changing laws, regulations and standards relating to corporate
governance and public disclosure, including the Sarbanes-Oxley
Act of 2002, new SEC regulations and Nasdaq Stock Market rules.
Devoting the necessary resources to comply with evolving
corporate governance and public disclosure standards may result
in increased general and administrative expenses and a diversion
of management time and attention to compliance activities.
Moreover, we may not be able to comply with these new rules and
regulations on a timely basis.
</FONT>

<P align="left">
<I><FONT size="2">Recent And Proposed Regulations Related To
Equity Compensation Could Adversely Affect Earnings, Affect Our
Ability To Raise Capital And Affect Our Ability To Attract And
Retain Key Personnel.</FONT></I>

<P align="left">
<FONT size="2">Since our inception, we have used stock options
as a fundamental component of our employee compensation
packages. We believe that our stock option plans are an
essential tool to link the long-term interests of stockholders
and employees, especially executive management, and serve to
motivate management to make decisions that will, in the long
run, give the best returns to stockholders. The Financial
Accounting Standards Board (FASB)&nbsp;has announced that it
will propose changes to US GAAP that, if implemented, would
require us to record a charge to earnings for employee stock
option grants. This pending regulation would negatively impact
our earnings and could affect our ability to raise capital on
acceptable terms. In addition, new regulations implemented by
The Nasdaq National Market requiring stockholder approval for
all stock option plans could make it more difficult for us to
grant options to employees in the future. To the extent that new
regulations make it more difficult or expensive to grant options
to employees, we may incur increased compensation costs, change
our equity compensation strategy or find it difficult to
attract, retain and motivate employees, each of which could
materially and adversely affect our business.
</FONT>

<P align="center"><FONT size="2">39
</FONT>

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

<P align="left">
<I><FONT size="2">We Are Liable For C-Cube&#146;s Pre-Merger Tax
Liabilities, Including Tax Liabilities Resulting From The
Spin-Off Of Its Semiconductor Business.</FONT></I>

<P align="left">
<FONT size="2">Under the terms of the merger agreement with
C-Cube, Harmonic is generally liable for C-Cube&#146;s
pre-merger tax liabilities. Approximately $20.8&nbsp;million of
pre-merger tax liabilities remain outstanding and are included
in accrued liabilities. We are working with LSI Logic, which
acquired C-Cube&#146;s spun-off semiconductor business in June
2001 and assumed its obligations, to develop an approach to
settle these obligations, a process which has been underway
since the merger in 2000. These liabilities represent estimates
of C-Cube&#146;s pre-merger tax obligations to various tax
authorities in 13 countries. We are currently in discussions
with tax authorities in 2 of these countries, but none of these
estimates has yet been finalized. Harmonic expects to pay at
least $3.2&nbsp;million of these tax obligations during the
second quarter of 2004, but is unable to predict when the
remaining tax obligations will be paid, or in what amount. The
full amount of the estimated obligation has been classified as a
current liability. To the extent that these obligations are
finally settled for less than the amounts provided, Harmonic is
required, under the terms of the merger agreement, to refund the
difference to LSI Logic. Conversely, if the settlements are more
than the $20.8&nbsp;million pre-merger tax liability, LSI Logic
is obligated to reimburse Harmonic.
</FONT>

<P align="left">
<FONT size="2">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 LSI Logic,
Harmonic generally will remain liable, and such liability could
have a material adverse effect on our financial condition,
results of operations and cash flows.
</FONT>

<P align="left">
<I><FONT size="2">We May Be Subject To Risks Associated With
Other Acquisitions.</FONT></I>

<P align="left">
<FONT size="2">We have made, continue to consider making and may
make investments in complementary companies, products or
technologies. If we enter into acquisition transactions, we
could have difficulty assimilating or retaining the acquired
companies&#146; key personnel and operations or integrating the
acquired technology or products into ours. We also may face
challenges in achieving the strategic objectives, cost savings
or other benefits from a proposed acquisition and difficulties
in expanding our management information systems to accommodate
the acquired business. These difficulties could disrupt our
ongoing business, distract our management and employees and
significantly 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, or to provide for additional working capital
requirements, 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 align="left">
<I><FONT size="2">Cessation Of The Development And Production Of
Video Encoding Chips By C-Cube&#146;s Spun-off Semiconductor
Business May Adversely Impact Us.</FONT></I>

<P align="left">
<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 for its product and service
offerings. The spun-off semiconductor business is the sole
supplier of these chips to Harmonic. Several of these products
continue to be important to our business, and we have
incorporated these chips into additional products that we have
developed.
</FONT>

<P align="left">
<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
</FONT>

<P align="center"><FONT size="2">40
</FONT>

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

<DIV align="left">
<FONT size="2">able to or does not sustain its development and
production efforts in this area our business, financial
condition, results of operations and cash flow could be harmed.
Also, this agreement expires in October 2004.
</FONT>
</DIV>

<P align="left">
<I><FONT size="2">Our Failure To Adequately Protect Our
Proprietary Rights May Adversely Affect Us.</FONT></I>

<P align="left">
<FONT size="2">We currently hold 44 issued United States patents
and 16 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 align="left">
<FONT size="2">We believe that patents and patent applications
are not currently significant to our business, and investors
therefore should not rely on our patent portfolio to give us a
competitive advantage over others in our industry. 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 affect our business, operating
results, financial position and cash flows.
</FONT>

<P align="left">
<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 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 align="left">
<I><FONT size="2">We Or Our Customers May Face Intellectual
Property Infringement Claims From Third Parties.</FONT></I>

<P align="left">
<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.
</FONT>

<P align="left">
<FONT size="2">On July&nbsp;3, 2003, Stanford University and
Litton Systems filed a complaint in U.S. District Court for the
Central District of California alleging that optical fiber
amplifiers incorporated into certain of Harmonic&#146;s products
infringe U.S. Patent No.&nbsp;4,859,016. This patent expired in
September 2003. The complaint seeks injunctive relief, royalties
and damages. Harmonic has not been served in the case. Harmonic
is currently evaluating its position with respect to this patent
and has engaged in discussions with the plaintiff regarding
potential settlement of the matter. At this time, Harmonic is
unable to determine whether Harmonic will be able to settle this
matter on reasonable terms or at all, nor can Harmonic predict
the impact of an adverse outcome of this litigation if Harmonic
elects to defend against it. Consequently, Harmonic has made no
provision in its financial statements for the outcome of a
negotiated settlement or an unfavorable verdict in litigation.
An unfavorable outcome of this matter could have a material
adverse effect on Harmonic&#146;s business, operating results,
financial position and cash flows.
</FONT>

<P align="center"><FONT size="2">41
</FONT>

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

<P align="left">
<FONT size="2">Our suppliers and customers may receive similar
claims. We have agreed to indemnify some of our suppliers and
customers for alleged patent infringement. The scope of this
indemnity varies, but, in some instances, includes
indemnification for damages and expenses (including reasonable
attorney&#146;s fees). 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 align="left">
<I><FONT size="2">We Are The Subject Of Securities
Class&nbsp;Action Claims And Other Litigation Which, If
Adversely Determined, Could Harm Our Business And Operating
Results.</FONT></I>

<P align="left">
<FONT size="2">Between June&nbsp;28 and August&nbsp;25, 2000,
several actions alleging violations of the federal securities
laws by Harmonic and certain of its officers and directors (some
of whom are no longer with Harmonic) were filed in or removed to
the United States District Court for the Northern District of
California. The actions subsequently were consolidated.
</FONT>

<P align="left">
<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&nbsp;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&nbsp;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 align="left">
<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. On November&nbsp;13, 2002,
the Court issued an opinion granting the motions to dismiss the
amended complaint without leave to amend. Judgment for
defendants was entered on December&nbsp;2, 2002. On
December&nbsp;12, 2002, plaintiffs filed a motion to amend the
judgment and for leave to file an amended complaint pursuant to
Rules&nbsp;59(e) and 15(a) of the Federal Rules of Civil
Procedure. On June&nbsp;6, 2003, the Court denied
plaintiffs&#146; motion to amend the judgment and for leave to
file an amended complaint. Plaintiffs filed a notice of appeal
on July&nbsp;1, 2003. Plaintiffs filed their opening brief on
December&nbsp;3, 2003. Defendants filed their answering briefs
on March&nbsp;2, 2004. Plaintiffs&#146; optional reply brief is
due fourteen days from service of the answering briefs. No
hearing has been scheduled yet.
</FONT>

<P align="left">
<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 action 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 were
stayed pending resolution of the motions to dismiss the
securities class action. On July&nbsp;29, 2003, the Court
approved the parties&#146; stipulation to dismiss this
derivative action without prejudice and to toll the applicable
limitations period. The limitations period is tolled until
fourteen days after (1)&nbsp;defendants provide plaintiff with a
copy of the mandate issued by the Ninth Court in the securities
action or (2)&nbsp;either party provides written notice of
termination of the tolling period, whichever is first.
</FONT>

<P align="left">
<FONT size="2">A second derivative action purporting to be on
behalf of Harmonic was filed in the Superior Court for the
County of Santa Clara on May&nbsp;15, 2003. It alleges facts
similar to those previously alleged in the securities class
action and the federal derivative action. The complaint names as
defendants former and current Harmonic officers and directors,
along with former officers and directors of C-Cube Microsystems,
Inc., who were named in the securities class action. The
complaint
</FONT>

<P align="center"><FONT size="2">42
</FONT>

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

<DIV align="left">
<FONT size="2">also names Harmonic as a nominal defendant. The
complaint alleges claims for abuse of control, gross
mismanagement, and waste of corporate assets against the
Harmonic defendants, and claims for breach of fiduciary duty,
unjust enrichment, and negligent misrepresentation against all
defendants. On July&nbsp;22, 2003, the Court approved the
parties&#146; stipulation to stay the case pending resolution of
the appeal in the securities class action. Although the parties
initially agreed in principle to a dismissal without prejudice
on similar terms as in the federal derivative action, after
further discussion, the parties decided that the stay currently
in place suffices to protect their respective interests.
</FONT>
</DIV>

<P align="left">
<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.
No estimate can be made of the possible range of loss associated
with the resolution of this contingency and accordingly,
Harmonic has not recorded a liability. An unfavorable outcome of
this litigation could have a material adverse effect on
Harmonic&#146;s business, operating results, financial position
and cash flows.
</FONT>

<P align="left">
<FONT size="2">On July&nbsp;3, 2003, Stanford University and
Litton Systems filed a complaint in U.S. District Court for the
Central District of California alleging that optical fiber
amplifiers incorporated into certain of Harmonic&#146;s products
infringe U.S. Patent No.&nbsp;4,859,016. This patent expired in
September 2003. The complaint seeks injunctive relief, royalties
and damages. Harmonic has not been served in the case. Harmonic
is currently evaluating its position with respect to this patent
and has engaged in discussions with the plaintiff regarding
potential settlement of the matter. At this time, we are unable
to determine whether we will be able to settle this litigation
on reasonable terms or at all, nor can we predict the impact of
an adverse outcome of this litigation if we elect to defend
against it. No estimate can be made of the possible range of
loss associated with the resolution of this contingency and
accordingly, we have not recorded a liability associated with
the outcome of a negotiated settlement or an unfavorable verdict
in litigation. An unfavorable outcome of this matter could have
a material adverse effect on Harmonic&#146;s business, operating
results, financial position and cash flows.
</FONT>

<P align="left">
<I><FONT size="2">The Terrorist Attacks Of 2001 And The Ongoing
Threat Of Terrorism Have Created Great Uncertainty And May
Continue To Harm Our Business.</FONT></I>

<P align="left">
<FONT size="2">Current conditions in the U.S. and global
economies are uncertain. The terrorist attacks in 2001 created
many economic and political uncertainties that have severely
impacted the global economy. We experienced a further decline in
demand for our products after the attacks. The long-term effects
of the attacks, the situation in Iraq and the ongoing war on
terrorism on our business and on the global economy remain
unknown. Moreover, the potential for future terrorist attacks
has created additional uncertainty and makes it difficult to
estimate how quickly the U.S. and other economies will recover
and our business will improve.
</FONT>

<P align="left">
<I><FONT size="2">Our Stock Price May Be Volatile.</FONT></I>

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

<P align="left">
<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 align="center"><FONT size="2">43
</FONT>

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

<P align="left">
<I><FONT size="2">Some Anti-Takeover Provisions Contained In Our
Certificate Of Incorporation, Bylaws And Stockholder Rights
Plan, As Well As Provisions Of Delaware Law, Could Impair A
Takeover Attempt.</FONT></I>

<P align="left">
<FONT size="2">Harmonic has provisions in its certificate of
incorporation and bylaws, each of which could have the effect of
rendering more difficult or discouraging an acquisition deemed
undesirable by the Harmonic Board of Directors. These include
provisions:
</FONT>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD><FONT size="2"> &#149; </FONT></TD>
    <TD align="left">
    <FONT size="2">authorizing blank check preferred stock, which
    could be issued with voting, liquidation, dividend and other
    rights superior to Harmonic common stock;
    </FONT></TD>
</TR>

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

<TR valign="top">
    <TD><FONT size="2"> &#149; </FONT></TD>
    <TD align="left">
    <FONT size="2">limiting the liability of, and providing
    indemnification to, directors and officers;
    </FONT></TD>
</TR>

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

<TR valign="top">
    <TD><FONT size="2"> &#149; </FONT></TD>
    <TD align="left">
    <FONT size="2">limiting the ability of Harmonic stockholders to
    call and bring business before special meetings;
    </FONT></TD>
</TR>

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

<TR valign="top">
    <TD><FONT size="2"> &#149; </FONT></TD>
    <TD align="left">
    <FONT size="2">requiring advance notice of stockholder proposals
    for business to be conducted at meetings of Harmonic
    stockholders and for nominations of candidates for election to
    the Harmonic Board of Directors;
    </FONT></TD>
</TR>

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

<TR valign="top">
    <TD><FONT size="2"> &#149; </FONT></TD>
    <TD align="left">
    <FONT size="2">controlling the procedures for conduct and
    scheduling of Board and stockholder meetings; and
    </FONT></TD>
</TR>

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

<TR valign="top">
    <TD><FONT size="2"> &#149; </FONT></TD>
    <TD align="left">
    <FONT size="2">providing the board of directors with the express
    power to postpone previously scheduled annual meetings and to
    cancel previously scheduled special meetings.
    </FONT></TD>
</TR>

</TABLE>

<P align="left">
<FONT size="2">These provisions, alone or together, could delay
hostile takeovers and changes in control or management of
Harmonic.
</FONT>

<P align="left">
<FONT size="2">In addition, Harmonic has adopted a stockholder
rights plan. The rights are not intended to prevent a takeover
of Harmonic, and we believe these rights will help
Harmonic&#146;s negotiations with any potential acquirers.
However, if the Board of Directors believes that a particular
acquisition is undesirable, the rights may have the effect of
rendering more difficult or discouraging that acquisition. The
rights would cause substantial dilution to a person or group
that attempts to acquire Harmonic on terms or in a manner not
approved by the Harmonic Board of Directors, except pursuant to
an offer conditioned upon redemption of the rights.
</FONT>

<P align="left">
<FONT size="2">As a Delaware corporation, Harmonic also is
subject to provisions of Delaware law, including
Section&nbsp;203 of the Delaware General Corporation law, which
prevents some stockholders holding more than 15% of our
outstanding common stock from engaging in certain business
combinations without approval of the holders of substantially
all of our outstanding common stock.
</FONT>

<P align="left">
<FONT size="2">Any provision of our certificate of incorporation
or bylaws, our stockholder rights plan or Delaware law that has
the effect of delaying or deterring a change in control could
limit the opportunity for Harmonic stockholders to receive a
premium for their shares of Harmonic common stock, and could
also affect the price that some investors are willing to pay for
Harmonic common stock.
</FONT>

<P align="left">
<I><FONT size="2">We Have Broad Discretion In How We Use The Net
Proceeds Of Our Recent Offering, And We May Not Use These
Proceeds In A Manner Desired By Our Stockholders.</FONT></I>

<P align="left">
<FONT size="2">Our management will have broad discretion with
respect to the use of the net proceeds from our recent offering
and investors will be relying on the judgment of our management
regarding the application of these proceeds. Our management
could spend most of the net proceeds from this offering in ways
that our stockholders may not desire or that do not yield a
favorable return. Investors will not have the opportunity, as
part of your investment in our common stock, to influence the
manner in which the net proceeds of this offering are used. We
plan to use the net proceeds from the offering primarily for
working capital and general corporate purposes and to satisfy
existing liabilities. Our financial performance may differ form
our current expectations or our business needs may change as our
business and the industry we address evolve. As a result, the
proceeds we received in this offering may be used in a manner
significantly different from our current expectations.
</FONT>

<P align="center"><FONT size="2">44
</FONT>

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

<DIV>&nbsp;</DIV>

<!-- link2 "<FONT size="2">Item 7A. Quantitative and Qualitative Disclosures About Market Risk</FONT>" -->
<DIV align="left"><A NAME="009"></A></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="6%"></TD>
    <TD width="94%"></TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">Item&nbsp;7A.&nbsp;</FONT></TD>
    <TD>
    <I><FONT size="2">Quantitative and Qualitative Disclosures About
    Market Risk</FONT></I></TD>
</TR>

</TABLE>

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

<P align="left">
<FONT size="2">Harmonic has a number of international
subsidiaries each of whose sales are generally denominated in
U.S.&nbsp;dollars. Sales denominated in foreign currencies were
approximately&nbsp;4% of total net sales in 2003. 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 Harmonic&#146;s 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">
<I><FONT size="2">Interest Rate Risk</FONT></I>

<P align="left">
<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 Harmonic were to sell any of its securities prior to
stated maturity. A 10% change in interest rates would not have a
material impact on financial conditions, results of operations
and cash flows.
</FONT>

<!-- link2 "<FONT size="2">Item 8. Financial Statements and Supplementary Data</FONT>" -->
<DIV align="left"><A NAME="010"></A></DIV>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="5%"></TD>
    <TD width="95%"></TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">Item&nbsp;8.&nbsp;</FONT></TD>
    <TD>
    <I><FONT size="2">Financial Statements and Supplementary
    Data</FONT></I></TD>
</TR>

</TABLE>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="4%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">(a)</FONT></TD>
    <TD align="left">
    <FONT size="2">Index to Consolidated Financial Statements
    </FONT></TD>
</TR>

</TABLE>

<CENTER>
<TABLE width="60%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="90%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="2%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="2%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Page</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Report of Independent Auditors
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">47</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Consolidated Balance Sheets as of
    December&nbsp;31, 2003 and 2002
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">48</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Consolidated Statements of Operations for the
    years ended December&nbsp;31, 2003, 2002, and 2001
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">49</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Consolidated Statements of Stockholders&#146;
    Equity for the years ended December&nbsp;31, 2003, 2002, and 2001
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">50</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Consolidated Statements of Cash Flows for the
    years ended December&nbsp;31, 2003, 2002, 2001
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">51</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Notes to Consolidated Financial Statements
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">52</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

</TABLE>
</CENTER>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="4%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">(b)</FONT></TD>
    <TD align="left">
    <FONT size="2">Financial Statement Schedules: The following is
    filed as part of this Annual Report on Form&nbsp;10-K. See
    Item&nbsp;15(a)(2):
    </FONT></TD>
</TR>

</TABLE>

<P align="left">
<I><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Financial
Statement Schedule&nbsp;II: Valuation and Qualifying Accounts
and Reserves.</FONT></I>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="4%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD align="left">
    <FONT size="2">All other financial statement schedules have been
    omitted because the information is not required to be set forth
    herein, is not applicable or is included in the financial
    statements or notes thereto.
    </FONT></TD>
</TR>

</TABLE>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="4%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">(c)</FONT></TD>
    <TD align="left">
    <FONT size="2">Selected Quarterly Financial Data: The following
    table sets forth for the period indicated selected quarterly
    financial data for the Company.
    </FONT></TD>
</TR>

</TABLE>

<P align="center"><FONT size="2">45
</FONT>

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

<P align="left">
<FONT size="2">Quarterly Data (Unaudited)
</FONT>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="35%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="2%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="2%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="2%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="2%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="2%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="2%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="2%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="2%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="2%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="2%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="2%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="2%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="2%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="2%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="2%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="15"></TD>
    <TD></TD>
    <TD colspan="15"></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="15" align="center" nowrap><B><FONT size="1">2003</FONT></B></TD>
    <TD></TD>
    <TD colspan="15" align="center" nowrap><B><FONT size="1">2002</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="15" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="15" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">4th</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">3rd</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2nd</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">1st</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">4th</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">3rd</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2nd</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">1st</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="31"></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="31" align="center" nowrap><B><FONT size="1">(In thousands, except per share data)</FONT></B></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Quarterly Data:
    </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>
    <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>
    <TD align="left" valign="top">
    <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" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">56,329</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">47,253</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">41,653</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">37,041</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">39,272</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">37,019</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">56,309</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">54,032</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Gross profit
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">22,444</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" valign="bottom" nowrap><FONT size="2">14,660</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" valign="bottom" nowrap><FONT size="2">12,752</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" valign="bottom" nowrap><FONT size="2">10,747</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" valign="bottom" nowrap><FONT size="2">9,503</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" valign="bottom" nowrap><FONT size="2">9,928</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" valign="bottom" nowrap><FONT size="2">19,235</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" valign="bottom" nowrap><FONT size="2">15,763</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Income (loss)&nbsp;from operations(1)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">838</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" valign="bottom" nowrap><FONT size="2">(7,611</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(12,020</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(11,752</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(13,994</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(38,436</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(11,414</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(13,505</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Net income (loss)(1)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,370</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" valign="bottom" nowrap><FONT size="2">(7,454</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(11,682</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(11,667</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(13,752</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(38,030</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(11,124</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(14,012</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Basic net income (loss)&nbsp;per share
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">0.02</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" valign="bottom" nowrap><FONT size="2">(0.12</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(0.19</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(0.19</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(0.23</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(0.63</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(0.19</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(0.24</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Diluted net income (loss)&nbsp;per share
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">0.02</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" valign="bottom" nowrap><FONT size="2">(0.12</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(0.19</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(0.19</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(0.23</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(0.63</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(0.19</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(0.24</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

</TABLE>
</CENTER>

<P align="left">
<HR size="1" width="18%" align="left" noshade>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="4%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">(1)</FONT></TD>
    <TD align="left">
    <FONT size="2">The 2003 gross profit, loss from operations and
    net loss include credits to cost of sales of $1.1&nbsp;million,
    $1.1&nbsp;million, $1.1&nbsp;million, and $1.4 million in the
    first, second, third and fourth quarters, respectively, for
    products sold during the year which had been written down in
    prior years. Operating expenses included credits of
    $2.2&nbsp;million in the fourth quarter from the sale of our
    bankruptcy claims in Adelphia Communications resulting in the
    reversal of previously recorded bad debt provisions and a
    litigation settlement charge of $2.7&nbsp;million in the fourth
    quarter.
    </FONT></TD>
</TR>

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

<TR valign="top">
    <TD></TD>
    <TD align="left">
    <FONT size="2">The 2002 gross profit, loss from operations and
    net loss include credits to cost of sales of $2.9&nbsp;million,
    $2.1&nbsp;million, and $1.9&nbsp;million in the second, third
    and fourth quarters, respectively, for product sold during the
    periods which had been written down in prior years. Also
    included are charges of $2.9&nbsp;million, $23.3&nbsp;million
    and $0.7&nbsp;million in the second, third and fourth quarters,
    respectively, for probable losses on receivables and deferred
    cost of sales from Adelphia Communications, excess facilities,
    severance and other costs. See Note 4 of Notes to Consolidated
    Financial Statements.
    </FONT></TD>
</TR>

</TABLE>

<P align="center"><FONT size="2">46
</FONT>
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#toc">Table of Contents</A></H5><P>

<P align="center">
<FONT size="2">REPORT OF INDEPENDENT AUDITORS
</FONT>

<P align="left">
<FONT size="2">To the Board of Directors and Stockholders of
Harmonic Inc.:
</FONT>

<P align="left">
<FONT size="2">In our opinion, the consolidated financial
statements listed in the index appearing under Item&nbsp;8(a) on
page 46 present fairly, in all material respects, the financial
position of Harmonic Inc. and its subsidiaries at
December&nbsp;31, 2003 and 2002, and the results of their
operations and their cash flows for each of the three years in
the period ended December&nbsp;31, 2003 in conformity with
accounting principles generally accepted in the United States of
America. In addition, in our opinion, the financial statement
schedule listed in the index appearing under Item&nbsp;8(a) on
page 46 presents fairly, in all material respects, the
information set forth therein when read in conjunction with the
related consolidated financial statements. These financial
statements and financial statement schedule are the
responsibility of the Company&#146;s management; our
responsibility is to express an opinion on these financial
statements and financial statement schedule based on our audits.
We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of
America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable
basis for our opinion.
</FONT>

<P align="left">
<FONT size="2">/s/ PRICEWATERHOUSECOOPERS LLP
</FONT>

<DIV align="left">
<HR size="1" width="41%" align="left" noshade>
</DIV>

<DIV align="left">
<FONT size="2">PRICEWATERHOUSECOOPERS LLP
</FONT>
</DIV>

<P align="left">
<FONT size="2">San Jose, California
</FONT>

<DIV align="left">
<FONT size="2">March&nbsp;5, 2004
</FONT>
</DIV>

<P align="center"><FONT size="2">47
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<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>

<P align="center">
<FONT size="2">CONSOLIDATED BALANCE SHEETS
</FONT>

<CENTER>
<TABLE width="80%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="60%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="7%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="7%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="7"></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">December&nbsp;31,</FONT></B></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2003</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2002</FONT></B></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="7"></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="7"></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">(In thousands, except</FONT></B></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">par value amounts)</FONT></B></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="3" align="left" valign="top">
    <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>
    <TD colspan="3" align="left" valign="top">
    <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" align="left" valign="top">
    <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" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">41,877</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">21,542</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <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" valign="bottom" nowrap><FONT size="2">70,720</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" valign="bottom" nowrap><FONT size="2">27,616</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" align="left" valign="top">
    <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" valign="bottom" nowrap><FONT size="2">38,528</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" valign="bottom" nowrap><FONT size="2">24,484</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <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" valign="bottom" nowrap><FONT size="2">22,425</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" valign="bottom" nowrap><FONT size="2">25,904</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" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Prepaid expenses and other current assets
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">6,196</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" valign="bottom" nowrap><FONT size="2">6,390</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="7" align="left"><HR size="1" noshade></TD>

</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <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" valign="bottom" nowrap><FONT size="2">179,746</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" valign="bottom" nowrap><FONT size="2">105,936</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="3" align="left" valign="top">
    <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" valign="bottom" nowrap><FONT size="2">23,458</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" valign="bottom" nowrap><FONT size="2">32,456</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Intangibles and other assets
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">21,522</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" valign="bottom" nowrap><FONT size="2">35,362</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="7" align="left"><HR size="1" noshade></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Total assets
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">224,726</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">173,754</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="7" align="left"><HR size="4" noshade></TD>

</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <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" bgcolor="#EEEEEE">
    <TD colspan="3" align="left" valign="top">
    <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>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <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" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,027</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,862</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" align="left" valign="top">
    <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" valign="bottom" nowrap><FONT size="2">14,863</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" valign="bottom" nowrap><FONT size="2">7,258</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <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" valign="bottom" nowrap><FONT size="2">6,935</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" valign="bottom" nowrap><FONT size="2">6,900</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" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Deferred revenue
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">11,712</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" valign="bottom" nowrap><FONT size="2">8,969</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <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" valign="bottom" nowrap><FONT size="2">49,820</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" valign="bottom" nowrap><FONT size="2">49,701</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="7" align="left"><HR size="1" noshade></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <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" valign="bottom" nowrap><FONT size="2">84,357</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" valign="bottom" nowrap><FONT size="2">74,690</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <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" valign="bottom" nowrap><FONT size="2">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" valign="bottom" nowrap><FONT size="2">710</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Accrued excess facilities costs, long-term
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">28,627</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" valign="bottom" nowrap><FONT size="2">34,754</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <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" valign="bottom" nowrap><FONT size="2">4,952</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" valign="bottom" nowrap><FONT size="2">1,417</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="7" align="left"><HR size="1" noshade></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <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" valign="bottom" nowrap><FONT size="2">118,565</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" valign="bottom" nowrap><FONT size="2">111,571</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="7" align="left"><HR size="1" noshade></TD>

</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Commitments and contingencies (Notes 14, 15 and
    16)
    </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" align="left" valign="top">
    <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>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Preferred stock, $0.001 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" valign="bottom" nowrap><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" valign="bottom" nowrap><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" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Common stock, $0.001 par value, 150,000 shares
    authorized; 71,240 and 60,064 shares issued and outstanding
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">71</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" valign="bottom" nowrap><FONT size="2">60</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <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" valign="bottom" nowrap><FONT size="2">2,036,522</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" valign="bottom" nowrap><FONT size="2">1,963,234</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" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Accumulated deficit
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(1,930,558</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(1,901,125</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <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" valign="bottom" nowrap><FONT size="2">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" valign="bottom" nowrap><FONT size="2">14</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="7" align="left"><HR size="1" noshade></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <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" valign="bottom" nowrap><FONT size="2">106,161</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" valign="bottom" nowrap><FONT size="2">62,183</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="7" align="left"><HR size="1" noshade></TD>

</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Total liabilities and stockholders&#146; equity
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">224,726</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">173,754</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="7" align="left"><HR size="4" noshade></TD>

</TR>

</TABLE>
</CENTER>

<P align="center">
<FONT size="2">The accompanying notes are an integral part of
these consolidated financial statements.
</FONT>

<P align="center"><FONT size="2">48
</FONT>
<!-- PAGEBREAK -->
<P><HR noshade><P>
<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>

<P align="center">
<FONT size="2">CONSOLIDATED STATEMENTS OF OPERATIONS
</FONT>

<CENTER>
<TABLE width="90%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="51%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="11"></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><B><FONT size="1">Year Ended December&nbsp;31,</FONT></B></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2003</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2002</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2001</FONT></B></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="11"></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="11"></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><B><FONT size="1">(In thousands, except per share data)</FONT></B></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="3" align="left" valign="top">
    <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" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">182,276</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">186,632</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">203,810</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <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" valign="bottom" nowrap><FONT size="2">121,673</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" valign="bottom" nowrap><FONT size="2">132,203</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" valign="bottom" nowrap><FONT size="2">202,255</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="11" align="left"><HR size="1" noshade></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Gross profit
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">60,603</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" valign="bottom" nowrap><FONT size="2">54,429</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" valign="bottom" nowrap><FONT size="2">1,555</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="11" align="left"><HR size="1" noshade></TD>

</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <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>
    <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" align="left" valign="top">
    <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" valign="bottom" nowrap><FONT size="2">35,107</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" valign="bottom" nowrap><FONT size="2">40,829</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" valign="bottom" nowrap><FONT size="2">51,319</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <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" valign="bottom" nowrap><FONT size="2">48,309</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" valign="bottom" nowrap><FONT size="2">81,427</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" valign="bottom" nowrap><FONT size="2">106,340</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" align="left" valign="top">
    <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" valign="bottom" nowrap><FONT size="2">7,732</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" valign="bottom" nowrap><FONT size="2">9,522</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" valign="bottom" nowrap><FONT size="2">12,683</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="11" align="left"><HR size="1" noshade></TD>

</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <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" valign="bottom" nowrap><FONT size="2">91,148</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" valign="bottom" nowrap><FONT size="2">131,778</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" valign="bottom" nowrap><FONT size="2">170,342</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="11" align="left"><HR size="1" noshade></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="3" align="left" valign="top">
    <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><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(30,545</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(77,349</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(168,787</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Interest and other income, net
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,412</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" valign="bottom" nowrap><FONT size="2">931</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" valign="bottom" nowrap><FONT size="2">1,574</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="11" align="left"><HR size="1" noshade></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="3" align="left" valign="top">
    <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><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(29,133</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(76,418</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(167,213</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <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" valign="bottom" nowrap><FONT size="2">300</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" valign="bottom" nowrap><FONT size="2">500</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" valign="bottom" nowrap><FONT size="2">(806</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="11" align="left"><HR size="1" noshade></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Net loss
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(29,433</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(76,918</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(166,407</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="11" align="left"><HR size="4" noshade></TD>

</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">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>
    <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" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Basic and Diluted
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(0.47</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(1.29</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(2.84</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="11" align="left"><HR size="4" noshade></TD>

</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Weighted average shares:
    </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>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Basic and Diluted
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">62,288</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" valign="bottom" nowrap><FONT size="2">59,779</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" valign="bottom" nowrap><FONT size="2">58,540</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="11" align="left"><HR size="4" noshade></TD>

</TR>

</TABLE>
</CENTER>

<P align="center">
<FONT size="2">The accompanying notes are an integral part of
these consolidated financial statements.
</FONT>

<P align="center"><FONT size="2">49
</FONT>
<!-- PAGEBREAK -->
<P><HR noshade><P>
<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>

<P align="center">
<FONT size="2">CONSOLIDATED STATEMENTS OF STOCKHOLDERS&#146;
EQUITY
</FONT>

<DIV align="center">
<FONT size="2">(IN THOUSANDS)
</FONT>
</DIV>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="3%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="22%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="2%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="1">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="7"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Accumulated</FONT></B></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">Common Stock</FONT></B></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Other</FONT></B></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Capital in Excess</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Accumulated</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Comprehensive</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Stockholders&#146;</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Comprehensive</FONT></B></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Shares</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Amount</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">of Par Value</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Deficit</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Income</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Equity</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Income (Loss)</FONT></B></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="27"></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="27" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="1">Balance at December&nbsp;31, 2000
    </FONT></DIV>
    </TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">57,891</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="1">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">58</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="1">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">1,952,784</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="1">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(1,657,800</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="1">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">660</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="1">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">295,702</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>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="1">Net loss
    </FONT></DIV>
    </TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(166,407</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(166,407</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="1">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(166,407</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="1">Unrealized loss on investments
    </FONT></DIV>
    </TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(164</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(164</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(164</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="1">Currency translation
    </FONT></DIV>
    </TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(337</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(337</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(337</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><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>
    <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>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="1">Comprehensive loss
    </FONT></DIV>
    </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>
    <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>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="1">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(166,908</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><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>
    <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>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>

</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="1">Issuance of Common Stock under option and
    purchase plans
    </FONT></DIV>
    </TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">1,172</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">1</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">6,259</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">6,260</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>
    <TD colspan="2"><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD colspan="23" align="left"><HR size="1" noshade></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="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="1">Balance at December&nbsp;31, 2001
    </FONT></DIV>
    </TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">59,063</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">59</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">1,959,043</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(1,824,207</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">159</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">135,054</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>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="1">Net loss
    </FONT></DIV>
    </TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(76,918</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(76,918</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="1">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(76,918</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="1">Currency translation
    </FONT></DIV>
    </TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(145</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(145</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(145</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><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>
    <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>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>

</TR>

<TR>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="1">Comprehensive loss
    </FONT></DIV>
    </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>
    <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>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="1">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(77,063</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><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>
    <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>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="1">Stock option charge
    </FONT></DIV>
    </TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">422</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">422</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>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="1">Issuance of Common Stock under option and
    purchase plans
    </FONT></DIV>
    </TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">1,001</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">1</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">3,769</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">3,770</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>
    <TD colspan="2"><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD colspan="23" align="left"><HR size="1" noshade></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="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="1">Balance at December&nbsp;31, 2002
    </FONT></DIV>
    </TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">60,064</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">60</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">1,963,234</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(1,901,125</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">14</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">62,183</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>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="1">Net loss
    </FONT></DIV>
    </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 align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(29,433</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(29,433</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="1">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(29,433</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="1">Unrealized gain on investments
    </FONT></DIV>
    </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>
    <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 align="right" valign="bottom" nowrap><FONT size="1">61</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">61</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">61</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="1">Currency translation
    </FONT></DIV>
    </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 align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">51</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">51</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">51</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><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>
    <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>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="1">Comprehensive income
    </FONT></DIV>
    </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>
    <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>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="1">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(29,321</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><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>
    <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>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>

</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="1">Stock option charge
    </FONT></DIV>
    </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 align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">49</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">49</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" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="1">Issuance of Common Stock under option and
    purchase plans and other
    </FONT></DIV>
    </TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">826</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">1</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">1,822</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">1,823</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>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="1">Issuance of Common Stock in public offering, net
    </FONT></DIV>
    </TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">10,350</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">10</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">71,417</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">71,427</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>
    <TD colspan="2"><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD colspan="23" align="left"><HR size="1" noshade></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="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="1">Balance at December&nbsp;31, 2003
    </FONT></DIV>
    </TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">71,240</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="1">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">71</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="1">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">2,036,522</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="1">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(1,930,558</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="1">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">126</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="1">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">106,161</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>
    <TD colspan="2"><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD colspan="23" align="left"><HR size="4" noshade></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>

</TABLE>
</CENTER>

<P align="center">
<FONT size="2">The accompanying notes are an integral part of
these consolidated financial statements.
</FONT>

<P align="center"><FONT size="2">50
</FONT>
<!-- PAGEBREAK -->
<P><HR noshade><P>
<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>

<P align="center">
<FONT size="2">CONSOLIDATED STATEMENTS OF CASH FLOWS
</FONT>

<CENTER>
<TABLE width="90%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="54%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="11"></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><B><FONT size="1">Year Ended December 31,</FONT></B></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2003</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2002</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2001</FONT></B></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="11"></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="11"></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><B><FONT size="1">(In thousands)</FONT></B></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="3" align="left" valign="top">
    <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>
    <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>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Net loss
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(29,433</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(76,918</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(166,407</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Adjustments to reconcile net loss to net cash
    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>
    <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>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <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" valign="bottom" nowrap><FONT size="2">13,894</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" valign="bottom" nowrap><FONT size="2">18,648</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" valign="bottom" nowrap><FONT size="2">20,741</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" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Depreciation and amortization
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">12,274</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" valign="bottom" nowrap><FONT size="2">15,735</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" valign="bottom" nowrap><FONT size="2">18,169</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Stock option charge
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">49</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" valign="bottom" nowrap><FONT size="2">422</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" valign="bottom" nowrap><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" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Provision for (benefit from) excess and obsolete
    inventories
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(4,672</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(6,932</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">39,190</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <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" valign="bottom" nowrap><FONT size="2">88</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" valign="bottom" nowrap><FONT size="2">856</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" valign="bottom" nowrap><FONT size="2">12,523</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" align="left" valign="top">
    <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" valign="bottom" nowrap><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" valign="bottom" nowrap><FONT size="2">156</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" valign="bottom" nowrap><FONT size="2">(2,806</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <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>
    <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 align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Accounts receivable
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(14,051</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">8,035</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" valign="bottom" nowrap><FONT size="2">35,228</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <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" valign="bottom" nowrap><FONT size="2">8,188</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" valign="bottom" nowrap><FONT size="2">11,907</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" valign="bottom" nowrap><FONT size="2">10,038</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 align="left" valign="top">
    <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" valign="bottom" nowrap><FONT size="2">98</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" valign="bottom" nowrap><FONT size="2">4,840</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" valign="bottom" nowrap><FONT size="2">2,107</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <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" valign="bottom" nowrap><FONT size="2">7,605</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" valign="bottom" nowrap><FONT size="2">(3,038</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(22,487</FONT></TD>
    <TD align="left" valign="bottom" 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 align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Deferred revenue
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2,743</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" valign="bottom" nowrap><FONT size="2">2,390</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" valign="bottom" nowrap><FONT size="2">(8,454</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <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" valign="bottom" nowrap><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" valign="bottom" nowrap><FONT size="2">4,126</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" valign="bottom" nowrap><FONT size="2">1,763</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 align="left" valign="top">
    <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" valign="bottom" nowrap><FONT size="2">4,585</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" valign="bottom" nowrap><FONT size="2">(4,383</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">13,785</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Accrued excess facilities costs
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(6,927</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">18,752</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" valign="bottom" nowrap><FONT size="2">21,842</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="11" align="left"><HR size="1" noshade></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Net cash used in operating activities
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(5,559</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(5,404</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(24,768</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="11" align="left"><HR size="1" noshade></TD>

</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Cash flows provided by (used in) 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>
    <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" align="left" valign="top">
    <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><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(67,914</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(27,874</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(58,490</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Proceeds from sales of investments
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">24,909</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" valign="bottom" nowrap><FONT size="2">18,498</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" valign="bottom" nowrap><FONT size="2">126,150</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" align="left" valign="top">
    <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><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(3,364</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(3,292</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(29,080</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="11" align="left"><HR size="1" noshade></TD>

</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Net cash provided by (used in) investing
    activities
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(46,369</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(12,668</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">38,580</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="11" align="left"><HR size="1" noshade></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="3" align="left" valign="top">
    <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>
    <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>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <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" valign="bottom" nowrap><FONT size="2">73,251</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" valign="bottom" nowrap><FONT size="2">3,770</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" valign="bottom" nowrap><FONT size="2">6,260</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" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Borrowings under bank line and term loan
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,001</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" valign="bottom" nowrap><FONT size="2">1,274</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" valign="bottom" nowrap><FONT size="2">3,203</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Repayments under bank line and term loan
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(1,917</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(1,448</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(457</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="11" align="left"><HR size="1" noshade></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <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" valign="bottom" nowrap><FONT size="2">72,335</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" valign="bottom" nowrap><FONT size="2">3,596</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" valign="bottom" nowrap><FONT size="2">9,006</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="11" align="left"><HR size="1" noshade></TD>

</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <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><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(72</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">13</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" valign="bottom" nowrap><FONT size="2">(318</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="11" align="left"><HR size="1" noshade></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Net increase (decrease)&nbsp;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" valign="bottom" nowrap><FONT size="2">20,335</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" valign="bottom" nowrap><FONT size="2">(14,463</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">22,500</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <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" valign="bottom" nowrap><FONT size="2">21,542</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" valign="bottom" nowrap><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" valign="bottom" nowrap><FONT size="2">13,505</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="11" align="left"><HR size="1" noshade></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="3" align="left" valign="top">
    <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" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">41,877</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">21,542</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">36,005</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="11" align="left"><HR size="4" noshade></TD>

</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <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>
    <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" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Income tax payments (refunds), net
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">211</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(3,759</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(25,623</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Interest paid during the period
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">154</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">307</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">125</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

</TABLE>
</CENTER>

<P align="left">
<FONT size="2">The accompanying notes are an integral part of
these consolidated financial statements.
</FONT>

<P align="center"><FONT size="2">51
</FONT>
<!-- PAGEBREAK -->
<P><HR noshade><P>
<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>

<P align="center">
<FONT size="2">NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
</FONT>

<P align="left">
<FONT size="2">Note 1:&nbsp;Organization, Basis of Presentation
and Summary of Significant Accounting Policies
</FONT>

<P align="left">
<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, high definition television (HDTV), video and audio
streaming, and video-on-demand (VOD).
</FONT>

<P align="left">
<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 our digital headend products beginning in 1997,
we broadened our product offering to enable delivery of digital
video, voice and data over satellite and wireless networks and
cable systems.
</FONT>

<P align="left">
<FONT size="2">In order to further expand our digital systems
capability, Harmonic acquired 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 acquired by LSI Logic in June
2001. C-Cube then merged into Harmonic and Harmonic therefore
acquired C-Cube&#146;s DiviCom business, which provides encoding
products and systems for digital television. The merger was
structured as a tax-free exchange of stock and accounted for
under the purchase method of accounting. The purchase price,
including merger-related costs, was approximately
$1.8&nbsp;billion. As of December&nbsp;31, 2000, Harmonic
recorded an impairment charge of $1.4&nbsp;billion, eliminating
goodwill and reducing identified intangibles to
$79.3&nbsp;million. 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.
</FONT>

<P align="left">
<I><FONT size="2">Basis of Presentation.
</FONT></I><FONT size="2">The consolidated financial statements
of Harmonic include the financial statements of the Company and
its wholly-owned subsidiaries. All intercompany accounts and
transactions have been eliminated. Harmonic&#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">
<I><FONT size="2">Use of Estimates.
</FONT></I><FONT size="2">The preparation of financial
statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions
that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues
and expenses during the reported period. Actual results could
differ from those estimates.
</FONT>

<P align="left">
<I><FONT size="2">Cash and Cash Equivalents.
</FONT></I><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. Cash
equivalents are stated at amounts that approximate fair value,
based on quoted market prices.
</FONT>

<P align="left">
<I><FONT size="2">Investments.
</FONT></I><FONT size="2">Harmonic&#146;s short-term investments
are stated at fair value, which approximate the cost of
investments and are principally comprised of corporate debt
securities. 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 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.
</FONT>

<P align="left">
<I><FONT size="2">Fair Value of Financial Instruments.
</FONT></I><FONT size="2">The carrying value of Harmonic&#146;s
financial instruments, including cash, cash equivalents,
short-term investments, accounts receivable, accounts payable,
accrued liabilities and long-term debt approximate fair value
due to their short maturities.
</FONT>

<P align="center"><FONT size="2">52
</FONT>
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#toc">Table of Contents</A></H5><P>

<P align="left">
<I><FONT size="2">Concentrations of Credit Risk.
</FONT></I><FONT size="2">Financial instruments which subject
Harmonic to concentrations of credit risk consist primarily of
cash, cash equivalents, short-term investments and accounts
receivable. Cash, cash equivalents and short-term investments
are invested in short-term, highly liquid investment-grade
obligations of commercial or governmental issuers, in accordance
with Harmonic&#146;s investment policy. The investment policy
limits the amount of credit exposure to any one financial
institution, commercial or governmental issuer. Harmonic&#146;s
accounts receivable are derived from sales to cable, satellite,
and other network operators and distributors. Harmonic generally
does not require collateral and performs ongoing credit
evaluations of its customers and provides for expected losses.
Harmonic maintains an allowance for doubtful accounts based upon
the expected collectibility of its accounts receivable. The
expectation of collectibility is based on its review of credit
profiles of customers&#146; contractual terms and conditions,
current economic trends and historical payment experience. At
December&nbsp;31, 2003, receivables from two customers
represented 21% and 14% of total receivables. At
December&nbsp;31, 2002, receivables from three customers
represented 15%, 11%, and 11% of total receivables.
</FONT>

<P align="left">
<I><FONT size="2">Revenue Recognition.
</FONT></I><FONT size="2">Harmonic&#146;s principal sources of
revenue are from product sales, solution sales, services and
maintenance contracts. Harmonic recognizes revenue when
persuasive evidence of an arrangement exists, delivery has
occurred or services have been provided, the sale price is fixed
or determinable, collectibility is reasonably assured, and risk
of loss and title have transferred to the customer.
</FONT>

<P align="left">
<FONT size="2">Revenue from product sales, excluding the revenue
generated from service-related solutions, which are discussed
below, is generally recognized upon shipment, or once all
applicable criteria have been met. Allowances are provided for
estimated returns and discounts. Such allowances are adjusted
periodically to reflect actual and anticipated experience.
</FONT>

<P align="left">
<FONT size="2">Revenue on solution sales, which principally
consist of and include the design, manufacture, test,
integration and installation of equipment to the specifications
of Harmonic&#146;s customers, or acquired from third parties to
be integrated with Harmonic&#146;s products, is generally
recognized using the percentage of completion method. Under the
percentage of completion method, revenue recognized reflects the
portion of the anticipated contract revenue that has been
earned, equal to the ratio of labor costs expended to date to
anticipated final labor costs, based on current estimates of
labor costs to complete the project. If the estimated costs to
complete a project exceed the total contract amount, indicating
a loss, the entire anticipated loss is recognized. Harmonic
records revenue that is earned and recognized in excess of
amounts invoiced on fixed price contracts as accounts
receivables-unbilled.
</FONT>

<P align="left">
<FONT size="2">Revenue from services, which is primarily from
maintenance agreements, is generally recognized ratably as the
services are performed or based on contractual terms. The costs
associated with services are recognized as incurred. Maintenance
services are recognized ratably over the maintenance term, which
is typically one year. The costs associated with these
maintenance services are recognized as incurred. The
unrecognized revenue portion of maintenance agreements billed is
recorded as deferred revenue.
</FONT>

<P align="left">
<FONT size="2">Deferred revenue includes billings in excess of
revenue recognized, net of deferred cost of sales, and invoiced
amounts remain deferred until applicable revenue recognition
criteria are met.
</FONT>

<P align="left">
<FONT size="2">Certain agreements also include multiple
deliverables or elements for products, software and/or services.
Harmonic recognizes revenue from these agreements based on the
relative fair value of the products and services as they are
delivered. The determination of the fair value of the elements
is based on a number of factors, including the amount charged to
other customers for products or services, price lists, or other
relevant information. If an undelivered element is essential to
the functionality of the delivered element or required under the
terms of the agreement to be delivered concurrently, we defer
the revenue on the delivered element until that undelivered
element is delivered. In the absence of fair value for an
undelivered element, the arrangement is accounted for as a
single unit of accounting, resulting in a deferral of revenue
recognition for the delivered elements until the undelivered
elements are fulfilled.
</FONT>

<P align="left">
<FONT size="2">For certain products where software is more than
an incidental, but less than essential component of the
hardware, or where software has been identified as a separate
element included in a multiple element arrangement, we recognize
software license revenue in accordance with Statement of
Position No.&nbsp;97-2, &#147;Software Revenue Recognition&#148;
(&#147;SOP 97-2&#148;), as amended by Statement of Position
No.&nbsp;98-9, &#147;Software Revenue Recognition with Respect
to Certain
</FONT>

<P align="center"><FONT size="2">53
</FONT>

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

<DIV align="left">
<FONT size="2">Transactions&#148; (&#147;SOP 98-9&#148;). SOP
98-9 requires recognition of revenue using the &#147;residual
method&#148; when (1)&nbsp;there is vendor specific objective
evidence of the fair values of all undelivered elements in a
multiple element arrangement that is not accounted for using
long-term contract accounting; (2)&nbsp;vendor specific
objective evidence of the fair value does not exist for one or
more of the delivered elements in the arrangement; and
(3)&nbsp;all revenue recognition criteria of SOP 97-2, other
than the requirement for vendor specific objective evidence of
the fair value of each delivered element of the arrangement are
satisfied.
</FONT>
</DIV>

<P align="left">
<I><FONT size="2">Shipping and Handling Costs.
</FONT></I><FONT size="2">Shipping and handling costs incurred
for inventory purchases and product shipments are recorded in
&#147;Cost of sales&#148; in the Consolidated Statement of
Operations.
</FONT>

<P align="left">
<I><FONT size="2">Inventories.
</FONT></I><FONT size="2">Inventories are stated at the lower of
cost, using the weighted average method, or market. Harmonic
establishes provisions for excess and obsolete inventories after
evaluation of historical sales and future demand and market
conditions, expected product lifecycles and current inventory
levels to reduce such inventories to their estimated net
realizable value. Such provisions are charged to cost of sales.
</FONT>

<P align="left">
<I><FONT size="2">Capitalized Software Development Costs.
</FONT></I><FONT size="2">Costs related to research and
development are generally charged to expense as incurred.
Capitalization of material software development costs begins
when a product&#146;s technological feasibility has been
established in accordance with the provisions of Statement of
Financial Accounting Standards (&#147;SFAS&#148;) No.&nbsp;86,
&#147;Accounting for the Costs of Computer Software to be Sold,
Leased, or Otherwise Marketed.&#148; To date, the time period
between achieving technological feasibility, which the Company
has defined as the establishment of a working model, which
typically occurs when beta testing commences, and the general
availability of such software, has been short, and as such,
software development costs qualifying for capitalization have
been insignificant.
</FONT>

<P align="left">
<I><FONT size="2">Property and Equipment.
</FONT></I><FONT size="2">Property and equipment are recorded at
cost. Depreciation and amortization are computed using the
straight-line method over the estimated useful lives of the
assets. Estimated useful lives are 5&nbsp;years for furniture
and fixtures, and up to 4&nbsp;years for machinery and
equipment. Depreciation and amortization for leasehold
improvements are computed using the shorter of the remaining
useful lives of the assets up to 10&nbsp;years or the lease term
of the respective assets. Depreciation and amortization expense
related to equipment and improvements for the years ended
December&nbsp;31, 2003, 2002 and 2001 were $12.3&nbsp;million,
$15.7&nbsp;million and $18.2&nbsp;million, respectively.
</FONT>

<P align="left">
<I><FONT size="2">Goodwill and Intangible Assets.
</FONT></I><FONT size="2">Intangible assets represent purchased
intangible assets and the excess of acquisition cost over the
fair value of tangible and identified intangible net assets of
businesses acquired, or goodwill. Purchased intangible assets
include customer base, developed technology, trademark and
tradename, and supply agreements. On January&nbsp;1, 2002,
Harmonic adopted SFAS&nbsp;No.&nbsp;142, &#147;Goodwill and
Other Intangible Assets,&#148; and in accordance with this
statement, the Company reclassified assembled workforce, net of
related deferred tax liabilities, to goodwill, ceased amortizing
goodwill, and performed impairment tests of goodwill and
intangible assets. See Note&nbsp;3, &#147;Goodwill and
Identified Intangibles&#148;.
</FONT>

<P align="left">
<I><FONT size="2">Impairment of Long-Lived Assets.
</FONT></I><FONT size="2">Long-lived assets, such as other
intangibles and property and equipment, are evaluated for
recoverability when indicators of impairment are present. 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. The Company
evaluates the recoverability of other intangible assets and
long-lived assets on the basis of undiscounted cash flows from
each asset group. Under SFAS No.&nbsp;144, if impairment is
indicated, provisions for impairment are determined based on the
fair value, using discounted cash flows. No impairment losses
were incurred in the periods presented.
</FONT>

<P align="left">
<I><FONT size="2">Restructuring Costs and Accruals for Excess
Facilities. </FONT></I><FONT size="2">For restructuring
activities initiated prior to December&nbsp;31, 2002 Harmonic
recorded restructuring costs when the Company committed to an
exit plan and significant changes to the exit plan were not
likely. Harmonic determines the excess facilities accrual based
on estimates of expected sublease rental income for each excess
facility. For restructuring activities initiated after
December&nbsp;31, 2002, the Company adopted
SFAS&nbsp;No.&nbsp;146, &#147;Accounting for Costs Associated
with Exit or Disposal Activities,&#148; which requires that a
liability for costs associated with an exit or disposal activity
be recognized and measured initially at fair value only when the
liability is
</FONT>

<P align="center"><FONT size="2">54
</FONT>

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

<DIV align="left">
<FONT size="2">incurred. The adoption of SFAS No.&nbsp;146 did
not have a material impact on the Company&#146;s financial
position, results of operations, or cash flows.
</FONT>
</DIV>

<P align="left">
<I><FONT size="2">Accrued warranties.
</FONT></I><FONT size="2">The Company accrues for estimated
warranty at the time of product shipment and records such
accrued liabilities as part of &#147;Cost of sales&#148;.
Management periodically reviews the estimated fair value of its
warranty liability and adjusts based on the terms of warranties
provided to customers, historical and anticipated warranty
claims experience, and estimates of the timing and cost of
specified warranty claims.
</FONT>

<P align="left">
<I><FONT size="2">Currency Translation.
</FONT></I><FONT size="2">The functional currency of the
Company&#146;s Israeli operations is the U.S.&nbsp;dollar. All
other foreign subsidiaries use the respective local currency as
the functional currency. When the local currency is the
functional currency, gains and losses from translation of these
foreign currency financial statements into U.S.&nbsp;dollars are
recorded as a separate component of other comprehensive income
(loss)&nbsp;in stockholders&#146; equity. For subsidiaries where
the functional currency is the U.S. dollar, gains and losses
resulting from re-measuring foreign currency denominated
balances into U.S.&nbsp;dollars are included in interest and
other income, net.
</FONT>

<P align="left">
<I><FONT size="2">Income Taxes.
</FONT></I><FONT size="2">Deferred income tax assets and
liabilities are computed annually for differences between the
financial statement and tax bases of assets and liabilities that
will result in taxable or deductible amounts in the future based
on enacted tax laws and rates applicable to the periods in which
the differences are expected to affect taxable income. Valuation
allowances are established when necessary to reduce deferred tax
assets to the amount expected to be realized.
</FONT>

<P align="left">
<I><FONT size="2">Advertising Expenses.
</FONT></I><FONT size="2">Harmonic expenses the cost of
advertising as incurred. During 2003, 2002 and 2001, advertising
expenses were not material to results of operations.
</FONT>

<P align="left">
<I><FONT size="2">Stock Based Compensation.
</FONT></I><FONT size="2">Harmonic accounts for employee stock
option plans in accordance with Accounting Principles Board
No.&nbsp;25 (&#147;APB 25&#148;), &#147;Accounting for Stock
Issued to Employees&#148;, and has adopted the disclosure
requirements under SFAS No.&nbsp;148, &#147;Accounting for
Stock-Based Compensation &#151; Transition and Disclosure&#148;,
which was issued in December 2002. If charges for
Harmonic&#146;s stock plans had been determined based on the
fair value method at the grant dates, as prescribed in SFAS
No.&nbsp;123, &#147;Accounting for Stock-Based
Compensation&#148;, the Company&#146;s net loss and net loss per
share would have been as follows:
</FONT>

<CENTER>
<TABLE width="90%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="56%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="11"></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><B><FONT size="1">Year Ended December 31,</FONT></B></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><B><FONT size="1">(In thousands, except per share data)</FONT></B></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2003</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2002</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2001</FONT></B></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="11"></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Net loss as reported
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(29,433</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(76,918</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(166,407</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Deduct: Stock expense included in net loss, net
    of related tax effects
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><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" valign="bottom" nowrap><FONT size="2">372</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" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Add: Total stock expense determined under fair
    value based method for all awards, net of related tax effects
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(10,539</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(13,216</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(21,890</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="11" align="left"><HR size="1" noshade></TD>

</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Pro forma net loss
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(39,972</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(89,762</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(188,297</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="11" align="left"><HR size="1" noshade></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <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>
    <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>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">As reported
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(0.47</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(1.29</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(2.84</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="11" align="left"><HR size="1" noshade></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Pro forma
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(0.64</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(1.50</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(3.22</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="11" align="left"><HR size="1" noshade></TD>

</TR>

</TABLE>
</CENTER>

<P align="center"><FONT size="2">55
</FONT>

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

<P align="left">
<FONT size="2">The fair value of each option grant is estimated
on the date of grant using the Black-Scholes multiple option
pricing model with the following weighted average assumptions:
</FONT>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="45%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="2%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="2%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="2%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="2%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="2%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="11"></TD>
    <TD></TD>
    <TD colspan="11"></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><B><FONT size="1">Employee Stock Options</FONT></B></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><B><FONT size="1">Employee Stock Purchase Plan</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="23"></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="23" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2003</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2002</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2001</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2003</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2002</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2001</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="23"></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="23" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Dividend yield
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">0.0</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">0.0</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">0.0</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">0.0</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">0.0</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">0.0</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Volatility
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">126</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">122</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">112</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">131</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">139</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">142</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Risk-free interest rate
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2.3</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3.2</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">4.2</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1.7</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3.4</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3.9</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Expected life (years)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3.6</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" valign="bottom" nowrap><FONT size="2">3.4</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" valign="bottom" nowrap><FONT size="2">3.3</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" valign="bottom" nowrap><FONT size="2">1.3</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" valign="bottom" nowrap><FONT size="2">1.4</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" valign="bottom" nowrap><FONT size="2">1.2</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

</TABLE>
</CENTER>

<P align="left">
<I><FONT size="2">Comprehensive Income (Loss).
</FONT></I><FONT size="2">Comprehensive income
(loss)&nbsp;includes net loss and other comprehensive income
(loss). Other comprehensive income (loss)&nbsp;includes
cumulative translation adjustments and unrealized gains and
losses on available-for-sale securities. Harmonic&#146;s
comprehensive income (loss)&nbsp;has been presented in the
Consolidated Statement of Stockholders&#146; Equity.
</FONT>

<P align="left">
<I><FONT size="2">Accounting for Derivatives and Hedging
Activities. </FONT></I><FONT size="2">Harmonic accounts for
derivative financial instruments and hedging contracts in
accordance with SFAS No.&nbsp;133, &#147;Accounting for
Derivative Instruments and Hedging Activities&#148; and SFAS
No.&nbsp;149, &#147;Amendment of Statement 133 on Derivative
Instruments and Hedging activities&#148; which require that all
derivatives be recognized at fair value in the statement of
financial position, and that the corresponding gains or losses
be reported either in the statement of operations or as a
component of comprehensive income, depending on the type of
hedging relationship that exists.
</FONT>

<P align="left">
<FONT size="2">Periodically, Harmonic 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. Harmonic had no forward contracts outstanding as of
December&nbsp;31, 2003 and 2002.
</FONT>

<P align="left">
<I><FONT size="2">Reclassification.
</FONT></I><FONT size="2">Certain amounts in prior years&#146;
financial statements and related notes have been reclassified to
conform to the 2003 presentation. These reclassifications have
no material impact on previously reported net loss or cash flows.
</FONT>

<P align="left">
<FONT size="2">Note 2: Recent Accounting Pronouncements
</FONT>

<P align="left">
<FONT size="2">In November 2002, the Emerging Issues Task Force
(&#147;EITF&#148;) reached a consensus on Issue No.&nbsp;00-21,
&#147;Revenue Arrangements with Multiple Deliverables.&#148;
EITF Issue No.&nbsp;00-21 provides guidance on how to account
for arrangements that involve the delivery or performance of
multiple products, services and/or rights to use assets.
Harmonic adopted EITF Issue No.&nbsp;00-21 effective
June&nbsp;28, 2003, and the adoption did not have a significant
effect on the Company&#146;s financial position, results of
operations, or cash flows.
</FONT>

<P align="left">
<FONT size="2">In January 2003, the Financial Accounting
Standards Board (&#147;FASB&#148;) issued FASB Interpretation
No.&nbsp;46 (&#147;FIN&nbsp;46&#148;), &#147;Consolidation of
Variable Interest Entities&#148;, which addresses accounting for
the assets, liabilities and activities of another entity. Prior
to the issuance of FIN 46, a company generally included another
entity in its consolidated financial statements only if it
controlled the entity through voting interests. FIN 46 now
requires a variable interest entity, as defined in FIN 46, to be
consolidated by a company if that company is subject to a
majority of the risk of loss from the variable interest entity
activities or is entitled to receive a majority of the
entity&#146;s residual returns or both. FIN 46 also requires
disclosures about variable interest entities that the company is
not required to consolidate but in which it has a significant
variable interest. The consolidation requirements of FIN&nbsp;46
apply immediately to variable interest entities created after
January&nbsp;31, 2003 and to older entities in the first fiscal
year or interim period beginning after June&nbsp;15, 2003,
subsequently delayed to December&nbsp;31, 2003. Certain of the
disclosure requirements apply to all financial statements issued
after January&nbsp;31, 2003, regardless of when the variable
interest entity was established. The adoption of FIN&nbsp;46 had
no effect on the Company&#146;s financial position, results of
operations, or cash flows.
</FONT>

<P align="left">
<FONT size="2">In April 2003, the FASB issued
SFAS&nbsp;No.&nbsp;149, &#147;Amendment of Statement&nbsp;133 on
Derivative Instruments and Hedging activities.&#148;
SFAS&nbsp;No.&nbsp;149 amends and clarifies the accounting for
derivative instruments, including certain derivative
</FONT>

<P align="center"><FONT size="2">56
</FONT>

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

<DIV align="left">
<FONT size="2">instruments embedded in other contracts, and for
hedging activities under SFAS&nbsp;No.&nbsp;133,
&#147;Accounting for Derivative Instruments and Hedging
Activities.&#148; Harmonic adopted SFAS&nbsp;No.&nbsp;149
effective June&nbsp;28, 2003, and the adoption had no effect on
the Company&#146;s financial position, results of operations, or
cash flows.
</FONT>
</DIV>

<P align="left">
<FONT size="2">In May 2003, the FASB issued SFAS No.&nbsp;150,
&#147;Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity.&#148;
SFAS&nbsp;No.&nbsp;150 requires that certain financial
instruments, which under previous guidance were accounted for as
equity, must now be accounted for as liabilities. The financial
instruments affected include mandatorily redeemable stock,
certain financial instruments that require or may require the
issuer to buy back some of its shares in exchange for cash or
other assets and certain obligations that can be settled with
shares of stock. Harmonic adopted SFAS&nbsp;No.&nbsp;150
effective June&nbsp;28, 2003, and the adoption had no effect on
the Company&#146;s financial position, results of operations, or
cash flows.
</FONT>

<P align="left">
<FONT size="2">In August 2003, the EITF reached a consensus on
Issue No.&nbsp;03-05, &#147;Applicability of SOP&nbsp;97-2 to
Non-Software Deliverables in an Arrangement Containing
More-Than-Incidental Software.&#148; EITF Issue No.&nbsp;03-05
provides guidance on accounting for arrangements that include
software and non-software deliverables. Software-related
elements include software products and services and non-software
deliverables for which the related software is essential to its
functionality. The Company adopted the provisions of EITF Issue
No.&nbsp;03-05 for revenue arrangements entered into after
August&nbsp;13, 2003. The adoption did not have a significant
impact on the Company&#146;s financial position, results of
operations, or cash flows.
</FONT>

<P align="left">
<FONT size="2">In December 2003, the Securities and Exchange
Commission (&#147;SEC&#148;) issued Staff Accounting Bulletin
No.&nbsp;104 (&#147;SAB&nbsp;104&#148;). SAB&nbsp;104 revises or
rescinds portions of the interpretative guidance included in
Topic 13 of the codification of staff accounting bulletins The
primary purpose of SAB&nbsp;104 was to remove multiple element
guidance in SAB&nbsp;101 that is superseded by and potentially
in conflict with EITF Issue No.&nbsp;00-21. The Company adopted
the provisions of SAB&nbsp;No.&nbsp;104 effective
December&nbsp;17, 2003. The adoption did not have a significant
impact on the Company&#146;s financial position, results of
operations, or cash flows.
</FONT>

<P align="left">
<FONT size="2">Note 3: Goodwill and Identified Intangibles
</FONT>

<P align="left">
<FONT size="2">As of January&nbsp;1, 2002, Harmonic adopted
SFAS&nbsp;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. Upon
adoption, 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 and ceased the
amortization of goodwill.
</FONT>

<P align="left">
<FONT size="2">For purposes of applying SFAS No.&nbsp;142,
management believes the operating divisions, BAN and CS,
represent the Company&#146;s reporting units. CS is the only
reporting unit with goodwill and intangible assets. The Company
performed the transitional goodwill impairment test in the first
quarter of 2002 and the annual impairment test of goodwill in
the fourth quarter of 2002 and 2003. In all instances, 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, goodwill was determined not to be
impaired.
</FONT>

<P align="center"><FONT size="2">57
</FONT>

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

<P align="left">
<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, net of related tax effects,
for the fiscal year ended December&nbsp;31, 2001:
</FONT>

<CENTER>
<TABLE width="70%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="72%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="11%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="10%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><FONT size="1">Year Ended</FONT></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">December&nbsp;31, 2001</FONT></B></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">(In thousands,</FONT></B></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">except per share</FONT></B></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">data)</FONT></B></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <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 align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(166,407</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <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" valign="bottom" nowrap><FONT size="2">673</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Assembled workforce amortization, net of tax
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,092</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <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 align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(164,642</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <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>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <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 align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(2.84</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <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" valign="bottom" nowrap><FONT size="2">0.01</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Assembled workforce amortization, net of tax
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">0.02</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <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 align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(2.81</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

</TABLE>
</CENTER>

<P align="left">
<FONT size="2">For the years ended December&nbsp;31, 2003, 2002
and 2001, the Company recorded a total of $13.9&nbsp;million,
$18.7&nbsp;million and $20.7&nbsp;million, respectively, of
amortization expense for identified intangibles, of which
$6.2&nbsp;million, $9.1&nbsp;million and $8.1&nbsp;million,
respectively, was included in cost of sales. Estimated future
amortization expense for identified intangibles is
$13.9&nbsp;million for 2004, of which $6.2&nbsp;million will be
included in cost of sales, and $4.6&nbsp;million for 2005, of
which $2.1&nbsp;million will be included in cost of sales. The
following is a summary of goodwill and intangible assets as of
December&nbsp;31, 2003 and December&nbsp;31, 2002:
</FONT>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="30%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="11"></TD>
    <TD></TD>
    <TD colspan="11"></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><B><FONT size="1">December 31, 2003</FONT></B></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><B><FONT size="1">December 31, 2002</FONT></B></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Gross</FONT></B></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Net</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Gross</FONT></B></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Net</FONT></B></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Carrying</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Accumulated</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Carrying</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Carrying</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Accumulated</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Carrying</FONT></B></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Amount</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Amortization</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Amount</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Amount</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Amortization</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Amount</FONT></B></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="23"></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="23" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="23" align="center" nowrap><B><FONT size="1">(In thousands)</FONT></B></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="3" align="left" valign="top">
    <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>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <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" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">29,059</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(21,703</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">7,356</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">29,059</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(16,186</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">12,873</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" align="left" valign="top">
    <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" valign="bottom" nowrap><FONT size="2">33,295</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" valign="bottom" nowrap><FONT size="2">(24,112</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">9,183</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" valign="bottom" nowrap><FONT size="2">33,295</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" valign="bottom" nowrap><FONT size="2">(17,226</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">16,069</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <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" valign="bottom" nowrap><FONT size="2">4,076</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" valign="bottom" nowrap><FONT size="2">(2,949</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,127</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" valign="bottom" nowrap><FONT size="2">4,076</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" valign="bottom" nowrap><FONT size="2">(2,103</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,973</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" align="left" valign="top">
    <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" valign="bottom" nowrap><FONT size="2">3,107</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" valign="bottom" nowrap><FONT size="2">(2,248</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">859</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" valign="bottom" nowrap><FONT size="2">3,107</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" valign="bottom" nowrap><FONT size="2">(1,603</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,504</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="23" align="left"><HR size="1" noshade></TD>

</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <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" valign="bottom" nowrap><FONT size="2">69,537</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" valign="bottom" nowrap><FONT size="2">(51,012</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">18,525</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" valign="bottom" nowrap><FONT size="2">69,537</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" valign="bottom" nowrap><FONT size="2">(37,118</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">32,419</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="3" align="left" valign="top">
    <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" valign="bottom" nowrap><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" valign="bottom" nowrap><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" valign="bottom" nowrap><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" valign="bottom" nowrap><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" valign="bottom" nowrap><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" valign="bottom" nowrap><FONT size="2">1,780</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="23" align="left"><HR size="1" noshade></TD>

</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <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" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">71,317</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(51,012</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">20,305</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">71,317</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(37,118</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">34,199</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="23" align="left"><HR size="4" noshade></TD>

</TR>

</TABLE>
</CENTER>

<P align="left">
<FONT size="2">Note 4:&nbsp;Restructuring, Excess Facilities and
Inventory Provisions
</FONT>

<P align="left">
<FONT size="2">In response to a significant reduction in
industry spending, principally weak cable spending on
transmission upgrades and the resulting adverse impact on
Harmonic&#146;s operating results during 2001, the Company
implemented a series of measures to control costs and improve
operating efficiencies. These measures included three work force
reductions during 2001, reducing its workforce by approximately
30%, for which the Company recorded and paid severance and other
costs of $2.5&nbsp;million.
</FONT>

<P align="left">
<FONT size="2">In conjunction with the 2001 cost control
measures, Harmonic evaluated its facility requirements and
committed to a plan to exit excess facilities and consolidate
its operations, principally on Harmonic&#146;s Sunnyvale,
California campus. During 2001, Harmonic recorded a charge for
fixed asset impairment of $8.3&nbsp;million and excess
facilities costs of $21.8 million
</FONT>

<P align="center"><FONT size="2">58
</FONT>
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#toc">Table of Contents</A></H5><P>

<DIV align="left">
<FONT size="2">for a combined total of $30.1&nbsp;million to
selling, general and administrative expenses. The fixed asset
impairment of $8.3&nbsp;million for unrecoverable leasehold
improvements was recorded as a reduction of property, plant and
equipment. The excess facilities charge of $22.3&nbsp;million
was offset by $0.5&nbsp;million of deferred rent and was based
on future facilities costs over the estimated vacancy period,
reduced by estimated sublease income.
</FONT>
</DIV>

<P align="left">
<FONT size="2">As a result of uncertain market conditions and
lower sales during the second half of 2002, the Company
implemented further workforce reductions of approximately 120
full-time employees. Harmonic recorded severance and other costs
totaling $1.5&nbsp;million and paid $1.1&nbsp;million during
2002 and $0.4&nbsp;million during 2003 associated with these
actions. At December&nbsp;31, 2003, remaining accrued severance
costs were $34 thousand and will be paid during 2004.
</FONT>

<P align="left">
<FONT size="2">In addition to the work force reductions in the
second half of 2002, management reassessed the accrual for the
costs of excess facilities in light of the Company&#146;s
reduced headcount, difficult business conditions, and a weak
local commercial real estate market, and changed its estimates
with regard to the expected timing and amount of sublease income
due to the substantial and growing surplus of vacant commercial
space in the San Francisco Bay Area. Harmonic recorded an
additional excess facilities charge of $22.5&nbsp;million, net
of sublease income, to selling, general and administrative
expenses for facilities that Harmonic did not intend to occupy.
As of December&nbsp;31, 2002, accrued excess facilities cost
totaled $41.6&nbsp;million of which $6.8&nbsp;million was
included in current accrued liabilities and $34.8&nbsp;million
in other non-current liabilities. The Company incurred cash
outlays of $3.8&nbsp;million, net of $0.2&nbsp;million of
sublease income, during 2002 principally for lease payments,
property taxes, insurance and other maintenance fees related to
vacated facilities. As of December&nbsp;31, 2003, accrued excess
facilities cost totaled $34.7&nbsp;million of which
$6.1&nbsp;million was included in current accrued liabilities
and $28.6&nbsp;million in other non-current liabilities. The
Company incurred cash outlays of $5.5&nbsp;million during 2003
principally for lease payments, property taxes, insurance and
other maintenance fees related to vacated facilities. In 2004,
Harmonic expects to pay approximately $6.0&nbsp;million of
excess facility lease costs, net of estimated sublease income,
and to pay the remaining $28.6&nbsp;million, net of estimated
sublease income, over the remaining lease terms through
September 2010. Harmonic plans to reassess this liability
quarterly and adjust as necessary based on changes in the timing
and amounts of expected sublease rental income. The review
performed in the third quarter of 2003 resulted in the liability
being decreased by $3.3&nbsp;million due to a revision in the
assumptions as to the unoccupied portion of a building. This
revision was offset by a correction of straight-line rent
expense of $2.3&nbsp;million as a result of a lease extension on
another building. This lease extension was a condition of
leasing three additional buildings at corporate headquarters and
resulted in all leases terminating in September 2010. Because
the effect of the correction on any quarter or year was not
material to these results of operations and financial position,
the non-cash adjustment was recorded in the current year. In the
event we are unable to achieve expected levels of sublease
rental income, we will need to revise our estimate of the
liability, which could materially impact our financial position,
liquidity, cash flows and results of operations.
</FONT>

<P align="left">
<FONT size="2">The following table summarizes restructuring
activities:
</FONT>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="59%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Workforce</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Excess</FONT></B></TD>
    <TD></TD>
    <TD colspan="3"></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Reduction</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Facilities</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Total</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="11"></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="11"></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><B><FONT size="1">(In thousands)</FONT></B></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Balance at January&nbsp;1, 2002
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">22,842</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">22,842</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Provisions
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,505</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" valign="bottom" nowrap><FONT size="2">22,500</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" valign="bottom" nowrap><FONT size="2">24,005</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Cash payments, net of sublease income
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(1,091</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(3,748</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(4,839</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="11" align="left"><HR size="1" noshade></TD>

</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Balance at December&nbsp;31, 2002
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">414</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" valign="bottom" nowrap><FONT size="2">41,594</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" valign="bottom" nowrap><FONT size="2">42,008</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Provisions
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">15</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" valign="bottom" nowrap><FONT size="2">(1,404</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(1,389</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Cash payments
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(395</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(5,523</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(5,918</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="11" align="left"><HR size="1" noshade></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Balance at December&nbsp;31, 2003
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">34</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">34,667</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(34,701</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="11" align="left"><HR size="4" noshade></TD>

</TR>

</TABLE>
</CENTER>

<P align="left">
<FONT size="2">As a result of the significant reduction in
demand for its products, principally BAN division products,
Harmonic recorded provisions of $39.2&nbsp;million during 2001
for excess and obsolete inventories in accordance with its
policy and demand forecasts.
</FONT>

<P align="center"><FONT size="2">59
</FONT>
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#toc">Table of Contents</A></H5><P>

<P align="left">
<FONT size="2">Note 5:&nbsp;Cash, Cash Equivalents and
Investments
</FONT>

<P align="left">
<FONT size="2">At December&nbsp;31, 2003 and 2002, cash, cash
equivalents and short-term investments are summarized as follows:
</FONT>

<CENTER>
<TABLE width="80%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="64%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="8%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="8%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="7"></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">December 31,</FONT></B></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2003</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2002</FONT></B></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="7"></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="7"></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">(In thousands)</FONT></B></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <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" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">41,877</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">21,542</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <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><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 align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Less than one year
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">38,031</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" valign="bottom" nowrap><FONT size="2">26,116</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Due in 1-2&nbsp;years
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">32,689</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" valign="bottom" nowrap><FONT size="2">1,500</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="7" align="left"><HR size="1" noshade></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Total short-term investments
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">70,720</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" valign="bottom" nowrap><FONT size="2">27,616</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Total cash, cash equivalents and short-term
    investments
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">112,597</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">49,158</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="7" align="left"><HR size="4" noshade></TD>

</TR>

</TABLE>
</CENTER>

<P align="left">
<FONT size="2">Harmonic&#146;s short-term investments are stated
at fair value, which approximate the cost of investments and are
comprised of principally corporate debt securities.
</FONT>

<P align="left">
<FONT size="2">Note 6:&nbsp;Balance Sheet Details
</FONT>

<CENTER>
<TABLE width="80%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="63%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="8%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="8%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="7"></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">December 31,</FONT></B></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2003</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2002</FONT></B></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="7"></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="7"></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">(In thousands)</FONT></B></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <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><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>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Accounts receivable
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">43,227</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">30,959</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Unbilled accounts receivable
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">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" valign="bottom" nowrap><FONT size="2">166</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="7" align="left"><HR size="1" noshade></TD>

</TR>

<TR>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">43,846</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" valign="bottom" nowrap><FONT size="2">31,125</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Less: allowance for doubtful accounts, returns
    and discounts
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(5,318</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(6,641</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="7" align="left"><HR size="1" noshade></TD>

</TR>

<TR>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">38,528</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">24,484</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="7" align="left"><HR size="4" noshade></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <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><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>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <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" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">9,594</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">10,944</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <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" valign="bottom" nowrap><FONT size="2">1,135</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" valign="bottom" nowrap><FONT size="2">1,404</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <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" valign="bottom" nowrap><FONT size="2">11,696</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" valign="bottom" nowrap><FONT size="2">13,556</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="7" align="left"><HR size="1" noshade></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">22,425</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">25,904</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="7" align="left"><HR size="4" noshade></TD>

</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Property and equipment:
    </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 align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Furniture and fixtures
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">7,470</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">7,391</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Machinery and equipment
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">84,261</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" valign="bottom" nowrap><FONT size="2">81,408</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Leasehold improvements
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">25,792</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" valign="bottom" nowrap><FONT size="2">25,700</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="7" align="left"><HR size="1" noshade></TD>

</TR>

<TR>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">117,523</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" valign="bottom" nowrap><FONT size="2">114,499</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Less: accumulated depreciation and amortization
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(94,065</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(82,043</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="7" align="left"><HR size="1" noshade></TD>

</TR>

<TR>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">23,458</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">32,456</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="7" align="left"><HR size="4" noshade></TD>

</TR>

</TABLE>
</CENTER>

<P align="center"><FONT size="2">60
</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 width="80%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="63%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="8%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="8%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="7"></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">December 31,</FONT></B></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2003</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2002</FONT></B></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="7"></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="7"></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">(In thousands)</FONT></B></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Intangibles and other 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>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Identified intangibles, net of amortization
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">18,525</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">32,419</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <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" valign="bottom" nowrap><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" valign="bottom" nowrap><FONT size="2">1,780</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Other assets
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,217</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" valign="bottom" nowrap><FONT size="2">1,163</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="7" align="right" valign="bottom">
    <HR size="1" noshade></TD>
</TR>

<TR bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <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">$</FONT></TD>
    <TD><FONT size="2">21,522</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">35,362</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="7" align="left"><HR size="4" noshade></TD>

</TR>

<TR valign="bottom">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Accrued liabilities:
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">25,029</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 bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Pre-merger tax liability and other taxes
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">6,040</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">23,918</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Accrued excess facilities costs&nbsp;&#151;
    current
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">6,356</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" valign="bottom" nowrap><FONT size="2">6,840</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Accrued compensation
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">4,886</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" valign="bottom" nowrap><FONT size="2">6,512</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Accrued warranty
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">7,509</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" valign="bottom" nowrap><FONT size="2">5,866</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Other
    </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 align="right" valign="bottom" nowrap><FONT size="2">6,565</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="7" align="right" valign="bottom">
    <HR size="1" noshade></TD>
</TR>

<TR>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD><FONT size="2">49,820
</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">49,701</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="7" align="left"><HR size="4" noshade></TD>

</TR>

</TABLE>
</CENTER>

<P align="left">
<FONT size="2">Note 7:&nbsp;Net Loss Per Share
</FONT>

<P align="left">
<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 the common shares
outstanding during the period. The diluted net loss per share is
the same as the basic net loss per share for 2003, 2002, and
2001 because potential common shares, such as common shares
issuable upon the exercise of stock options, are only considered
when their effect would be dilutive. In 2003, 2002 and 2001,
6,977,019, 7,418,456 and 4,901,394 of weighted average
antidilutive securities, including options, were excluded from
the net loss per share computations, respectively, because their
effect is antidilutive.
</FONT>

<P align="left">
<FONT size="2">Following is a reconciliation of the numerators
and denominators of the basic and diluted net loss per share
computations:
</FONT>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="59%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="11"></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><B><FONT size="1">Year ended December 31,</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2003</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2002</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2001</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="11"></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="11"></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><B><FONT size="1">(In thousands, except per share data)</FONT></B></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Net loss (numerator)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(29,433</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(76,918</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(166,407</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="11" align="left"><HR size="4" noshade></TD>

</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Shares calculation (denominator):
    </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>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Weighted average shares outstanding&nbsp;&#151;
    basic
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">62,288</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" valign="bottom" nowrap><FONT size="2">59,779</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" valign="bottom" nowrap><FONT size="2">58,540</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Effect of Dilutive Securities:
    </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>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Potential Common Stock relating to stock options
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><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" valign="bottom" nowrap><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" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="11" align="left"><HR size="1" noshade></TD>

</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Average shares outstanding&nbsp;&#151; diluted
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">62,288</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" valign="bottom" nowrap><FONT size="2">59,779</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" valign="bottom" nowrap><FONT size="2">58,540</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="11" align="left"><HR size="4" noshade></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Net loss per share&nbsp;&#151; basic and diluted
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(0.47</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(1.29</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(2.84</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="11" align="left"><HR size="4" noshade></TD>

</TR>

</TABLE>
</CENTER>

<P align="left">
<FONT size="2">Note 8:&nbsp;Credit Facilities and Long-Term Debt
</FONT>

<P align="left">
<FONT size="2">Harmonic has a bank line of credit facility with
Silicon Valley Bank, which provides for borrowings of up to
$13.5&nbsp;million, including $3.5&nbsp;million for equipment
under a secured term loan. This facility, which was amended and
restated in December 2003, expires in December 2004, contains
financial and other covenants including the requirement for
Harmonic to maintain cash, cash equivalents and short-term
investments, net of credit extensions, of not less than
$65.0&nbsp;million. If Harmonic is unable to maintain this cash,
cash equivalents and short-term investments balance or satisfy
the additional affirmative covenant requirements, Harmonic would
be in noncompliance with the facility. In the event of
noncompliance by Harmonic with the covenants under the facility,
Silicon Valley Bank would be entitled to exercise its remedies
under the facility which include declaring all obligations
immediately due and payable and disposing of the collateral if
obligations were not repaid. At December&nbsp;31, 2003, Harmonic
was in compliance with the covenants under this line of credit
facility. The December 2003
</FONT>

<P align="center"><FONT size="2">61
</FONT>
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#toc">Table of Contents</A></H5><P>

<DIV align="left">
<FONT size="2">amendment resulted in the company paying a fee of
approximately $8 thousand and requiring payment of approximately
$30 thousand of additional fees if the company does not maintain
an unrestricted deposit of $25.0&nbsp;million with the bank.
Future borrowings pursuant to the line bear interest at the
bank&#146;s prime rate (4.0%) or prime plus 1.0% (prime rate
plus 0.5%-1.5% for equipment borrowings) depending upon the
Company&#146;s total cash position and previous six months&#146;
revenue. Borrowings are payable monthly and are collateralized
by all of Harmonic&#146;s assets. As of December&nbsp;31, 2003,
$1.7&nbsp;million was outstanding under the equipment term loan
portion of this facility of which $1.0&nbsp;million was borrowed
during 2003. The term loan is payable monthly, including
principal and interest at 4.0% per annum on outstanding
borrowings as of December&nbsp;31, 2003 and matures at various
dates through January 2007. Other than standby letters of credit
and guarantees (Note 14), there were no other outstanding
borrowings or commitments under the line of credit facility as
of December&nbsp;31, 2003.
</FONT>
</DIV>

<P align="left">
<FONT size="2">As of December&nbsp;31, 2002, Harmonic&#146;s
bank line of credit facility contained financial and other
covenants including a minimum cash covenant established in the
November 2002 modification which required the Company to
maintain at least 35% of its cash, cash equivalents and
short-term investments with the bank.
</FONT>

<P align="left">
<FONT size="2">Note 9:&nbsp;Capital Stock
</FONT>

<P align="left">
<I><FONT size="2">Preferred Stock.
</FONT></I><FONT size="2">Harmonic has 5,000,000 authorized
shares of preferred stock. On July&nbsp;23, 2002, The Company
classified 100,000 of these shares as Series&nbsp;A
Participating Preferred Stock in connection with the
Board&#146;s same day approval and adoption of a stockholder
rights plan. Under the plan, Harmonic declared and paid a
dividend of one preferred share purchase right for each share of
Harmonic common stock held by our stockholders of record as of
the close of business on August&nbsp;7, 2002. Each preferred
share purchase right entitles the holder to purchase from us one
one-thousandth of a share of Series&nbsp;A Participating
Preferred Stock, par value $0.001 per share, at a price of
$25.00, subject to adjustment. The rights are not immediately
exercisable, however, and will become exercisable only upon the
occurrence of certain events. The stockholder rights plan may
have the effect of deterring or delaying a change in control of
Harmonic.
</FONT>

<P align="left">
<I><FONT size="2">Stock Issuances.
</FONT></I><FONT size="2">During 2003, Harmonic issued
10,350,000&nbsp;shares of common stock in a public offering,
including shares sold upon exercises of over-allotment options,
at a price of $7.40 per share. The net proceeds to the Company
were approximately $71.4&nbsp;million, which is net of
underwriters&#146; discounts and commissions of approximately
$4.2&nbsp;million and related legal, accounting, printing and
other expenses totaling approximately $0.9&nbsp;million. The
Form&nbsp;S-3 registration statement used in the public offering
remains effective and Harmonic continues to have the ability to
use the registration statement 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 approximately $73&nbsp;million,
subject to market conditions and our capital needs.
</FONT>

<P align="left">
<FONT size="2">Note 10:&nbsp;Benefit Plans
</FONT>

<P align="left">
<I><FONT size="2">Stock Option Plans.
</FONT></I><FONT size="2">Harmonic has reserved
10,923,000&nbsp;shares of Common Stock for issuance under
various employee stock option plans. The options are granted for
periods not exceeding ten years and generally vest 25% at one
year from date of grant, and an additional 1/48 per month
thereafter. Stock options are granted at the fair market value
of the stock at the date of grant.
</FONT>

<P align="left">
<I><FONT size="2">Director Option Plans.
</FONT></I><FONT size="2">In May 2002, Harmonic&#146;s
stockholders approved the 2002 Director Option Plan, replacing
the 1995 Director Option Plan. Harmonic has a total of 428,000
shares of Common Stock reserved for issuance under the Director
Plans. The Director Plans provide for the grant of non-statutory
stock options to certain non-employee directors of Harmonic
pursuant to an automatic, non-discretionary grant mechanism.
Options are granted at the fair market value of the stock at the
date of grant for periods not exceeding ten years. Initial
grants generally vest monthly over three years, and subsequent
grants generally vest monthly over one year.
</FONT>

<P align="center"><FONT size="2">62
</FONT>

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

<P align="left">
<FONT size="2">The following table summarizes activities under
the Plans:
</FONT>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="53%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="7%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Weighted</FONT></B></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Shares</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Stock</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Average</FONT></B></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Available</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Options</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Exercise</FONT></B></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">for Grant</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Outstanding</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Price</FONT></B></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="11"></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="11"></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><B><FONT size="1">(In thousands except exercise price)</FONT></B></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Balance at December&nbsp;31, 2000
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">751</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" valign="bottom" nowrap><FONT size="2">7,642</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">22.73</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Shares authorized
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2,000</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" valign="bottom" nowrap><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" valign="bottom" nowrap><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 align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Options granted
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(2,717</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2,717</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" valign="bottom" nowrap><FONT size="2">9.06</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Options exercised
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><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" valign="bottom" nowrap><FONT size="2">(447</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">5.50</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Options canceled
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,777</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" valign="bottom" nowrap><FONT size="2">(1,777</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">19.72</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Options expired
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><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" valign="bottom" nowrap><FONT size="2">(970</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">32.91</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="11" align="left"><HR size="1" noshade></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Balance at December&nbsp;31, 2001
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,811</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" valign="bottom" nowrap><FONT size="2">7,165</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" valign="bottom" nowrap><FONT size="2">17.99</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Shares authorized
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,800</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" valign="bottom" nowrap><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" valign="bottom" nowrap><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 align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Options granted
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(1,871</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,871</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" valign="bottom" nowrap><FONT size="2">9.78</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Options exercised
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><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" valign="bottom" nowrap><FONT size="2">(205</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3.00</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Options canceled
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,038</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" valign="bottom" nowrap><FONT size="2">(1,038</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">14.59</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Options expired
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(14</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(489</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">16.16</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="11" align="left"><HR size="1" noshade></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Balance at December&nbsp;31, 2002
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2,764</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" valign="bottom" nowrap><FONT size="2">7,304</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" valign="bottom" nowrap><FONT size="2">16.91</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Shares authorized
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,500</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" valign="bottom" nowrap><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" valign="bottom" nowrap><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 align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Options granted
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(1,495</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,495</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" valign="bottom" nowrap><FONT size="2">3.61</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Options exercised
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><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" valign="bottom" nowrap><FONT size="2">(85</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2.32</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Options canceled
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">635</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" valign="bottom" nowrap><FONT size="2">(635</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">13.11</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Options expired
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><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" valign="bottom" nowrap><FONT size="2">(132</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">42.71</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="11" align="left"><HR size="1" noshade></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Balance at December&nbsp;31, 2003
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3,404</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" valign="bottom" nowrap><FONT size="2">7,947</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">14.44</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="11" align="left"><HR size="4" noshade></TD>

</TR>

</TABLE>
</CENTER>

<P align="left">
<FONT size="2">The following table summarizes information
regarding stock options outstanding at December&nbsp;31, 2003:
</FONT>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="15%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="7%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="7%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="7%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="7%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="7%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="7"></TD>
    <TD></TD>
    <TD colspan="11"></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">Stock Options Outstanding</FONT></B></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><B><FONT size="1">Stock Options Exercisable</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Weighted-Average</FONT></B></TD>
    <TD></TD>
    <TD colspan="11"></TD>
</TR>

<TR>
    <TD align="center" nowrap><FONT size="1">Range of</FONT></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Number Outstanding</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Remaining</FONT></B></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Number Exercisable</FONT></B></TD>
    <TD></TD>
    <TD colspan="3"></TD>
</TR>

<TR>
    <TD align="center" nowrap><B><FONT size="1">Exercise</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">at December&nbsp;31,</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Contractual Life</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Weighted-Average</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">at December&nbsp;31,</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Weighted Average</FONT></B></TD>
</TR>

<TR>
    <TD align="center" nowrap><B><FONT size="1">Prices</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2003</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">(Years)</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Exercise Price</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2003</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Exercise Price</FONT></B></TD>
</TR>

<TR>
    <TD colspan="21"></TD>
</TR>

<TR>
    <TD colspan="21" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD colspan="21"></TD>
</TR>

<TR>
    <TD colspan="21" align="center" nowrap><B><FONT size="1">(In thousands, except exercise price and life)</FONT></B></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="right" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">$0.90&nbsp;&#150;&nbsp;&nbsp;&nbsp;3.46
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,439</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">8.8</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3.30</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" valign="bottom" nowrap><FONT size="2">79</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1.83</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="right" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">3.47&nbsp;&#150;&nbsp;&nbsp;&nbsp;8.65
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,244</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" valign="bottom" nowrap><FONT size="2">5.4</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" valign="bottom" nowrap><FONT size="2">6.72</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" valign="bottom" nowrap><FONT size="2">962</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" valign="bottom" nowrap><FONT size="2">6.88</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="right" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">8.68&nbsp;&#150;&nbsp;&nbsp;&nbsp;9.13
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,208</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" valign="bottom" nowrap><FONT size="2">7.0</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" valign="bottom" nowrap><FONT size="2">9.11</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" valign="bottom" nowrap><FONT size="2">889</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" valign="bottom" nowrap><FONT size="2">9.11</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="right" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">9.25&nbsp;&#150;&nbsp;&nbsp;10.44
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,472</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" valign="bottom" nowrap><FONT size="2">7.4</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" valign="bottom" nowrap><FONT size="2">10.39</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" valign="bottom" nowrap><FONT size="2">827</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" valign="bottom" nowrap><FONT size="2">10.38</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="right" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">10.58&nbsp;&#150;&nbsp;&nbsp;23.57
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,655</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" valign="bottom" nowrap><FONT size="2">6.5</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" valign="bottom" nowrap><FONT size="2">21.12</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" valign="bottom" nowrap><FONT size="2">1,352</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" valign="bottom" nowrap><FONT size="2">21.49</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="right" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">23.75&nbsp;&#150;&nbsp;&nbsp;50.72
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">632</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" valign="bottom" nowrap><FONT size="2">5.5</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" valign="bottom" nowrap><FONT size="2">28.94</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" valign="bottom" nowrap><FONT size="2">617</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" valign="bottom" nowrap><FONT size="2">28.87</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="right" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">53.02&nbsp;&#150;&nbsp;121.68
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">297</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" valign="bottom" nowrap><FONT size="2">6.1</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" valign="bottom" nowrap><FONT size="2">74.22</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" valign="bottom" nowrap><FONT size="2">288</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" valign="bottom" nowrap><FONT size="2">74.10</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="19" align="left"><HR size="1" noshade></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 align="right" valign="bottom" nowrap><FONT size="2">7,947</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" valign="bottom" nowrap><FONT size="2">6.9</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">14.44</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">5,014</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">18.28</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="19" align="left"><HR size="4" noshade></TD>

</TR>

</TABLE>
</CENTER>

<P align="left">
<FONT size="2">The weighted-average fair value of options
granted was $2.74, $7.24, and $6.33 for 2003, 2002, and 2001,
respectively.
</FONT>

<P align="left">
<I><FONT size="2">Employee Stock Purchase Plan.
</FONT></I><FONT size="2">In May 2002, Harmonic&#146;s
stockholders approved the 2002 Employee Stock Purchase Plan (the
&#147;2002 Purchase Plan&#148;) replacing the 1995 Employee
Stock Purchase Plan effective for the offering period beginning
on July&nbsp;1, 2002. The 2002 Purchase Plan, which has reserved
1,500,000 shares for issuance, enables employees to purchase
shares at 85% of the fair market value of the Common Stock at
the beginning of the offering period or end of the purchase
period, whichever is lower. Each offering period has a maximum
duration of two years and consists of four six-month purchase
periods. Offering periods and purchase periods generally begin
on the first trading day on or after
</FONT>

<P align="center"><FONT size="2">63
</FONT>
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#toc">Table of Contents</A></H5><P>

<DIV align="left">
<FONT size="2">January&nbsp;1 and July&nbsp;1 of each year. The
2002 Purchase Plan is intended to qualify as an &#147;employee
stock purchase plan&#148; under Section&nbsp;423 of the Internal
Revenue Code. During 2003, 2002, and 2001, the number of shares
of stock issued under the purchase plans were 725,086, 780,670,
and 813,181 shares at weighted average prices of $2.24, $3.99,
and $4.80, respectively. The weighted-average fair value of each
right to purchase shares of common stock granted under the
purchase plans were $2.15, $5.21, and $6.30 for 2003, 2002, and
2001, respectively. At December&nbsp;31, 2003, 774,914 shares
were reserved for future issuances under the 2002 Purchase Plan.
</FONT>
</DIV>

<P align="left">
<FONT size="2">As of December&nbsp;31, 2003, based on employee
participation rates and its stock price, Harmonic believes that
it may have insufficient shares reserved for issuance under its
Purchase Plan to cover all expected purchases under offering
periods that have commenced and which run through
January&nbsp;2, 2006. Although Harmonic has sufficient
authorized shares to satisfy purchases during its current six
month purchase periods ending January&nbsp;2, 2004 and
July&nbsp;1, 2004, Harmonic believes that approximately 90,000
additional shares will be required to meet expected purchases
under the six month purchase periods ending January&nbsp;2,
2005, July&nbsp;1, 2005 and January&nbsp;2, 2006. The issuance
of these additional shares requires Board and stockholder
approval. Harmonic expects to request stockholder approval in
May 2004. The terms of the Purchase Plan allow for the plan
administrator to terminate the Purchase Plan at any time or
allocate a specific number of shares to be issued at each
purchase period. If additional shares are authorized to be
issued in relation to these purchase periods, stock-based
compensation expense may result. Stock-based compensation
expense will be re-measured quarterly, will be recognized as
earned using the multiple option method, will fluctuate as the
price per share of Harmonic Common Stock fluctuates and could be
significant. Final measurement of any stock-based compensation
expense will occur on the stock purchase date at the end of each
six month purchase period.
</FONT>

<P align="left">
<I><FONT size="2">Retirement/ Savings Plan.
</FONT></I><FONT size="2">Harmonic has a retirement/savings plan
which qualifies as a thrift plan under Section&nbsp;401(k) of
the Internal Revenue Code. This plan allows participants to
contribute up to 20% of total compensation, subject to
applicable Internal Revenue Service limitations. Harmonic makes
discretionary contributions to the plan of 25% of the first 4%
contributed by eligible participants up to a maximum
contribution per participant of $750 per year. Such amounts
totaled $0.2&nbsp;million in 2003, $0.3&nbsp;million in 2002,
and $0.3&nbsp;million in 2001.
</FONT>

<P align="left">
<FONT size="2">Note&nbsp;11:&nbsp;Income Taxes
</FONT>

<P align="left">
<FONT size="2">The provision for (benefit from) income taxes
consists of the following:
</FONT>

<CENTER>
<TABLE width="90%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="57%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="11"></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><B><FONT size="1">December&nbsp;31,</FONT></B></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2003</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2002</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2001</FONT></B></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="11"></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="11"></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><B><FONT size="1">(In thousands)</FONT></B></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Current:
    </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>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Federal
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><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 align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Foreign
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">300</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" valign="bottom" nowrap><FONT size="2">279</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" valign="bottom" nowrap><FONT size="2">2,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">State
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><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" valign="bottom" nowrap><FONT size="2">65</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" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="11" align="left"><HR size="1" noshade></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">300</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" valign="bottom" nowrap><FONT size="2">344</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" valign="bottom" nowrap><FONT size="2">2,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Deferred:
    </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>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Federal
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><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" valign="bottom" nowrap><FONT size="2">156</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" valign="bottom" nowrap><FONT size="2">(1,580</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Foreign
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><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" valign="bottom" nowrap><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" valign="bottom" nowrap><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 align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">State
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><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" valign="bottom" nowrap><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" valign="bottom" nowrap><FONT size="2">(1,226</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="11" align="left"><HR size="1" noshade></TD>

</TR>

<TR>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><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" valign="bottom" nowrap><FONT size="2">156</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" valign="bottom" nowrap><FONT size="2">(2,806</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="11" align="left"><HR size="1" noshade></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">300</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">500</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(806</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="11" align="left"><HR size="4" noshade></TD>

</TR>

</TABLE>
</CENTER>

<P align="center"><FONT size="2">64
</FONT>
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#toc">Table of Contents</A></H5><P>

<P align="left">
<FONT size="2">Harmonic&#146;s provision for (benefit from)
income taxes differed from the amount computed by applying the
statutory U.S.&nbsp;federal income tax rate to the loss before
income taxes as follows:
</FONT>

<CENTER>
<TABLE width="90%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="57%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="11"></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><B><FONT size="1">December 31,</FONT></B></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2003</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2002</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2001</FONT></B></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="11"></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="11"></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><B><FONT size="1">(In thousands)</FONT></B></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Benefit from income taxes at statutory rate
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(10,197</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(26,746</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(58,395</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Differential in rates on foreign earnings
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">325</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" valign="bottom" nowrap><FONT size="2">1,183</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" valign="bottom" nowrap><FONT size="2">6,324</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">State taxes, net of federal benefit
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(696</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(4,620</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(10,782</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Acquired in-process technology and non-deductible
    goodwill
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><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" valign="bottom" nowrap><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" valign="bottom" nowrap><FONT size="2">791</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Research and development credit
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(551</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(5,700</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Valuation allowance
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">11,129</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" valign="bottom" nowrap><FONT size="2">41,883</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" valign="bottom" nowrap><FONT size="2">63,026</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Other
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">290</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" valign="bottom" nowrap><FONT size="2">(5,500</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(1,770</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="11" align="left"><HR size="1" noshade></TD>

</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Net provision for (benefit from) income taxes
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">300</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">500</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(806</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="11" align="left"><HR size="1" noshade></TD>

</TR>

</TABLE>
</CENTER>

<P align="left">
<FONT size="2">Deferred tax assets (liabilities)&nbsp;comprise
the following:
</FONT>

<CENTER>
<TABLE width="90%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="52%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="11"></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><B><FONT size="1">December 31,</FONT></B></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2003</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2002</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2001</FONT></B></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="11"></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="11"></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><B><FONT size="1">(In thousands)</FONT></B></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Deferred tax 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>
    <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>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Reserves and accruals
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">41,219</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">52,121</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">42,934</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" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Net operating loss carryovers
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">64,918</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" valign="bottom" nowrap><FONT size="2">48,128</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" valign="bottom" nowrap><FONT size="2">26,892</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Depreciation and amortization
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">4,445</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" valign="bottom" nowrap><FONT size="2">4,613</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" valign="bottom" nowrap><FONT size="2">4,312</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" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Research and development credit carryovers
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">12,408</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" valign="bottom" nowrap><FONT size="2">10,898</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" valign="bottom" nowrap><FONT size="2">2,265</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Other
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">8,182</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" valign="bottom" nowrap><FONT size="2">2,440</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" valign="bottom" nowrap><FONT size="2">7,716</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="11" align="left"><HR size="1" noshade></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Total deferred tax assets
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">131,172</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" valign="bottom" nowrap><FONT size="2">118,200</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" valign="bottom" nowrap><FONT size="2">84,119</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Valuation allowance
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(123,615</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(104,909</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(63,026</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="11" align="left"><HR size="1" noshade></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Net deferred tax assets
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">7,557</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" valign="bottom" nowrap><FONT size="2">13,291</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" valign="bottom" nowrap><FONT size="2">21,093</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Deferred tax 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>
    <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" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Intangibles
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(7,557</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(13,291</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(21,093</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="11" align="left"><HR size="1" noshade></TD>

</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Net deferred tax assets (liabilities)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="11" align="left"><HR size="4" noshade></TD>

</TR>

</TABLE>
</CENTER>

<P align="left">
<FONT size="2">Realization of deferred tax assets is dependent
upon future earnings, the timing and amount of which are
uncertain. Accordingly, the net deferred tax assets have been
fully offset by a valuation allowance. The valuation allowance
increased by $18.7&nbsp;million and $41.9&nbsp;million for the
years ended December&nbsp;31, 2003 and 2002, respectively.
</FONT>

<P align="left">
<FONT size="2">As of December&nbsp;31, 2003, the Company had tax
net operating loss carryforwards for federal income tax purposes
of approximately $180.3&nbsp;million, which expire beginning in
the year 2020. The Company also has state net operating loss
carryforwards of approximately $31.5&nbsp;million, which expire
beginning in 2004. As of December&nbsp;31, 2003, the Company
also had federal and state tax credit carryovers of
approximately $7.6&nbsp;million and $8.5&nbsp;million,
respectively, available to offset future taxable income. The
federal credits expire beginning 2004, while the state credits
will not expire.
</FONT>

<P align="left">
<FONT size="2">Utilization of the Company&#146;s net operating
loss and tax credits may be subject to substantial annual
limitation due to the ownership change limitations provided by
the Internal Revenue Code and similar state provisions. Such an
annual limitation could result in the expiration of the net
operating loss before utilization.
</FONT>

<P align="left">
<FONT size="2">Under the terms of the merger agreement with
C-Cube, Harmonic is generally liable for C-Cube&#146;s
pre-merger tax liabilities. Approximately $20.8&nbsp;million of
pre-merger tax liabilities remain outstanding and Harmonic
expects final settlement of these obligations to a variety of
taxing authorities and LSI Logic during 2004. These amounts have
been included in accrued liabilities.
</FONT>

<P align="center"><FONT size="2">65
</FONT>
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#toc">Table of Contents</A></H5><P>

<P align="left">
<FONT size="2">Note 12:&nbsp;Segment Information
</FONT>

<P align="left">
<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. The Company has been organized
into two operating segments: BAN, for fiber optic systems, and
CS, for digital headend systems. Each segment has its own
management team directing its product development, marketing
strategies and its customer service requirements. A separate
sales force generally supports both segments with appropriate
product and market specialization as required.
</FONT>

<P align="left">
<FONT size="2">The results of the reportable segments are
derived directly from Harmonic&#146;s management reporting
system. These results reported below are based on
Harmonic&#146;s method of internal reporting and are not
necessarily presented in conformity with generally accepted
accounting principles. Management measures the performance of
each segment based on several metrics, including revenue and
income or loss from segment operations. These results are used,
in part, to evaluate the performance of, and allocate resources
to each of the segments. Income (loss)&nbsp;from segment
operations excludes intangible amortization expense, corporate
expenses, excess facilities charges, eliminations, and interest
and other income, net. Corporate expenses and excess facilities
charges, include human resources, legal, finance and other
corporate departments, facility adjustment charges of
$1.4&nbsp;million, $22.5&nbsp;million and $30.1&nbsp;million for
the years ended December&nbsp;31, 2003, 2002 and 2001,
respectively, and intercompany eliminations. Net income or loss,
and assets and liabilities are not internally reported by
business segment.
</FONT>

<P align="left">
<I><FONT size="2">Segment Sales and Profit:</FONT></I>

<CENTER>
<TABLE width="90%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="54%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="11"></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><B><FONT size="1">Year Ended December 31,</FONT></B></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2003</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2002</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2001</FONT></B></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="11"></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="11"></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><B><FONT size="1">(In thousands)</FONT></B></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="3" align="left" valign="top">
    <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>
    <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>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Convergent Systems (CS)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">113,207</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">109,718</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">129,038</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" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Broadband Access Networks (BAN)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">69,069</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" valign="bottom" nowrap><FONT size="2">76,914</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" valign="bottom" nowrap><FONT size="2">74,772</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="11" align="left"><HR size="1" noshade></TD>

</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <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" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">182,276</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">186,632</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">203,810</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="11" align="left"><HR size="4" noshade></TD>

</TR>

</TABLE>
</CENTER>

<CENTER>
<TABLE width="90%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="56%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="11"></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><B><FONT size="1">Year Ended December 31,</FONT></B></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2003</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2002</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2001</FONT></B></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="11"></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="11"></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><B><FONT size="1">(In thousands)</FONT></B></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Income (loss)&nbsp;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>
    <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>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <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" valign="bottom" nowrap><FONT size="2">(4,398</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(15,649</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(36,254</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <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" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,102</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(4,033</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(60,103</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="11" align="left"><HR size="1" noshade></TD>

</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <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 align="right" valign="bottom" nowrap><FONT size="2">(3,296</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(19,682</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(96,357</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <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" valign="bottom" nowrap><FONT size="2">(13,894</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(18,648</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(20,741</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Interest and other income, net
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,412</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" valign="bottom" nowrap><FONT size="2">931</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" valign="bottom" nowrap><FONT size="2">1,574</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Facilities adjustments
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,376</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" valign="bottom" nowrap><FONT size="2">(22,500</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(30,100</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Corporate expenses and eliminations
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(14,731</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(16,519</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(21,589</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="11" align="left"><HR size="1" noshade></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <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 align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(29,133</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(76,418</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(167,213</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="11" align="left"><HR size="4" noshade></TD>

</TR>

</TABLE>
</CENTER>

<P align="center"><FONT size="2">66
</FONT>
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#toc">Table of Contents</A></H5><P>

<P align="left">
<I><FONT size="2">Geographic Information:</FONT></I>

<CENTER>
<TABLE width="90%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="54%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="11"></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><B><FONT size="1">Year Ended December 31,</FONT></B></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2003</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2002</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2001</FONT></B></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="11"></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="11"></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><B><FONT size="1">(In thousands)</FONT></B></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="3" align="left" valign="top">
    <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>
    <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>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">United States
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">130,226</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">133,222</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">121,479</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" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">International
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">52,050</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" valign="bottom" nowrap><FONT size="2">53,410</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" valign="bottom" nowrap><FONT size="2">82,331</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="11" align="left"><HR size="1" noshade></TD>

</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Total
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">182,276</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">186,632</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">203,810</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="11" align="left"><HR size="4" noshade></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Property, equipment and 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>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">United States
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">41,905</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">64,863</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">96,472</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" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">International
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,858</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" valign="bottom" nowrap><FONT size="2">1,792</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" valign="bottom" nowrap><FONT size="2">2,285</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="11" align="left"><HR size="1" noshade></TD>

</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Total
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">43,763</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">66,655</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">98,757</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="11" align="left"><HR size="4" noshade></TD>

</TR>

</TABLE>
</CENTER>

<P align="left">
<I><FONT size="2">Major Customers. </FONT></I><FONT size="2">To
date, a substantial majority of Harmonic&#146;s net sales have
been to relatively few customers, and Harmonic expects this
customer concentration to continue in the foreseeable future. In
2003, sales to Comcast accounted for 32%. In 2002, sales to
Charter Communications and Comcast accounted for 18% and 10% of
net sales, respectively. In 2001, sales to DIRECTV and Charter
Communications accounted for 13% and 11% of net sales,
respectively.
</FONT>

<P align="left">
<FONT size="2">Note 13:&nbsp;Related Party
</FONT>

<P align="left">
<FONT size="2">A director of Harmonic since January 2002 is CEO
of Broadband Services Inc. (BSI). BSI has purchased products
from Harmonic in connection with its supply chain management and
fulfillment services business. Revenues from BSI were $31
thousand for the year ended December&nbsp;31, 2003 and
$8.9&nbsp;million for the year ended December&nbsp;31, 2002.
Accounts receivable from BSI were zero as of December 31, 2003
and $0.4&nbsp;million as of December&nbsp;31, 2002. This
director is also a director of Terayon Communications, with whom
the Company signed a reseller agreement for certain products
during the second quarter of 2002. During 2003 and 2002, the
Company purchased approximately $3.0&nbsp;million and
$1.1&nbsp;million, respectively, in products from Terayon. As of
December&nbsp;31, 2003 and 2002, Harmonic had liabilities to
Terayon of approximately $0.3&nbsp;million and $0.5 million,
respectively, for inventory purchases.
</FONT>

<P align="left">
<FONT size="2">Note 14:&nbsp;Guarantees
</FONT>

<P align="left">
<I><FONT size="2">Warranties. </FONT></I><FONT size="2">The
Company accrues for estimated warranty costs at the time of
product shipment. Management periodically reviews the estimated
fair value of its warranty liability and adjusts based on the
terms of warranties provided to customers, historical and
anticipated warranty claims experience, and estimates of the
timing and cost of specified warranty claims. Activity for the
Company&#146;s warranty accrual, which is included in accrued
liabilities is summarized below (in thousands):
</FONT>

<CENTER>
<TABLE width="70%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="85%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Balance as of January&nbsp;1, 2003
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">5,866</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Accrual for warranties
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">4,602</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Warranty costs incurred
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(5,582</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Balance as of December&nbsp;31, 2003
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">4,886</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

</TABLE>
</CENTER>

<P align="left">
<I><FONT size="2">Standby Letters of Credit.
</FONT></I><FONT size="2">As of December&nbsp;31, 2003 the
Company&#146;s financial guarantees consisted of standby letters
of credit outstanding, which were principally related to a
litigation settlement, customs bond requirements and corporate
purchase cards. The maximum amount of potential future payments
under these arrangements was $2.8&nbsp;million.
</FONT>

<P align="left">
<I><FONT size="2">Indemnifications.
</FONT></I><FONT size="2">Harmonic indemnifies the members of
its Board of Directors pursuant to the requirements of its
bylaws, and some of its suppliers and customers for specified
intellectual property rights pursuant to certain parameters and
restrictions. The scope of these indemnities varies, but in some
instances, includes indemnification for damages and expenses
(including reasonable attorneys&#146; fees). There have been no
claims for indemnification and, accordingly, no amounts have
been accrued in respect of the indemnifications provisions
through December&nbsp;31, 2003.
</FONT>

<P align="center"><FONT size="2">67
</FONT>
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#toc">Table of Contents</A></H5><P>

<P align="left">
<I><FONT size="2">Guarantees. </FONT></I><FONT size="2">As of
December&nbsp;31, 2003, Harmonic had no other guarantees
outstanding.
</FONT>

<P align="left">
<FONT size="2">Note&nbsp;15:&nbsp;Commitments and Contingencies
</FONT>

<P align="left">
<I><FONT size="2">Commitments&nbsp;&#151; Facilities Leases.
</FONT></I><FONT size="2">Harmonic leases its facilities under
noncancelable operating leases which expire at various dates
through September 2010. Total lease payments related to these
operating leases were $10.4&nbsp;million, $11.5&nbsp;million and
$10.5&nbsp;million for 2003, 2002 and 2001, respectively. Future
minimum lease payments under noncancelable operating leases at
December&nbsp;31, 2002, are as follows (in thousands):
</FONT>

<CENTER>
<TABLE width="70%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="85%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">2004
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">10,053</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">2005
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">9,949</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">2006
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">11,060</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">2007
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">12,435</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">2008
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">12,486</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Thereafter
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">22,409</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><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 align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">78,392</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

</TABLE>
</CENTER>

<P align="left">
<FONT size="2">As of December&nbsp;31, 2003, $35.3&nbsp;million
of these lease costs were provided for as accrued excess
facility costs. See Note&nbsp;4 &#147;Restructuring, Excess
Facilities and Inventory Provisions.&#148;
</FONT>

<P align="left">
<I><FONT size="2">Commitments&nbsp;&#151; Royalties.
</FONT></I><FONT size="2">Harmonic has obtained research and
development grants under various Israeli government programs
that require the payment of royalties on sales of certain
products resulting from such research. During 2003, 2002 and
2001 royalty expenses were $0.6&nbsp;million, $0.6&nbsp;million
and $0.7&nbsp;million, respectively.
</FONT>

<P align="left">
<I><FONT size="2">Purchase Commitments with Contract
Manufacturers and Suppliers. </FONT></I><FONT size="2">The
Company uses several contract manufacturers and suppliers to
provide manufacturing services for a substantial majority of its
products. In addition, some components, sub-assembly and modules
are obtained from a sole supplier or limited group of suppliers.
During the normal course of business, in order to reduce
manufacturing lead times and ensure adequate component supply,
the Company enters into agreements with certain contract
manufacturers and suppliers that allows them to procure
inventory based upon criteria as defined by the Company.
</FONT>

<P align="left">
<I><FONT size="2">Commitments&nbsp;&#151; Contingencies.
</FONT></I><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. Such assertions and claims
arise in the normal course of our operations. The resolution of
assertions and claims cannot be predicted with certainty.
Management believes that the final outcome of such matters would
not have a material adverse effect on Harmonic&#146;s business,
operating results, financial position and cash flows.
</FONT>

<P align="left">
<FONT size="2">Note&nbsp;16:&nbsp;Legal Proceedings
</FONT>

<P align="left">
<FONT size="2">Between June&nbsp;28 and August&nbsp;25, 2000,
several actions alleging violations of the federal securities
laws by Harmonic and certain of its officers and directors (some
of whom are no longer with Harmonic) were filed in or removed to
the United States District Court for the Northern District of
California. The actions subsequently were consolidated.
</FONT>

<P align="left">
<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
</FONT>

<P align="center"><FONT size="2">68
</FONT>

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

<DIV align="left">
<FONT size="2">sections&nbsp;10(b) and 20(a) of the Securities
Exchange Act of 1934. The complaint also alleged that certain
defendants violated section&nbsp;14(a) of the Exchange Act and
sections&nbsp;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>
</DIV>

<P align="left">
<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. On November&nbsp;13, 2002,
the Court issued an opinion granting the motions to dismiss the
amended complaint without leave to amend. Judgment for
defendants was entered on December&nbsp;2, 2002. On
December&nbsp;12, 2002, plaintiffs filed a motion to amend the
judgment and for leave to file an amended complaint pursuant to
Rules&nbsp;59(e) and 15(a) of the Federal Rules of Civil
Procedure. On June&nbsp;6, 2003, the Court denied
plaintiffs&#146; motion to amend the judgment and for leave to
file an amended complaint. Plaintiffs filed a notice of appeal
on July&nbsp;1, 2003. Plaintiffs filed their opening brief on
December&nbsp;3, 2003. Defendants filed their answering briefs
on March&nbsp;2, 2004. Plaintiffs&#146; optional reply brief is
due fourteen days from service of the answering briefs. No
hearing has been scheduled yet.
</FONT>

<P align="left">
<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 action 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 were
stayed pending resolution of the motions to dismiss the
securities class action. On July&nbsp;29, 2003, the Court
approved the parties&#146; stipulation to dismiss this
derivative action without prejudice and to toll the applicable
limitations period. The limitations period is tolled until
fourteen days after (1)&nbsp;defendants provide plaintiff with a
copy of the mandate issued by the Ninth Court in the securities
action or (2)&nbsp;either party provides written notice of
termination of the tolling period, whichever is first.
</FONT>

<P align="left">
<FONT size="2">A second derivative action purporting to be on
behalf of Harmonic was filed in the Superior Court for the
County of Santa Clara on May&nbsp;15, 2003. It alleges facts
similar to those previously alleged in the securities class
action and the federal derivative action. The complaint names as
defendants former and current Harmonic officers and directors,
along with former officers and directors of C-Cube Microsystems,
Inc., who were named in the securities class action. The
complaint also names Harmonic as a nominal defendant. The
complaint alleges claims for abuse of control, gross
mismanagement, and waste of corporate assets against the
Harmonic defendants, and claims for breach of fiduciary duty,
unjust enrichment, and negligent misrepresentation against all
defendants. On July&nbsp;22, 2003, the Court approved the
parties&#146; stipulation to stay the case pending resolution of
the appeal in the securities class action. Although the parties
initially agreed in principle to a dismissal without prejudice
on similar terms as in the federal derivative action, after
further discussion, the parties decided that the stay currently
in place suffices to protect their respective interests.
</FONT>

<P align="left">
<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.
No estimate can be made of the possible range of loss associated
with the resolution of this contingency and accordingly,
Harmonic has not recorded a liability. An unfavorable outcome of
this litigation could have a material adverse effect on
Harmonic&#146;s business, operating results, financial position
and cash flows.
</FONT>

<P align="left">
<FONT size="2">Harmonic announced on July&nbsp;17, 2003 a
settlement of its litigation with Power and Telephone Supply
(P&#38;T) in Federal court in Tennessee. Under the terms of the
settlement agreement, Harmonic agreed to pay $2.8&nbsp;million
to P&#38;T in release of all outstanding claims. The settlement
follows summary judgment against Harmonic on certain of the
claims made by P&#38;T under a Tennessee statute relating to
retailers and suppliers. These claims arose from the
cancellation of purchase orders on P&#38;T by one of its
end-customers in 2000. Harmonic&#146;s operating results for the
second quarter and twelve months of 2003 include a charge to
general and administrative expense of approximately
$2.7&nbsp;million related to the settlement with P&#38;T. The
settlement charge is net of the value of products returned and
other costs. Harmonic paid $1.0&nbsp;million of the settlement
on July&nbsp;24, 2003 and paid the balance of $1.8&nbsp;million
on January&nbsp;15, 2004.
</FONT>

<P align="center"><FONT size="2">69
</FONT>

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

<P align="left">
<FONT size="2">On July&nbsp;3, 2003, Stanford University and
Litton Systems filed a complaint in U.S. District Court for the
Central District of California alleging that optical fiber
amplifiers incorporated into certain of Harmonic&#146;s products
infringe U.S. Patent No.&nbsp;4,859,016. This patent expired in
September 2003. The complaint seeks injunctive relief, royalties
and damages. Harmonic has not been served in the case. Harmonic
is currently evaluating its position with respect to this patent
and has engaged in discussions with the plaintiff regarding
potential settlement of the matter. At this time, Harmonic is
unable to determine whether it will be able to settle this
litigation on reasonable terms or at all, nor can we predict the
impact of an adverse outcome of this litigation if it elects to
defend against it. No estimate can be made of the possible range
of loss associated with the resolution of this contingency and
accordingly, we have not recorded a liability associated with
the outcome of a negotiated settlement or an unfavorable verdict
in litigation. An unfavorable outcome of this matter could have
a material adverse effect on Harmonic&#146;s business, operating
results, financial position and cash flows.
</FONT>

<DIV>&nbsp;</DIV>

<!-- link2 "<FONT size="2">Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure</FONT>" -->
<DIV align="left"><A NAME="011"></A></DIV>

<DIV align="left">
<FONT size="2">Item&nbsp;9. <I>Changes In and Disagreements With
Accountants on Accounting and Financial Disclosure</I>
</FONT>
</DIV>

<P align="left">
<FONT size="2">None.
</FONT>

<DIV>&nbsp;</DIV>

<!-- link2 "<FONT size="2">Item 9A. Controls and Procedures</FONT>" -->
<DIV align="left"><A NAME="012"></A></DIV>

<DIV align="left">
<FONT size="2">Item&nbsp;9A. <I>Controls and Procedures</I>
</FONT>
</DIV>

<P align="left">
<FONT size="2">Our chief executive officer and our chief
financial officer participated in the evaluation of the
effectiveness of the Company&#146;s &#147;disclosure controls
and procedures&#148; (as defined in the Securities Exchange Act
of 1934, as amended (the &#147;Exchange Act&#148;),
Rules&nbsp;13a-15(e) or 15d-15(e)) as of December&nbsp;31, 2003,
and have concluded that our disclosure controls and procedures
were effective to ensure the timely collection, evaluation and
disclosure of information relating to the Company that could
potentially be subject to disclosure under the Exchange Act and
the rules and regulations promulgated thereunder. There were no
significant changes in our internal controls identified in
connection with the evaluation as of December&nbsp;31, 2003 that
have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
</FONT>

<!-- link1 "<FONT size="2">PART III</FONT>" -->
<DIV align="left"><A NAME="013"></A></DIV>

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

<P align="left">
<FONT size="2">Certain information required by Part&nbsp;III is
omitted from this Report on Form&nbsp;10-K in that the
Registrant will file its definitive Proxy Statement for its 2004
Annual Meeting of Stockholders, pursuant to Regulation&nbsp;14A
of the Securities Exchange Act of 1934, as amended (the
&#147;2004 Proxy Statement&#148;), not later than 120&nbsp;days
after the end of the fiscal year covered by this Report, and
certain information included in the 2004 Proxy Statement is
incorporated herein by reference.
</FONT>

<DIV>&nbsp;</DIV>

<!-- link2 "<FONT size="2">Item 10. Directors and Executive Officers of Registrant</FONT>" -->
<DIV align="left"><A NAME="014"></A></DIV>

<DIV align="left">
<FONT size="2">Item&nbsp;10. <I>Directors and Executive Officers
of Registrant</I>
</FONT>
</DIV>

<P align="left">
<FONT size="2">Information concerning our directors required by
this Item will be set forth in the 2004 Proxy Statement under
the caption &#147;Election of Directors&#148; and is
incorporated herein by reference.
</FONT>

<P align="left">
<FONT size="2">Information concerning our executive officers
required by this Item is included in Part&nbsp;I, Item&nbsp;1
hereof under the caption, &#147;Executive Officers of
Registrant&#148;.
</FONT>

<P align="left">
<FONT size="2">Information relating to compliance with
Section&nbsp;16(a) of the Securities Exchange Act of 1934 will
be set forth in the 2004 Proxy Statement under the caption
&#147;Section&nbsp;16(a) Beneficial Ownership Reporting
Compliance&#148; and is incorporated herein by reference.
</FONT>

<P align="left">
<FONT size="2">Information concerning our audit committee and
our audit committee financial expert will be set forth in our
2004 Proxy Statement and is incorporated herein by reference.
</FONT>

<P align="left">
<FONT size="2">Harmonic has adopted a Code of Business Conduct
and Ethics for Senior Operational and Financial Leadership (the
&#147;Code&#148;) which applies to its Chairman and Chief
Executive Officer, its Chief Financial Officer, its Corporate
Controller and
</FONT>

<P align="center"><FONT size="2">70
</FONT>

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

<DIV align="left">
<FONT size="2">other senior operational and financial
management. The Code of Ethics is available on the
Company&#146;s website at <U>www.harmonicinc.com</U>.
</FONT>
</DIV>

<P align="left">
<FONT size="2">Harmonic intends to satisfy the disclosure
requirement under Item&nbsp;10 of Form 8-K regarding an
amendment to, or waiver from, a provision of this Code of Ethics
by posting such information on our website, at the address
specified above, and to the extent required by the listing
standards of the Nasdaq Stock Market, by filing a Current Report
on Form&nbsp;8-K with the Securities and Exchange Commission
disclosing such information.
</FONT>

<DIV>&nbsp;</DIV>

<!-- link2 "<FONT size="2">Item 11. Executive Compensation</FONT>" -->
<DIV align="left"><A NAME="015"></A></DIV>

<DIV align="left">
<FONT size="2">Item&nbsp;11. <I>Executive Compensation</I>
</FONT>
</DIV>

<P align="left">
<FONT size="2">The information required by this Item will be set
forth in the 2004 Proxy Statement under the caption
&#147;Executive Compensation&#148; and is incorporated herein by
reference.
</FONT>

<DIV>&nbsp;</DIV>

<!-- link2 "<FONT size="2">Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters</FONT>" -->
<DIV align="left"><A NAME="016"></A></DIV>

<DIV align="left">
<FONT size="2">Item&nbsp;12. <I>Security Ownership of Certain
Beneficial Owners and Management and Related Stockholder
Matters</I>
</FONT>
</DIV>

<P align="left">
<FONT size="2">Information related to security ownership of
certain beneficial owners and security ownership of management
and related stockholder matters will be set forth in the 2004
Proxy Statement under the captions &#147;Security Ownership of
Certain Beneficial Owners and Management&#148; and &#147;Equity
Compensation Plan Information&#148; and is incorporated herein
by reference.
</FONT>

<DIV>&nbsp;</DIV>

<!-- link2 "<FONT size="2">Item 13. Certain Relationships and Related Transactions</FONT>" -->
<DIV align="left"><A NAME="017"></A></DIV>

<DIV align="left">
<FONT size="2">Item&nbsp;13. <I>Certain Relationships and
Related Transactions</I>
</FONT>
</DIV>

<P align="left">
<FONT size="2">None.
</FONT>

<DIV>&nbsp;</DIV>

<!-- link2 "<FONT size="2">Item 14. Principal Accounting Fees and Services</FONT>" -->
<DIV align="left"><A NAME="018"></A></DIV>

<DIV align="left">
<FONT size="2">Item&nbsp;14. <I>Principal Accounting Fees and
Services</I>
</FONT>
</DIV>

<P align="left">
<FONT size="2">The information required for this item will be
set forth in the 2004 Proxy Statement in the section titled
&#147;Independent Public Accountants&#148; under the captions
&#147;Audit Fees.&#148; &#147;Audit Related Fees,&#148;
&#147;Tax Fees&#148; and &#147;All Other Fees&#148; and is
incorporated herein by reference.
</FONT>

<!-- link1 "<FONT size="2">PART IV</FONT>" -->
<DIV align="left"><A NAME="019"></A></DIV>

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

<DIV>&nbsp;</DIV>

<!-- link2 "<FONT size="2">Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K</FONT>" -->
<DIV align="left"><A NAME="020"></A></DIV>

<DIV align="left">
<FONT size="2">Item&nbsp;15. <I>Exhibits, Financial Statement
Schedules and Reports on Form&nbsp;8-K</I>
</FONT>
</DIV>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="7%"></TD>
    <TD width="93%"></TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">(a)&nbsp; (1)</FONT></TD>
    <TD align="left">
    <FONT size="2">Financial Statements. See Index to Consolidated
    Financial Statements at Item&nbsp;8 on page&nbsp;45 of this
    Annual Report on Form&nbsp;10-K:
    </FONT></TD>
</TR>

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

<TR valign="top">
    <TD><FONT size="2">(a)&nbsp; (2)</FONT></TD>
    <TD align="left">
    <FONT size="2">Financial Statement Schedules. The following are
    filed as part of this Annual Report on Form&nbsp;10-K:
    </FONT></TD>
</TR>

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

<TR valign="top">
    <TD></TD>
    <TD align="left">
    <FONT size="2">Financial Statement Schedule&nbsp;II&nbsp;&#151;
    Valuation and Qualifying Accounts and Reserves.
    </FONT></TD>
</TR>

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

<TR valign="top">
    <TD></TD>
    <TD align="left">
    <FONT size="2">All other financial statement schedules have been
    omitted because the information is not required to be set forth
    herein, is not applicable or is included in the financial
    statements or notes thereto.
    </FONT></TD>
</TR>

</TABLE>

<P align="center"><FONT size="2">71
</FONT>
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#toc">Table of Contents</A></H5><P>

<P align="center">
<FONT size="2">Schedule&nbsp;II
</FONT>

<P align="center">
<FONT size="2">Valuation and Qualifying Accounts and Reserves
</FONT>

<DIV align="center">
<FONT size="2">Allowance for Doubtful Accounts, Returns and
Discounts
</FONT>
</DIV>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="40%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Balance at</FONT></B></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Deduction</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Balance at</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Beginning</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Charges to</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Charges to</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">from</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">End of</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">of Period</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Revenue</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Expense</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Reserves</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Period</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="19"></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="19" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="19"></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="19" align="center" nowrap><B><FONT size="1">(In thousands)</FONT></B></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">2003
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">6,641</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" valign="bottom" nowrap><FONT size="2">769</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" valign="bottom" nowrap><FONT size="2">(1,623</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(469</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">5,318</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">2002
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">8,595</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" valign="bottom" nowrap><FONT size="2">2,272</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" valign="bottom" nowrap><FONT size="2">3,576</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" valign="bottom" nowrap><FONT size="2">(7,802</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">6,641</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">2001
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">6,920</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" valign="bottom" nowrap><FONT size="2">9,776</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" valign="bottom" nowrap><FONT size="2">3,988</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" valign="bottom" nowrap><FONT size="2">(12,089</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">8,595</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

</TABLE>
</CENTER>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="7%"></TD>
    <TD width="93%"></TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">(a)&nbsp; (3)</FONT></TD>
    <TD align="left">
    <FONT size="2">Exhibits. The documents listed in the
    Exhibit&nbsp;Index of this Annual Report on Form&nbsp;10-K are
    filed herewith. Copies of the exhibits listed in the
    Exhibit&nbsp;Index will be furnished, upon request, to holders
    or beneficial owners of Harmonic&#146;s Common Stock.
    </FONT></TD>
</TR>

</TABLE>

<P align="left">
<FONT size="2">(b)&nbsp;&nbsp;&nbsp;&nbsp;Reports on
Form&nbsp;8-K.
</FONT>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="22%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="75%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="center" nowrap><FONT size="1">Date</FONT></TD>
    <TD></TD>
    <TD></TD>
</TR>

<TR>
    <TD align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">October&nbsp;16, 2003
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">On October&nbsp;16, 2003, the Company issued a
    press release announcing results for the quarter ended
    September&nbsp;26, 2003 and furnished its press release on
    Form&nbsp;8-K.
    </FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">October&nbsp;24, 2003
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">On October&nbsp;24, 2003, the Company filed its
    unaudited condensed consolidated financial statements as of and
    for the period ended September&nbsp;26, 2003 on Form&nbsp;8-K
    for purposes of incorporating by reference these financial
    statements into Harmonic Registration Statement on Form&nbsp;S-3
    (File No.&nbsp;333-84430) filed by Harmonic under the Securities
    Act of 1933, as amended.
    </FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">November&nbsp;3, 2003
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">On October&nbsp;29, 2003, the Company entered
    into an Underwriting Agreement with UBS Securities LLC,
    SoundView Technology Corporation and Needham &#38; Company, Inc.
    as managing underwriters on behalf of the several underwriters
    listed in Schedule&nbsp;A thereto (collectively, the
    &#147;Underwriters&#148;) relating to the offering and sale of
    9&nbsp;million shares of the Company&#146;s common stock
    (&#147;Common Stock&#148;) at a purchase price to the public of
    $7.40 per share. In the Underwriting Agreement, the Company
    granted to the Underwriters an option to purchase from the
    Company, solely for the purpose of covering over-allotments, up
    to 1.35&nbsp;million additional shares of Common Stock and
    furnished its press release on Form&nbsp;8-K.
    </FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">November&nbsp;13, 2003
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">On November&nbsp;12, 2003, the Company issued a
    press release announcing that the underwriters of its public
    offering of 9&nbsp;million shares of common stock at a price of
    $7.40 per share had exercised their option to purchase
    1.35&nbsp;million additional shares of common stock to cover
    over-allotments, resulting in an aggregate public offering price
    from the over-allotment shares of $9.99&nbsp;million, and
    furnished its press release on Form&nbsp;8-K.
    </FONT></TD>
</TR>

</TABLE>
</CENTER>

<P align="left">
<FONT size="2">(c)&nbsp;&nbsp;&nbsp;&nbsp;See response to
Item&nbsp;15(a)(3) above.
</FONT>

<P align="left">
<FONT size="2">(d)&nbsp;&nbsp;&nbsp;&nbsp;See response to
Item&nbsp;15(a)(2) above.
</FONT>

<P align="center"><FONT size="2">72
</FONT>
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#toc">Table of Contents</A></H5><P>

<!-- link1 "<FONT size="2">SIGNATURES</FONT>" -->
<DIV align="left"><A NAME="021"></A></DIV>

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

<P align="left">
<FONT size="2">Pursuant to the requirements of Section&nbsp;13
or 15 (d)&nbsp;of the Securities Act of 1934, the Registrant,
Harmonic Inc., a Delaware corporation, has duly caused this
Annual Report on Form&nbsp;10-K to be signed on its behalf by
the undersigned, thereunto duly authorized, in the City of
Sunnyvale, State of California, on March&nbsp;8, 2004.
</FONT>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="40%"></TD>
    <TD width="60%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD align="left">
    <FONT size="2">HARMONIC INC.
    </FONT></TD>
</TR>

</TABLE>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="40%"></TD>
    <TD width="3%"></TD>
    <TD width="57%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">By:&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">/s/ ANTHONY J. LEY
    </FONT></TD>
</TR>

</TABLE>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="40%"></TD>
    <TD width="60%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD align="left">
    <HR size="1" align="left" noshade></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD align="left">
    <FONT size="2">Anthony J. Ley
    </FONT></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD align="left">
    <FONT size="2">Chairman, President and Chief Executive Officer
    </FONT></TD>
</TR>

</TABLE>

<P align="left">
<FONT size="2">Pursuant to the requirements of the Securities
Exchange Act of 1934, this Annual Report on Form&nbsp;10-K, has
been signed by the following persons on behalf of the Registrant
in the capacities and on the dates indicated:
</FONT>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="40%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="42%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="12%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="center" nowrap><FONT size="1">Signature</FONT></TD>
    <TD></TD>
    <TD align="center" nowrap><B><FONT size="1">Title</FONT></B></TD>
    <TD></TD>
    <TD align="center" nowrap><B><FONT size="1">Date</FONT></B></TD>
</TR>

<TR>
    <TD colspan="5"></TD>
</TR>

<TR>
    <TD colspan="5" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <FONT size="2">/s/ ANTHONY J. LEY<BR>
    <HR size="1" noshade>(Anthony J. Ley)
    </FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="center" valign="top">
    <FONT size="2">Chairman, President &#38; Chief Executive Officer
    (Principal Executive Officer)
    </FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">March&nbsp;8, 2004
    </FONT></TD>
</TR>

<TR>
    <TD colspan="5"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <FONT size="2">/s/ ROBIN N. DICKSON<BR>
    <HR size="1" noshade>(Robin N. Dickson)
    </FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="center" valign="top">
    <FONT size="2">Chief Financial Officer<BR>
    (Principal Financial and Accounting Officer)
    </FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">March&nbsp;8, 2004
    </FONT></TD>
</TR>

<TR>
    <TD colspan="5"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <FONT size="2">/s/ E. FLOYD KVAMME<BR>
    <HR size="1" noshade>(E. Floyd Kvamme)
    </FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="center" valign="top">
    <FONT size="2">Director
    </FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">March&nbsp;8, 2004
    </FONT></TD>
</TR>

<TR>
    <TD colspan="5"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <FONT size="2">/s/ WILLIAM REDDERSEN<BR>
    <HR size="1" noshade>(William Reddersen)
    </FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="center" valign="top">
    <FONT size="2">Director
    </FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">March&nbsp;8, 2004
    </FONT></TD>
</TR>

<TR>
    <TD colspan="5"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <FONT size="2">/s/ LEWIS SOLOMON<BR>
    <HR size="1" noshade>(Lewis Solomon)
    </FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="center" valign="top">
    <FONT size="2">Director
    </FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">March&nbsp;8, 2004
    </FONT></TD>
</TR>

<TR>
    <TD colspan="5"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <FONT size="2">/s/ MICHEL L. VAILLAUD<BR>
    <HR size="1" noshade>(Michel L. Vaillaud)
    </FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="center" valign="top">
    <FONT size="2">Director
    </FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">March&nbsp;8, 2004
    </FONT></TD>
</TR>

<TR>
    <TD colspan="5"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <FONT size="2">/s/ DAVID R. VAN VALKENBURG<BR>
    <HR size="1" noshade>(David Van Valkenburg)
    </FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="center" valign="top">
    <FONT size="2">Director
    </FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">March&nbsp;8, 2004
    </FONT></TD>
</TR>

</TABLE>
</CENTER>

<P align="center"><FONT size="2">73
</FONT>
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#toc">Table of Contents</A></H5><P>

<!-- link1 "<FONT size="2">EXHIBIT INDEX</FONT>" -->
<DIV align="left"><A NAME="022"></A></DIV>

<P align="center">
<FONT size="2">EXHIBIT INDEX
</FONT>

<P align="left">
<FONT size="2">The following Exhibits to this report are filed
herewith, or if marked with a (i), (ii), (iii), (iv), (v), (vi),
(vii), (viii), (ix), (x), (xi) or (xii) are incorporated herein
by reference.
</FONT>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="8%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="8%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="80%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3" align="center" nowrap><FONT size="1">Exhibit</FONT></TD>
    <TD></TD>
    <TD></TD>
</TR>

<TR>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Number</FONT></B></TD>
    <TD></TD>
    <TD></TD>
</TR>

<TR>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">2</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT size="2">.1(v)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Agreement and Plan of Merger and Reorganization
    by and among C-Cube Microsystems, Inc. and the Registrant dated
    October&nbsp;27, 1999
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">3</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT size="2">.1(ix)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Certificate of Incorporation of Registrant as
    amended
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">3</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT size="2">.2(x)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Certificate of Designation of Rights, Preferences
    and Privileges of Series&nbsp;A Participating in Preferred Stock
    of Registrant
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">3</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT size="2">.3(x)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Amended and Restated Bylaws of Registrant
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">4</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT size="2">.1(i)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Form of Common Stock Certificate
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">4</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT size="2">.2(x)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Preferred Stock Rights Agreement dated
    July&nbsp;24, 2002 between the Registrant and Mellon Investor
    Services LLC
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">10</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT size="2">.1(i)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Form of Indemnification Agreement
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">10</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT size="2">.2(i)*</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">1988 Stock Option Plan and form of Stock Option
    Agreement
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">10</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT size="2">.3(i)*</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">1995 Stock Plan and form of Stock Option Agreement
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">10</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT size="2">.4(i)*</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">1995 Employee Stock Purchase Plan and form of
    Subscription Agreement
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">10</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT size="2">.5(i)*</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">1995 Director Option Plan and form of Director
    Option Agreement
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">10</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT size="2">.6(i)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Registration and Participation Rights and
    Modification Agreement dated as of July&nbsp;22, 1994 among
    Registrant and certain holders of Registrant&#146;s Common Stock
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">10</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT size="2">.7(ii)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Business Loan Agreement, Commercial Security
    Agreement and Promissory Note dated August&nbsp;26, 1993, as
    amended on September&nbsp;14, 1995, between Registrant and
    Silicon Valley Bank
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">10</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT size="2">.8(ii)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Facility lease dated as of January&nbsp;12, 1996
    by and between Eastrich No.&nbsp;137 Corporation and Company
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">10</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT size="2">.9*</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Change of Control Severance Agreement dated
    February&nbsp;20, 2004 between Registrant and Anthony J. Ley
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">10</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT size="2">.10*</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Form of Change of Control Severance Agreement
    between Registrant and certain executive officers of Registrant
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">10</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT size="2">.11(iv)*</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">1997 Nonstatutory Stock Option Plan
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">10</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT size="2">.12(vi)*</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">1999 Nonstatutory Stock Option Plan
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">10</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT size="2">.13(vii)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Lease Agreement for 603-611 Baltic Way,
    Sunnyvale, California
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">10</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT size="2">.14(vii)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Lease Agreement for 1322 Crossman Avenue,
    Sunnyvale, California
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">10</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT size="2">.15(vii)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Lease Agreement for 646 Caribbean Drive,
    Sunnyvale, California
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">10</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT size="2">.16(vii)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Lease Agreement for 632 Caribbean Drive,
    Sunnyvale, California
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">10</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT size="2">.17(vii)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">First Amendment to the Lease Agreement for 549
    Baltic Way, Sunnyvale, California
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">10</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT size="2">.18(ix)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Restated Non-Recourse Receivables Purchase
    Agreement dated September&nbsp;25, 2001 between Registrant and
    Silicon Valley Bank
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">10</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT size="2">.19(ix)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Modification dated December&nbsp;14, 2001 to the
    Restated Non-Recourse Receivables Purchase Agreement dated
    September&nbsp;25, 2001, between Registrant and Silicon Valley
    Bank
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">10</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT size="2">.21(xi)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Amendment to Loan Documents, dated
    September&nbsp;26, 2003, by and between Silicon Valley Bank and
    Harmonic Inc.
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">10</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT size="2">.22(xii)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">2002 Director Option Plan and Form of Stock
    Option Agreement
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">10</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT size="2">.23(xii)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">2002 Employee Stock Purchase Plan and Form of
    Subscription Agreement
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">10</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT size="2">.24(viii)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Supply License and Development Agreement, dated
    as of October&nbsp;27, 1999, by and between C-Cube Microsystems
    and Harmonic
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">10</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT size="2">.25</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Amended and Restated Loan and Security Agreement
    by and between Harmonic Inc., as Borrower, and Silicon Valley
    Bank, as Lender, dated as of December&nbsp;19, 2003
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">21</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT size="2">.1</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Subsidiaries of Registrant
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">23</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT size="2">.1</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Consent of Independent Accountants
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">31</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT size="2">.1</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Certification of Principal Executive Officer
    Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">31</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT size="2">.2</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Certification of Principal Financial Officer
    Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
    </FONT></TD>
</TR>

</TABLE>
</CENTER>

<P align="center"><FONT size="2">74
</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 width="100%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="8%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="8%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="80%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3" align="center" nowrap><FONT size="1">Exhibit</FONT></TD>
    <TD></TD>
    <TD></TD>
</TR>

<TR>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Number</FONT></B></TD>
    <TD></TD>
    <TD></TD>
</TR>

<TR>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">32</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT size="2">.1</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Certification of Chief Executive Officer pursuant
    to 18 U.S.C. Section&nbsp;1350, as adopted pursuant to
    Section&nbsp;906 of the Sarbanes-Oxley Act of 2002
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">32</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT size="2">.2</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Certification of Chief Financial Officer pursuant
    to 18 U.S.C. Section&nbsp;1350, as adopted pursuant to
    Section&nbsp;906 of the Sarbanes-Oxley Act of 2002
    </FONT></TD>
</TR>

</TABLE>
</CENTER>

<P align="left">
<HR size="1" width="18%" align="left" noshade>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="5%"></TD>
    <TD width="95%"></TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">&nbsp;&nbsp;*</FONT></TD>
    <TD align="left">
    <FONT size="2">Indicates a management contract or compensatory
    plan or arrangement relating to executive officers or directors
    of the Company.
    </FONT></TD>
</TR>

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

<TR valign="top">
    <TD><FONT size="2">&nbsp;&nbsp;(i)</FONT></TD>
    <TD align="left">
    <FONT size="2">Previously filed as an Exhibit to the
    Company&#146;s Registration Statement on Form&nbsp;S-1
    No.&nbsp;33-90752.
    </FONT></TD>
</TR>

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

<TR valign="top">
    <TD><FONT size="2">&nbsp;(ii)</FONT></TD>
    <TD align="left">
    <FONT size="2">Previously filed as an Exhibit to the
    Company&#146;s Annual Report on Form&nbsp;10-K for the year
    ended December&nbsp;31, 1995.
    </FONT></TD>
</TR>

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

<TR valign="top">
    <TD><FONT size="2">&nbsp;(iii)</FONT></TD>
    <TD align="left">
    <FONT size="2">Previously filed as an Exhibit to the
    Company&#146;s Annual Report on Form&nbsp;10-K for the year
    ended December&nbsp;31, 1996.
    </FONT></TD>
</TR>

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

<TR valign="top">
    <TD><FONT size="2">&nbsp;(iv)</FONT></TD>
    <TD align="left">
    <FONT size="2">Previously filed as an Exhibit to the
    Company&#146;s Registration Statement on Form&nbsp;S-8 dated
    January&nbsp;14, 1998.
    </FONT></TD>
</TR>

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

<TR valign="top">
    <TD><FONT size="2">&nbsp;(v)</FONT></TD>
    <TD align="left">
    <FONT size="2">Previously filed as an Exhibit to the
    Company&#146;s Current Report on Form&nbsp;8-K dated
    November&nbsp;1, 1999.
    </FONT></TD>
</TR>

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

<TR valign="top">
    <TD><FONT size="2">&nbsp;(vi)</FONT></TD>
    <TD align="left">
    <FONT size="2">Previously filed as an Exhibit to the
    Company&#146;s Annual Report on Form&nbsp;10-K for the year
    ended December&nbsp;31, 1999.
    </FONT></TD>
</TR>

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

<TR valign="top">
    <TD><FONT size="2">&nbsp;(vii)</FONT></TD>
    <TD align="left">
    <FONT size="2">Previously filed as an Exhibit to the
    Company&#146;s Amendment to its Quarterly Report on
    Form&nbsp;10-Q/ A for the quarter ended June&nbsp;30, 2000.
    </FONT></TD>
</TR>

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

<TR valign="top">
    <TD><FONT size="2">(viii)</FONT></TD>
    <TD align="left">
    <FONT size="2">Previously filed as an Exhibit to the
    Company&#146;s Registration Statement on Form&nbsp;S-4
    No.&nbsp;333-33148.
    </FONT></TD>
</TR>

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

<TR valign="top">
    <TD><FONT size="2">&nbsp;(ix)</FONT></TD>
    <TD align="left">
    <FONT size="2">Previously filed as an Exhibit to the
    Company&#146;s Annual Report on Form&nbsp;10-K for the year
    ended December&nbsp;31, 2001.
    </FONT></TD>
</TR>

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

<TR valign="top">
    <TD><FONT size="2">&nbsp;(x)</FONT></TD>
    <TD align="left">
    <FONT size="2">Previously filed as an Exhibit to the
    Company&#146;s Current Report on Form&nbsp;8-K dated
    July&nbsp;25, 2002.
    </FONT></TD>
</TR>

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

<TR valign="top">
    <TD><FONT size="2">&nbsp;(xi)</FONT></TD>
    <TD align="left">
    <FONT size="2">Previously filed as an Exhibit to the Company
    Quarterly Report on Form&nbsp;10-Q for the quarter ended
    September&nbsp;26, 2003.
    </FONT></TD>
</TR>

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

<TR valign="top">
    <TD><FONT size="2">&nbsp;(xii)</FONT></TD>
    <TD align="left">
    <FONT size="2">Previously filed as an Exhibit to the
    Company&#146;s Current Annual Report on Form&nbsp;10-K for the
    year ended December&nbsp;31, 2002.
    </FONT></TD>
</TR>

</TABLE>

<P align="center"><FONT size="2">75
</FONT>
</BODY>
</HTML>

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.9
<SEQUENCE>3
<FILENAME>f96175exv10w9.txt
<DESCRIPTION>EXHIBIT 10.9
<TEXT>
<PAGE>
[HARMONIC LOGO]

                                                                    EXHIBIT 10.9


                                  HARMONIC INC.

                      CHANGE OF CONTROL SEVERANCE AGREEMENT


     This Change of Control Severance Agreement (the "Agreement") is made and
entered into by and between ANTHONY LEY, (the "Employee") and Harmonic, Inc.
(the "Company"), effective as of the latest date set forth by the signatures of
the parties hereto below.

RECITALS

     A.   It is expected that the Company from time to time will consider the
possibility of an acquisition by another company or other Change of Control. The
Board of Directors of the Company (the "Board ") recognizes that such
consideration can be a distraction to the Employee and can cause the Employee to
consider alternative employment opportunities. The Board has determined that it
is in the best interests of the Company and its shareholders to assure that the
Company will have the continued dedication and objectivity of the Employee,
notwithstanding the possibility, threat or occurrence of a Change of Control (as
defined below) of the Company.

     B.   The Board believes that it is in the best interests of the Company and
its shareholders to provide the Employee with an incentive to continue his
employment and to motivate the Employee to maximize the value of the Company
upon a Change of Control for the benefit of its shareholders.

     C.   The Board believes that it is imperative to provide the Employee with
certain severance benefits upon Employee's termination of employment following a
Change of Control which provides the Employee with enhanced financial security
and provides incentive and encouragement to the Employee to remain with the
Company notwithstanding the possibility of a Change of Control.

     D.   Certain capitalized terms used in the Agreement are defined in Section
6 below.

     The parties hereto agree as follows:

     1.   Term of Agreement. This Agreement shall terminate upon the date that
all obligations of the parties hereto with respect to this Agreement have been
satisfied.

     2.   At-Will Employment. The Company and the Employee acknowledge that the
Employee's employment is and shall continue to be at-will, as defined under
applicable law. If the Employee's employment terminates for any reason,
including (without limitation) any termination prior to a Change of Control, the
Employee shall not be entitled to any payments, benefits, damages, awards or
compensation other than as provided by this Agreement, or as may otherwise be
available in accordance with the Company's established employee plans and
practices or pursuant to other agreements with the Company.

     3.   Severance Benefits.

          (a)  Termination Following a Change of Control. If the Employee's
employment terminates at any time within eighteen (18) months following a Change
of Control, then, subject to Section 5, the Employee shall be entitled to
receive the following severance benefits:

               (i)  Involuntary Termination. If the Employee's employment is
terminated as a result of Involuntary Termination other than for Cause, then the
Employee shall receive the following severance benefits from the Company:

                    (1)  Severance Payment. A cash payment in an amount equal to
two hundred percent (200%) of the Employee's Annual Compensation;
<PAGE>

                    (2)  Bonus Payment. A cash payment in an amount equal to
twice either: a) 50% of the established annual target bonus or b) the average of
the actual bonuses paid in each of the two prior years, whichever is greater.

                    (3)  Continued Employee Benefits. One hundred percent (100%)
Company-paid health, dental and life insurance coverage at the same level of
coverage as was provided to such employee immediately prior to the Change of
Control (the "Company-Paid Coverage"). If such coverage included the Employee's
dependents immediately prior to the Change of Control, such dependent shall also
be covered at Company expense. Company- Paid Coverage shall continue until the
earlier of (i) two years from the date of the Change of Control, or (ii) the
date that the Employee and his dependents become covered under another
employer's group health, dental or life insurance plans. For purposes of Title X
of the Consolidated Budget Reconciliation Act of 1985 ("COBRA"), the date of the
"qualifying event" for Employee and his dependent shall be the date upon which
the Company-Paid Coverage terminates.

                    (4)  Option and Restricted Stock Accelerated Vesting. One
hundred percent (100%) of the unvested portion of any outstanding stock option
or restricted stock held by the Employee shall automatically be accelerated in
full so as to become completely vested and all such outstanding stock options
shall be exercisable for a period of one year after such termination.

                    (5)  Outplacement Assistance. If desired by Employee,
Company will pay up to five thousand dollars ($5,000.00) for outplacement
assistance selected by Company and approved by Employee.

          (b)  Timing of Severance Payments. Any severance payment to which
Employee is entitled under Section 3(a)(i)(1) shall be paid by the Company to
the Employee (or to the Employee's successors in interest pursuant to Section
7(b)) in cash and in full, not later than thirty (30) calendar days following
the Termination Date or within twelve (12) months of Termination Date at the
election of the Employee.

          (c)  Voluntary Resignation; Termination For Cause. If the Employee's
employment terminates by reason of the Employee's voluntary resignation (and is
not an Involuntary Termination), or if the Employee is terminated for Cause,
then the Employee shall not be entitled to receive severance or other benefits
except for those (if any) as may then be established under the Company's then
existing severance and benefits plans and practices or pursuant to other
agreements with the Company.

          (d)  Disability; Death. If the Company terminates the Employee's
employment as a result of the Employee's Disability or such Employee's
employment is terminated due to the death of the Employee then the Employee
shall not be entitled to receive severance or other benefits except for those
(if any) as may then be established under the Company's then existing severance
and benefits plans and practices or pursuant to other agreements with the
Company.

          (e)  Termination Apart from Change of Control. In the event the
Employee's employment is terminated for any reason, either prior to the
occurrence of a Change of Control or after the eighteen (18) -month period
following a Change of Control, then the Employee shall be entitled to receive
severance and any other benefits only as may then be established under the
Company's existing severance and benefits plans and practices or pursuant to
other agreements with the Company.

     4.   Attorney Fees; Costs and Expenses. The Company shall promptly
reimburse Employee, on a monthly basis, for the reasonable attorney fees, costs
and expenses incurred by the Employee in connection with any action brought by
Employee to enforce his rights hereunder, regardless of the outcome of the
action.

     5.   Limitation on Payments. In the event that the severance and other
benefits provided for in this Agreement or otherwise payable to the Employee (i)
constitute "parachute payments" within the meaning of Section 280G of the
Internal Revenue Code of 1986 as amended (the "Code") and (ii) but for this
Section 5, would be subject to the excise tax imposed by Section 4999 of the
Code, then the Employee's severance benefits under Section 3(a)(i) shall be
either

                                       2
<PAGE>
          (a)  delivered in full, or

          (b)  delivered as to such lesser extent which would result in no
portion of such severance benefits being subject to excise tax under Section
4999 of the Code, whichever of the foregoing amounts taking into account the
applicable federal, state and local income taxes and the excise tax imposed by
Section 4999, results in the receipt by the Employee on an after-tax basis, of
the greatest amount of severance benefits, notwithstanding that all or some
portion of such severance benefits may be taxable under Section 4999 of the
Code. Unless the Company and the Employee otherwise agree in writing, any
determination required under this Section 5 shall be made in writing by the
Company's Accountants immediately prior to Change of Control, whose
determination shall be conclusive and binding upon the Employee and the Company
for all purposes. For purposes of making the calculations required by this
Section 5, the Accountants may make reasonable assumptions and approximations
concerning applicable taxes and may rely on reasonable, good faith
interpretations concerning the application of Sections 280G and 4999 of the
Code. The Company and the Employee shall furnish to the Accountants such
information and documents as the Accountants may reasonably request in order to
make a determination under this Section. The Company shall bear all costs the
Accountants may reasonably incur in connection with any calculations
contemplated by this Section 5.

     6.   Definition of Terms. The following terms referred to in this Agreement
shall have the following meanings:

          (a)  Annual Compensation. "Annual Compensation" means an amount equal
to Employee's Company base salary for the twelve months preceding the Change of
Control.

          (b)  Cause. "Cause" shall mean (i) any act of personal dishonesty
taken by the Employee in connection with his responsibilities as an employee and
intended to result in substantial personal enrichment of the Employee, (ii) the
conviction of a felony) (iii) a willful act by the Employee which constitutes
gross misconduct and which is injurious to the Company, and (iv) following
delivery to the Employee of a written demand for performance from the Company
which describes the basis for the Company's belief that the Employee has not
substantially performed his duties, continued violations by the Employee of the
Employee's obligations to the Company which are demonstrably willful and
deliberate on the Employee's part.

          (c)  Change of Control. "Change of Control" means the occurrence of
any of the following events:

               (i)  Any "person" (as such term is used in Sections 13(d) and
14(d) of the Securities Exchange Act of 1934, as amended) becomes the
"beneficial owner" (as defined in Rule 13d-3 under said Act), directly or
indirectly, of securities of the Company representing fifty percent (50%) or
more of the total voting power represented by the Company's then outstanding
voting securities;

               (ii) A change in the composition of the Board occurring within a
two-year period, as a result of which fewer than a majority of the directors are
Incumbent Directors. "Incumbent Directors" shall mean directors who either (A)
are directors of the Company as of the date hereof, or (B) are elected, or
nominated for election, to the Board with the affirmative votes of at least a
majority of the Incumbent Directors at the time of such election or nomination
(but shall not include an individual whose election or nomination is in
connection with an actual or threatened proxy contest relating to the election
of directors to the Company);

               (iii) The consummation of a merger or consolidation of the
Company with any other corporation, other than a merger or consolidation which
would result in the voting securities of the Company outstanding immediately
prior thereto continuing to represent (either by remaining outstanding or by
being converted into voting securities of the surviving entity) at least fifty
percent (50%) of the total voting power represented by the voting securities of
the Company or such surviving entity outstanding immediately after such merger
or consolidation;

               (iv) The consummation of the sale or disposition by the Company
of all or substantially all the Company's assets.

                                       3
<PAGE>

          (d)  Disability. "Disability" shall mean that the Employee has been
unable to perform his Company duties as the result of his incapacity due to
physical or mental illness, and such inability, at least 26 weeks after its
commencement, is determined to be total and permanent by a physician selected by
the Company or its insurers and acceptable to the Employee or the Employee's
legal representative (such Agreement as to acceptability not to be unreasonably
withheld). Termination resulting from Disability may only be effected after at
least 30 days written notice by the Company of its intention to terminate the
Employee's employment. In the event that the Employee resumes the performance of
substantially all of his duties hereunder before the termination of his
employment becomes effective, the notice of intent to terminate shall
automatically be deemed to have been revoked.

          (e)  Involuntary Termination. "Involuntary Termination" shall mean (i)
without the Employee's express written consent, the significant reduction of the
Employee's duties authority or responsibilities relative to the Employee's
duties, authority or responsibilities as in effect immediately prior to such
reduction, or the assignment to Employee of such reduced duties, authority or
responsibilities; (ii) without the Employee's express written consent, a
substantial reduction, without good business reasons, of the facilities and
perquisites (including office space and location) available to the Employee
immediately prior to such reduction; (iii) a reduction by the Company in the
base salary of the Employee as in effect immediately prior to such reduction;
(iv) a material reduction by the Company in the kind or level of employee
benefits, including bonuses, to which the Employee was entitled immediately
prior to such reduction with the result that the Employee's overall benefits
package is significantly reduced; (v) the relocation of the Employee to a
facility or a location more than twenty-five (25) miles from the Employee's then
present location, without the Employee's express written consent; (vi) any
purported termination of the Employee by the Company which is not effected for
Disability or for Cause, or any purported termination for which the grounds
relied upon are not valid; (vii) the failure of the Company to obtain the
assumption of this Agreement by any successors contemplated in Section 7(a)
below; or (viii) any act or set of facts or circumstances which would, under
California case law or statute constitute a constructive termination of the
Employee.

          (f)  Termination Date. "Termination Date" shall mean (i) if this
Agreement is terminated by the Company for Disability, thirty (30) days after
notice of termination is given to the Employee (provided that the Employee shall
not have returned to the performance of the Employee's duties on a full-time
basis during such thirty (30)-day period), (ii) if the Employee's employment is
terminated by the Company for any other reason, the date on which a notice of
termination is given, provided that if within thirty (30) days after the Company
gives the Employee notice of termination, the Employee notifies the Company that
a dispute exists concerning the termination or the benefits due pursuant to this
Agreement, then the Termination Date shall be the date on which such dispute is
finally determined, either by mutual written agreement of the parties, or by a
final judgment, order or decree of a court of competent jurisdiction (the time
for appeal therefrom having expired and no appeal having been perfected), or
(iii) if the Agreement is terminated by the Employee, the date on which the
Employee delivers the notice of termination to the Company.

     7.   Successors.

          (a)  Company's Successors. Any successor to the Company (whether
direct or indirect and whether by purchase, merger, consolidation, liquidation
or otherwise) to all or substantially all of the Company's business and/or
assets shall assume the obligations under this Agreement and agree expressly to
perform the obligations under this Agreement in the same manner and to the same
extent as the Company would be required to perform such obligations in the
absence of a succession. For all purposes under this Agreement, the term
"Company" shall include any successor to the Company's business and/or assets
which executes and delivers the assumption agreement described in this Section
7(a) or which becomes bound by the terms of this Agreement by operation of law.

          (b)  Employee's Successors. The terms of this Agreement and all rights
of the Employee hereunder shall inure to the benefit of, and be enforceable by,
the Employee's personal or legal representatives, executors, administrators,
successors, heirs, distributees, devisees and legatees.

     8.   Notice.

                                       4
<PAGE>

          (a)  General. Notices and all other communications contemplated by
this Agreement shall be in writing and shall be deemed to have been duly given
when personally delivered or when mailed by U.S. registered or certified mail,
return receipt requested and postage prepaid. In the case of the Employee,
mailed notices shall be addressed to him at the home address which he most
recently communicated to the Company in writing. In the case of the Company,
mailed notices shall be addressed to its corporate headquarters, and all notices
directed shall be to the attention of its Secretary.

          (b)  Notice of Termination. Any termination by the Company for Cause
or by the Employee as a result of a voluntary resignation or an Involuntary
Termination shall be communicated by a notice of termination to the other party
hereto given in accordance with Section 8(a) of this Agreement. Such notice
shall indicate the specific termination provision in this Agreement relied upon,
shall set forth in reasonable detail the facts and circumstances claimed to
provide a basis for termination under the provision so indicated, and shall
specify the termination date (which shall be not more than 30 days after the
giving of such notice). The failure by the Employee to include in the notice any
fact or circumstance which contributes to a showing of Involuntary Termination
shall not waive any right of the Employee hereunder or preclude the Employee
from asserting such fact or circumstance in enforcing his rights hereunder.

     9.   Miscellaneous Provisions.

          (a)  No Duty to Mitigate. The Employee shall not be required to
mitigate the amount of any payment contemplated by this Agreement, nor shall any
such payment be reduced by any earnings that the Employee may receive from any
other source.

          (b)  Waiver. No provision of this Agreement shall be modified, waived
or discharged unless the modification, waiver or discharge is agreed to in
writing and signed by the Employee and by an authorized officer of the Company
(other than the Employee). No waiver by either party of any breach of, or of
compliance with, any condition or provision of this Agreement by the other party
shall be considered a waiver of any other condition or provision or of the same
condition or provision at another time.

          (c)  Whole Agreement. No agreements, representations or understandings
(whether oral or written and whether express or implied) which are not expressly
set forth in this Agreement have been made or entered into by either party with
respect to the subject matter hereof. This Agreement represents the entire
understanding of the parties hereto with respect to the subject matter hereof
and supersedes all prior arrangements and understandings regarding same.

          (d)  Choice of Law. This Agreement shall be deemed to have been
executed and delivered within the State of California and the validity,
interpretation, construction and performance of this Agreement shall be governed
by the laws of the State of California, without regard to choice of law
principles.

          (e)  Severability. The invalidity or unenforceability of any provision
or provisions of this Agreement shall not affect the validity or enforceability
of any other provision hereof, which shall remain in full force and effect.

          (f)  Withholding. All payments made pursuant to this Agreement will be
subject to withholding of applicable income and employment taxes.

          (g)  Counterparts. This Agreement may be executed in counterparts,
each of which shall be deemed an original but all of which together will
constitute one and the same instrument.

                                       5
<PAGE>
[HARMONIC LOGO]


     IN WITNESS WHEREOF, each of the parties has executed this Agreement, in the
case of the Company by its duly authorized officer, as of the day and year set
forth below.


COMPANY                   HARMONIC, INC.


                          By: /s/ David R. Van Valkenburg
                              -------------------------------------------------

                          Title: Chairperson, Harmonic Compensation and Equity
                                 Ownership Committee
                                 ----------------------------------------------

                          Date:  March 1, 2004
                               ------------------------------------------------



EMPLOYEE                  Name: /s/ Anthony J. Ley
                                -----------------------------------------------

                          Date: March 1, 2004
                               ------------------------------------------------





                                       6

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.10
<SEQUENCE>4
<FILENAME>f96175exv10w10.txt
<DESCRIPTION>EXHIBIT 10.10
<TEXT>
<PAGE>
[HARMONIC LOGO]

                                                                   EXHIBIT 10.10

                                  HARMONIC INC.

                 FORM OF CHANGE OF CONTROL SEVERANCE AGREEMENT


     This Form Change of Control Severance Agreement (the "Agreement") is made '
and entered into by and between ________________, (the "Employee") and Harmonic,
Inc. (the "Company"), effective as of the latest date set forth by the
signatures of the parties hereto below.

RECITALS

     A.   It is expected that the Company from time to time will consider the
possibility of an acquisition by another company or other Change of Control. The
Board of Directors of the Company (the "Board ") recognizes that such
consideration can be a distraction to the Employee and can cause the Employee to
consider alternative employment opportunities. The Board has determined that it
is in the best interests of the Company and its shareholders to assure that the
Company will have the continued dedication and objectivity of the Employee,
notwithstanding the possibility, threat or occurrence of a Change of Control (as
defined below) of the Company.

     B.   The Board believes that it is in the best interests of the Company and
its shareholders to provide the Employee with an incentive to continue his
employment and to motivate the Employee to maximize the value of the Company
upon a Change of Control for the benefit of its shareholders.

     C.   The Board believes that it is imperative to provide the Employee with
certain severance benefits upon Employee's termination of employment following a
Change of Control which provides the Employee with enhanced financial security
and provides incentive and encouragement to the Employee to remain with the
Company notwithstanding the possibility of a Change of Control. D. Certain
capitalized terms used in the Agreement are defined in Section 6 below.

     The parties hereto agree as follows:

     1.   Term of Agreement. This Agreement shall terminate upon the date that
all obligations of the parties hereto with respect to this Agreement have been
satisfied.

     2.   At-Will Employment. The Company and the Employee acknowledge that the
Employee's employment is and shall continue to be at-will, as defined under
applicable law. If the Employee's employment terminates for any reason,
including (without limitation) any termination prior to a Change of Control, the
Employee shall not be entitled to any payments, benefits, damages, awards or
compensation other than as provided by this Agreement, or as may otherwise be
available in accordance with the Company's established employee plans and
practices or pursuant to other agreements with the Company.

     3.   Severance Benefits.

          (a)  Termination Following a Change of Control. If the Employee's
employment terminates at any time within eighteen (18) months following a Change
of Control, then, subject to Section 5, the Employee shall be entitled to
receive the following severance benefits:

               (i)  Involuntary Termination. If the Employee's employment is
terminated as a result of Involuntary Termination other than for Cause, then the
Employee shall receive the following severance benefits from the Company:

                    (1)  Severance Payment. A cash payment in an amount equal to
one hundred percent (100%) of the Employee's Annual Compensation;
<PAGE>

                    (2)  Bonus Payment. A cash payment in an amount equal to
either 50% of the established annual target bonus or the average of the actual
bonus paid in each of the two prior years, whichever is greater.

                    (3)  Continued Employee Benefits. One hundred percent (100%)
Company-paid health, dental and life insurance coverage at the same level of
coverage as was provided to such employee immediately prior to the Change of
Control (the "Company-Paid Coverage"). If such coverage included the Employee's
dependents immediately prior to the Change of Control, such dependent shall also
be covered at Company expense. Company- Paid Coverage shall continue until the
earlier of (i) one year from the date of the Change of Control, or (ii) the date
that the Employee and his dependents become covered under another employer's
group health, dental or life insurance plans. For purposes of Title X of the
Consolidated Budget Reconciliation Act of 1985 ("COBRA"), the date of the
"qualifying event" for Employee and his dependent shall be the date upon which
the Company-Paid Coverage terminates.

                    (4)  Option and Restricted Stock Accelerated Vesting. One
hundred percent (100%) of the unvested portion of any outstanding stock option
or restricted stock held by the Employee shall automatically be accelerated in
full so as to become completely vested and all such outstanding stock options
shall be exercisable for a period of one year after such termination.

                    (5)  Outplacement Assistance. If desired by Employee,
Company will pay up to five thousand dollars ($5,000.00) for outplacement
assistance selected by Company and approved by Employee.

          (b)  Timing of Severance Payments. Any severance payment to which
Employee is entitled under Section 3(a)(i)(1) shall be paid by the Company to
the Employee (or to the Employee's successors in interest pursuant to Section
7(b)) in cash and in full, not later than thirty (30) calendar days following
the Termination Date or within twelve (12) months of Termination Date at the
election of the Employee.

          (c)  Voluntary Resignation; Termination For Cause. If the Employee's
employment terminates by reason of the Employee's voluntary resignation (and is
not an Involuntary Termination), or if the Employee is terminated for Cause,
then the Employee shall not be entitled to receive severance or other benefits
except for those (if any) as may then be established under the Company's then
existing severance and benefits plans and practices or pursuant to other
agreements with the Company.

          (d)  Disability; Death. If the Company terminates the Employee's
employment as a result of the Employee's Disability or such Employee's
employment is terminated due to the death of the Employee then the Employee
shall not be entitled to receive severance or other benefits except for those
(if any) as may then be established under the Company's then existing severance
and benefits plans and practices or pursuant to other agreements with the
Company.

          (e)  Termination Apart from Change of Control. In the event the
Employee's employment is terminated for any reason, either prior to the
occurrence of a Change of Control or after the eighteen (18) -month period
following a Change of Control, then the Employee shall be entitled to receive
severance and any other benefits only as may then be established under the
Company's existing severance and benefits plans and practices or pursuant to
other agreements with the Company.

     4.   Attorney Fees; Costs and Expenses. The Company shall promptly
reimburse Employee, on a monthly basis, for the reasonable attorney fees, costs
and expenses incurred by the Employee in connection with any action brought by
Employee to enforce his rights hereunder, regardless of the outcome of the
action.

     5.   Limitation on Payments. In the event that the severance and other
benefits provided for in this Agreement or otherwise payable to the Employee (i)
constitute "parachute payments" within the meaning of Section 280G of the
Internal Revenue Code of 1986 as amended (the "Code") and (ii) but for this
Section 5, would be subject to the excise tax imposed by Section 4999 of the
Code, then the Employee's severance benefits under Section 3(a)(i) shall be
either


                                       2
<PAGE>

          (a)  delivered in full, or

          (b)  delivered as to such lesser extent which would result in no
portion of such severance benefits being subject to excise tax under Section
4999 of the Code, whichever of the foregoing amounts taking into account the
applicable federal, state and local income taxes and the excise tax imposed by
Section 4999, results in the receipt by the Employee on an after-tax basis, of
the greatest amount of severance benefits, notwithstanding that all or some
portion of such severance benefits may be taxable under Section 4999 of the
Code. Unless the Company and the Employee otherwise agree in writing, any
determination required under this Section 5 shall be made in writing by the
Company's Accountants immediately prior to Change of Control, whose
determination shall be conclusive and binding upon the Employee and the Company
for all purposes. For purposes of making the calculations required by this
Section 5, the Accountants may make reasonable assumptions and approximations
concerning applicable taxes and may rely on reasonable, good faith
interpretations concerning the application of Sections 280G and 4999 of the
Code. The Company and the Employee shall furnish to the Accountants such
information and documents as the Accountants may reasonably request in order to
make a determination under this Section. The Company shall bear all costs the
Accountants may reasonably incur in connection with any calculations
contemplated by this Section 5.

     6.   Definition of Terms. The following terms referred to in this Agreement
shall have the following meanings:

          (a)  Annual Compensation. "Annual Compensation" means an amount equal
to Employee's Company base salary for the twelve months preceding the Change of
Control.

          (b)  Cause. "Cause" shall mean (i) any act of personal dishonesty
taken by the Employee in connection with his responsibilities as an employee and
intended to result in substantial personal enrichment of the Employee, (ii) the
conviction of a felony) (iii) a willful act by the Employee which constitutes
gross misconduct and which is injurious to the Company, and (iv) following
delivery to the Employee of a written demand for performance from the Company
which describes the basis for the Company's belief that the Employee has not
substantially performed his duties, continued violations by the Employee of the
Employee's obligations to the Company which are demonstrably willful and
deliberate on the Employee's part.

          (c)  Change of Control. "Change of Control" means the occurrence of
any of the following events:

               (i)  Any "person" (as such term is used in Sections 13(d) and
14(d) of the Securities Exchange Act of 1934, as amended) becomes the
"beneficial owner" (as defined in Rule 13d-3 under said Act), directly or
indirectly, of securities of the Company representing fifty percent (50%) or
more of the total voting power represented by the Company's then outstanding
voting securities;

               (ii) A change in the composition of the Board occurring within a
two-year period, as a result of which fewer than a majority of the directors are
Incumbent Directors. "Incumbent Directors" shall mean directors who either (A)
are directors of the Company as of the date hereof, or (B) are elected, or
nominated for election, to the Board with the affirmative votes of at least a
majority of the Incumbent Directors at the time of such election or nomination
(but shall not include an individual whose election or nomination is in
connection with an actual or threatened proxy contest relating to the election
of directors to the Company);

               (iii) The consummation of a merger or consolidation of the
Company with any other corporation, other than a merger or consolidation which
would result in the voting securities of the Company outstanding immediately
prior thereto continuing to represent (either by remaining outstanding or by
being converted into voting securities of the surviving entity) at least fifty
percent (50%) of the total voting power represented by the voting securities of
the Company or such surviving entity outstanding immediately after such merger
or consolidation;

               (iv) The consummation of the sale or disposition by the Company
of all or substantially all the Company's assets.


                                       3
<PAGE>

          (d)  Disability. "Disability" shall mean that the Employee has been
unable to perform his Company duties as the result of his incapacity due to
physical or mental illness, and such inability, at least 26 weeks after its
commencement, is determined to be total and permanent by a physician selected by
the Company or its insurers and acceptable to the Employee or the Employee's
legal representative (such Agreement as to acceptability not to be unreasonably
withheld). Termination resulting from Disability may only be effected after at
least 30 days written notice by the Company of its intention to terminate the
Employee's employment. In the event that the Employee resumes the performance of
substantially all of his duties hereunder before the termination of his
employment becomes effective, the notice of intent to terminate shall
automatically be deemed to have been revoked.

          (e)  Involuntary Termination. "Involuntary Termination" shall mean (i)
without the Employee's express written consent, the significant reduction of the
Employee's duties authority or responsibilities relative to the Employee's
duties, authority or responsibilities as in effect immediately prior to such
reduction, or the assignment to Employee of such reduced duties, authority or
responsibilities; (ii) without the Employee's express written consent, a
substantial reduction, without good business reasons, of the facilities and
perquisites (including office space and location) available to the Employee
immediately prior to such reduction; (iii) a reduction by the Company in the
base salary of the Employee as in effect immediately prior to such reduction;
(iv) a material reduction by the Company in the kind or level of employee
benefits, including bonuses, to which the Employee was entitled immediately
prior to such reduction with the result that the Employee's overall benefits
package is significantly reduced; (v) the relocation of the Employee to a
facility or a location more than twenty-five (25) miles from the Employee's then
present location, without the Employee's express written consent; (vi) any
purported termination of the Employee by the Company which is not effected for
Disability or for Cause, or any purported termination for which the grounds
relied upon are not valid; (vii) the failure of the Company to obtain the
assumption of this Agreement by any successors contemplated in Section 7(a)
below; or (viii) any act or set of facts or circumstances which would, under
California case law or statute constitute a constructive termination of the
Employee.

          (f)  Termination Date. "Termination Date" shall mean (i) if this
Agreement is terminated by the Company for Disability, thirty (30) days after
notice of termination is given to the Employee (provided that the Employee shall
not have returned to the performance of the Employee's duties on a full-time
basis during such thirty (30)-day period), (ii) if the Employee's employment is
terminated by the Company for any other reason, the date on which a notice of
termination is given, provided that if within thirty (30) days after the Company
gives the Employee notice of termination, the Employee notifies the Company that
a dispute exists concerning the termination or the benefits due pursuant to this
Agreement, then the Termination Date shall be the date on which such dispute is
finally determined, either by mutual written agreement of the parties, or by a
final judgment, order or decree of a court of competent jurisdiction (the time
for appeal therefrom having expired and no appeal having been perfected), or
(iii) if the Agreement is terminated by the Employee, the date on which the
Employee delivers the notice of termination to the Company.

     7.   Successors.

          (a)  Company's Successors. Any successor to the Company (whether
direct or indirect and whether by purchase, merger, consolidation, liquidation
or otherwise) to all or substantially all of the Company's business and/or
assets shall assume the obligations under this Agreement and agree expressly to
perform the obligations under this Agreement in the same manner and to the same
extent as the Company would be required to perform such obligations in the
absence of a succession. For all purposes under this Agreement, the term
"Company" shall include any successor to the Company's business and/or assets
which executes and delivers the assumption agreement described in this Section
7(a) or which becomes bound by the terms of this Agreement by operation of law.

          (b)  Employee's Successors. The terms of this Agreement and all rights
of the Employee hereunder shall inure to the benefit of, and be enforceable by,
the Employee's personal or legal representatives, executors, administrators,
successors, heirs, distributees, devisees and legatees.

     8.   Notice.

                                       4
<PAGE>

          (a)  General. Notices and all other communications contemplated by
this Agreement shall be in writing and shall be deemed to have been duly given
when personally delivered or when mailed by U.S. registered or certified mail,
return receipt requested and postage prepaid. In the case of the Employee,
mailed notices shall be addressed to him at the home address which he most
recently communicated to the Company in writing. In the case of the Company,
mailed notices shall be addressed to its corporate headquarters, and all notices
directed shall be to the attention of its Secretary.

          (b)  Notice of Termination. Any termination by the Company for Cause
or by the Employee as a result of a voluntary resignation or an Involuntary
Termination shall be communicated by a notice of termination to the other party
hereto given in accordance with Section 8(a) of this Agreement. Such notice
shall indicate the specific termination provision in this Agreement relied upon,
shall set forth in reasonable detail the facts and circumstances claimed to
provide a basis for termination under the provision so indicated, and shall
specify the termination date (which shall be not more than 30 days after the
giving of such notice). The failure by the Employee to include in the notice any
fact or circumstance which contributes to a showing of Involuntary Termination
shall not waive any right of the Employee hereunder or preclude the Employee
from asserting such fact or circumstance in enforcing his rights hereunder.

     9.   Miscellaneous Provisions.

          (a)  No Duty to Mitigate. The Employee shall not be required to
mitigate the amount of any payment contemplated by this Agreement, nor shall any
such payment be reduced by any earnings that the Employee may receive from any
other source.

          (b)  Waiver. No provision of this Agreement shall be modified, waived
or discharged unless the modification, waiver or discharge is agreed to in
writing and signed by the Employee and by an authorized officer of the Company
(other than the Employee). No waiver by either party of any breach of, or of
compliance with, any condition or provision of this Agreement by the other party
shall be considered a waiver of any other condition or provision or of the same
condition or provision at another time.

          (c)  Whole Agreement. No agreements, representations or understandings
(whether oral or written and whether express or implied) which are not expressly
set forth in this Agreement have been made or entered into by either party with
respect to the subject matter hereof. This Agreement represents the entire
understanding of the parties hereto with respect to the subject matter hereof
and supersedes all prior arrangements and understandings regarding same.

          (d)  Choice of Law. This Agreement shall be deemed to have been
executed and delivered within the State of California and the validity,
interpretation, construction and performance of this Agreement shall be governed
by the laws of the State of California, without regard to choice of law
principles.

          (e)  Severability. The invalidity or unenforceability of any provision
or provisions of this Agreement shall not affect the validity or enforceability
of any other provision hereof, which shall remain in full force and effect.

          (f)  Withholding. All payments made pursuant to this Agreement will be
subject to withholding of applicable income and employment taxes.

          (g)  Counterparts. This Agreement may be executed in counterparts,
each of which shall be deemed an original but all of which together will
constitute one and the same instrument.


                                       5
<PAGE>
[HARMONIC LOGO]



     IN WITNESS WHEREOF, each of the parties has executed this Agreement, in the
case of the Company by its duly authorized officer, as of the day and year set
forth below.


COMPANY                       HARMONIC, INC.


                              By:
                                 ----------------------------------------------

                              Title:
                                    -------------------------------------------

                              Date:
                                   --------------------------------------------



EMPLOYEE                      Name:
                                   --------------------------------------------

                              Date:
                                   --------------------------------------------

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.25
<SEQUENCE>5
<FILENAME>f96175exv10w25.txt
<DESCRIPTION>EXHIBIT 10.25
<TEXT>
<PAGE>
                                                                   EXHIBIT 10.25



                              AMENDED AND RESTATED

                           LOAN AND SECURITY AGREEMENT

                                 by and between

                           HARMONIC INC., AS BORROWER

                                       and

                         SILICON VALLEY BANK, AS LENDER

                                December 19, 2003

<PAGE>

                               TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                                             PAGE
<S>                                                                                          <C>
1.       DEFINITIONS; ACCOUNTING AND OTHER TERMS..........................................     1

2.       LOAN AND TERMS OF PAYMENT........................................................     1

         2.1      Promise to Pay..........................................................     1

         2.2      Equipment Advances......................................................     2

         2.3      Overadvances............................................................     3

         2.4      Interest Rate, Payments.................................................     3

         2.5      Fees....................................................................     4

3.       CONDITIONS OF LOANS..............................................................     4

         3.1      Conditions Precedent to Initial Credit Extension........................     4

         3.2      Conditions Precedent to all Credit Extensions...........................     4

4.       CREATION OF SECURITY INTEREST....................................................     4

         4.1      Grant of Security Interest..............................................     4

         4.2      Authorization to File; Delivery of Additional Documentation.............     5

5.       REPRESENTATIONS AND WARRANTIES...................................................     5

         5.1      Due Organization; Organizational Structure; Authorization...............     5

         5.2      Places of Business; Location of Collateral..............................     5

         5.3      Collateral..............................................................     5

         5.4      Litigation..............................................................     6

         5.5      No Material Adverse Change in Financial Statements......................     6

         5.6      Taxes...................................................................     6

         5.7      Solvency................................................................     6

         5.8      Existing Term Debt......................................................     6

         5.9      Regulatory Compliance...................................................     6

         5.10     Subsidiaries............................................................     7

         5.11     Full Disclosure.........................................................     7

6.       AFFIRMATIVE COVENANTS............................................................     7

         6.1      Government Compliance...................................................     7

         6.2      Financial Statements, Reports, Certificates.............................     7

         6.3      Inventory; Returns......................................................     8
</TABLE>

<PAGE>

                                TABLE OF CONTENTS
                                   (CONTINUED)

<TABLE>
<CAPTION>
                                                                                             PAGE
<S>                                                                                          <C>
         6.4      Collateral..............................................................     8

         6.5      Taxes; Pension Contributions............................................     9

         6.6      Insurance...............................................................     9

         6.7      Financial Covenant......................................................     9

         6.8      Registration of Intellectual Property Rights............................    10

         6.9      Payment of Existing Term Debt...........................................    10

         6.10     Use of Proceeds.........................................................    10

         6.11     Remittance of Proceeds..................................................    10

         6.12     Primary Accounts........................................................    10

         6.13     Account Control Agreements..............................................    10

         6.14     Further Assurances......................................................    10

7.       NEGATIVE COVENANTS...............................................................    11

         7.1      Dispositions............................................................    11

         7.2      Changes in Business, Ownership, Management or Business Locations........    11

         7.3      Mergers or Acquisitions.................................................    11

         7.4      Indebtedness............................................................    11

         7.5      Encumbrance.............................................................    11

         7.6      Distributions; Investments..............................................    12

         7.7      Transactions with Affiliates............................................    12

         7.8      Subordinated Debt.......................................................    12

         7.9      Compliance..............................................................    12

8.       EVENTS OF DEFAULT................................................................    12

         8.1      Payment Default.........................................................    12

         8.2      Covenant Default........................................................    12

         8.3      Material Adverse Change.................................................    12

         8.4      Attachment..............................................................    13

         8.5      Insolvency..............................................................    13

         8.6      Other Agreements........................................................    13

         8.7      Judgments...............................................................    13

         8.8      Misrepresentations......................................................    13
</TABLE>

                                       ii.

<PAGE>

                                TABLE OF CONTENTS
                                   (CONTINUED)

<TABLE>
<CAPTION>
                                                                                             PAGE
<S>                                                                                          <C>
         8.9      Guaranty................................................................    13

9.       BANK'S RIGHTS AND REMEDIES.......................................................    13

         9.1      Rights and Remedies.....................................................    14

         9.2      Power of Attorney.......................................................    14

         9.3      Accounts Collection.....................................................    16

         9.4      Bank Expenses...........................................................    16

         9.5      Bank's Liability for Collateral.........................................    16

         9.6      Remedies Cumulative.....................................................    16

         9.7      Demand Waiver...........................................................    16

10.      NOTICES..........................................................................    16

11.      CHOICE OF LAW , VENUE AND JURY TRIAL WAIVER......................................    17

12.      GENERAL PROVISIONS...............................................................    17

         12.1     Successors and Assigns..................................................    17

         12.2     Indemnification.........................................................    17

         12.3     Time of Essence.........................................................    17

         12.4     Severability of Provisions..............................................    17

         12.5     Amendments in Writing; Integration......................................    17

         12.6     Counterparts............................................................    18

         12.7     Survival................................................................    18

         12.8     Confidentiality.........................................................    18

         12.9     Attorneys' Fees, Costs and Expenses.....................................    18

13.      DEFINITIONS......................................................................    18
</TABLE>

                                      iii.

<PAGE>

         THIS AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT (as amended,
restated, or otherwise modified from time to time, this "AGREEMENT"), dated as
of December 19, 2003, is by and between SILICON VALLEY BANK ("BANK"), whose
address is 3003 Tasman Drive, Santa Clara, California, 95054, and HARMONIC INC.,
a Delaware corporation ("BORROWER"), whose address is 549 Baltic Way, Sunnyvale,
California 94089, and provides the terms on which Bank will lend to Borrower and
Borrower will repay Bank. The parties hereto agree as follows:

1.       DEFINITIONS; ACCOUNTING AND OTHER TERMS

         Capitalized terms used herein shall have the meanings given to such
terms in Section 13 of this Agreement. Accounting terms not defined in this
Agreement will be construed according to GAAP. Calculations and determinations
must be made following GAAP. The term "financial statements" includes the notes
and schedules thereto. The terms "including" and "includes" always mean
"including (or includes) without limitation," in this or any other Loan
Document.

2.       LOAN AND TERMS OF PAYMENT

         2.1      PROMISE TO PAY.

         Borrower promises to pay Bank the unpaid principal amount of all
Advances and interest on the unpaid principal amount of the Advances.

                  2.1.1    ADVANCES.

                           (a)      Bank will make Advances not exceeding the
Committed Revolving Line minus (A) the outstanding principal balance of the
Advances minus (B) the amount of all outstanding Letters of Credit (including
drawn but unreimbursed Letters of Credit). Amounts borrowed hereunder that
remain available for borrowing under this Agreement may be repaid and reborrowed
prior to the Maturity Date.

                           (b)      To obtain an Advance, Borrower must notify
Bank by facsimile or telephone by 12:00 noon Pacific Time on the Business Day
the Advance is to be made. Borrower must promptly confirm the notification by
delivering to Bank the Loan Payment/Advance Request Form attached as Exhibit B
(the "PAYMENT/ADVANCE FORM"). Bank will credit Advances to Borrower's deposit
account. Bank may make Advances under this Agreement based on instructions from
a Responsible Officer or his or her designee or without instructions if the
Advances are necessary to meet Obligations which have become due. Bank may rely
on any telephone notice given by a person whom Bank believes is a Responsible
Officer or designee. Borrower will indemnify Bank for any loss Bank suffers due
to such reliance.

                           (c)      The Committed Revolving Line shall terminate
on the Maturity Date, and all Advances are immediately due and payable on the
Maturity Date.

<PAGE>

                  2.1.2    LETTERS OF CREDIT.

                           (a)      Bank will issue or have issued standby
Letters of Credit for Borrower's account not exceeding the amount available
under the Committed Revolving Line (each, a "LETTER OF CREDIT"). Each Letter of
Credit will have an expiry date of no later than 180 days after the Maturity
Date, but Borrower's reimbursement obligation will be secured by cash in an
amount equal to 105% of the face amount of all such Letters of Credit plus all
interest, fees, and costs due or to become due in connection therewith on terms
acceptable to Bank at any time after the Maturity Date if such Maturity Date is
not extended by Bank or if an Event of Default occurs and continues. Borrower
agrees to execute any further documentation in connection with the Letters of
Credit as Bank may reasonably request.

                           (b)      Prior to or simultaneously with the opening
of each Letter of Credit, Borrower shall pay to Bank Bank's customary fees
(subject to negotiation) in connection with the opening of a letter of credit
(the "LETTER OF CREDIT FEES"). The Letter of Credit Fees shall be paid upon the
opening of each Letter of Credit and upon each anniversary thereof, if required.
In addition, Borrower shall pay to Bank, for its own account, any and all
additional issuance, negotiation, processing, transfer or other fees to the
extent and as and when required by the provisions of any application for Letters
of Credit. All Letter of Credit Fees shall be part of the Obligations.

                           (c)      If any Letter of Credit is drawn upon, such
amount shall constitute an Advance but shall be immediately due and payable. If
such amount is not paid immediately, then the full amount thereof shall accrue
interest at the rate set forth in Section 2.4(a).

         2.2      EQUIPMENT ADVANCES.

                           (a)      Through September 18, 2004 (the "EQUIPMENT
AVAILABILITY END DATE"), Bank will make advances (each, an "EQUIPMENT ADVANCE"
and, collectively, "EQUIPMENT ADVANCES") not exceeding the Committed Equipment
Line.

                           (b)      Interest accrues from the date of each
Equipment Advance (each, an "EQUIPMENT ADVANCE FUNDING DATE") at the rate in
Section 2.4(a). Each Equipment Advance is payable in 36 equal monthly
installments of principal, plus accrued interest, beginning on the first of the
month following the Equipment Advance Funding Date for such Equipment Advance
and ending on the Equipment Maturity Date for such Equipment Advance. Equipment
Advances when repaid may not be reborrowed.

                           (c)      To obtain an Equipment Advance, Borrower
must provide notice in the form of a Payment/Advance Form to Bank (the notice is
irrevocable) by facsimile no later than 12:00 noon Pacific Time one Business Day
before the day on which the Equipment Advance is to be made. The Payment/Advance
Form must be signed by a Responsible Officer or designee and include a copy of
the invoice for the Equipment being financed.

                           (d)      The outstanding principal amount of term
loans previously advanced by Bank to Borrower pursuant to that certain Loan and
Security Agreement dated March 28, 2003, as amended by that Amendment to Loan
Documents dated July 17, 2003, as further amended by that certain Amendment to
Loan Documents dated September 26, 2003, are

                                       2.
<PAGE>

set forth on Schedule A attached hereto (the "EXISTING EQUIPMENT DEBT"). The
Existing Equipment Debt shall, for all purposes hereof, be "Equipment Advances"
hereunder and be governed by all the terms and conditions of this Agreement,
except that the principal of said Existing Equipment Debt shall continue to be
payable in accordance with the amortization schedule set forth on Schedule A.
The Existing Equipment Debt shall be taken into account in determining the
maximum amount of Equipment Advances under Section 2.2(a).

         2.3      OVERADVANCES.

         If, at any time, Borrower's Obligations hereunder exceed the Committed
Revolving Line, Borrower shall immediately pay Bank the excess.

         2.4      INTEREST RATE, PAYMENTS.

                           (a)      ADVANCES. Advances accrue interest on the
outstanding principal balance thereof at a per annum rate equal one percentage
point (1.00%) above the Prime Rate. Equipment Advances accrue interest on the
outstanding principal balance thereof at a per annum rate equal to one and
one-half percentage points (1.50%) above the Prime Rate. After an Event of
Default has occurred, Obligations shall accrue interest at a rate per annum
equal to two percent (2%) above the rate effective immediately before the Event
of Default. The interest rate increases or decreases when the Prime Rate
changes. Interest is computed on a 360 day year for the actual number of days
elapsed.

                           (b)      INTEREST RATE REDUCTION. If Borrower
maintains the revenue guidelines for each time period set forth below, and
provided no Event of Default has occurred and is continuing, then the interest
rate set forth in Section 2.4(a) above with respect to the Advances and the
Equipment Advances shall be reduced by one percentage point (1.00%) for the
three months following each such period of compliance, but, in any event, shall
not be less than the Prime Rate.

<TABLE>
<CAPTION>
MINIMUM REVENUE                                   SIX MONTHS ENDING
---------------                                   -----------------
<S>                                               <C>
  $85,000,000                                          12/31/03
  $70,000,000                                           4/2/04
  $68,000,000                                           7/2/04
  $72,000,000                                          10/1/04
  $73,000,000                                          12/31/04
</TABLE>

                           (c)      PAYMENTS. Interest due on the Advances and
Equipment Advances is payable on the first of each month. Bank may debit any of
Borrower's deposit accounts, including account number 0341964970, for principal
and interest payments owing or any amounts Borrower owes Bank. Bank will notify
Borrower when it debits Borrower's accounts. These debits are not a set-off.
Payments received after 12:00 noon Pacific Time are considered received at the
opening of business on the next Business Day. When a payment is due on a day
that is not a Business Day, the payment is due the next Business Day and
additional fees or interest accrue.

                                       3.
<PAGE>

         2.5      FEES.

                  Borrower will pay:

                           (a)      LOAN FEE. Fully earned, non-refundable loan
fees in the amount of $25,000 for the Committed Revolving Line and in the amount
of $5,111.50 for the Committed Equipment Line are due on or before the Closing
Date. Borrower shall receive a one-time credit in the amount of $21,875 toward
payment of the Committed Revolving Line fee. If, at any time, Borrower fails to
maintain a minimum aggregate amount of $25,000,000 of unrestricted funds on
deposit for 10 consecutive Business Days with SVB Asset Management and/or SVB
Securities, Borrower shall pay an additional $25,000 fee for the Committed
Revolving Line and an additional $5,111.50 fee for the Committed Equipment Line.

                           (b)      BANK EXPENSES. All Bank Expenses (including
reasonable attorneys' fees and expenses) incurred through the date of this
Agreement are payable upon demand, and Bank Expenses incurred after the date of
this Agreement are payable within ten (10) Business Days after delivery of
invoice to Borrower.

3.       CONDITIONS OF LOANS

         3.1      CONDITIONS PRECEDENT TO INITIAL CREDIT EXTENSION.

         Bank's obligation to make the initial Credit Extension is subject to
the condition precedent that it receive the agreements, documents, and fees it
requires.

         3.2      CONDITIONS PRECEDENT TO ALL CREDIT EXTENSIONS.

         Bank's obligation to make each Credit Extension, including the initial
Credit Extension, is subject to the following:

                           (a)      timely receipt of any Payment/Advance Form;
and

                           (b)      the representations and warranties in
Section 5 must be materially true on the date of the Payment/Advance Form and on
the effective date of each Advance and no Event of Default may have occurred and
be continuing, or result from such Advance. Each Credit Extension is Borrower's
representation and warranty on that date that the representations and warranties
of Section 5 remain true in all material respects; provided, however, that those
representations and warranties expressly referring to another date shall be true
in all material respects as of such date only.

4.       CREATION OF SECURITY INTEREST

         4.1      GRANT OF SECURITY INTEREST.

         Borrower grants Bank a continuing security interest in all presently
existing and later acquired Collateral to secure all Obligations and performance
of each of Borrower's duties under the Loan Documents. Any security interest
will be a first priority security interest in the Collateral. If this Agreement
is terminated, Bank's lien and security interest in the Collateral

                                       4.
<PAGE>

will continue until Borrower fully satisfies its Obligations (other than
inchoate indemnity obligations).

         4.2      AUTHORIZATION TO FILE; DELIVERY OF ADDITIONAL DOCUMENTATION.

         Borrower authorizes Bank to file financing statements without notice to
Borrower, with all appropriate jurisdictions, as Bank deems appropriate, in
order to perfect or protect Bank's security interest in the Collateral. Borrower
shall execute and deliver to Bank, at the request of Bank, all documents that
Bank may reasonably request, in form satisfactory to Bank, to perfect and
continue perfected Bank's security interest in the Collateral and in order to
fully consummate all of the transactions contemplated under the Loan Documents.

5.       REPRESENTATIONS AND WARRANTIES

         Borrower represents and warrants as follows:

         5.1      DUE ORGANIZATION; ORGANIZATIONAL STRUCTURE; AUTHORIZATION.

         Borrower and each Subsidiary is duly existing and in good standing in
its state of formation and qualified and licensed to do business in, and in good
standing in, any state in which the conduct of its business or its ownership of
property requires that it be qualified, except where the failure to do so could
not reasonably be expected to cause a Material Adverse Change.

         Borrower has not changed its state of formation or organizational
structure or type or any organizational number assigned by its jurisdiction of
formation.

         The execution, delivery and performance of the Loan Documents have been
duly authorized, and do not conflict with Borrower's formation documents, nor
constitute an event of default under any material agreement by which Borrower is
bound. Borrower is not in default under any agreement to which or by which it is
bound in which the default could reasonably be expected to cause a Material
Adverse Change.

         5.2      PLACES OF BUSINESS; LOCATION OF COLLATERAL.

         Except as set forth in the Disclosure Letter, the Equipment and
Inventory is not in the possession of any third party bailee (such as at a
warehouse, but excluding Equipment or Inventory in the possession of third
parties for demonstration or evaluation purposes, or otherwise in the ordinary
course of business consistent with past practices). In the event that Borrower,
after the date hereof, intends to store or otherwise deliver the Collateral to
such a bailee, then Borrower may amend the Disclosure Letter so long as such new
location is within the continental United States.

         5.3      COLLATERAL.

                           (a)      Borrower has rights in the Collateral and
its Intellectual Property sufficient to grant a security interest therein, free
of Liens except Permitted Liens. All of Borrower's Deposit Accounts and any
existing commercial tort claims are described on the Disclosure Letter. The
Accounts are bona fide, existing obligations, and the service or property

                                       5.
<PAGE>

has been performed or delivered to the account debtor or its agent for immediate
shipment to and unconditional acceptance by the account debtor. All Inventory is
in all material respects of good and marketable quality, free from material
defects. Borrower is the sole owner of the Intellectual Property, except for
non-exclusive and exclusive licenses granted in the ordinary course of business.
Each issued Patent owned by Borrower is valid and enforceable and no part of the
Intellectual Property has been judged invalid or unenforceable, in whole or in
part, and no claim has been made that any part of the Intellectual Property
violates the rights of any third party, except to the extent such claim could
not reasonably be expected to cause a Material Adverse Change. None of the
Equipment financed by Bank now is or will be affixed to any real property in
such a manner, or with such intent, as to become a fixture.

                           (b)      All statements made and all unpaid balances
appearing in all invoices, instruments, and other documents evidencing the
Accounts are and shall be true and correct. All such invoices, instruments, and
other documents, and all of Borrower's Books are and shall be genuine and in all
respects are what they purport to be. All sales and other transactions
underlying or giving rise to each Account shall comply in all material respects
with all applicable laws and governmental rules and regulations. To the best of
Borrower's knowledge, all signatures and endorsements on all documents,
instruments, and agreements relating to all Accounts are and shall be genuine,
and all such documents, instruments, and agreements are and shall be legally
enforceable in accordance with their terms.

         5.4      LITIGATION.

         Except as shown in the Disclosure Letter, there are no actions or
proceedings pending or, to the knowledge of Borrower's Responsible Officers,
threatened by or against Borrower or any Subsidiary in which a likely adverse
decision could reasonably be expected to cause a Material Adverse Change.

         5.5      NO MATERIAL ADVERSE CHANGE IN FINANCIAL STATEMENTS.

         All consolidated financial statements for Borrower, and any Subsidiary,
delivered to Bank fairly present in all material respects Borrower's
consolidated financial condition and Borrower's consolidated results of
operations. There has not been any material deterioration in Borrower's
consolidated financial condition since the date of the most recent financial
statements submitted to Bank.

         5.6      TAXES.

         As of the date hereof, and except as set forth on the Disclosure
Letter, Borrower is unaware of any claims or adjustments proposed for any of
Borrower's prior tax years which could result in additional taxes becoming due
and payable by Borrower.

         5.7      SOLVENCY.

         The fair salable value of Borrower's assets (including goodwill minus
disposition costs) exceeds the fair value of its liabilities; the Borrower's
remaining assets after the transactions contemplated herein are not unreasonably
small in relation to its business; and Borrower is able to pay its debts
(including trade debts) as they mature.

                                       6.
<PAGE>

         5.8      EXISTING TERM DEBT.

         Schedule A accurately reflects the outstanding principal amount of and
the payment dates, payment amounts, and maturity dates with respect to the
Existing Equipment Debt.

         5.9      REGULATORY COMPLIANCE.

         Borrower is not an "investment company" or a company "controlled" by an
"investment company" under the Investment Company Act. Borrower is not engaged
as one of its important activities in extending credit for margin stock (under
Regulations T and U of the Federal Reserve Board of Governors). Borrower has
complied in all material respects with the Federal Fair Labor Standards Act.
Borrower has not violated any laws, ordinances or rules, the violation of which
could reasonably be expected to cause a Material Adverse Change. None of
Borrower's or any Subsidiary's properties or assets has been used by Borrower or
any Subsidiary or, to the best of Borrower's knowledge, by previous Persons, in
disposing, producing, storing, treating, or transporting any hazardous substance
other than legally. Borrower and each Subsidiary has timely filed all required
tax returns and paid, or made adequate provision to pay, all material taxes,
except those being contested in good faith with adequate reserves under GAAP.
Borrower and each Subsidiary has obtained all consents, approvals and
authorizations of, made all declarations or filings with, and given all notices
to, all government authorities that are necessary to continue its business as
currently conducted, except where the failure to do so could not reasonably be
expected to cause a Material Adverse Change.

         5.10     SUBSIDIARIES.

         Borrower does not own any stock, partnership interest or other equity
securities except for Permitted Investments.

         5.11     FULL DISCLOSURE.

         No written representation, warranty or other statement of Borrower in
any certificate or written statement given to Bank (taken together with all such
written certificates and written statements to Bank) contains any untrue
statement of a material fact or omits to state a material fact necessary to make
the statements contained in the certificates or statements not misleading (it
being recognized by Bank that the projections and forecasts provided by Borrower
in good faith and based upon reasonable assumptions are not viewed as facts and
that actual results during the period or periods covered by such projections and
forecasts may differ from the projected and forecasted results).

6.       AFFIRMATIVE COVENANTS

         Borrower will do all of the following for so long as Bank has an
obligation to lend, or there are outstanding Obligations:

                                       7.
<PAGE>

         6.1      GOVERNMENT COMPLIANCE.

         Subject to Section 7.3, Borrower will maintain its and all
Subsidiaries' legal existence and good standing in its jurisdiction of formation
and maintain qualification in each jurisdiction in which the failure to so
qualify would reasonably be expected to cause a material adverse effect on
Borrower's business or operations. Borrower will comply, and have each
Subsidiary comply, with all laws, ordinances and regulations to which it is
subject, noncompliance with which could have a material adverse effect on
Borrower's business or operations or would reasonably be expected to cause a
Material Adverse Change.

         6.2      FINANCIAL STATEMENTS, REPORTS, CERTIFICATES.

                           (a)      Borrower will deliver to Bank: (i) as soon
as available, but no later than 45 days after the last day of each quarter, a
company prepared consolidated balance sheet and income statement covering
Borrower's consolidated operations during the period certified by a Responsible
Officer and in a form acceptable to Bank; (ii) as soon as available, but no
later than 120 days after the last day of Borrower's fiscal year, audited
consolidated financial statements prepared under GAAP, consistently applied,
together with an opinion on the financial statements from an independent
certified public accounting firm reasonably acceptable to Bank; (iii) annual
financial projections in form and substance commensurate with those provided to
Borrower's board of directors or utilized by Borrower's executive management, in
form and substance satisfactory to Bank; (iv) within 5 days of filing, copies of
all statements, reports and notices made available to Borrower's security
holders or to any holders of Subordinated Debt and all reports on Form 10-K,
10-Q and 8-K filed with the Securities and Exchange Commission (the "SEC")
(other than those reports on Form 10-K, 10-Q or 8-K (relating to certification)
that are otherwise publicly available through the SEC's EDGAR system); (v) a
prompt report of any claim, proceeding, litigation, or investigation in the
future threatened or instituted against Borrower which would reasonably be
expected to result in damages to Borrower of $500,000 or more, exclusive of
litigation the potential liability in connection with which is fully insured
against; and (vi) budgets, sales projections, operating plans or other financial
information Bank reasonably requests.

                           (b)      Within 45 days after the last day of each
quarter, Borrower will deliver to Bank with the quarterly financial statements a
Compliance Certificate.

                           (c)      Borrower will allow Bank to audit Borrower's
Collateral at Borrower's expense, and the charge therefor shall be $750 per
person per day (or such higher amount as shall represent Bank's then current
standard charge for the same), plus reasonable out-of-pocket expenses. In the
event Borrower and Bank schedule and audit more than 10 days in advance, and
Borrower seeks to reschedule the audit with less than 10 days written notice to
Bank, then (without limiting any of Bank's rights and remedies) Borrower shall
pay Bank a cancellation fee of $1,000 plus any out-of-pocket expenses incurred
by Bank to compensate Bank for the anticipated costs and expenses of
cancellation. The results of audits will be satisfactory to Bank, and audits
will be conducted no more often than once every year unless an Event of Default
shall have occurred.

                                       8.
<PAGE>

         6.3      INVENTORY; RETURNS.

         Borrower will keep all Inventory in good and marketable condition, free
from material defects. Returns and allowances between Borrower and its account
debtors will follow Borrower's customary practices as they exist at execution of
this Agreement. Borrower must promptly notify Bank of all returns, recoveries,
disputes and claims that occur after the occurrence and during the continuance
of an Event of Default.

         6.4      COLLATERAL.

                           (a)      Borrower will give Bank at least 30 days
prior written notice before opening any additional place of business, changing
its chief executive office, or moving any of the Equipment or Inventory (but
excluding Equipment or Inventory in the possession of third parties for
documentation or evaluation purposes, or otherwise in the ordinary course of
business consistent with past practices) to a location other than Borrower's
address set forth in the preamble hereof or in the Disclosure Letter, except
that Borrower may maintain sales offices in the ordinary course of business at
which not more than a total of $10,000 fair market value of Equipment is
located.

                           (b)      In the event that Borrower shall at any time
after the date hereof have any commercial tort claims against others, which it
is asserting or intends to assert, and in which the likely recovery exceeds
$1,000,000, Borrower shall promptly notify Bank thereof in writing and provide
Bank with such information regarding the same as Bank shall request (unless
providing such information would waive Borrower's attorney-client privilege).
Such notification to Bank shall constitute a grant of a security interest in the
commercial tort claim and all proceeds thereof to Bank, and Borrower shall
execute and deliver all such documents and take all such actions as Bank shall
request in connection therewith.

         6.5      TAXES; PENSION CONTRIBUTIONS.

         Borrower will make, and cause each Subsidiary to make, timely payment
of all material federal, state, and local taxes or assessments and will deliver
to Bank, on demand, appropriate certificates attesting to the payment.
Notwithstanding the foregoing, Borrower may defer payment of any contested
taxes, provided that Borrower (a) in good faith contests its obligations to pay
the taxes by appropriate proceedings promptly and diligently instituted and
conducted, (b) notifies Bank in writing of the commencement of, and any material
development in, any such proceedings involving more than $500,000, and (c) posts
bonds or takes other steps required to keep the contested taxes from becoming a
lien upon any of the Collateral. Borrower has paid, and shall continue to pay
all amounts necessary to fund all present and future pension, profit sharing,
and deferred compensation plans in accordance with their terms, and Borrower has
not and will not withdraw from participation in, permit partial or complete
termination of, or permit the occurrence of any other event with respect to, any
such plan which could reasonably be expected to result in any liability of
Borrower, including any liability to the Pension Benefit Guaranty Corporation or
its successors or any other governmental agency.

         6.6      INSURANCE.

         Borrower will keep its business and the Collateral insured for risks
and in amounts

                                       9.
<PAGE>

standard for Borrower's industry, and as Bank may reasonably request. Insurance
policies will be in a form, with companies, and in amounts that are satisfactory
to Bank in Bank's reasonable discretion. All property policies will have a
lender's loss payable endorsement showing Bank as an additional loss payee and
all liability policies will show the Bank as an additional insured and provide
that the insurer must give Bank at least 20 days notice before canceling its
policy. At Bank's request, Borrower will deliver certified copies of policies
and evidence of all premium payments. Proceeds payable under any policy will, at
Bank's option if an Event of Default has occurred and is continuing, be payable
to Bank on account of the Obligations. Bank shall release to Borrower, so long
as no Event of Default is reasonably likely to occur as a result of such release
by Bank, insurance proceeds with respect to Equipment which proceeds shall be
utilized by Borrower for the replacement of the Equipment with respect to which
the insurance proceeds were paid. Bank may require reasonable assurance that the
insurance proceeds were utilized by Borrower for such purpose.

         6.7      FINANCIAL COVENANT.

                  At all times, Borrower shall have unrestricted cash and cash
equivalents (net of Credit Extensions) of no less than $65,000,000.

         6.8      REGISTRATION OF INTELLECTUAL PROPERTY RIGHTS.

         Borrower will (a) protect, defend and maintain the validity and
enforceability of the Intellectual Property and promptly advise Bank in writing
of material infringements, (b) not allow any Intellectual Property material to
Borrower's business to be abandoned, forfeited or dedicated to the public
without Bank's written consent, (c) concurrently with the filing of any Patent
or Trademark with the United States Patent and Trademark Office, any Copyright
with the United States Copyright Office, or any similar office or agency in any
other country or any political subdivision thereof, by either itself or through
any agent, employee, licensee or designee, promptly inform Bank (if any such
additional Patents, Trademarks, and/or Copyrights are not otherwise disclosed in
Borrower's public filings with the SEC), and, upon request of Bank, execute and
deliver any and all agreements, instruments, documents, and papers as Bank may
request to evidence Bank's security interest in such Copyright, Patent or
Trademark, including, with respect to Trademarks, the goodwill of Borrower,
relating thereto or represented thereby.

         6.9      PAYMENT OF EXISTING TERM DEBT.

         Borrower shall pay the Existing Term Debt in accordance with the
amortization schedule set forth on Schedule A.

         6.10     USE OF PROCEEDS.

         Borrower shall use the Advances (including Advances constituting
Letters of Credit) only for its general working capital requirements. Borrower
shall use the Equipment Advances only to purchase Equipment.

                                      10.
<PAGE>

         6.11     PRIMARY ACCOUNTS.

         Borrower shall maintain its primary operating accounts with Bank.

         6.12     ACCOUNT CONTROL AGREEMENTS.

         Borrower shall provide five (5) Business Days written notice to Bank
before establishing any new deposit account or securities account and shall
deliver to Bank a Control Agreement within 30 days after the opening any such
account.

         6.13     FURTHER ASSURANCES.

         Borrower will execute any further instruments and take further action
as Bank reasonably requests to perfect or continue Bank's security interest in
the Collateral or to effect the purposes of this Agreement.

7.       NEGATIVE COVENANTS

         Borrower will not do any of the following without Bank's prior written
consent for so long as Bank has an obligation to lend or there are any
outstanding Obligations (other than inchoate indemnity obligations):

         7.1      DISPOSITIONS.

         Convey, sell, lease, transfer or otherwise dispose of (collectively
"TRANSFER"), or permit any of its Subsidiaries to Transfer, all or any part of
its business or property, except for Transfers of (a) Inventory in the ordinary
course of business; (b) non-exclusive licenses and exclusive licenses limited to
a geographic range or field of use and similar arrangements (such as source code
escrow arrangements) for the use of the property of Borrower or its Subsidiaries
in the ordinary course of business; (c) worn-out, surplus, or obsolete Equipment
in good faith in an arm's-length transaction; (d) Accounts where Adelphia
Communications and/or its Subsidiaries are the account debtor(s) and claims in
the bankruptcy proceedings of Adelphia Communications and/or its Subsidiaries
related to such Accounts, such Accounts and claims in an aggregate amount not to
exceed $3,000,000, to Satellite Asset Management or to such other purchaser in
good faith in an arm's-length transaction; or (e) cash or cash equivalents so
long as Borrower is in compliance with Section 6.7.

         7.2      CHANGES IN BUSINESS, OWNERSHIP, OR STATE OF INCORPORATION.

         Engage in or permit any of its Subsidiaries to engage in any business
other than the businesses currently engaged in by Borrower or reasonably related
thereto or have a Change in Control. Borrower will not, without at least 30 days
prior written notice to Bank, change its state of incorporation.

         7.3      MERGERS OR ACQUISITIONS.

         Merge or consolidate, or permit any of its Subsidiaries to merge or
consolidate, with any other Person, or acquire, or permit any of its
Subsidiaries to acquire, all or substantially all of the

                                      11.
<PAGE>

capital stock or property of another Person, except where (a) no Event of
Default has occurred and is continuing or would result from such action during
the term of this Agreement, (b) Borrower is the sole surviving entity, and (c)
such transactions do not result in a decrease of more than 25% Tangible Net
Worth.

         7.4      INDEBTEDNESS.

         Create, incur, assume, or be liable for any Indebtedness, or permit any
Subsidiary to do so, other than Permitted Indebtedness.

         7.5      ENCUMBRANCE.

         Create, incur, or allow any Lien on any of its property (including its
Intellectual Property), or assign or convey any right to receive income,
including the sale of any Accounts (except as permitted by Section 7.1), or
permit any of its Subsidiaries to do so, except for Permitted Liens, or permit
any Collateral not to be subject to the first priority security interest granted
hereunder.

         7.6      DISTRIBUTIONS; INVESTMENTS.

         Directly or indirectly acquire or own any Person, or make any
Investment in any Person, other than Permitted Investments or as permitted by
Section 7.3, or permit any of its Subsidiaries to do so. Pay any dividends
(other than dividends payable solely in capital stock) or make any distribution
or payment or redeem, retire or purchase any capital stock except for (a)
repurchases of stock from former employees or directors of Borrower under the
terms of applicable repurchase agreements, provided that no Event of Default has
occurred, is continuing or would exist after giving effect to the repurchases,
and (b) the conversion of any convertible securities into other securities
pursuant to the terms of such convertible securities or otherwise in exchange
therefore, and payments in cash for any fractional shares of such convertible
securities.

         7.7      TRANSACTIONS WITH AFFILIATES.

         Directly or indirectly enter into or permit to exist any material
transaction with any Affiliate of Borrower (other than Subsidiaries of Borrower)
except for transactions that are in the ordinary course of Borrower's business,
upon fair and reasonable terms that are no less favorable to Borrower than would
be obtained in an arm's length transaction with a non-affiliated Person.

         7.8      SUBORDINATED DEBT.

         Make or permit any payment on any Subordinated Debt, except under the
terms of the Subordinated Debt, or amend any provision in any document relating
to the Subordinated Debt without Bank's prior written consent.

         7.9      COMPLIANCE.

         Become an "investment company" or a company controlled by an
"investment company," under the Investment Company Act of 1940 or undertake as
one of its important activities extending credit to purchase or carry margin
stock, or use the proceeds of any Advance

                                      12.
<PAGE>

for that purpose; fail to meet the minimum funding requirements of ERISA, permit
a Reportable Event or Prohibited Transaction, as defined in ERISA, to occur;
fail to comply with the Federal Fair Labor Standards Act or violate any other
law or regulation, if the violation could reasonably be expected to have a
material adverse effect on Borrower's business or operations or would reasonably
be expected to cause a Material Adverse Change, or permit any of its
Subsidiaries to do so.

8.       EVENTS OF DEFAULT

         Any one of the following is an Event of Default:

         8.1      PAYMENT DEFAULT.

         If Borrower fails to pay any of the Obligations within three (3)
Business Days of their due date;

         8.2      COVENANT DEFAULT.

         If Borrower does not perform any obligation in Section 6 or violates
any covenant in Section 7;

         8.3      MATERIAL ADVERSE CHANGE.

         If there (a) occurs a material adverse change in the business,
operations, or condition (financial or otherwise) of the Borrower, (b) is a
material impairment of the prospect of repayment of any portion of the
Obligations or (c) is a material impairment of the value or priority of Bank's
security interests in the Collateral;

         8.4      ATTACHMENT.

         If any material portion of Borrower's assets is attached, seized,
levied on, or comes into possession of a trustee or receiver and the attachment,
seizure or levy is not removed in 10 days, or if Borrower is enjoined,
restrained, or prevented by court order from conducting a material part of its
business or if a judgment or other claim becomes a Lien on a material portion of
Borrower's assets, or if a notice of lien, levy, or assessment is filed against
any of Borrower's assets by any government agency and not paid within 10 days
after Borrower receives notice. These are not Events of Default if stayed or if
a bond is posted pending contest by Borrower (but no Advances will be made
during the cure period);

         8.5      INSOLVENCY.

         If Borrower becomes insolvent or if Borrower begins an Insolvency
Proceeding or an Insolvency Proceeding is begun against Borrower and not
dismissed or stayed within 45 days (but no Advances will be made before any
Insolvency Proceeding is dismissed);

         8.6      OTHER AGREEMENTS.

         If there is a default in any agreement between Borrower or a third
party that gives the

                                      13.
<PAGE>

third party the right to accelerate an Indebtedness exceeding $1,000,000 or that
could cause or result in a Material Adverse Change;

         8.7      JUDGMENTS.

         If money judgments in excess of $1,000,000 are rendered against
Borrower and unsatisfied and unstayed for 10 days (but no Advances will be made
before the judgment is stayed or satisfied);

         8.8      MISREPRESENTATIONS.

         If Borrower or any Person acting for Borrower makes any material
misrepresentation or material misstatement now or later in any warranty or
representation in this Agreement or in any writing delivered to Bank or to
induce Bank to enter this Agreement or any Loan Document; or

9.       BANK'S RIGHTS AND REMEDIES

         9.1      RIGHTS AND REMEDIES.

         When an Event of Default occurs and continues Bank may, without notice
or demand, do any or all of the following:

                           (a)      Declare all Obligations immediately due and
payable (but if an Event of Default described in Section 8.5 occurs all
Obligations are immediately due and payable without any action by Bank);

                           (b)      Stop advancing money or extending credit for
Borrower's benefit under this Agreement or under any other agreement between
Borrower and Bank;

                           (c)      Settle or adjust disputes and claims
directly with account debtors for amounts, on terms and in any order that Bank
considers advisable;

                           (d)      Make any payments and do any acts it
considers necessary or reasonable to protect its security interest in the
Collateral. Borrower will assemble the Collateral if Bank requires and make it
available as Bank designates. Bank may enter premises where the Collateral is
located, take and maintain possession of any part of the Collateral, and pay,
purchase, contest, or compromise any Lien which appears to be prior or superior
to its security interest and pay all expenses incurred. Borrower grants Bank a
license to enter and occupy any of its premises, without charge, to exercise any
of Bank's rights or remedies;

                           (e)      Apply to the Obligations any (i) balances
and deposits of Borrower it holds, or (ii) any amount held by Bank owing to or
for the credit or the account of Borrower;

                           (f)      Ship, reclaim, recover, store, finish,
maintain, repair, prepare for sale, advertise for sale, and sell the Collateral.
Bank is granted a non-exclusive, royalty-free license or other right to use,
without charge, Borrower's labels, Patents, Copyrights, Mask Works, rights of
use of any name, trade secrets, trade names, Trademarks, service marks, and
advertising matter, or any similar property as it pertains to the Collateral, in
completing

                                      14.
<PAGE>

production of, advertising for sale, and selling any Collateral and, in
connection with Bank's exercise of its rights under this Section, Borrower's
rights under all licenses and all franchise agreements inure to Bank's benefit;
and

                           (g)      Dispose of the Collateral according to the
                                    Code.

         9.2      POWER OF ATTORNEY.

         Effective only when an Event of Default occurs and continues, Borrower
irrevocably appoints Bank as its lawful attorney to: (a) endorse Borrower's name
on any checks or other forms of payment or security; (b) sign Borrower's name on
any invoice or bill of lading for any Account or drafts against account debtors,
(c) make, settle, and adjust all claims under Borrower's insurance policies; (d)
settle and adjust disputes and claims about the Accounts directly with account
debtors, for amounts and on terms Bank determines reasonable; and (e) transfer
the Collateral into the name of Bank or a third party as the Code permits. Bank
may exercise the power of attorney to sign Borrower's name on any documents
necessary to perfect or continue the perfection of any security interest
regardless of whether an Event of Default has occurred. Bank's appointment as
Borrower's attorney in fact, and all of Bank's rights and powers, coupled with
an interest, are irrevocable until all Obligations have been fully repaid and
performed and Bank's obligation to provide Credit Extensions terminates.

         9.3      ACCOUNTS COLLECTION.

         When an Event of Default occurs and continues, (a) Bank may notify any
Person owing Borrower money of Bank's security interest in the funds and verify
the amount of the Account, and (b) Borrower must collect all payments in trust
for Bank and, if requested by Bank, immediately deliver the payments to Bank in
the form received from the account debtor, with proper endorsements for deposit.

         9.4      BANK EXPENSES.

         If Borrower fails to pay any amount or furnish any required proof of
payment to third persons, Bank may make all or part of the payment or obtain
insurance policies required in Section 6.6, and take any action under the
policies Bank deems prudent. Any amounts paid by Bank are Bank Expenses and
immediately due and payable, bearing interest at the then applicable rate and
secured by the Collateral. No payments by Bank are deemed an agreement to make
similar payments in the future or Bank's waiver of any Event of Default.

         9.5      BANK'S LIABILITY FOR COLLATERAL.

         If Bank complies with reasonable banking practices and the Code, it is
not liable for: (a) the safekeeping of the Collateral; (b) any loss or damage to
the Collateral; (c) any diminution in the value of the Collateral; or (d) any
act or default of any carrier, warehouseman, bailee, or other person. Borrower
bears all risk of loss, damage or destruction of the Collateral.

         9.6      REMEDIES CUMULATIVE.

         Bank's rights and remedies under this Agreement, the Loan Documents,
and all other

                                      15.
<PAGE>

agreements are cumulative. Bank has all rights and remedies provided under the
Code, by law, or in equity. Bank's exercise of one right or remedy is not an
election, and Bank's waiver of any Event of Default is not a continuing waiver.
Bank's delay is not a waiver, election, or acquiescence. No waiver is effective
unless signed by Bank and then is only effective for the specific instance and
purpose for which it was given.

         9.7      DEMAND WAIVER.

         Borrower waives demand, notice of default or dishonor, notice of
payment and nonpayment, notice of any default, nonpayment at maturity, release,
compromise, settlement, extension, or renewal of accounts, documents,
instruments, chattel paper, and guarantees held by Bank on which Borrower is
liable.

10.      NOTICES

         All notices or demands by any party about this Agreement or any other
related agreement must be in writing and be personally delivered or sent by an
overnight delivery service, by certified mail, postage prepaid, return receipt
requested, or by facsimile to the addresses set forth at the beginning of this
Agreement. A party may change its notice address by giving the other party
written notice.

11.      CHOICE OF LAW , VENUE AND JURY TRIAL WAIVER

         California law governs the Loan Documents without regard to principles
of conflicts of law. Borrower and Bank each submit to the exclusive jurisdiction
of the State and Federal courts in Santa Clara County, California.

BORROWER AND BANK EACH WAIVE THEIR RIGHT TO A JURY TRIAL OF ANY CLAIM OR CAUSE
OF ACTION ARISING OUT OF ANY OF THE LOAN DOCUMENTS OR ANY CONTEMPLATED
TRANSACTION, INCLUDING CONTRACT, TORT, BREACH OF DUTY AND ALL OTHER CLAIMS. THIS
WAIVER IS A MATERIAL INDUCEMENT FOR BOTH PARTIES TO ENTER INTO THIS AGREEMENT.
EACH PARTY HAS REVIEWED THIS WAIVER WITH ITS COUNSEL.

12.      GENERAL PROVISIONS

         12.1     SUCCESSORS AND ASSIGNS.

         This Agreement binds and is for the benefit of the successors and
permitted assigns of each party. Borrower may not assign this Agreement or any
rights under it without Bank's prior written consent which may be granted or
withheld in Bank's discretion. Bank has the right, without the consent of or
notice to Borrower, to sell, transfer, negotiate, or grant participation in all
or any part of, or any interest in, Bank's obligations, rights and benefits
under this Agreement.

         12.2     INDEMNIFICATION.

         Borrower will indemnify, defend and hold harmless Bank and its
officers, employees,

                                      16.
<PAGE>

and agents against: (a) all obligations, demands, claims, and liabilities
asserted by any other party in connection with the transactions contemplated by
the Loan Documents; and (b) all losses or Bank Expenses incurred, or paid by
Bank from, following, or consequential to transactions between Bank and Borrower
(including reasonable attorneys' fees and expenses), except with respect to (a)
and (b) above, for obligations, demands, claims, liabilities or losses caused by
Bank's gross negligence or willful misconduct.

         12.3     TIME OF ESSENCE.

         Time is of the essence for the performance of all obligations in this
Agreement.

         12.4     SEVERABILITY OF PROVISIONS.

         Each provision of this Agreement is severable from every other
provision in determining the enforceability of any provision.

         12.5     AMENDMENTS IN WRITING; INTEGRATION.

         All amendments to this Agreement must be in writing and signed by
Borrower and Bank. This Agreement represents the entire agreement about this
subject matter, and supersedes prior negotiations or agreements. All prior
agreements, understandings, representations, warranties, and negotiations
between the parties about the subject matter of this Agreement merge into this
Agreement and the Loan Documents.

         12.6     COUNTERPARTS.

         This Agreement may be executed in any number of counterparts and by
different parties on separate counterparts, each of which, when executed and
delivered, are an original, and all taken together, constitute one Agreement.

         12.7     SURVIVAL.

         All covenants, representations and warranties made in this Agreement
continue in full force while any Obligations remain outstanding. The obligations
of Borrower in Section 12.2 to indemnify Bank will survive until all statutes of
limitations for actions that may be brought against Bank have run.

         12.8     CONFIDENTIALITY.

         In handling any confidential information, Bank will exercise the same
degree of care that it exercises for its own proprietary information, but
disclosure of information may be made (a) to Bank's subsidiaries or affiliates
in connection with their business with Borrower, (b) to prospective transferees
or purchasers of any interest in the loans (provided, however, Bank shall use
commercially reasonable efforts in obtaining such prospective transferee or
purchasers agreement of the terms of this provision), (c) as required by law,
regulation, subpoena, or other order, (d) as required in connection with Bank's
examination or audit, and (e) as Bank considers appropriate exercising remedies
under this Agreement. Confidential information includes information that is not
either: (x) in the public domain or already in Bank's possession before

                                      17.
<PAGE>

disclosed to Bank by Borrower, or becomes part of the public domain after
disclosure to Bank; or (y) disclosed to Bank by a third party, if Bank does not
know that the third party is prohibited from disclosing the information.

         12.9     ATTORNEYS' FEES, COSTS AND EXPENSES.

         In any action or proceeding between Borrower and Bank arising out of
the Loan Documents, the prevailing party will be entitled to recover its
reasonable attorneys' fees and other reasonable costs and expenses incurred, in
addition to any other relief to which it may be entitled.

13.      DEFINITIONS

         In this Agreement:

         "ACCOUNTS" are all existing and later arising accounts, contract
rights, and other obligations owed Borrower in connection with its sale or lease
of goods (including licensing software and other technology) or provision of
services, all credit insurance, guaranties, other security and all merchandise
returned or reclaimed by Borrower and Borrower's Books relating to any of the
foregoing.

         "ADVANCE" or "ADVANCES" is a loan advance (or advances) under the
Committed Revolving Line, including Advances used to issue or fund Letters of
Credit.

         "AFFILIATE" of a Person is a Person that owns or controls directly or
indirectly the Person, any Person that controls or is controlled by or is under
common control with the Person, and each of that Person's senior executive
officers, directors, partners and, for any Person that is a limited liability
company, that Person's managers and members.

         "BANK EXPENSES" are all audit fees and expenses and reasonable costs
and expenses (including reasonable attorneys' fees and expenses) for preparing,
negotiating, administering, defending and enforcing the Loan Documents
(including appeals or Insolvency Proceedings).

         "BORROWER'S BOOKS" are all Borrower's books and records including
ledgers, records regarding Borrower's assets or liabilities, the Collateral,
business operations or financial condition and all computer programs or discs or
any equipment containing the information.

         "BUSINESS DAY" is any day that is not a Saturday, Sunday or a day on
which the Bank is closed.

         "CHANGE IN CONTROL" is a transaction in which any "PERSON" or "GROUP"
(within the meaning of Section 13(d) and 14(d)(2) of the Securities Exchange Act
of 1934) becomes the "BENEFICIAL OWNER" (as defined in Rule 13d-3 under the
Securities Exchange Act of 1934), directly or indirectly, of a sufficient number
of shares of all classes of stock then outstanding of Borrower ordinarily
entitled to vote in the election of directors, empowering such "PERSON" or
"GROUP" to elect a majority of the board of directors of Borrower, who did not
have such power before such transaction.

                                      18.
<PAGE>

         "CLOSING DATE" is the date of this Agreement.

         "CODE" is the Uniform Commercial Code in effect in any applicable
jurisdiction.

         "COLLATERAL" is the property described on Exhibit A.

         "COMMITTED EQUIPMENT LINE" is an Equipment Advance or Equipment
Advances of up to the aggregate principal amount of $2,044,597.84.

         "COMMITTED REVOLVING LINE" is an Advance or Advances of up to the
aggregate principal amount of $10,000,000.

         "COMPLIANCE CERTIFICATE" is a Compliance Certificate signed by a
Responsible Officer in substantially the same form of Exhibit C attached hereto.

         "CONTINGENT OBLIGATION" is, for any Person, any direct or indirect
liability, contingent or not, of that Person for (a) any indebtedness, lease,
dividend, letter of credit or other obligation of another such as an obligation
directly or indirectly guaranteed, endorsed, co-made, discounted or sold with
recourse by that Person, or for which that Person is directly or indirectly
liable; (b) any obligations for undrawn letters of credit for the account of
that Person; and (c) all obligations from any interest rate, currency or
commodity swap agreement, interest rate cap or collar agreement, or other
agreement or arrangement designated to protect a Person against fluctuation in
interest rates, currency exchange rates or commodity prices; but "CONTINGENT
OBLIGATION" does not include endorsements in the ordinary course of business.
The amount of a Contingent Obligation is the stated or determined amount of the
primary obligation for which the Contingent Obligation is made or, if not
determinable, the maximum reasonably anticipated liability for it determined by
the Person in good faith; but the amount may not exceed the maximum of the
obligations under the guarantee or other support arrangement.

         "CONTROL AGREEMENT" is an account control agreement, in form and
substance satisfactory to Bank, executed and delivered by Borrower, Bank and all
applicable depositary institutions, with respect to Borrower's deposit or
operating accounts, or all applicable securities intermediaries, with respect to
Borrower's securities accounts.

         "COPYRIGHTS" are all copyright rights, applications or registrations
and like protections in each work or authorship or derivative work, whether
published or not (whether or not it is a trade secret) now or later existing,
created, acquired or held.

         "CREDIT EXTENSION" is each Advance, Equipment Advance, Letter of
Credit, the Existing Equipment Debt or any other extension of credit by Bank for
Borrower's benefit.

         "DEPOSIT ACCOUNTS" means all present and future "deposit account" as
defined in the California Uniform Commercial Code in effect on the date hereof
with such additions to such term as may hereafter be made, and includes, without
limitation, all general and special bank accounts, demand accounts, checking
accounts, savings accounts, and certificates of deposit.

         "EQUIPMENT" is all present and future machinery, equipment, tenant
improvements, furniture, fixtures, vehicles, tools, parts and attachments in
which Borrower has any interest.

                                      19.
<PAGE>

         "EQUIPMENT ADVANCE" is defined in Section 2.2(a).

         "EQUIPMENT AVAILABILITY END DATE" is defined in Section 2.2(a).

         "EQUIPMENT MATURITY DATE" is with respect to each Equipment Advance,
the last day of the Repayment Period for such Equipment Advance, or if earlier,
the date of acceleration of such Equipment Advance by Bank following an Event of
Default.

         "EXISTING EQUIPMENT DEBT" is defined in Section 2.2(d).

         "ERISA" is the Employment Retirement Income Security Act of 1974, and
its regulations.

         "FOREIGN SUBSIDIARY" is any Subsidiary of Borrower that is organized
under the laws of any jurisdiction outside of the United States.

         "GAAP" is generally accepted accounting principles.

         "GENERAL INTANGIBLES" means all present and future "general
intangibles" as defined in the California Uniform Commercial Code in effect on
the date hereof with such additions to such term as may hereafter be made, and
includes, without limitation, all Intellectual Property, payment intangibles,
royalties, contract rights, goodwill, franchise agreements, purchase orders,
customer lists, route lists, telephone numbers, domain names, claims, income tax
refunds, security and other deposits, options to purchase or sell real or
personal property, rights in all litigation presently or hereafter pending
(whether in contract, tort, or otherwise), insurance policies (including,
without limitation, key man, property damage, and business interruption
insurance), payments of insurance and rights to payment of any kind.

         "GUARANTOR" is any present or future guarantor of the Obligations.

         "INDEBTEDNESS" is (a) indebtedness for borrowed money or the deferred
price of property or services, such as reimbursement and other obligations for
surety bonds and letters of credit, (b) obligations evidenced by notes, bonds,
debentures or similar instruments, (c) capital lease obligations and (d)
Contingent Obligations.

         "INSOLVENCY PROCEEDING" are proceedings by or against any Person under
the United States Bankruptcy Code, or any other bankruptcy or insolvency law,
including assignments for the benefit of creditors, compositions, extensions
generally with its creditors, or proceedings seeking reorganization,
arrangement, or other relief.

         "INTELLECTUAL PROPERTY" is:

                           (a)      Copyrights, Trademarks, Patents, and Mask
Works including amendments, renewals, extensions, and all licenses or other
rights to use and all license fees and royalties from the use;

                           (b)      Any trade secrets and any intellectual
property rights in computer software and computer software products now or later
existing, created, acquired or held; and

                                      20.
<PAGE>

                           (c)      All design rights which may be available to
Borrower now or later created, acquired or held.

         "INVENTORY" is present and future inventory in which Borrower has any
interest, including merchandise, raw materials, parts, supplies, packing and
shipping materials, work in process and finished products intended for sale or
lease or to be furnished under a contract of service, of every kind and
description now or later owned by or in the custody or possession, actual or
constructive, of Borrower, including inventory temporarily out of its custody or
possession or in transit and including returns on any accounts or other proceeds
(including insurance proceeds) from the sale or disposition of any of the
foregoing and any documents of title.

         "INVESTMENT" is any beneficial ownership of (including stock,
partnership interest or other securities) any Person, or any loan, advance or
capital contribution to any Person.

         "INVESTMENT PROPERTY" means all present and future investment property,
securities, stocks, bonds, debentures, debt securities, partnership interests,
limited liability company interests, options, security entitlements, securities
accounts, commodity contracts, commodity accounts, and all financial assets held
in any securities account or otherwise, and all option and warrants to purchase
any of the foregoing, wherever located, and all other securities of every kind,
whether certificated or uncertificated.

         "LETTER OF CREDIT" is defined in Section 2.1.2.

         "LETTER OF CREDIT FEES" is defined in Section 2.1.2.

         "LIEN" is a mortgage, lien, deed of trust, charge, pledge, security
interest or other encumbrance.

         "LOAN DOCUMENTS" are, collectively, this Agreement, any note, or notes
or guaranties executed by Borrower or Guarantor, any account control agreements,
and any other present or future agreement between Borrower or for the benefit of
Bank in connection with this Agreement, all as amended, extended or restated.

         "MASK WORKS" are all mask works or similar rights available for the
protection of semiconductor chips, now owned or later acquired.

         "MATERIAL ADVERSE CHANGE" is described in Section 8.3.

         "MATURITY DATE" is December 18, 2004.

         "OBLIGATIONS" are debts, principal, interest, Bank Expenses and other
amounts Borrower owes Bank now or later, including cash management services,
letters of credit and foreign exchange contracts, if any and including interest
accruing after Insolvency Proceedings begin and debts, liabilities, or
obligations of Borrower assigned to Bank.

         "OTHER PROPERTY" means the following as defined in the California
Uniform Commercial Code in effect on the date hereof with such additions to such
term as may hereafter be made, and all rights relating thereto: all present and
future "commercial tort claims" (including, without

                                      21.
<PAGE>

limitation, any commercial tort claims identified pursuant to Sections 5.3 or
6.4(b)), "documents", "instruments", "promissory notes", "chattel paper",
"letters of credit", "letter-of-credit rights", "fixtures", "farm products", and
"money"; and all other goods and personal property of every kind, tangible and
intangible, whether or not governed by the California Uniform Commercial Code.

         "PATENTS" are patents, patent applications and like protections,
including improvements, divisions, continuations, renewals, reissues, extensions
and continuations-in-part of the same.

         "PERMITTED INDEBTEDNESS" is:

                           (a)      Borrower's Obligations;

                           (b)      Indebtedness existing on the Closing Date
and shown on the Disclosure Letter;

                           (c)      Subordinated Debt;

                           (d)      Indebtedness of Borrower to any Subsidiary
of Borrower and of Subsidiaries to any other Subsidiary or to Borrower;

                           (e)      Indebtedness to trade creditors incurred in
the ordinary course of business;

                           (f)      Indebtedness to financial institutions other
than Bank in connection with obligations from any interest rate, currency or
commodity swap agreement, interest rate cap or collar agreement, or other
agreement or arrangement designated to protect Borrower against fluctuation in
interest rates, currency exchange rates or commodity prices so long as such
Indebtedness does not to exceed $10,000,000;

                           (g)      Indebtedness secured by Permitted Liens;

                           (h)      Indebtedness of any Person existing at the
time such Person is merged with or into Borrower or becomes a Subsidiary as
permitted hereby, provided that such Indebtedness is not incurred in connection
with, or in contemplation of, such Person merging with and into the Borrower or
becoming a Subsidiary of the Borrower; and

                           (i)      Indebtedness with respect to surety, appeal,
indemnity, performance or other similar bonds incurred in the ordinary course of
business, consistent with past practices.

         "PERMITTED INVESTMENTS" are:

                           (a)      Investments shown on the Disclosure Letter
and existing on the Closing Date;

                           (b)      (i) marketable direct obligations issued or
unconditionally guaranteed by the United States of America or any agency or any
State thereof maturing within

                                      22.
<PAGE>

one (1) year from the date of acquisition thereof, (ii) commercial paper
maturing no more than one (1) year from the date of creation thereof and
currently having rating of at least A-2 or P-2 from either Standard & Poor's
Corporation or Moody's Investors Service, Inc., (iii) certificates of deposit
maturing no more than one (1) year from the date of investment therein issued by
Bank, and (iv) future Investments in similar types of Investments pursuant to
Borrower's investment policy (attached hereto as Schedule B) that has been
formally adopted or otherwise approved by Borrower's Board of Directors;

                           (c)      Investments accepted in connection with
Transfers permitted by Section 7.1;

                           (d)      Investments in connection with the
acquisition of any part of the capital stock or property of another Person so
long as (i) no Event of Default has occurred and is continuing or would result
from such action during the term of this Agreement, (ii) Borrower is in
compliance with Section 7.3 hereof, and (iii) such transactions do not result in
a decrease of more than 25% Tangible Net Worth;

                           (e)      Investments consisting of (i) travel
advances, employee relocation loans and other employee loans and advances in the
ordinary course of business not to exceed $1,000,000 and (ii) non-cash loans to
employees, officers or directors relating to the purchase of equity securities
of Borrower pursuant to employee stock purchase plans or arrangements approved
by Borrower's board of directors;

                           (f)      Investments (including debt obligations)
received in connection with the bankruptcy or reorganization of customers or
suppliers and in settlement of delinquent obligations of, and other disputes
with, customers or suppliers arising in the ordinary course of business;

                           (g)      Investments consisting of notes receivable
or, prepaid royalties and other credit obligations to customers and suppliers
who are not Affiliates, in the ordinary course of business.

                           (h)      Investments consisting of the endorsement of
negotiable instruments for deposit or collection or similar transactions in the
ordinary course of Borrower;

                           (i)      Investments of Subsidiaries in or to other
Subsidiaries or Borrower and Investments by Borrower in Subsidiaries; and

                           (j)      Joint ventures or strategic alliances in the
ordinary course of Borrower's business consisting of the non-exclusive licensing
of technology, the development of technology or the providing of technical
support, provided that (i) any cash investments by Borrower do not exceed
$5,000,000 in the aggregate in any fiscal year, and (ii) Borrower remains in
compliance with Section 6.7 hereof.

         "PERMITTED LIENS" are:

                           (a)      Liens existing on the Closing Date and shown
on the Disclosure Letter or arising under this Agreement or other Loan
Documents;

                                      23.
<PAGE>

                           (b)      Liens for taxes, fees, assessments or other
government charges or levies, either not delinquent or being contested in good
faith and for which Borrower maintains adequate reserves on its Books, if they
have no priority over any of Bank's security interests;

                           (c)      Purchase money Liens (i) on Equipment
acquired or held by Borrower or its Subsidiaries incurred for financing the
acquisition of the Equipment, or (ii) existing on equipment when acquired, if
the Lien is confined to the property and improvements and the proceeds of the
equipment;

                           (d)      Liens arising from judgments, decrees or
attachments in circumstances not constituting an Event of Default;

                           (e)      Liens in favor of customs and revenue
authorities arising as a matter of law to secure payments of customs duties in
connection with the importation of goods;

                           (f)      Liens in favor of other financial
institutions arising in connection with Borrower's deposit accounts or
securities accounts held at such institutions, provided that Bank has a first
priority perfected security interest in such accounts and in the amounts and
securities held therein;

                           (g)      Liens in connection with surety or appeals
bonds or letters of credit securing such bonds or reimbursement obligations in
connection with statutory obligations, bids, tenders, or otherwise in the
ordinary course of business provided all such Liens in the aggregate could not
(even if enforced) reasonably be likely cause or result in an Event of Default;

                           (h)      Leases or subleases granted in the ordinary
course of Borrower's business, including in connection with Borrower's leased
premises or leased property;

                           (i)      Additional Liens consented to in writing by
Bank which consent may be withheld in Bank's good faith business judgment;

                           (j)      Licenses or sublicenses granted in the
ordinary course of Borrower's business and any interest or title of a licensor
or under any license or sublicense;

                           (k)      Other Liens not described above arising in
the ordinary course of business and not having or not reasonably likely to have
a material adverse effect on Borrower's and it Subsidiaries' business or
operations taken as a whole or would reasonably be expected to cause or result
in a Material Adverse Change; and

                           (l)      Liens incurred in the extension, renewal or
refinancing of the indebtedness secured by Liens described in (a) through (c),
but any extension, renewal or replacement Lien must be limited to the property
encumbered by the existing Lien and the principal amount of the indebtedness may
not increase.

         Bank shall have the right to require, as a condition to its consent
under clause (i) above, that the holder of the additional Lien sign an
intercreditor agreement, in favor of Bank in form and substance satisfactory to
Bank in its sole discretion, to acknowledge that the holder's Lien is
subordinate to the Lien in favor of Bank and agree not to take any action to
enforce its

                                      24.
<PAGE>

subordinate Lien so long as any of the Obligations remain outstanding, and that
Borrower agree that any uncured default in any obligation secured by the
subordinate Lien shall also constitute an Event of Default under this Agreement.

         "PERSON" is any individual, sole proprietorship, partnership, limited
liability company, joint venture, company association, trust, unincorporated
organization, association, corporation, institution, public benefit corporation,
firm, joint stock company, estate, entity or government agency.

         "PRIME RATE" is Bank's most recently announced "prime rate," even if it
is not Bank's lowest rate, and, in any event, shall not be less than four
percent (4.00%) per annum.

         "REPAYMENT PERIOD" as to each Equipment Advance, is 36 months.

         "RESPONSIBLE OFFICER" is each of the Chief Executive Officer, the
President, the Chief Financial Officer and the Controller of Borrower.

         "SUBORDINATED DEBT" is debt incurred by Borrower subordinated to
Borrower's indebtedness owed to Bank and which is reflected in a written
agreement in a manner and form acceptable to Bank and approved by Bank in
writing.

         "SUBSIDIARY" is for any Person, or any other business entity of which
more than 50% of the voting stock or other equity interests is owned or
controlled, directly or indirectly, by the Person or one or more Affiliates of
the Person.

         "TANGIBLE NET WORTH" is, on any date, the consolidated total assets of
Borrower and its Subsidiaries minus, (i) any amounts attributable to (a)
goodwill, (b) intangible items such as unamortized debt discount and expense,
Patents, trade and service marks and names, Copyrights and research and
development expenses except prepaid expenses, and (c) reserves not already
deducted from assets, and (ii) Total Liabilities.

         "TOTAL LIABILITIES" is on any day, obligations that should, under GAAP,
be classified as liabilities on Borrower's consolidated balance sheet, including
all Indebtedness and the current portion Subordinated Debt allowed to be paid,
but excluding all other Subordinated Debt.

         "TRADEMARKS" are trademark and servicemark rights, registered or not,
applications to register and registrations and like protections, and the entire
goodwill of the business of Assignor connected with the trademarks.

         "TRANSFER" is defined in Section 7.1.

                          [The signature page follows.]

                                      25.
<PAGE>

         IN WITNESS WHEREOF, the parties have duly authorized and caused this
Agreement to be executed as of the date first written above.

BORROWER:

HARMONIC INC.

By: /s/ Robin N. Dickson
    -----------------------

Printed Name: ROBIN N. DICKSON

Title:        CFO

BANK:

SILICON VALLEY BANK

By: /s/ Arman Zand
    ----------------------

Printed Name: ARMAN ZAND

Title:        V.P

<PAGE>

                                    EXHIBIT A

         The Collateral consists of all of Borrower's right, title and interest
in and to the following, whether now owned or hereafter existing:

         all Accounts;

         all Inventory;

         all Equipment;

         all Deposit Accounts;

         all General Intangibles (including, without limitation, all
Intellectual Property);

         all Investment Property;

         all Other Property;

         and any and all claims, rights, and interests in any of the above, and
all guaranties and security for any of the above, and all substitutions and
replacements for, additions, accessions, attachments, accessories, and
improvements to and proceeds (including proceeds of any insurance policies,
proceeds of proceeds and claims against third parties) of, any and all of the
above; and

         all Borrower's Books relating to the foregoing.

         Notwithstanding the foregoing, the security interest granted herein
shall not extend to and the term "Collateral" shall not include (a) any license
or contract rights to the extent (i) the granting of a security interest in it
would be contrary to applicable law, or (ii) that such rights are nonassignable
by their terms (but only to the extent such prohibition is enforceable under
applicable law) without the consent of the licensor or other party (but only to
the extent such consent has not been obtained); (b) that portion (if any) of the
capital stock (or other equity interests) of such Foreign Subsidiary owned by
Borrower that is in excess of 65% of the aggregate issued and outstanding
capital stock (or other equity interests) of such Foreign Subsidiary; and (c)
and any property that is subject to a Lien that is otherwise permitted pursuant
to clause (c) of the definition of "Permitted Liens" and Bank agrees to execute
any instruments or documents necessary to release its interest in such property
and to effect the foregoing.

<PAGE>

                                    EXHIBIT B

                        LOAN PAYMENT/ADVANCE REQUEST FORM

           DEADLINE FOR SAME DAY PROCESSING IS 12:00 NOON PACIFIC TIME

FAX TO: _________________                                   Date: ______________

BORROWER: ___________________________

[ ] LOAN PAYMENT:

  From Account # __________________________    To Account # ____________________
                (Name and Deposit Account #)                  (Loan Account #)

  Principal $____________________________and/or Interest $______________________

Borrower's representations and warranties in the Loan and Security Agreement are
true, correct and complete in all material respects on and as of the date
hereof, but those representations and warranties expressly referring to another
date shall be true, correct and complete in all material respects as of such
date.

AUTHORIZED SIGNATURE:________________________      Phone Number:________________

[ ] LOAN ADVANCE:

COMPLETE OUTGOING WIRE REQUEST SECTION BELOW IF ALL OR A PORTION OF THE FUNDS
FROM THIS LOAN ADVANCE ARE FOR AN OUTGOING WIRE.

From Account #____________________     To Account #_____________________________
                (Loan Account #)                    (Name and Deposit Account #)

Amount of Advance $________________________

Borrower's representations and warranties in the Loan and Security Agreement are
true, correct and complete in all material respects on and as of the date of the
requested Advance, but those representations and warranties expressly referring
to another date shall be true, correct and complete in all material respects as
of such date.

AUTHORIZED SIGNATURE:_______________________       Phone Number:________________

OUTGOING WIRE REQUEST

COMPLETE ONLY IF ALL OR A PORTION OF FUNDS FROM THE LOAN ADVANCE ABOVE ARE TO BE
WIRED.
Deadline for same day processing is 12:00 noon, Pacific Time

Beneficiary Name:____________________________   Amount of Wire: $_______________
Beneficiary Bank:____________________________   Account Number:_________________
City and State:______________________________
Beneficiary Bank Transit (ABA) #:____________   Beneficiary Bank Code (Swift,
                                                Sort, Chip, etc.):______________

                                                (FOR INTERNATIONAL WIRE ONLY)
Intermediary Bank:___________________________   Transit (ABA) #:________________
For Further Credit to:_____________________________________________________
Special Instruction:_______________________________________________________

<PAGE>

By signing below, I (we) acknowledge and agree that my (our) funds transfer
request shall be processed in accordance with and subject to the terms and
conditions set forth in the agreements(s) covering funds transfer service(s),
which agreements(s) were previously received and executed by me (us).

Authorized Signature:_________________  2nd Signature (if required):____________
Print Name/Title:_____________________  Print Name/Title:_______________________
Telephone #___________________________  Telephone #_____________________________

                                       2.
<PAGE>

                                    EXHIBIT C

                             COMPLIANCE CERTIFICATE

TO:           SILICON VALLEY BANK
              3003 Tasman Drive
              Santa Clara, CA 95054

FROM:         Harmonic Inc.
              549 Baltic Way
              Sunnyvale, CA 94089

         The undersigned authorized officer of HARMONIC INC. ("Borrower")
certifies that under the terms and conditions of the Loan and Security Agreement
between Borrower and Bank (the "Agreement"), (i) Borrower is in complete
compliance for the period ending _______________ with all required covenants,
except as noted below, and (ii) all representations and warranties in the
Agreement are true and correct in all material respects on this date. Attached
are the required documents supporting the certification. The undersigned officer
certifies that such documents were prepared in accordance with Generally
Accepted Accounting Principles (GAAP) consistently applied from one period to
the next, except as explained in an accompanying letter or footnotes. The
undersigned officer acknowledges that no borrowings may be requested at any time
or date of determination that Borrower is not in compliance with any of the
terms of the Agreement, and that compliance is determined not just at the date
this certificate is delivered.

         PLEASE INDICATE COMPLIANCE STATUS BY CIRCLING YES/NO UNDER "COMPLIES"
COLUMN.

<TABLE>
<CAPTION>
REPORTING COVENANT                     REQUIRED                       COMPLIES
------------------                     --------                       --------
<S>                                    <C>                          <C>      <C>
Quarterly financial statements + CC    Quarterly within 45 days     Yes      No

Annual (Audited)                       FYE within 120 days          Yes      No

Collateral Audit                       Annual                       Yes      No
</TABLE>

<TABLE>
<CAPTION>
FINANCIAL COVENANT                     REQUIRED        ACTUAL         COMPLIES
------------------                     --------        ------         --------
<S>                                    <C>             <C>          <C>      <C>
Maintain at all times:

Unrestricted cash and                  $65,000,000                  Yes      No
cash equivalents
</TABLE>

COMMENTS REGARDING EXCEPTIONS: See Attached.              BANK USE ONLY

Sincerely,                                  Received by:________________________
                                                         AUTHORIZED SIGNER
HARMONIC INC.
________________________________________    Date:_______________________________
SIGNATURE
                                            Verified:___________________________
________________________________________                 AUTHORIZED SIGNER
TITLE
                                            Date:_______________________________
________________________________________
DATE                                        Compliance Status:     Yes        No

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-21.1
<SEQUENCE>6
<FILENAME>f96175exv21w1.txt
<DESCRIPTION>EXHIBIT 21.1
<TEXT>
<PAGE>
                                                                    Exhibit 21.1

                         HARMONIC INC. AND SUBSIDIARIES

                         SUBSIDIARIES OF THE REGISTRANT

The following table shows certain information with respect to the active
subsidiaries of the Company as of December 31, 2003:

<TABLE>
<CAPTION>
                                      STATE OR OTHER        PERCENT OF VOTING
                                       JURISDICTION          SECURITIES OWNED
             NAME                    OF INCORPORATION          BY HARMONIC
--------------------------------     ------------------     -------------------
<S>                                  <C>                    <C>
Harmonic (Asia Pacific) Ltd.         Hong Kong                     100%
Harmonic Data Systems Ltd.           Israel                        100%
Harmonic Europe S.A.S.               France                        100%
Harmonic Germany GmbH                Germany                       100%
Harmonic International Inc.          U.S.A.                        100%
Harmonic International Limited       Bermuda                       100%
Harmonic Lightwaves (Israel) Ltd.    Israel                        100%
Harmonic (UK) Ltd.                   United Kingdom                100%
</TABLE>

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-23.1
<SEQUENCE>7
<FILENAME>f96175exv23w1.txt
<DESCRIPTION>EXHIBIT 23.1
<TEXT>
<PAGE>
                                                                  Exhibit 23.1

                       CONSENT OF INDEPENDENT ACCOUNTANTS

We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (Nos. 333-105873, 333-91464, 333-84720, 333-59248,
333-43160, 333-86649, 333-65051, 333-44265, 333-38025 and 033-94138) and Form
S-3 (No. 333-84430) of Harmonic Inc. of our report dated March 5, 2004, relating
to the financial statements and financial statement schedule, which appears in
this Annual Report on Form 10-K.

/s/ PRICEWATERHOUSECOOPERS LLP
------------------------------
PRICEWATERHOUSECOOPERS LLP

San Jose, California
March 5, 2004

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-31.1
<SEQUENCE>8
<FILENAME>f96175exv31w1.txt
<DESCRIPTION>EXHIBIT 31.1
<TEXT>
<PAGE>
                                                                  Exhibit 31.1

                                  Harmonic Inc.
                 Certification of Principal Executive Officer
                           Pursuant to Section 302 of
                         The Sarbanes-Oxley Act of 2002

I,  Anthony  J. Ley,  Chairman,  President  and  Chief  Executive  Officer  of
Harmonic Inc., certify that:

1.    I have reviewed this annual report on Form 10-K of Harmonic Inc.:

2.    Based on my knowledge, this report does not contain any untrue statement
      of a material fact or omit to state a material fact necessary to make the
      statements made, in light of the circumstances under which such statements
      were made, not misleading with respect to the period covered by this
      report;

3.    Based on my knowledge, the financial statements, and other financial
      information included in this report, fairly present in all material
      respects the financial condition, results of operations and cash flows of
      the registrant as of, and for, the periods presented in this report;

4.    The registrant's other certifying officer(s) and I are responsible for
      establishing and maintaining disclosure controls and procedures (as
      defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant
      and have:

      a)    Designed such disclosure controls and procedures, or caused such
            disclosure controls and procedures to be designed under our
            supervision, to ensure that material information relating to the
            registrant, including its consolidated subsidiaries, is made known
            to us by others within those entities, particularly during the
            period in which this report is being prepared;

      b)    Evaluated the effectiveness of the registrant's disclosure controls
            and procedures and presented in this report our conclusions about
            the effectiveness of the disclosure controls and procedures, as of
            the end of the period covered by this report based on such
            evaluation; and

      c)    Disclosed in this report any change in the registrant's internal
            control over financial reporting that occurred during the
            registrant's most recent fiscal quarter (the registrant's fourth
            fiscal quarter in the case of an annual report) that has materially
            affected, or is reasonably likely to materially affect, the
            registrant's internal control over financial reporting; and

5.    The registrant's other certifying officer(s) and I have disclosed, based
      on our most recent evaluation of internal control over financial
      reporting, to the registrant's auditors and the audit committee of the
      registrant's board of directors (or persons performing the equivalent
      functions):

      a)    All significant deficiencies and material weaknesses in the design
            or operation of internal control over financial reporting which are
            reasonably likely to adversely affect the registrant's ability to
            record, process, summarize and report financial information; and

      b)    Any fraud, whether or not material, that involves management or
            other employees who have a significant role in the registrant's
            internal control over financial reporting.


Date: March 8, 2004                    By:  /s/Anthony J. Ley
                                            ------------------------------------
                                            Anthony J. Ley
                                            Chairman, President and Chief
                                            Executive Officer
                                            (Principal Executive Officer)

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-31.2
<SEQUENCE>9
<FILENAME>f96175exv31w2.txt
<DESCRIPTION>EXHIBIT 31.2
<TEXT>
<PAGE>
                                                                  Exhibit 31.2

                                  Harmonic Inc.
                 Certification of Principal Financial Officer
                           Pursuant to Section 302 of
                         The Sarbanes-Oxley Act of 2002

I, Robin N. Dickson,  Principal  Financial  Officer of Harmonic Inc.,  certify
that:

1.    I have reviewed this annual report on Form 10-K of Harmonic Inc.:

2.    Based on my knowledge, this report does not contain any untrue statement
      of a material fact or omit to state a material fact necessary to make the
      statements made, in light of the circumstances under which such statements
      were made, not misleading with respect to the period covered by this
      report;

3.    Based on my knowledge, the financial statements, and other financial
      information included in this report, fairly present in all material
      respects the financial condition, results of operations and cash flows of
      the registrant as of, and for, the periods presented in this report;

4.    The registrant's other certifying officer(s) and I are responsible for
      establishing and maintaining disclosure controls and procedures (as
      defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant
      and have:

      a)    Designed such disclosure controls and procedures, or caused such
            disclosure controls and procedures to be designed under our
            supervision, to ensure that material information relating to the
            registrant, including its consolidated subsidiaries, is made known
            to us by others within those entities, particularly during the
            period in which this report is being prepared;

      b)    Evaluated the effectiveness of the registrant's disclosure controls
            and procedures and presented in this report our conclusions about
            the effectiveness of the disclosure controls and procedures, as of
            the end of the period covered by this report based on such
            evaluation; and

      c)    Disclosed in this report any change in the registrant's internal
            control over financial reporting that occurred during the
            registrant's most recent fiscal quarter (the registrant's fourth
            fiscal quarter in the case of an annual report) that has materially
            affected, or is reasonably likely to materially affect, the
            registrant's internal control over financial reporting; and

5.    The registrant's other certifying officer(s) and I have disclosed, based
      on our most recent evaluation of internal control over financial
      reporting, to the registrant's auditors and the audit committee of the
      registrant's board of directors (or persons performing the equivalent
      functions):

      a)    All significant deficiencies and material weaknesses in the design
            or operation of internal control over financial reporting which are
            reasonably likely to adversely affect the registrant's ability to
            record, process, summarize and report financial information; and

      b)    Any fraud, whether or not material, that involves management or
            other employees who have a significant role in the registrant's
            internal control over financial reporting.

Date: March 8, 2004                    By:  /s/Robin N. Dickson
                                            ------------------------------------
                                            Robin N. Dickson
                                            Chief Financial Officer
                                            (Principal Financial Officer)

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-32.1
<SEQUENCE>10
<FILENAME>f96175exv32w1.txt
<DESCRIPTION>EXHIBIT 32.1
<TEXT>
<PAGE>
                                                                  Exhibit 32.1

                                  Harmonic Inc.
                 Certification of Principal Executive Officer
          Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to
                Section 906 of the Sarbanes-Oxley Act of 2002

As of the date hereof, I, Anthony J. Ley, Chairman, President and Chief
Executive Officer of Harmonic Inc. (the "Company"), certify, pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, that the annual report of the Company on Form 10-K for the fiscal
year ended December 31, 2003, as filed with the Securities and Exchange
Commission (the "Report"), fully complies with the requirements of Section 13(a)
or 15(d) of the Securities Exchange Act of 1934 and that information contained
in the Report fairly presents, in all material respects, the financial condition
and results of operations of the Company. This written statement is being
furnished to the Securities and Exchange Commission as an exhibit accompanying
such Report and shall not be deemed filed pursuant to the Securities Exchange
Act of 1934.

Date:  March 8, 2004

                                       /s/ Anthony J. Ley
                                       ---------------------------------
                                       Anthony J. Ley
                                       Chairman, President and Chief
                                       Executive Officer
                                       (Principal Executive Officer)

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-32.2
<SEQUENCE>11
<FILENAME>f96175exv32w2.txt
<DESCRIPTION>EXHIBIT 32.2
<TEXT>
<PAGE>
                                                                  Exhibit 32.2

                                  Harmonic Inc.
                 Certification of Principal Financial Officer
          Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to
                Section 906 of the Sarbanes-Oxley Act of 2002

As of the date hereof, I, Robin N. Dickson, Chief Financial Officer of Harmonic
Inc. (the "Company"), certify, pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the annual
report of the Company on Form 10-K for the fiscal year ended December 31, 2003,
as filed with the Securities and Exchange Commission (the "Report"), fully
complies with the requirements of Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 and that information contained in the Report fairly
presents, in all material respects, the financial condition and results of
operations of the Company. This written statement is being furnished to the
Securities and Exchange Commission as an exhibit accompanying such Report and
shall not be deemed filed pursuant to the Securities Exchange Act of 1934.

Date:  March 8, 2004

                                       /s/ Robin N. Dickson
                                       ---------------------------------
                                       Robin N. Dickson
                                       Chief Financial Officer
                                       (Principal Financial Officer)


</TEXT>
</DOCUMENT>
</SUBMISSION>
