<SUBMISSION>
<ACCESSION-NUMBER>0000950134-06-004928
<TYPE>10-K
<PUBLIC-DOCUMENT-COUNT>7
<PERIOD>20051231
<FILING-DATE>20060314
<DATE-OF-FILING-DATE-CHANGE>20060313
<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>06683420
</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>f18224e10vk.htm
<DESCRIPTION>FORM 10-K
<TEXT>
<HTML>
<HEAD>
<TITLE>e10vk</TITLE>
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<BODY bgcolor="#FFFFFF">
<!-- PAGEBREAK -->
<H5 align="left" style="page-break-before:always"><A HREF="#toc">Table of Contents</A></H5><P>

<FONT face="helvetica,arial">

<DIV align="center" style="font-size: 2pt;color: #000000; background: #ffffff;">
<DIV style="width: 100%; border-top: 2.0pt solid black; font-size: 1pt">&nbsp;</DIV>
</DIV>

<DIV align="center" style="font-size: 4pt;color: #000000; background: #ffffff;">
<DIV style="width: 100%; border-top: 2.0pt solid black; font-size: 1pt">&nbsp;</DIV>
</DIV>

<DIV align="center" style="font-size: 12pt;color: #000000; background: #ffffff; margin-top: 4pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>UNITED STATES</B>
</DIV>

<DIV align="center" style="font-size: 12pt;color: #000000; background: #ffffff;">
<B>SECURITIES AND EXCHANGE COMMISSION</B>
</DIV>

<DIV align="center" style="font-size: 10pt;color: #000000; background: #ffffff;">
<B>Washington,&nbsp;D.C. 20549</B>
</DIV>

<DIV align="center" style="font-size: 4pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<DIV style="width: 26%; border-top: 1.0pt solid black; font-size: 1pt">&nbsp;</DIV>
</DIV>

<DIV align="center" style="font-size: 12pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>FORM <FONT style="white-space: nowrap">10-K</FONT></B>
</DIV>

<DIV align="center" style="font-size: 4pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<DIV style="width: 26%; border-top: 1.0pt solid black; font-size: 1pt">&nbsp;</DIV>
</DIV>
<FONT face="times new roman,times">

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 9pt; margin-top: 12pt; ">

<TR style="font-size: 1pt;">
    <TD width="16%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="81%">&nbsp;</TD>
</TR>

<TR>
    <TD align="left" nowrap><B><FONT face="helvetica,arial">(Mark One)</FONT></B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="center" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial"><FONT face="wingdings">&#254;</FONT>
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <B><FONT face="helvetica,arial">ANNUAL REPORT PURSUANT TO
    SECTION&nbsp;13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
    1934</FONT></B></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <B><FONT face="helvetica,arial">For the Fiscal Year Ended
    December&nbsp;31, 2005</FONT></B></TD>
</TR>

<TR>
    <TD colspan="3">&nbsp;</TD>
</TR>

<TR>
    <TD align="center" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <B><FONT face="helvetica,arial"><FONT face="wingdings">&#111;</FONT></FONT></B></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <B><FONT face="helvetica,arial">TRANSITION REPORT PURSUANT TO
    SECTION&nbsp;13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
    1934</FONT></B></TD>
</TR>

</TABLE>
</CENTER>
</FONT>

<DIV align="center" style="font-size: 9pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Commission File No.&nbsp;0-25826</B>
</DIV>

<DIV align="center" style="font-size: 14pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>HARMONIC INC.</B>
</DIV>

<DIV align="center" style="font-size: 8pt;color: #000000; background: #ffffff;">
<B>(Exact name of Registrant as specified in its charter)</B>
</DIV>
<FONT face="times new roman,times">

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 9pt; margin-top: 6pt; ">

<TR style="font-size: 1pt;">
    <TD width="59%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="38%">&nbsp;</TD>
</TR>

<TR>
    <TD align="center" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <B><FONT face="helvetica,arial">Delaware</FONT></B></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">
    <B><FONT face="helvetica,arial">77-0201147</FONT></B></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>

</TR>

<TR>
    <TD align="center" valign="top">
    <B><FONT face="helvetica,arial">(State or other jurisdiction of
    incorporation or<BR>
    organization)</FONT></B></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">
    <B><FONT face="helvetica,arial">(I.R.S. Employer Identification
    Number)</FONT></B></TD>
</TR>

</TABLE>
</CENTER>
</FONT>

<DIV align="center" style="font-size: 9pt;color: #000000; background: #ffffff;">
<B>549 Baltic Way</B>
</DIV>

<DIV align="center" style="font-size: 9pt;color: #000000; background: #ffffff;">
<B>Sunnyvale, CA 94089</B>
</DIV>

<DIV align="center" style="font-size: 9pt;color: #000000; background: #ffffff;">
<B>(408)&nbsp;542-2500</B>
</DIV>

<DIV align="center" style="font-size: 8pt;color: #000000; background: #ffffff;">
<B>(Address, including zip code, and telephone number, including
area code, of Registrant&#146;s principal executive offices)</B>
</DIV>

<DIV align="center" style="font-size: 9pt;color: #000000; background: #ffffff;">
<B>Securities registered pursuant to section&nbsp;12(b) of the
Act:</B>
</DIV>

<DIV align="center" style="font-size: 9pt;color: #000000; background: #ffffff;">
<B>None</B>
</DIV>

<DIV align="center" style="font-size: 9pt;color: #000000; background: #ffffff;">
<B>Securities registered pursuant to section&nbsp;12(g) of the
Act:</B>
</DIV>

<DIV align="center" style="font-size: 9pt;color: #000000; background: #ffffff;">
<B>Common Stock, par value $.001&nbsp;per share</B>
</DIV>

<DIV align="center" style="font-size: 9pt;color: #000000; background: #ffffff;">
<B>Preferred Share Purchase Rights</B>
</DIV>
<FONT face="times new roman,times">

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 8pt; margin-top: 3pt; ">

<TR style="font-size: 1pt;">
    <TD width="76%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="21%">&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <FONT face="helvetica,arial">Indicate by check mark if the
    Registrant is a well-known seasoned issuer, as defined in
    Rule&nbsp;405 of the Securities Act.
    </FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">
    <B><FONT face="helvetica,arial">Yes&nbsp;<FONT face="wingdings">&#111;</FONT>&nbsp;&nbsp;&nbsp;&nbsp;No&nbsp;<FONT face="wingdings">&#254;</FONT></FONT></B></TD>
</TR>

<TR>
    <TD colspan="3">&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <FONT face="helvetica,arial">Indicate by check mark if the
    Registrant is not required to file reports pursuant to
    Section&nbsp;13 or 15(d) of the Exchange Act.
    </FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">
    <B><FONT face="helvetica,arial">Yes&nbsp;<FONT face="wingdings">&#111;</FONT>&nbsp;&nbsp;&nbsp;&nbsp;No&nbsp;<FONT face="wingdings">&#254;</FONT></FONT></B></TD>
</TR>

<TR>
    <TD colspan="3">&nbsp;</TD>
</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <FONT face="helvetica,arial">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
    </FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <FONT face="helvetica,arial">90&nbsp;days.
    </FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">
    <B><FONT face="helvetica,arial">Yes&nbsp;<FONT face="wingdings">&#254;</FONT>&nbsp;&nbsp;&nbsp;&nbsp;No&nbsp;<FONT face="wingdings">&#111;</FONT></FONT></B></TD>
</TR>

<TR>
    <TD colspan="3">&nbsp;</TD>
</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <FONT face="helvetica,arial">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&nbsp;III of this Form&nbsp;10-K or any
    amendment to this
    </FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <FONT face="helvetica,arial">Form&nbsp;10-K.
    </FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">
    <B><FONT face="helvetica,arial">Yes&nbsp;<FONT face="wingdings">&#111;</FONT>&nbsp;&nbsp;&nbsp;&nbsp;No&nbsp;<FONT face="wingdings">&#254;</FONT></FONT></B></TD>
</TR>

<TR>
    <TD colspan="3">&nbsp;</TD>
</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <FONT face="helvetica,arial">Indicate by check mark whether the
    Registrant is a large accelerated filer, an accelerated filer,
    or a non-accelerated filer. See definition of &#147;accelerated
    filer and large accelerated filer&#148;(as defined in
    Rule&nbsp;12b-2 of the Exchange Act). (Check
    one):&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B>Large
    accelerated
    filer&nbsp;<FONT face="wingdings">&#111;</FONT>&nbsp;&nbsp;Accelerated
    filer&nbsp;<FONT face="wingdings">&#254;</FONT>&nbsp;&nbsp;Non-accelerated
    filer&nbsp;<FONT face="wingdings">&#111;</FONT></B>
    </FONT></TD>
</TR>

<TR>
    <TD colspan="3">&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <FONT face="helvetica,arial">Indicate by check mark whether the
    Registrant is a shell company (as defined in Rule&nbsp;12b-2 of
    the Exchange Act).
    </FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">
    <B><FONT face="helvetica,arial">Yes&nbsp;<FONT face="wingdings">&#111;</FONT>&nbsp;&nbsp;&nbsp;&nbsp;No&nbsp;<FONT face="wingdings">&#254;</FONT></FONT></B></TD>
</TR>

</TABLE>
</CENTER>
</FONT>

<DIV align="left" style="font-size: 8pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Based on the closing sale price of the Common Stock on the
NASDAQ National Market System on July&nbsp;1, 2005, the
aggregate market value of the voting Common Stock held by
non-affiliates of the Registrant was $357,244,182. 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.
</DIV>

<DIV align="left" style="font-size: 8pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
The number of shares outstanding of the Registrant&#146;s Common
Stock, $.001&nbsp;par value, was 74,122,425 on February&nbsp;28,
2006.
</DIV>

<DIV align="center" style="font-size: 8pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>DOCUMENTS INCORPORATED BY REFERENCE</B>
</DIV>

<DIV align="left" style="font-size: 8pt;color: #000000; background: #ffffff; margin-top: 3pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Portions of the Proxy Statement for the Registrant&#146;s 2006
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, 2005) are
incorporated by reference in Part&nbsp;II and Part&nbsp;III of
this Form&nbsp;<FONT style="white-space: nowrap">10-K.
</FONT>
</DIV>

<DIV align="center" style="font-size: 2pt;color: #000000; background: #ffffff; margin-top: 8pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<DIV style="width: 100%; border-top: 2.0pt solid black; font-size: 1pt">&nbsp;</DIV>
</DIV>

<DIV align="center" style="font-size: 4pt;color: #000000; background: #ffffff;">
<DIV style="width: 100%; border-top: 2.0pt solid black; font-size: 1pt">&nbsp;</DIV>
</DIV>

</FONT>
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<P><HR noshade><P>

<FONT face="helvetica,arial">

<!-- 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">PART I</A></TD></TR>
<TR><TD colspan="9"><A HREF="#001">PART II</A></TD></TR>
<TR><TD colspan="9"><A HREF="#002">REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM</A></TD></TR>
<TR><TD colspan="9"><A HREF="#003">CONSOLIDATED BALANCE SHEETS</A></TD></TR>
<TR><TD colspan="9"><A HREF="#004">CONSOLIDATED STATEMENTS OF OPERATIONS</A></TD></TR>
<TR><TD colspan="9"><A HREF="#005">CONSOLIDATED STATEMENTS OF STOCKHOLDERS&#146; EQUITY (IN THOUSANDS)</A></TD></TR>
<TR><TD colspan="9"><A HREF="#006">CONSOLIDATED STATEMENTS OF CASH FLOWS</A></TD></TR>
<TR><TD colspan="9"><A HREF="#007">NOTES TO CONSOLIDATED FINANCIAL STATEMENTS</A></TD></TR>
<TR><TD></TD><TD colspan="8"><A HREF="#008">Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure</A></TD></TR>
<TR><TD></TD><TD colspan="8"><A HREF="#009">Item 9A. Controls and Procedures</A></TD></TR>
<TR><TD></TD><TD colspan="8"><A HREF="#010">Item 9B. Other Information</A></TD></TR>
<TR><TD colspan="9"><A HREF="#011">PART III</A></TD></TR>
<TR><TD></TD><TD colspan="8"><A HREF="#012">Item 10. Directors and Executive Officers of Registrant</A></TD></TR>
<TR><TD></TD><TD colspan="8"><A HREF="#013">Item 11. Executive Compensation</A></TD></TR>
<TR><TD></TD><TD colspan="8"><A HREF="#014">Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters</A></TD></TR>
<TR><TD></TD><TD colspan="8"><A HREF="#015">Item 13. Certain Relationships and Related Transactions</A></TD></TR>
<TR><TD></TD><TD colspan="8"><A HREF="#016">Item 14. Principal Accounting Fees and Services</A></TD></TR>
<TR><TD colspan="9"><A HREF="#017">PART IV</A></TD></TR>
<TR><TD></TD><TD colspan="8"><A HREF="#018">Item 15. Exhibits and Financial Statement Schedules</A></TD></TR>
<TR><TD colspan="9"><A HREF="#019">SIGNATURES</A></TD></TR>
<TR><TD colspan="9"><A HREF="#020">EXHIBIT INDEX</A></TD></TR>
<TR><TD colspan="9"><A HREF="f18224exv21w1.htm">EXHIBIT 21.1</A></TD></TR>
<TR><TD colspan="9"><A HREF="f18224exv23w1.htm">EXHIBIT 23.1</A></TD></TR>
<TR><TD colspan="9"><A HREF="f18224exv31w1.htm">EXHIBIT 31.1</A></TD></TR>
<TR><TD colspan="9"><A HREF="f18224exv31w2.htm">EXHIBIT 31.2</A></TD></TR>
<TR><TD colspan="9"><A HREF="f18224exv32w1.htm">EXHIBIT 32.1</A></TD></TR>
<TR><TD colspan="9"><A HREF="f18224exv32w2.htm">EXHIBIT 32.2</A></TD></TR>
</TABLE>
</CENTER>
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<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#toc">Table of Contents</A></H5><P>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>FORWARD LOOKING STATEMENTS</B>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Some of the statements contained in this Annual Report on
Form&nbsp;<FONT style="white-space: nowrap">10-K</FONT> are
forward-looking statements that involve risk and uncertainties.
The statements contained in this Annual Report on
Form&nbsp;<FONT style="white-space: nowrap">10-K</FONT> that are
not purely historical are forward-looking statements within the
meaning of Section&nbsp;27A of the Securities Act of 1933, as
amended, and Section&nbsp;21E of the Securities Exchange Act of
1934, as amended, including, without limitation, statements
regarding our expectations, beliefs, intentions or strategies
regarding the future. These statements are subject to known and
unknown risks, uncertainties and other factors, which may cause
our actual results to differ materially from those implied by
the forward-looking statements. In some cases, you can identify
forward-looking statements by terminology such as
&#147;may,&#148; &#147;will,&#148; &#147;could,&#148;
&#147;should,&#148; &#147;expects,&#148; &#147;plans,&#148;
&#147;anticipates,&#148; &#147;believes,&#148;
&#147;intends,&#148; &#147;estimates,&#148;
&#147;predicts,&#148; &#147;potential,&#148; or
&#147;continue&#148; or the negative of these terms or other
comparable terminology. Important factors that may cause actual
results to differ from expectations include those discussed in
&#147;Risk Factors&#148; beginning on page&nbsp;13 in this
document. All forward-looking statements included in this Annual
Report on
Form&nbsp;<FONT style="white-space: nowrap">10-K</FONT> are
based on information available to us on the date thereof, and we
assume no obligation to update any such forward-looking
statements. The terms &#147;Harmonic,&#148; &#147;the
Company,&#148; &#147;we,&#148; &#147;us,&#148; &#147;its,&#148;
and &#147;our&#148; as used in this Annual Report on
Form&nbsp;<FONT style="white-space: nowrap">10-K</FONT> refer to
Harmonic Inc. and its subsidiaries and its predecessors as a
combined entity, except where the context requires otherwise.
</DIV>

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

<DIV align="center" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 18pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>PART&nbsp;I</B>
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="6%"></TD>
    <TD width="94%"></TD>
</TR>

<TR valign="top">
    <TD><B>Item&nbsp;1.<I>&nbsp;</I></B></TD>
    <TD>
    <B><I>Business</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>OVERVIEW</B>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
We design, manufacture and sell products and systems that enable
network operators to provide a range of interactive and advanced
digital services that include digital video,
<FONT style="white-space: nowrap">video-on</FONT>-demand (VOD),
high definition television (HDTV), high-speed Internet access
and telephony. Historically, most of our sales have been derived
from sales of digital video products and fiber optic
transmission systems to cable television and direct broadcast
satellite (DBS)&nbsp;operators. We also derive a growing portion
of our sales from telephone companies, or telcos, that offer
video services to their customers.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Harmonic was initially incorporated in California in June 1988
and reincorporated into Delaware in May 1995. From our
acquisition of C-Cube Microsystems DiviCom business in 2000
until the end of 2005, Harmonic was 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 had its own management team directing its product
development and marketing strategies and its customer service
requirements. In the fourth quarter of 2005, an organizational
restructuring was announced that combined the Company&#146;s
CS&nbsp;division and BAN division into a single segment.
Effective January&nbsp;1, 2006, the Company&#146;s new
organizational structure is in place, with marketing, research
and development and operations now headed by an Executive Vice
President. The Company now operates as a single operating
segment and intends to report its financial results as a single
segment as of the first quarter of 2006. A separate sales force
has historically supported both the CS and BAN divisions with
appropriate product and market specialization as required, and
will continue to sell the entire range of products of the
Company.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Our principal executive offices are located at 549 Baltic Way,
Sunnyvale, California 94089. Our telephone number is
(408)&nbsp;542-2500.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>INDUSTRY OVERVIEW</B>
</DIV>

<DIV style="margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="1%"></TD>
    <TD width="99%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B>Demand for broadband and digital video services</B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
The demand for broadband services has increased significantly in
recent years due in large part to the dramatic growth of the
Internet. In addition, the delivery to subscribers of television
programming and Internet-based information and
</DIV>

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<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff;">
communication services is converging, driven in part by advances
in technology and in part by changes in the regulatory and
competitive environment. Today, there are a number of developing
trends which impact the broadcasting and television business and
that of our service provider customers who deliver video
programming to homes. These trends include:
</DIV>

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    <TD width="99%"></TD>
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    <TD></TD>
    <TD>
    On-Demand Services</TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
The introduction of digital video recorders and network-based
<FONT style="white-space: nowrap">video-on</FONT>-demand
services is leading to changes in the way consumers watch
television programming. Consumers are increasingly utilizing
&#147;time-shifting&#148; and &#147;ad-skipping&#148;
technology. Further advances in technology are likely to
accelerate these trends, with cable, satellite and telco
operators all announcing initiatives, some in conjunction with
broadcasters, to increasingly personalize subscribers&#146;
video viewing.
</DIV>

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    <TD width="1%"></TD>
    <TD width="99%"></TD>
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    <TD></TD>
    <TD>
    High-Definition Television</TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
The increasing popularity of HDTV sets and &#147;home
theater&#148; equipment is putting pressure on broadcasters and
<FONT style="white-space: nowrap">pay-TV</FONT> providers to
offer additional HDTV content and higher quality video signals
for both standard and high definition services. A recent report
by Kagan Research projected that sales of HDTV sets could
comprise the majority of TV set unit sales in the U.S.&nbsp;in
2006.
</DIV>

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    <TD></TD>
    <TD>
    Mobile Video</TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Several telcos in the U.S. and abroad have launched video
service to cellular telephones and other hand-held devices.
Certain cable operators have entered into agreements with other
mobile phone operators that are likely to lead to further
expansion of mobile video services.
</DIV>

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    <TD></TD>
    <TD>
    New Entrants and Distribution Methods</TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Several companies, including Google, Yahoo! and Apple, have
recently announced that they intend to enter the video
distribution business and enable customers to download video
content to personal computers and devices such as video iPods.
It is likely that the potential entry of these companies into
the video distribution business will further change traditional
video viewing habits and distribution methods.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
These trends are expected to increase the demand from service
providers for sophisticated digital video systems and optical
network products, which are required to acquire video content
from the source and deliver it to the end-user.
</DIV>

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    <TD></TD>
    <TD>
    <B>Competition and deregulation</B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Regulatory reform has spurred competition among communication
service providers worldwide to offer combinations of video,
voice and data services. The Telecommunications Act of 1996
generally permits 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 now offer broadband
services, including broadcast digital video, VOD, internet
access and telephony, over their cable systems. Similarly,
telephone companies, or telcos, have deployed various digital
subscriber line, or DSL, technologies for high-speed data
services over their existing copper networks. A number of telcos
have begun to deploy alternative delivery systems such as fiber
to the premises, or FTTP, for data and video transmission, and
some have also deployed video services over their DSL and mobile
networks. Following further regulatory changes, DBS operators
have introduced local standard definition channels in most
markets, allowing them to compete more effectively with cable
multiple system operators, or MSOs. These operators have also
recently announced plans to add local high definition channels
in major markets. 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
</DIV>

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<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff;">
digital broadcasting in order to reallocate analog broadcast
spectrum, to provide more channel capacity, higher quality
video, and 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
entry of telephone companies into the business of providing
video services.
</DIV>

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    <TD></TD>
    <TD>
    <B>Our cable market</B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
To address increasing competition and demand for high-speed
broadband services, cable operators have introduced 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. Cable operators have been upgrading and
rebuilding their networks to offer digital video, which enables
them to provide more channels and better picture quality than
analog video, allowing them to better compete against the
substantial penetration of digital DBS&nbsp;services. These
upgrades to digital video allow cable operators to roll out HDTV
and new interactive services such as VOD on their digital
platforms. In order to provide high-speed Internet service,
cable operators have deployed cable modems in an increasing
number of their systems and are also upgrading and building out
their networks to provide residential telephony and business
services in a number of major markets. Major U.S.&nbsp;cable
operators have indicated that the completion of major network
upgrades, which involved significant labor and construction
costs, is resulting in lower capital expenditures. 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
a hybrid fiber-coax, or HFC, network. Additionally, the
provision of HDTV&nbsp;channels requires significantly more
bandwidth than the equivalent number of standard definition
channels. As these new services continue to attract increasing
numbers of subscribers, cable operators have begun to upgrade
headends with &#147;digital simulcasting,&#148; the first step
in the transition to an all-digital network. Digital
simulcasting makes all channels available in digital format, in
addition to certain of the same channels in analog format for
analog-only cable subscribers. Further improvements are being
made to the transmission network to handle the greater volume
and complexity of network traffic and to address competition
from telcos. We expect that, although total U.S.&nbsp;cable
capital expenditures are declining, cable operators will
continue to invest capital to more effectively manage available
bandwidth in the headend as well as make further network
improvements.
</DIV>

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    <TD width="99%"></TD>
</TR>

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    <TD></TD>
    <TD>
    <B>Our satellite market</B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Satellite operators around the world have established digital
television services that serve millions of subscribers. These
services are capable of providing up to several hundred channels
of high quality video. DBS&nbsp;services, however, operate
mostly in a one-way environment. Signals are 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 or VOD. 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&nbsp;operators have made local channels available
in all major markets in standard definition format. In the U.S.,
must-carry 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, although the need to provide more HDTV
channels poses continuing bandwidth challenges and is expected
to require further capital expenditures by such operators.
</DIV>

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    <TD width="1%"></TD>
    <TD width="99%"></TD>
</TR>

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    <TD></TD>
    <TD>
    <B>Our telco market</B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Telcos are also facing increasing competition and demand for
high-speed residential broadband services. Like the cable
networks, the telcos&#146; legacy networks are not well equipped
to offer new services. The bandwidth and distance limitations of
the copper-based last mile have limited DSL deployment and
present an even greater barrier to providing video services. As
cable companies and certain new broadband service providers
deliver video and are capturing data and voice customers, many
telcos have added, or are planning to add, video and Internet
services as a competitive response. Multi-channel video
delivered over DSL lines has significant bandwidth limitations,
but the use of video compression technology at very low bit
rates and improvements in DSL technology has allowed operators
to introduce video services. Many major telcos are now
implementing plans to rebuild or upgrade their networks to offer
bundled video, voice and data services.
</DIV>

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    <TD width="1%"></TD>
    <TD width="99%"></TD>
</TR>

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    <TD></TD>
    <TD>
    <B>Other markets</B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
In the terrestrial broadcasting market, operators in many
countries are now required by regulation to convert from analog
to digital transmission in order to free up broadcast spectrum.
The conversion to digital transmission 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. Similarly, operators of wireless
broadcast systems require encoding for the conversion of analog
signals to digital.
</DIV>

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    <TD width="1%"></TD>
    <TD width="99%"></TD>
</TR>

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    <TD></TD>
    <TD>
    <B>The market opportunity</B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
The demand for more bandwidth-intensive video, voice and data
content has strained existing communications networks and
created bottlenecks, especially in the headends and in the last
mile of the communications infrastructure where homes connect to
the local network. 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 in a competitive environment 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. Personalized video services, such as VOD, 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. In addition, the delivery of
live television and downloads to cellular telephones and other
mobile devices poses bandwidth and management problems.
Compression of video and data to utilize effectively the
available bandwidth, the cost-effective transport of digital
traffic within networks, and the construction of robust fat
pipes for distribution of content are all essential elements to
the ability of operators to maximize revenue and minimize
capital expenditures and operating costs.
</DIV>

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    <TD width="1%"></TD>
    <TD width="99%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B>Current industry conditions</B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
In recent years, the telecommunications industry has been
impacted by financial difficulties in both the service and
equipment sectors, including bankruptcies. Many of our domestic
and international customers accumulated significant levels of
debt and have begun or completed reorganizations and financial
restructurings. In particular, Adelphia Communications, a major
domestic cable operator, declared bankruptcy in June 2002. While
we believe that the financial condition of many of our customers
that underwent financial difficulties has now stabilized or
improved, yet industry capital expenditures remain below the
levels experienced in 1999 and 2000. Furthermore, we believe it
is likely that continuing industry restructuring and
consolidation will take place via mergers or spin-offs. For
example, it is expected that Adelphia Communications will emerge
from bankruptcy in 2006, with its cable systems proposed to be
</DIV>

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<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff;">
sold to Comcast and Time-Warner Cable, the largest
U.S.&nbsp;MSOs. Also, NTL and Telewest, the major cable
operators in the U.K., have recently completed their announced
merger. 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.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>PRODUCTS</B>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Harmonic&#146;s products generally fall into two principal
categories, video processing products and edge and access
products. In addition, we provide network management software
and have recently introduced new application software products.
Harmonic also provides technical support services to its
customers worldwide. Our video processing 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 edge products enable operators to
deliver customized broadcast or narrowcast on-demand services to
their subscribers, and our access products, which consist mainly
of optical transmission products, node platforms and return path
products, allow operators to deliver video, data and voice
services over their physical networks.
</DIV>

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<TR>
    <TD width="1%"></TD>
    <TD width="99%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B>Video processing products</B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<I>DiviCom encoders.</I>&nbsp;We offer a 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 transmission rates.
Their compliance with widely adopted standards enables
interoperability with other products and systems. Our MV100
encoder is designed with sufficient processing power to function
with the new MPEG-4 and VC-1 video compression standards as well
as MPEG-2. Our Ion and Electra 1000 encoders are modular
encoders designed for lower cost, higher density applications.
Up to four encoder modules can be inserted into a single rack
unit. Our recently introduced Electra 5000 multi-codec encoder
is capable of providing multiple video streams of the same
channel in different formats and resolutions, or a variety of
channels in the same format. Our MV450 and MV3500 encoders are
designed for encoding of high definition television signals.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<I>MediaNode.</I>&nbsp;The MediaNode multiplexer/remutiplexers
combine video streams generated by encoders and other system
components into a single transport stream at the required data
rate.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<I>Stream Processing products.</I>&nbsp;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 video streams without expensive decoding and
re-encoding. We also provide the CherryPicker digital stream
management system under a reseller agreement with Terayon
Communications.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<I>ProView Integrated Receiver-Decoders.</I>&nbsp;The ProView
family of products allows service providers to acquire content
from terrestrial and satellite broadcasters for distribution to
their subscribers. These products are available in both standard
and high definition formats.
</DIV>

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<TR>
    <TD width="1%"></TD>
    <TD width="99%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B>Edge and access products</B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<I>Narrowcast Services Gateway.</I>&nbsp;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 inputs,
allowing the operator to use bandwidth efficiently by delivering
IP signals from the headend to the edge of the network for
subsequent modulation onto the hybrid fiber-coax
(HFC)&nbsp;network.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<I>Transmitters and optical amplifiers.</I>&nbsp;The MAXLink
transmitters and optical amplifiers operate at a wavelength of
1550 nm and serve long-haul applications. The MAXLink Plus
further increases the channel capacity of cable and other
networks
</DIV>

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<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff;">
and can transmit over distances in excess of 200 kilometers. 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.
Our METROLink Dense Wave Division Multiplexing
(DWDM)&nbsp;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 of hubs and the associated
building and equipment maintenance costs.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<I>Optical nodes and return path equipment.</I>&nbsp;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 reconstruction or replacement of our
customers&#146; networks. 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.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<I>IP transmission equipment.</I> The FLXLink Commercial
Services solution allows an operator to leverage its existing
network by providing high-speed services on a wavelength of a
shared fiber to individual customers or to multiple-dwelling
units. This solution comprises data transport capability at
various speeds and network interface units to connect to the
subscriber&#146;s internal wiring.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="1%"></TD>
    <TD width="99%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B>Software products</B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<I>Management and control software.</I> Our NMX Digital Service
Manager gives 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. Our NETWatch management system operates in
physical 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 NMX&nbsp;Digital Service Manager and
NETWatch software is designed to be integrated into larger
network management systems through the use of simple network
management protocol, or SNMP.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<I>Application software.</I> We offer software-based solutions
which work in conjunction with our hardware. ClearCut software
provides operators with high-quality digital storage of
real-time broadcasts for on-demand services, and our ProStream
8000 solution allows operators to present on-screen mosaics with
several channels tiled within a single video stream.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

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<TR>
    <TD width="1%"></TD>
    <TD width="99%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B>Technical services</B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
We provide consulting, implementation and maintenance services
to our customers worldwide. We draw upon our expertise in
broadcast television, communications networking and compression
technology to design, integrate and install complete solutions
for our customers. 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,
<FONT style="white-space: nowrap">end-to</FONT>-end system
testing, comprehensive training and ongoing maintenance.
Harmonic also has extensive experience in integrating our
products with numerous third-party products and services.
</DIV>

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<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>CUSTOMERS</B>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
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 2005.
</DIV>
<FONT face="times new roman,times">

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10pt; margin-top: 12pt; ">

<TR style="font-size: 1pt;">
    <TD width="50%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="47%">&nbsp;</TD>
</TR>

<TR style="font-size: 8pt;">
    <TD align="left" nowrap><B><FONT face="helvetica,arial">United States</FONT></B></TD>
    <TD>&nbsp;</TD>
    <TD align="left" nowrap><B><FONT face="helvetica,arial">International</FONT></B></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Adelphia Communications
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <FONT face="helvetica,arial">Acetel
    </FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Charter Communications
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <FONT face="helvetica,arial">Bell Express Vu
    </FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Comcast
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <FONT face="helvetica,arial">Capella
    </FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Cox
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <FONT face="helvetica,arial">Media Cruise Solutions
    </FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">EchoStar
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <FONT face="helvetica,arial">NTL
    </FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Midcontinent Communications
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <FONT face="helvetica,arial">Siemens
    </FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Tellabs/ Verizon
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <FONT face="helvetica,arial">Sumitomo/BNMux
    </FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Thales
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <FONT face="helvetica,arial">Telewest
    </FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Time Warner Cable
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <FONT face="helvetica,arial">Telindus
    </FONT></TD>
</TR>

</TABLE>
</CENTER>
</FONT>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
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
2005, 2004 and 2003 accounted for approximately 54%, 55% and 65%
of net sales, respectively. In 2005, 2004 and 2003 Comcast
accounted for 18%, 17% and 32% of net sales, respectively.
Although we are attempting to broaden our customer base by
penetrating new markets such as the telco and broadcast markets,
and expanding internationally, we expect to see continuing
industry consolidation and customer concentration. See
&#147;Risk Factors&nbsp;- Our Customer Base Is Concentrated And
The Loss Of One Or More Of Our Key Customers Would Harm Our
Business.&#148;
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Sales to customers outside of the U.S.&nbsp;in 2005, 2004 and
2003 represented 40%, 42%, and 29% 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 announced or
completed reorganizations and financial restructurings,
including bankruptcy filings; others have announced plans to
merge, or have recently completed mergers. Furthermore,
additional 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;Risk Factors&nbsp;- We Depend On Our
International Sales And Are Subject To The Risks Associated With
International Operations, Which May Negatively Affect Our
Operating Results.&#148;
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>SALES AND MARKETING</B>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
In the U.S.&nbsp;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 U.S.&nbsp;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, which includes 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,
<FONT style="white-space: nowrap">support-on</FONT>-demand and
training for our customers and distributors both in our
facilities and <FONT style="white-space: nowrap">on-site.
</FONT>
</DIV>

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<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Our marketing organization develops strategies for product lines
and market segments, and, in conjunction with our sales force,
identifies the 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 organization is 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 exhibitions at
trade shows.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>MANUFACTURING AND SUPPLIERS</B>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
We use third party contract manufacturers extensively to
assemble full turnkey products and a substantial majority of
subassemblies and modules for our products. 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 and such
agreement provides for automatic annual renewals. Difficulties
in managing relationships with contract manufacturers could
impede our ability to meet our customers&#146; requirements and
adversely affect our operating results. See &#147;Risk
Factors&nbsp;- 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.&#148;
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Our manufacturing operations consist primarily of final assembly
and testing of fiber optic systems. 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 be sure 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 fiber optic systems, and because
such manufacturing capabilities are not readily available from
third parties, any interruption in our manufacturing operations
could materially and adversely affect our business, operating
results, financial position or cash flows.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
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. For example, we
are dependent on LSI Logic for video encoding chips. 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 ending in late 2006
with automatic annual renewals. 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 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 or cash flows.
</DIV>

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<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>INTELLECTUAL PROPERTY</B>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
We currently hold 38 issued U.S.&nbsp;patents and 19 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.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
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 or cash flows.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
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.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
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. 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 or cash flows to be
materially adversely affected. Also, you should read &#147;Risk
Factors&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.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>BACKLOG</B>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
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, 2005, backlog,
including deferred revenue, amounted to $35.2&nbsp;million,
compared to $55.0&nbsp;million at December&nbsp;31, 2004. The
reduction in backlog at December&nbsp;31, 2005 from
December&nbsp;31, 2004 is due principally to the
</DIV>

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<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff;">
significant amount of backlog at the end of 2004 which related
to orders for digital simulcasting projects from a major
customer. Most of the goods related to this backlog were shipped
and the revenue recorded in the first quarter of 2005, our
highest revenue quarter in 2005. 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, 2005, or any other date, is not
necessarily indicative of actual sales for any succeeding period.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>COMPETITION</B>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
The markets for fiber optics systems and digital video systems
are extremely competitive and have been characterized by rapid
technological change and declining average selling prices. The
principal competitive factors in these markets include product
performance, reliability, price, breadth of product offerings,
network management capabilities, sales and distribution
capabilities, technical support and service, and relationships
with network operators. We believe that we compete favorably in
many of these categories. Harmonic&#146;s competitors in the
fiber optics systems business include corporations such as
Motorola and Cisco Systems, which recently completed its
acquisition of Scientific-Atlanta, and C-Cor. In the digital
video systems business, we compete broadly with vertically
integrated system suppliers including Motorola, Cisco Systems,
Tandberg Television and Thomson Multimedia, and in certain
product lines with a number of smaller companies.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
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 or cash
flows.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
If any of our competitors&#146; products or technologies were to
become the industry standard, our business could be seriously
harmed. 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. Further, our competitors 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, which could result in
lower gross margins.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>RESEARCH AND DEVELOPMENT</B>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
We have historically devoted a significant amount of our
resources to research and development. Research and development
expenses in 2005, 2004 and 2003 were $38.2&nbsp;million,
$35.6&nbsp;million and $35.1&nbsp;million, respectively.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
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 are focused heavily
on the new video compression standards (MPEG4 or AVC and
Microsoft VC-1). We also devote significant resources to
products for MPEG over Internet Protocol (IP), VOD and switched
broadcast, stream processing and stream management software.
Other research and development efforts are focused in broadband
optical products that enable the transmission of video over
fiber optic networks.
</DIV>

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<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
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.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>EMPLOYEES</B>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
As of December&nbsp;31, 2005, we employed a total of 618 people,
including 220 in sales, service and marketing, 177 in research
and development, 121 in manufacturing operations and 100 in a
general and administrative capacity. There were 443 employees in
the U.S. and 175 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. In
connection with the consolidation of our two operating divisions
in December 2005, we reduced our workforce by approximately
40&nbsp;people. 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.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

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<TR>
    <TD width="1%"></TD>
    <TD width="99%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B>Executive Officers of Registrant</B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
The following table sets forth certain information regarding the
executive officers of Harmonic and their ages as of
March&nbsp;1, 2006:
</DIV>
<FONT face="times new roman,times">

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10pt; margin-top: 12pt; ">

<TR style="font-size: 1pt;">
    <TD width="26%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="9%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="59%">&nbsp;</TD>
</TR>

<TR style="font-size: 8pt;">
    <TD align="left" nowrap><B><FONT face="helvetica,arial">Name</FONT></B></TD>
    <TD>&nbsp;</TD>
    <TD align="center" nowrap><B><FONT face="helvetica,arial">Age</FONT></B></TD>
    <TD>&nbsp;</TD>
    <TD align="center" nowrap><B><FONT face="helvetica,arial">Position</FONT></B></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Anthony J. Ley
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">
    <FONT face="helvetica,arial">67
    </FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <FONT face="helvetica,arial">Chairman of the Board of Directors,
    President&nbsp;&#38; Chief Executive Officer
    </FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Robin N. Dickson
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">
    <FONT face="helvetica,arial">58
    </FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <FONT face="helvetica,arial">Chief Financial Officer
    </FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Patrick Harshman
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">
    <FONT face="helvetica,arial">41
    </FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <FONT face="helvetica,arial">Executive Vice President
    </FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Israel Levi
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">
    <FONT face="helvetica,arial">66
    </FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <FONT face="helvetica,arial">Senior Vice President, Operations
    and Quality
    </FONT></TD>
</TR>

</TABLE>
</CENTER>
</FONT>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<I>Anthony J. Ley </I>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 U.S., 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. (U.K.) and a senior member of
the I.E.E.E.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<I>Robin N. Dickson </I>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.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<I>Patrick Harshman </I>joined Harmonic in 1993 and was
appointed Executive Vice President in December 2005, with
responsibility for research and development, marketing,
operations and technical services. He was President of the
</DIV>

<P align="center" style="font-size: 10pt;color: #000000; background: #ffffff;">12

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<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff;">
Broadband Access Networks Division from January 2001 until
December 2005. Prior to serving as President of the Broadband
Access Networks Division, Dr.&nbsp;Harshman was Vice President
of Marketing, responsible for Harmonic&#146;s digital video and
fiber optic transmission product lines. 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.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<I>Israel Levi </I>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.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

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<TR>
    <TD width="1%"></TD>
    <TD width="99%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B>Available Information</B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Harmonic makes available free of charge on the Harmonic website
the Company&#146;s annual report on
Form&nbsp;<FONT style="white-space: nowrap">10-K,</FONT>
quarterly reports on
Form&nbsp;<FONT style="white-space: nowrap">10-Q,</FONT> current
reports on
Form&nbsp;<FONT style="white-space: nowrap">8-K,</FONT> 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
http://<U>www.harmonicinc.com</U>. In addition, the SEC
maintains an Internet site (http://www.sec.gov) that contains
reports, proxy statements and other information that issuers
file electronically.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Item&nbsp;1A.&nbsp;<I>Risk Factors</I></B>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 3pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<I>We Depend On Cable, Satellite And Telecom 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.</I>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
A significant portion of Harmonic&#146;s sales have been derived
from sales to cable television, satellite and telecommunications
operators, and we expect these sales to constitute a significant
portion of net sales for the foreseeable future. Demand for our
products will depend on the magnitude and timing of capital
spending by cable television operators, satellite operators,
telephone companies and broadcasters for constructing and
upgrading their systems.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
These capital spending patterns are dependent on a variety of
factors, including:
</DIV>

<DIV style="margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

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

<TR valign="top">
    <TD>&#149;</TD>
    <TD align="left">
    <FONT style="font-size: 10pt">access to financing;
    </FONT></TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&#149;</TD>
    <TD align="left">
    <FONT style="font-size: 10pt">annual budget cycles;
    </FONT></TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&#149;</TD>
    <TD align="left">
    <FONT style="font-size: 10pt">the impact of industry
    consolidation;
    </FONT></TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&#149;</TD>
    <TD align="left">
    <FONT style="font-size: 10pt">the status of federal, local and
    foreign government regulation of telecommunications and
    television broadcasting;
    </FONT></TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&#149;</TD>
    <TD align="left">
    <FONT style="font-size: 10pt">overall demand for communication
    services and the acceptance of new video, voice and data
    services;
    </FONT></TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&#149;</TD>
    <TD align="left">
    <FONT style="font-size: 10pt">evolving industry standards and
    network architectures;
    </FONT></TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&#149;</TD>
    <TD align="left">
    <FONT style="font-size: 10pt">competitive pressures, including
    pricing pressures;
    </FONT></TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&#149;</TD>
    <TD align="left">
    <FONT style="font-size: 10pt">discretionary customer spending
    patterns;&nbsp;and
    </FONT></TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&#149;</TD>
    <TD align="left">
    <FONT style="font-size: 10pt">general economic conditions.
    </FONT></TD>
</TR>

</TABLE>

<P align="center" style="font-size: 10pt;color: #000000; background: #ffffff;">13

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<FONT face="helvetica,arial">

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
In the past, specific factors contributing to reduced capital
spending have included:
</DIV>

<DIV style="margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

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

<TR valign="top">
    <TD>&#149;</TD>
    <TD align="left">
    <FONT style="font-size: 10pt">uncertainty related to development
    of digital video industry standards;
    </FONT></TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&#149;</TD>
    <TD align="left">
    <FONT style="font-size: 10pt">delays associated with the
    evaluation of new services, new standards, and system
    architectures by many cable and satellite television operators;
    </FONT></TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&#149;</TD>
    <TD align="left">
    <FONT style="font-size: 10pt">emphasis on generating revenue
    from existing customers by operators instead of new construction
    or network upgrades;
    </FONT></TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&#149;</TD>
    <TD align="left">
    <FONT style="font-size: 10pt">a reduction in the amount of
    capital available to finance projects of our customers and
    potential customers;
    </FONT></TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&#149;</TD>
    <TD align="left">
    <FONT style="font-size: 10pt">proposed and completed business
    combinations and divestitures by our customers and regulatory
    review thereof;
    </FONT></TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&#149;</TD>
    <TD align="left">
    <FONT style="font-size: 10pt">economic and financial conditions
    in domestic and international markets;&nbsp;and
    </FONT></TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&#149;</TD>
    <TD align="left">
    <FONT style="font-size: 10pt">bankruptcies and financial
    restructuring of major customers.
    </FONT></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
The financial difficulties of certain of our customers and
changes in our customers&#146; deployment plans adversely
affected our business in recent years. However, we believe that
the financial condition of many of our customers has stabilized
or improved, and our net sales increased in 2005 compared to
2004, and in 2004 compared to 2003. However, 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. In addition, industry
consolidation has, in the past and may in the future, constrain
capital spending among our customers. In this regard, we believe
that the bankruptcy of Adelphia Communications has led to
capital spending delays and we cannot currently predict the
impact of the proposed sale of Adelphia Communications&#146;
cable systems to Comcast and Time-Warner Cable on our future
sales. As a result, we cannot assure you that we will maintain
or increase our net sales in the future.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Major U.S.&nbsp;cable operators have indicated that the
substantial completion of major network upgrades, which involved
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 U.S.&nbsp;cable
operators, our revenue may decline and our operating results
would be adversely affected.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<I>Our Customer Base Is Concentrated And The Loss Of One Or More
Of Our Key Customers, Or a Failure to Diversify Our Customer
Base, Could Harm Our Business.</I>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
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 2005,
2004 and 2003 accounted for approximately 54%, 55% and 65% 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
market, The News Corporation Ltd. acquired an indirect
controlling interest in Hughes Electronics, the parent company
of DIRECTV in 2003. NTL and Telewest, the two largest cable
operators in the U.K., have recently completed their announced
merger. In the telco market, AT&#38;T has announced an agreement
to acquire Bell South. In addition, the sale or financial
restructuring of companies such as Adelphia Communications and
several European operators may lead to further industry
consolidation. In 2005, 2004 and 2003, sales to Comcast
accounted for 18%, 17% and 32%, respectively, of net sales. 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
</DIV>

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<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff;">
liquidity. In this regard, sales to Comcast declined in 2004
compared to 2003, both in absolute dollars and as a percentage
of revenues. Furthermore, in the third and fourth quarters of
2005, sales for a major telco accounted for 13% of net sales.
However, we do not expect to make significant shipments for this
telco in 2006. The loss of, or any reduction in orders from, a
significant customer would harm our business.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
In addition, historically we have been dependent upon capital
spending in the cable and satellite industry. We are attempting
to diversify our customer base beyond cable and satellite
customers, principally into the telco market. Major telcos have
begun to implement plans to rebuild or upgrade their networks to
offer bundled video, voice and data services. While we have
recently increased our revenue from telco customers, we are
relatively new to this market. In order to be successful in this
market, we may need to build alliances with telco equipment
manufacturers, adapt our products for telco applications, take
orders at prices resulting in lower margins, and build internal
expertise to handle the particular contractual and technical
demands of the telco industry. As a result of these and other
factors, we cannot assure you that we will be able to increase
our revenues from the telco market, or that we can do so
profitably, and any failure to increase revenues and profits
from telco customers could adversely affect our business.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

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<TR>
    <TD width="1%"></TD>
    <TD width="99%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <I>Our Operating Results Are Likely To Fluctuate Significantly
    And May Fail To Meet Or Exceed The Expectations Of Securities
    Analysts Or Investors, Causing Our Stock Price To Decline.</I></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
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:
</DIV>

<DIV style="margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 5pt;color: #000000; background: #ffffff;">

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

<TR valign="top">
    <TD>&#149;</TD>
    <TD align="left">
    <FONT style="font-size: 10pt">the level and timing of capital
    spending of our customers, both in the U.S. and in foreign
    markets;
    </FONT></TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&#149;</TD>
    <TD align="left">
    <FONT style="font-size: 10pt">changes in market demand;
    </FONT></TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&#149;</TD>
    <TD align="left">
    <FONT style="font-size: 10pt">the timing and amount of orders,
    especially from significant customers;
    </FONT></TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&#149;</TD>
    <TD align="left">
    <FONT style="font-size: 10pt">the timing of revenue recognition
    from solution contracts which may span several quarters;
    </FONT></TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&#149;</TD>
    <TD align="left">
    <FONT style="font-size: 10pt">the timing of revenue recognition
    on sales arrangements, which may include multiple deliverables;
    </FONT></TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&#149;</TD>
    <TD align="left">
    <FONT style="font-size: 10pt">the need to replace revenue from
    shipments to a distributor for a major telco, which we do not
    expect to continue at the same level of revenue in 2006 as in
    2005;
    </FONT></TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&#149;</TD>
    <TD align="left">
    <FONT style="font-size: 10pt">competitive market conditions,
    including pricing actions by our competitors;
    </FONT></TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&#149;</TD>
    <TD align="left">
    <FONT style="font-size: 10pt">seasonality, with fewer
    construction and upgrade projects typically occurring in winter
    months and otherwise being affected by inclement weather;
    </FONT></TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&#149;</TD>
    <TD align="left">
    <FONT style="font-size: 10pt">our unpredictable sales cycles;
    </FONT></TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&#149;</TD>
    <TD align="left">
    <FONT style="font-size: 10pt">the amount and timing of sales to
    telcos, which are particularly difficult to predict;
    </FONT></TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&#149;</TD>
    <TD align="left">
    <FONT style="font-size: 10pt">new product introductions by our
    competitors or by us;
    </FONT></TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&#149;</TD>
    <TD align="left">
    <FONT style="font-size: 10pt">changes in domestic and
    international regulatory environments;
    </FONT></TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&#149;</TD>
    <TD align="left">
    <FONT style="font-size: 10pt">market acceptance of new or
    existing products;
    </FONT></TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&#149;</TD>
    <TD align="left">
    <FONT style="font-size: 10pt">the cost and availability of
    components, subassemblies and modules;
    </FONT></TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&#149;</TD>
    <TD align="left">
    <FONT style="font-size: 10pt">the mix of our customer base and
    sales channels;
    </FONT></TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&#149;</TD>
    <TD align="left">
    <FONT style="font-size: 10pt">the mix of our products sold;
    </FONT></TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&#149;</TD>
    <TD align="left">
    <FONT style="font-size: 10pt">changes in our operating expenses
    and extraordinary expenses;
    </FONT></TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&#149;</TD>
    <TD align="left">
    <FONT style="font-size: 10pt">the impact of FAS&nbsp;123(R), a
    new accounting standard which will require us to expense stock
    options;
    </FONT></TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&#149;</TD>
    <TD align="left">
    <FONT style="font-size: 10pt">our development of custom products
    and software;
    </FONT></TD>
</TR>

</TABLE>

<P align="center" style="font-size: 10pt;color: #000000; background: #ffffff;">15

</FONT>

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<FONT face="helvetica,arial">

<DIV style="margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 5pt;color: #000000; background: #ffffff;">

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

<TR valign="top">
    <TD>&#149;</TD>
    <TD align="left">
    <FONT style="font-size: 10pt">the quantity of third-party
    products we sell, which products carry lower gross margins,
    compared to our own products;
    </FONT></TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&#149;</TD>
    <TD align="left">
    <FONT style="font-size: 10pt">the quantity of FTTP products we
    sell, which products carry lower gross margins than our other
    products;
    </FONT></TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&#149;</TD>
    <TD align="left">
    <FONT style="font-size: 10pt">the level of international
    sales;&nbsp;and
    </FONT></TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&#149;</TD>
    <TD align="left">
    <FONT style="font-size: 10pt">economic and financial conditions
    specific to the cable, satellite and telco industries, and
    general economic conditions.
    </FONT></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
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 compatible set top boxes, and our
customers&#146; need for local franchise and licensing approvals.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
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 during the first
quarter of 2003, the third quarter of 2004, and a decrease in
gross profit percentage in 2005, 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.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="1%"></TD>
    <TD width="99%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <I>Our Future Growth Depends on Market Acceptance of Several
    Emerging Broadband Services, on the Adoption of New Broadband
    Technologies and on Several Other Broadband Industry Trends.</I></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Future demand for our products will depend significantly on the
growing market acceptance of several emerging broadband
services, including digital video; VOD; HDTV; very high-speed
data services and voice-over-IP (VoIP) telephony.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
The effective delivery of these services will depend, in part,
on a variety of new network architectures and standards, such as:
</DIV>

<DIV style="margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 5pt;color: #000000; background: #ffffff;">

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

<TR valign="top">
    <TD>&#149;</TD>
    <TD align="left">
    <FONT style="font-size: 10pt">new video compression standards
    such as MPEG-4/ H.264 and Microsoft&#146;s Windows Media 9
    broadcast profile
    <FONT style="white-space: nowrap">(VC-1);</FONT>
    </FONT></TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&#149;</TD>
    <TD align="left">
    <FONT style="font-size: 10pt">FTTP and DSL networks designed to
    facilitate the delivery of video services by telcos;
    </FONT></TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&#149;</TD>
    <TD align="left">
    <FONT style="font-size: 10pt">the greater use of protocols such
    as IP;&nbsp;and
    </FONT></TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&#149;</TD>
    <TD align="left">
    <FONT style="font-size: 10pt">the introduction of new consumer
    devices, such as advanced set-top boxes and personal video
    recorders (PVRs).
    </FONT></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
If adoption of these emerging services and/or technologies is
not as widespread or as rapid as we expect, or if we are unable
to develop new products based on these technologies on a timely
basis, our net sales growth will be materially and adversely
affected.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Furthermore, other technological, industry and regulatory trends
will affect the growth of our business. These trends include the
following:
</DIV>

<DIV style="margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

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

<TR valign="top">
    <TD>&#149;</TD>
    <TD align="left">
    <FONT style="font-size: 10pt">convergence, or the desire of
    certain network operators to deliver a package of video, voice
    and data services to consumers, also known as the &#147;triple
    play&#148;;
    </FONT></TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&#149;</TD>
    <TD align="left">
    <FONT style="font-size: 10pt">the use of digital video by
    businesses, governments and educators;
    </FONT></TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&#149;</TD>
    <TD align="left">
    <FONT style="font-size: 10pt">the entry of telcos into the video
    business;
    </FONT></TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&#149;</TD>
    <TD align="left">
    <FONT style="font-size: 10pt">growth in HDTV, on-demand services
    and mobile video;
    </FONT></TD>
</TR>

</TABLE>

<P align="center" style="font-size: 10pt;color: #000000; background: #ffffff;">16

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<DIV style="margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 5pt;color: #000000; background: #ffffff;">

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

<TR valign="top">
    <TD>&#149;</TD>
    <TD align="left">
    <FONT style="font-size: 10pt">efforts by regulators and
    governments in the U.S. and abroad to encourage the adoption of
    broadband and digital technologies;&nbsp;and
    </FONT></TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&#149;</TD>
    <TD align="left">
    <FONT style="font-size: 10pt">the extent and nature of
    regulatory attitudes toward such issues as competition between
    operators, access by third parties to networks of other
    operators, local franchising requirements for telcos to offer
    video, and new services such as VoIP.
    </FONT></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
If, for instance, operators do not pursue the &#147;triple
play&#148; as aggressively as we expect, our net sales growth
would be materially and adversely affected. Similarly, if our
expectations regarding these and other trends are not met, our
net sales may be materially and adversely affected.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="1%"></TD>
    <TD width="99%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <I>We Need To Develop And Introduce New And Enhanced Products In
    A Timely Manner To Remain Competitive.</I></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
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:
</DIV>

<DIV style="margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 5pt;color: #000000; background: #ffffff;">

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

<TR valign="top">
    <TD>&#149;</TD>
    <TD align="left">
    <FONT style="font-size: 10pt">are not cost effective;
    </FONT></TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&#149;</TD>
    <TD align="left">
    <FONT style="font-size: 10pt">are not brought to market in a
    timely manner;
    </FONT></TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&#149;</TD>
    <TD align="left">
    <FONT style="font-size: 10pt">are not in accordance with
    evolving industry standards and architectures;
    </FONT></TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&#149;</TD>
    <TD align="left">
    <FONT style="font-size: 10pt">fail to achieve market
    acceptance;&nbsp;or
    </FONT></TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&#149;</TD>
    <TD align="left">
    <FONT style="font-size: 10pt">are ahead of the market.
    </FONT></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
We are currently developing and marketing products based on new
video compression standards. Encoding products based on the
current MPEG-2 compression standards have represented a
significant portion of the Company&#146;s sales since the
acquisition of DiviCom in 2000. New standards, such as MPEG-4/
H.264 and Microsoft&#146;s Windows Media 9 broadcast profile
(VC-1), have been adopted which provide significantly greater
compression efficiency, thereby making more bandwidth available
to operators. The availability of more bandwidth is particularly
important to those DBS and telco operators seeking to launch, or
expand, HDTV services. One of our competitors has already
announced significant orders for MPEG-4 HD encoders from a major
DBS operator. Harmonic is developing products, including HD
encoders, based on these new standards in order to remain
competitive and is devoting considerable resources to this
effort. There can be no assurance that these efforts will be
successful in the near future, or at all, or that competitors
will not take significant market share in HD encoding.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
We are also currently marketing products for FTTP networks which
certain telcos have begun to build. We believe that a number of
our existing products can be deployed successfully in these
networks and we have devoted considerable resources to obtaining
orders, qualifying our products and hiring knowledgeable
personnel. Shipments of products for a major telco&#146;s FTTP
projects represented 13% of sales in our third and fourth
quarters of 2005. However, we do not expect to make significant
shipments for this telco in 2006, and we have reduced the amount
of resources devoted to these products. While we expect to
continue to market these products to other customers, there can
be no assurance that these efforts will be successful in the
near future, or at all.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
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.
</DIV>

<P align="center" style="font-size: 10pt;color: #000000; background: #ffffff;">17

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<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

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<TR>
    <TD width="1%"></TD>
    <TD width="99%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <I>Broadband Communications Markets Are Characterized By Rapid
    Technological Change.</I></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
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. Also, decisions by
customers to adopt new technologies or products are often
delayed by extensive evaluation and qualification processes and
can result in delays in sales of current 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.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="1%"></TD>
    <TD width="99%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <I>The Markets In Which We Operate Are Intensely Competitive And
    Many Of Our Competitors Are Larger And More Established.</I></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
The markets for fiber optics systems and digital video systems
are extremely competitive and have been characterized by rapid
technological change and declining average selling prices.
Pressure on average selling prices was particularly severe
during the recent economic downturn as equipment suppliers
competed aggressively for customers&#146; reduced capital
spending. Harmonic&#146;s competitors in the fiber optics
systems business include corporations such as Motorola, Cisco
Systems and C-Cor. In the digital and video broadcasting systems
business, we compete broadly with vertically integrated system
suppliers including Motorola, Cisco Systems, Tandberg Television
and Thomson Multimedia, and in certain product lines with a
number of smaller companies.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
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.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
If any of our competitors&#146; products or technologies were to
become the industry standard, our business could be seriously
harmed. For example, new standards for video compression are
being introduced and products based on these standards are being
developed by Harmonic and certain competitors. If our
competitors are successful in bringing these products to market
earlier, or if these products are more technologically capable
than ours, then our sales could be materially and adversely
affected. 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.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="1%"></TD>
    <TD width="99%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <I>If Sales Forecasted For A Particular Period Are Not Realized
    In That Period Due To The Unpredictable Sales Cycles Of Our
    Products, Our Operating Results For That Period Will Be
    Harmed.</I></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
The sales cycles of many of our products, particularly our newer
products and products sold internationally, are typically
unpredictable and usually involve:
</DIV>

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

<TR valign="top">
    <TD>&#149;</TD>
    <TD align="left">
    <FONT style="font-size: 10pt">a significant technical evaluation;
    </FONT></TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&#149;</TD>
    <TD align="left">
    <FONT style="font-size: 10pt">a commitment of capital and other
    resources by cable, satellite, and other network operators;
    </FONT></TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&#149;</TD>
    <TD align="left">
    <FONT style="font-size: 10pt">time required to engineer the
    deployment of new technologies or new broadband services;
    </FONT></TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&#149;</TD>
    <TD align="left">
    <FONT style="font-size: 10pt">testing and acceptance of new
    technologies that affect key operations;&nbsp;and
    </FONT></TD>
</TR>

</TABLE>

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    <TD width="5%"></TD>
    <TD width="95%"></TD>
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<TR valign="top">
    <TD>&#149;</TD>
    <TD align="left">
    <FONT style="font-size: 10pt">test marketing of new services
    with subscribers.
    </FONT></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
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 and
the market price of our common stock could decline. In this
regard, our sales cycles with our current and potential
satellite and telco customers are particularly unpredictable.
Additionally, orders may include multiple elements, the timing
of delivery of which may impact the timing of revenue
recognition. Quarterly and annual results may fluctuate
significantly due to revenue recognition policies and the timing
of the receipt of orders. For example, revenue from two
significant customer orders in the third quarter of 2004 was
delayed due to these factors until the fourth quarter of 2004.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
In addition, a significant portion of our revenue is derived
from solution sales that principally consist of and include the
system design, manufacture, test, installation and integration
of equipment to the specifications of Harmonic&#146;s customers,
including equipment acquired from third parties to be integrated
with Harmonic&#146;s products. Revenue forecasts for solution
contracts are based on the estimated timing of the system
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.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

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    <TD>
    <I>We Depend On Our International Sales And Are Subject To The
    Risks Associated With International Operations, Which May
    Negatively Affect Our Operating Results.</I></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Sales to customers outside of the U.S.&nbsp;in 2005, 2004 and
2003 represented 40%, 42% and 29% 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
manufacturers, and our efforts to increase sales in
international markets, are subject to a number of risks,
including:
</DIV>

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

<TR valign="top">
    <TD>&#149;</TD>
    <TD align="left">
    <FONT style="font-size: 10pt">changes in foreign government
    regulations and telecommunications standards;
    </FONT></TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&#149;</TD>
    <TD align="left">
    <FONT style="font-size: 10pt">import and export license
    requirements, tariffs, taxes and other trade barriers;
    </FONT></TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&#149;</TD>
    <TD align="left">
    <FONT style="font-size: 10pt">fluctuations in currency exchange
    rates;
    </FONT></TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&#149;</TD>
    <TD align="left">
    <FONT style="font-size: 10pt">difficulty in collecting accounts
    receivable;
    </FONT></TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&#149;</TD>
    <TD align="left">
    <FONT style="font-size: 10pt">the burden of complying with a
    wide variety of foreign laws, treaties and technical standards;
    </FONT></TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&#149;</TD>
    <TD align="left">
    <FONT style="font-size: 10pt">difficulty in staffing and
    managing foreign operations;
    </FONT></TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&#149;</TD>
    <TD align="left">
    <FONT style="font-size: 10pt">political and economic
    instability;&nbsp;and
    </FONT></TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&#149;</TD>
    <TD align="left">
    <FONT style="font-size: 10pt">changes in economic policies by
    foreign governments.
    </FONT></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
During 2004, a significant percentage of our international
revenues were derived from a major upgrade by a Japanese
customer of its satellite facilities. That upgrade has now been
completed, and sales to this customer in 2005 declined compared
to 2004, which has adversely affected our sales to international
customers.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
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 as well as mergers. 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.
</DIV>

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<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
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.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
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 U.S.&nbsp;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. Any or
all of these factors could adversely impact our business and
results of operations.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

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    <TD>
    <I>Pending Business Combinations And Other Financial And
    Regulatory Issues Among Our Customers Could Adversely Affect Our
    Business.</I></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Many of our domestic and international customers accumulated
significant levels of debt and announced reorganizations and
financial restructurings during the past three 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.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
While the capital market concerns about the domestic cable
industry have eased, 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 Comcast/ AT&#38;T Broadband
transaction in 2002 and the acquisition by The News Corporation
Ltd. in December 2003 of 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 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. More recently, restructuring of the
industry has continued with the privatization of Cox
Communications, the planned sale of Adelphia
Communications&#146; cable systems out of bankruptcy to Comcast
and Time-Warner, the proposed sale of Cablevision&#146;s VOOM!
satellite assets to Echostar and the recently completed merger
of U.K. cable operators NTL and Telewest. In addition, further
business combinations may occur in our 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.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

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    <TD width="1%"></TD>
    <TD width="99%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <I>Changes in Telecommunications Legislation and Regulations
    Could Harm Our Prospects And Future Sales.</I></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Changes in telecommunications legislation and regulations in the
U.S. and other countries could affect the sales of our products.
In particular, regulations dealing with access by competitors to
the networks of incumbent operators could slow or stop
additional construction or expansion by these operators. Local
franchising and licensing requirements may slow the entry of
telcos into the vidoe business. Increased regulation of our
customers&#146; pricing or service offerings could limit their
investments and consequently the sales of our products. Changes
in regulations could have a material adverse effect on our
business, operating results, and financial condition.
</DIV>

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    <TD width="1%"></TD>
    <TD width="99%"></TD>
</TR>

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    <TD></TD>
    <TD>
    <I>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.</I></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
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.
</DIV>

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    <TD width="1%"></TD>
    <TD width="99%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <I>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.</I></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
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 issued FAS&nbsp;123(R) that will require us to
record a charge to earnings for employee stock option grants and
employee stock purchase plan rights for all future periods
beginning on January&nbsp;1, 2006. This standard will negatively
impact our earnings and may affect our ability to raise capital
on acceptable terms. In addition, 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
accounting standards 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.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

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</TR>

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    <TD></TD>
    <TD>
    <I>We Are Exposed To Additional Costs And Risks Associated With
    Complying With Increasing And New Regulation&nbsp;Of Corporate
    Governance And Disclosure Standards.</I></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
We are spending an increased amount of management time and
external resources to comply with changing laws, regulations and
standards relating to corporate governance and public
disclosure, including the Sarbanes-Oxley Act of 2002, SEC
regulations and Nasdaq Stock Market rules. Particularly,
Section&nbsp;404 of the Sarbanes-Oxley Act requires
management&#146;s annual review and evaluation of our internal
control over financial reporting, and attestation of the
effectiveness of our internal control over financial reporting
by management and the Company&#146;s independent registered
public accounting firm in connection with the filing of the
annual report on
Form&nbsp;<FONT style="white-space: nowrap">10-K</FONT> for each
fiscal year. We have documented and tested our internal control
systems and procedures and have made improvements in order for
us to comply with the requirements of Section&nbsp;404. This
process required us to hire additional personnel and outside
advisory services and has resulted in significant additional
expenses. While our assessment of our internal control over
financial reporting resulted in our conclusion that as of
December&nbsp;31, 2005, our internal control over financial
reporting was effective, we cannot predict the outcome of our
testing in future periods. If we conclude in future periods that
our internal control over financial reporting is not effective
or if our independent registered public accounting firm is
unable to provide an unqualified opinion as of future year-ends,
investors may lose confidence in our financial statements, and
the price of our stock may suffer.
</DIV>

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<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

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    <TD></TD>
    <TD>
    <I>We May Need Additional Capital In The Future And May Not Be
    Able To Secure Adequate Funds On Terms Acceptable To Us.</I></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
We have generated substantial operating losses since we began
operations in June 1988. 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, 2005 we had an accumulated deficit of
$1.9&nbsp;billion. These losses, among other things, have had
and may have an adverse effect on our stockholders&#146; equity
and working capital.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
We believe that the proceeds of the stock offering we completed
in November 2003, together 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
strategic opportunities or to strengthen our financial position.
The stock offering we completed in November 2003 related to a
registration statement on
Form&nbsp;<FONT style="white-space: nowrap">S-3</FONT> declared
effective by the SEC in April 2002. In April 2005, we filed
another registration statement on
Form&nbsp;<FONT style="white-space: nowrap">S-3</FONT> with the
SEC. Pursuant to these registration statements on
Form&nbsp;<FONT style="white-space: nowrap">S-3,</FONT> which
have been declared effective by the SEC, we will continue to be
able to issue registered common stock, preferred stock, debt
securities and warrants to purchase common stock from time to
time, up to an aggregate of approximately $200&nbsp;million,
subject to market conditions and our capital needs. Our ability
to raise funds may be adversely affected by a number of factors
relating to Harmonic, as well as factors beyond our control,
including 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.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
In addition, we actively 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.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
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.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

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</TR>

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    <TD></TD>
    <TD>
    <I>If Demand For Our Products Increases More Quickly Than We
    Expect, We May Be Unable To Meet Our Customers&#146;
    Requirements.</I></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Our net sales increased approximately 4% in 2005 compared to
2004, and approximately 36% in 2004 from 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. 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 sufficient volumes 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
</DIV>

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<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff;">
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.
</DIV>

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    <I>We Must Be Able To Manage Expenses And Inventory Risks
    Associated With Meeting The Demand Of Our Customers.</I></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
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 have been in the past
adversely affected by significant charges for excess and
obsolete inventories.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
In addition, the Company must carefully manage the introduction
of next generation products in order to balance potential
inventory risks associated with excess quantities of older
product lines and forecasts of customer demand for new products.
For example, in 2005, we wrote down approximately
$8.4&nbsp;million for obsolete and excess inventory, with a
major portion of the write-down being the result of product
transitions in certain product lines. There can be no assurance
that the Company will be able to manage these product
transitions in the future without incurring write-downs for
excess inventory or having inadequate supplies of new products
to meet customer expectations.
</DIV>

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    <TD>
    <I>We Face Risks Associated With Having Important Facilities And
    Resources Located In Israel.</I></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Harmonic maintains a facility in Caesarea in the State of Israel
with a total of 71 employees as of December&nbsp;31, 2005, or
approximately 11% of our workforce. The employees at this
facility consist principally of research and development
personnel involved in development of certain digital video
products. 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 between Israel and its trading partners
could significantly harm our business. The September 2001
terrorist attacks, the situation in Iraq, the ongoing
U.S.&nbsp;war on terrorism, terrorist attacks and hostilities
within Israel, and the election of Hamas representatives to a
majority of the seats in the Palestinian Legislative Council
have heightened these risks. We cannot assure you that current
tensions in the Middle East will not adversely affect our
business and results of operations.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
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.
</DIV>

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    <I>We Purchase Several Key Components, Subassemblies And Modules
    Used In The Manufacture Or Integration Of Our Products From Sole
    Or Limited Sources, And We Are Increasingly Dependent On
    Contract Manufacturers.</I></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
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. For example, we
depend on LSI Logic for video encoding chips. 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
</DIV>

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<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff;">
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.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Difficulties in managing relationships with current contract
manufacturers 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 negatively 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 in the past were adversely
affected by significant excess and obsolete inventory charges.
</DIV>

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    <I>We Need To Effectively Manage Our Operations And The Cyclical
    Nature Of Our Business.</I></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
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. 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, as we did
during 2004, adding 33&nbsp;employees. In the first quarter of
2005, we added 42&nbsp;employees in connection with our
acquisition of BTL. In connection with the consolidation of our
two operating divisions in December 2005, we reduced our
workforce by approximately 40 employees. 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.
</DIV>

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    <TD>
    <I>We May Be Materially Affected By The WEEE And RoHS
    Directives.</I></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
The European Parliament and the Council of the European Union
have finalized the Waste Electrical and Electronic Equipment
(WEEE)&nbsp;directive, which became effective in August 2005,
which regulates the collection, recovery, and recycling of waste
from electrical and electronic products, and the Restriction on
the Use of Certain Hazardous Substances in Electrical and
Electronic Equipment (RoHS) directive, which will become
effective in July 2006, which bans the use of certain hazardous
materials including lead, mercury, cadmium, hexavalent chromium,
and polybrominated biphenyls (PBBs), and polybrominated diphenyl
ethers (PBDEs) that exceed certain specified levels. Under WEEE,
we are responsible for financing operations for the collection,
treatment, disposal, and recycling of past and future covered
products that we produce. We cannot assure you that compliance
with WEEE and RoHS will not have a material adverse effect on
our financial condition or results of operations.
</DIV>

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    <TD>
    <I>We Are Liable For C-Cube&#146;s Pre-Merger Tax Liabilities,
    Including Tax Liabilities Resulting From The Spin-Off Of Its
    Semiconductor Business.</I></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
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, 2005, approximately $10.0&nbsp;million
of pre-merger tax liabilities remained 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 11 countries. Harmonic paid $5.8&nbsp;million of
these tax obligations in February
</DIV>

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<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff;">
2005, 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 $10.0&nbsp;million pre-merger tax liability after the
February 2005 payments, LSI Logic is obligated to reimburse
Harmonic.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
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 or cash
flows.
</DIV>

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    <I>We May Be Subject To Risks Associated With Other
    Acquisitions.</I></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
We have made, continue to consider making and may make
investments in complementary companies, products or
technologies. For example, on February&nbsp;25, 2005, we
acquired all of the issued and outstanding shares of Broadcast
Technology Ltd., a private U.K. company. In connection with this
and other acquisition transactions, we could have difficulty
assimilating or retaining the acquired companies&#146; key
personnel and operations, integrating the acquired technology or
products into ours or complying with internal control
requirements of the Sarbanes-Oxley Act as a result of an
acquisition. We also may face challenges in achieving the
strategic objectives, cost savings or other benefits from these
proposed acquisitions 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 or operating results could be harmed.
</DIV>

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    <TD></TD>
    <TD>
    <I>Cessation Of The Development And Production Of Video Encoding
    Chips By C-Cube&#146;s Spun-off Semiconductor Business May
    Adversely Impact Us.</I></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
The DiviCom business and C-Cube semiconductor business (acquired
by LSI Logic in June 2001) 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 has access to certain of the
spun-off semiconductor business technologies and products on
which the DiviCom business previously depended for its product
and service offerings. The current term of this agreement is
through October 2006, with automatic annual renewal unless
terminated by either party in accordance with the agreement
provisions. 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. If the spun-off semiconductor business is not 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.
</DIV>

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    <TD>
    <I>Our Failure To Adequately Protect Our Proprietary Rights May
    Adversely Affect Us.</I></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
We currently hold 38 issued U.S.&nbsp;patents and 19 issued
foreign patents, and have a number of patent applications
pending. Although we attempt to protect our intellectual
property rights through patents, trademarks, copyrights,
</DIV>

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<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff;">
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.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
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 or cash flows.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
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.
</DIV>

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    <TD>
    <I>We Or Our Customers May Face Intellectual Property
    Infringement Claims From Third Parties.</I></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
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.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
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.&nbsp;Patent No.&nbsp;4859016. This patent expired in
September 2003. The complaint seeks injunctive relief, royalties
and damages. Harmonic has not been served in the case. 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
or cash flows.
</DIV>

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<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
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).
</DIV>

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    <TD>
    <I>We Are The Subject Of Securities Class&nbsp;Action Claims And
    Other Litigation Which, If Adversely Determined, Could Harm Our
    Business And Operating Results.</I></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Between June 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 (the &#147;District Court&#148;) for the
Northern District of California. The actions subsequently were
consolidated.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
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 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 19 and May&nbsp;3, 2000. In addition
to Harmonic and certain of its officers and directors, the
complaint also named C-Cube Microsystems Inc. and several of its
officers and directors as defendants. The complaint alleged
that, by making false or misleading statements regarding
Harmonic&#146;s prospects and customers and its acquisition of
C-Cube, certain defendants violated sections 10(b) and 20(a) of
the Securities Exchange Act of 1934 (the &#147;Exchange
Act&#148;). 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
(the &#147;Securities Act&#148;) by filing a false or misleading
registration statement, prospectus, and joint proxy in
connection with the C-Cube acquisition.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
On July&nbsp;3, 2001, the District 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 District 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 District 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. The appeal was heard by a panel of three
judges of the United States Court of Appeals for the Ninth
Circuit (the &#147;Ninth Circuit&#148;) on February&nbsp;17,
2005.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
On November&nbsp;8, 2005, the Ninth Circuit panel affirmed in
part, reversed in part, and remanded for further proceedings the
decision of the District Court. The Ninth Circuit affirmed the
District Court&#146;s dismissal of the plaintiffs&#146; fraud
claims under Sections&nbsp;10(b), 14(a), and 20(a) of the
Exchange Act with prejudice, finding that the plaintiffs failed
to adequately plead their allegations of fraud. The Ninth
Circuit reversed the District Court&#146;s dismissal of the
plaintiffs&#146; claims under Sections&nbsp;11 and 12(a)(2) of
the Securities Act, however, finding that those claims did not
allege fraud and therefore were subject to only minimal pleading
standards. Regarding the secondary liability claim under
Section&nbsp;15 of the Securities Act, the Ninth Circuit
reversed the dismissal of that claim against Anthony J. Ley,
Harmonic&#146;s Chairman and Chief Executive Officer, and
affirmed the dismissal of that claim against Harmonic, while
granting leave to amend. The Ninth Circuit remanded the
surviving claims to the District Court for further proceedings.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
On November&nbsp;22, 2005, both the Harmonic defendants and the
plaintiffs petitioned the Ninth Circuit for a rehearing of the
appeal. On February&nbsp;16, 2006 the Ninth Circuit denied both
petitions.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
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&nbsp;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
</DIV>

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<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff;">
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.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
A second derivative action purporting to be on behalf of
Harmonic was filed in the Superior Court for the County of
Santa&nbsp;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.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Based on its review of the surviving claims in the securities
class actions, 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 each of these claims, and, accordingly, Harmonic
has not recorded a liability. An unfavorable outcome of any of
these litigation matters could have a material adverse effect on
Harmonic&#146;s business, operating results, financial position
or cash flows.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
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.&nbsp;Patent No.&nbsp;4859016. This patent expired in
September 2003. The complaint seeks injunctive relief, royalties
and damages. Harmonic has not been served in the case. 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
or cash flows.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="1%"></TD>
    <TD width="99%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <I>The Terrorist Attacks Of 2001 And The Ongoing Threat Of
    Terrorism Have Created Great Uncertainty And May Continue To
    Harm Our Business.</I></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
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 the
stability and strength of the U.S. and other economies and the
impact of economic conditions on our business.
</DIV>

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<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="1%"></TD>
    <TD width="99%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <I>We Rely On A Continuous Power Supply To Conduct Our
    Operations, And Any Electrical And Natural Gas Crisis Could
    Disrupt Our Operations And Increase Our Expenses.</I></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
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.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

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<TR>
    <TD width="1%"></TD>
    <TD width="99%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <I>The Markets In Which We, Our Customers And Suppliers Operate
    Are Subject To The Risk Of Earthquakes And Other Natural
    Disasters.</I></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Our headquarters and the majority of our operations are located
in California, which is prone to earthquakes, and some of the
other locations in which we, our customers and suppliers conduct
business are prone to natural disasters. In the event that any
of our business centers are affected by any such disasters, we
may sustain damage to our operations and properties and suffer
significant financial losses. Furthermore, we rely on third
party manufacturers for the production of many of our products,
and any disruption in the business or operations of such
manufacturers could adversely impact our business. In addition,
if there is a major earthquake or other natural disaster in any
of the locations in which our significant customers are located,
we face the risk that our customers may incur losses, or
sustained business interruption and/or loss which may materially
impair their ability to continue their purchase of products from
us. A major earthquake or other natural disaster in the markets
in which we, our customers or suppliers operate could have a
material adverse effect on our business, financial condition,
results of operations and cash flows.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

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<TR>
    <TD width="1%"></TD>
    <TD width="99%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <I>Our Stock Price May Be Volatile.</I></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
The market price of our common stock has fluctuated
significantly in the past, 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.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

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<TR>
    <TD width="1%"></TD>
    <TD width="99%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <I>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.</I></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
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:
</DIV>

<DIV style="margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

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

<TR valign="top">
    <TD>&#149;</TD>
    <TD align="left">
    <FONT style="font-size: 10pt">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 style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&#149;</TD>
    <TD align="left">
    <FONT style="font-size: 10pt">limiting the liability of, and
    providing indemnification to, directors and officers;
    </FONT></TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&#149;</TD>
    <TD align="left">
    <FONT style="font-size: 10pt">limiting the ability of Harmonic
    stockholders to call and bring business before special meetings;
    </FONT></TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&#149;</TD>
    <TD align="left">
    <FONT style="font-size: 10pt">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 style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&#149;</TD>
    <TD align="left">
    <FONT style="font-size: 10pt">controlling the procedures for
    conduct and scheduling of Board and stockholder
    meetings;&nbsp;and
    </FONT></TD>
</TR>

</TABLE>

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<DIV style="margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 5pt;color: #000000; background: #ffffff;">

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

<TR valign="top">
    <TD>&#149;</TD>
    <TD align="left">
    <FONT style="font-size: 10pt">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>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
These provisions, alone or together, could delay hostile
takeovers and changes in control or management of Harmonic.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
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.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
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.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
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.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Item&nbsp;1B.&nbsp;<I>Unresolved Staff Comments</I></B>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
None.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

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<TR>
    <TD width="6%"></TD>
    <TD width="94%"></TD>
</TR>

<TR valign="top">
    <TD><B>Item&nbsp;2.<I>&nbsp;</I></B></TD>
    <TD>
    <B><I>Properties</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
All of our facilities are leased, including our principal
operations and corporate headquarters in Sunnyvale, California.
We also have a research and development center in New York,
several sales offices in the U.S., sales and support centers in
the United Kingdom, France, and China, and a research and
development center in Israel. Our leases, which expire at
various dates through September 2010, are for approximately
420,000&nbsp;square feet of space. In the U.S., of the
366,000&nbsp;square feet under lease, approximately
134,000&nbsp;square feet is in excess of our requirements and we
no longer occupy, do not intend to occupy, and have subleased,
or plan to sublease. The estimated loss on subleases has been
included in the excess facilities charges recorded in 2001 and
2002. In the fourth quarter of 2005 we subleased a portion of an
unoccupied building for the remaining term of the lease which
resulted in a $1.1&nbsp;million reduction to the excess
facilities liability.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

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<TR>
    <TD width="6%"></TD>
    <TD width="94%"></TD>
</TR>

<TR valign="top">
    <TD><B>Item&nbsp;3.<I>&nbsp;</I></B></TD>
    <TD>
    <B><I>Legal Proceedings</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<I> Shareholder Litigation</I>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Between June 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
U.S.&nbsp;District Court for the Northern District of
California. The actions subsequently were consolidated.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
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 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 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
</DIV>

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<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff;">
statements regarding Harmonic&#146;s prospects and customers and
its acquisition of C-Cube, certain defendants violated sections
10(b) and 20(a) of the Securities Exchange Act of 1934 (the
&#147;Exchange Act&#148;). 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 (the &#147;Securities Act&#148;) by filing a false or
misleading registration statement, prospectus, and joint proxy
in connection with the C-Cube acquisition.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
On July&nbsp;3, 2001, the District 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 District 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 District 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. The appeal was heard by a panel of three
judges of the United States Court of Appeals for the Ninth
Circuit (the &#147;Ninth Circuit&#148;) on February&nbsp;17,
2005.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
On November&nbsp;8, 2005, the Ninth Circuit panel affirmed in
part, reversed in part, and remanded for further proceedings the
decision of the District Court. The Ninth Circuit affirmed the
District Court&#146;s dismissal of the plaintiffs&#146; fraud
claims under Sections&nbsp;10(b), 14(a), and 20(a) of the
Exchange Act with prejudice, finding that the plaintiffs failed
to adequately plead their allegations of fraud. The Ninth
Circuit reversed the District Court&#146;s dismissal of the
plaintiffs&#146; claims under Sections&nbsp;11 and 12(a)(2) of
the Securities Act, however, finding that those claims did not
allege fraud and therefore were subject to only minimal pleading
standards. Regarding the secondary liability claim under
Section&nbsp;15 of the Securities Act, the Ninth Circuit
reversed the dismissal of that claim against Anthony J. Ley,
Harmonic&#146;s Chairman and Chief Executive Officer, and
affirmed the dismissal of that claim against Harmonic, while
granting leave to amend. The Ninth Circuit remanded the
surviving claims to the District Court for further proceedings.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
On November&nbsp;22, 2005, both the Harmonic defendants and the
plaintiffs petitioned the Ninth Circuit for a rehearing of the
appeal. On February&nbsp;16, 2006 the Ninth Circuit denied both
petitions.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
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&nbsp;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.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
A second derivative action purporting to be on behalf of
Harmonic was filed in the Superior Court for the County of
Santa&nbsp;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
</DIV>

<P align="center" style="font-size: 10pt;color: #000000; background: #ffffff;">31

</FONT>

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<FONT face="helvetica,arial">

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff;">
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.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Based on its review of the surviving claims in the securities
class actions, 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
or cash flows.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<I> Other Litigation</I>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
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.&nbsp;Patent No.&nbsp;4859016. This patent expired in
September 2003. The complaint seeks injunctive relief, royalties
and damages. Harmonic has not been served in the case. 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
or cash flows.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Harmonic is involved in other litigation and may be subject to
claims arising in the normal course of business. In the opinion
of management the amount of ultimate liability with respect to
these matters in the aggregate will not have a material adverse
effect on the Company or its operating results, financial
position or cash flows.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B><I> Item&nbsp;4.&nbsp;Submission of Matters to a Vote of
Security Holders</I></B>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
No matters were submitted to a vote of stockholders during the
fourth quarter of the year ended December&nbsp;31, 2005.
</DIV>

<P align="center" style="font-size: 10pt;color: #000000; background: #ffffff;">32

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<FONT face="helvetica,arial">

<!-- link1 "PART II" -->
<DIV align="left"><A NAME="001"></A></DIV>

<DIV align="center" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 18pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>PART&nbsp;II</B>
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="6%"></TD>
    <TD width="94%"></TD>
</TR>

<TR valign="top">
    <TD><B>Item&nbsp;5.<I>&nbsp;</I></B></TD>
    <TD>
    <B><I>Market for the Registrant&#146;s Common Equity, Related
    Stock Holder Matters, and Issuer Purchases of Equity
    Securities</I></B></TD>
</TR>

</TABLE>

<DIV style="margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;color: #000000; background: #ffffff;">

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

<TR valign="top">
    <TD><I>(a)&nbsp;</I></TD>
    <TD align="left">
    <I>Market information:</I> 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:</TD>
</TR>

</TABLE>
<FONT face="times new roman,times">

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10pt; margin-top: 12pt; ">

<TR style="font-size: 1pt;">
    <TD width="35%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="15%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="14%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="14%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="14%">&nbsp;</TD>
</TR>

<TR style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">High</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">Low</FONT></B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">2004
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">First quarter
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">13.75</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">7.35</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Second quarter
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">10.55</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">5.28</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Third quarter
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">7.46</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">4.86</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Fourth quarter
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">9.11</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">6.84</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">2005
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">First quarter
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">12.33</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">7.49</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Second quarter
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">9.91</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">4.83</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Third quarter
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">6.14</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">4.93</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Fourth quarter
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">5.85</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">4.34</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

</TABLE>
</CENTER>
</FONT>

<DIV align="left" style="font-size: 3pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<DIV style="width: 12%; border-top: 1.0pt solid black; font-size: 1pt">&nbsp;</DIV>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 3pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<I>Holders of record:</I> At March&nbsp;1, 2006 there were 464
stockholders of record of Harmonic&#146;s Common Stock.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<I>Dividends:</I> Harmonic has never declared or paid any
dividends on its capital stock. Harmonic currently expects to
retain future earnings, if any, for 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.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<I>Securities authorized for issuance under equity compensation
plans:</I> The disclosure required by Item&nbsp;201(d) of
Regulation&nbsp;<FONT style="white-space: nowrap">S-K</FONT> is
set forth in the 2006 Proxy Statement under the caption
&#147;Equity Plan Information&#148; and is incorporated herein
by reference.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<I>Sales of unregistered securities:</I> On February&nbsp;25,
2005, Harmonic purchased all of the issued and outstanding
shares of Broadcast Technology Ltd. (BTL), a private U.K.
company, for a purchase consideration of approximately
&#163;3.0&nbsp;million in cash and 169,112&nbsp;shares of
Harmonic&#146;s common stock. Harmonic purchased all of the
shares of BTL directly from, and paid the consideration thereof
directly to, the shareholders of BTL. In connection with such
sale of our common stock, Harmonic relied upon the exemption
from registration under the Securities Act provided by
Regulation&nbsp;S. Harmonic based its reliance upon
Regulation&nbsp;S on the fact that the offer and sale of
Harmonic&#146;s common stock was made in the U.K., there were no
directed selling efforts made by Harmonic in the U.S.&nbsp;with
respect to such securities, and Harmonic required the purchasers
of its common stock to agree to such restrictions on resale and
other matters as required by Regulation&nbsp;S. During the
fiscal year ended December&nbsp;31, 2005, Harmonic did not sell
any other securities in transactions that were not registered
under the Securities Act of 1933.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<I>(b)&nbsp;Use of proceeds:</I> Not applicable.
</DIV>

<DIV style="margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;color: #000000; background: #ffffff;">

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

<TR valign="top">
    <TD><I>(c)&nbsp;</I></TD>
    <TD align="left">
    <I>Purchase of equity securities by the issuer and affiliated
    purchasers:</I> During the three months ended December&nbsp;31,
    2005, Harmonic did not, nor did any of its affiliated entities,
    repurchase any of Harmonic&#146;s equity securities.</TD>
</TR>

</TABLE>

<P align="center" style="font-size: 10pt;color: #000000; background: #ffffff;">33

</FONT>

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<FONT face="helvetica,arial">

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="6%"></TD>
    <TD width="94%"></TD>
</TR>

<TR valign="top">
    <TD><B>Item&nbsp;6.<I>&nbsp;</I></B></TD>
    <TD>
    <B><I>Selected Financial Data</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
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;<FONT style="white-space: nowrap">10-K.
</FONT>
</DIV>
<FONT face="times new roman,times">

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10pt; margin-top: 12pt; ">

<TR style="font-size: 1pt;">
    <TD width="44%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
</TR>


<TR style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="18" align="center" nowrap><B><FONT face="helvetica,arial">Year Ended December&nbsp;31,</FONT></B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="18" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">2005</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">2004</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">2003</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">2002</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">2001</FONT></B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>


<TR style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="18" align="center" nowrap><B><FONT face="helvetica,arial">(In thousands, except per share data)</FONT></B></TD><TD></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <B><FONT face="helvetica,arial">Consolidated Statement of
    Operations Data</FONT></B></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="21">&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Net sales
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">257,378</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">248,306</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">182,276</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">186,632</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">203,810</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Gross
    profit<SUP style="font-size: 85%; vertical-align: text-top">(1)</SUP>
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">93,948</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">104,495</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">60,603</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">54,429</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">1,555</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Income (loss) from
    operations<SUP style="font-size: 85%; vertical-align: text-top">(1)(2)</SUP>
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(7,044</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">1,436</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(30,545</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(77,349</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(168,787</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Net income
    (loss)<SUP style="font-size: 85%; vertical-align: text-top">(1)</SUP>
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(5,731</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">1,574</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(29,433</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(76,918</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(166,407</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Basic net income (loss) per share
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(0.08</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">0.02</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(0.47</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(1.29</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(2.84</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Diluted net income (loss) per share
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(0.08</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">0.02</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(0.47</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(1.29</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(2.84</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
</TR>

<TR>
    <TD colspan="21">&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <B><FONT face="helvetica,arial">Consolidated Balance Sheet
    Data</FONT></B></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="21">&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Cash, cash equivalents and
    short-term investments
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">110,828</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">100,607</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">112,597</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">49,158</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">54,277</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Working capital
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">117,353</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">117,112</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">95,389</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">31,246</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">66,608</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Total assets
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">226,297</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">242,356</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">224,726</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">173,754</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">238,056</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Long term debt, including current
    portion
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">1,272</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">2,339</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">1,656</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">2,572</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">2,746</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Stockholders&#146; equity
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">112,982</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">110,557</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">106,161</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">62,183</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">135,054</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

</TABLE>
</CENTER>
</FONT>

<DIV align="left" style="font-size: 3pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<DIV style="width: 16%; border-top: 1.0pt solid black; font-size: 1pt">&nbsp;</DIV>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 3pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
(1) The 2005 gross profit, loss from operations and net loss
included a charge of $8.4&nbsp;million for the writedown of
inventory resulting primarily from the introduction of new
products and the related obsolescence of existing inventory.
Operating expenses included an expense of $1.1&nbsp;million for
severance costs from the consolidation of the Company&#146;s two
operating segments into a single segment effective as of
January&nbsp;1, 2006, and a benefit of $1.1&nbsp;million from
the reversal of previously recorded excess facilities costs due
to subleasing an excess facility.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
The 2004 gross profit, income from operations and net income
included credits of $4.0&nbsp;million for products sold during
the year that had been written down in prior years.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
The 2003 gross profit, loss from operations and net loss
included credits of $4.7&nbsp;million for products sold during
the year that 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.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
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 products sold during the year that 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.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
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 included $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.
</DIV>

<P align="center" style="font-size: 10pt;color: #000000; background: #ffffff;">34

</FONT>

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

<FONT face="helvetica,arial">

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
(2)&nbsp;Income (loss) from operations for 2005, 2004, 2003,
2002 and 2001 included amortization of intangible assets of
$2.6&nbsp;million, $13.9&nbsp;million, $13.9&nbsp;million,
$18.7&nbsp;million and $20.7&nbsp;million, respectively. On
January&nbsp;1, 2002, we ceased amortization of goodwill due to
adoption of SFAS&nbsp;No.&nbsp;142, Goodwill and Other
Intangible Assets.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
See Notes&nbsp;4 and 5 of Notes to Consolidated Financial
Statements.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="6%"></TD>
    <TD width="94%"></TD>
</TR>

<TR valign="top">
    <TD><B>Item&nbsp;7.<I>&nbsp;</I></B></TD>
    <TD>
    <B><I>Management&#146;s Discussion and Analysis of Financial
    Condition and Results of Operations</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Overview</B>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
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, HDTV, high-speed Internet access and
telephony. Our digital video systems enable our customers to
process video for distribution over cable, satellite, telephone
and wireless networks. We also provide fiber optic transmission
systems to cable television operators and to certain telephone
companies that offer video services to their customers.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
In order to further expand our digital systems capability,
Harmonic acquired C-Cube Microsystems Inc&#146;s Divicom
business in May 2000, which provided encoding products and
systems for digital television. From the completion of the
merger until the end of 2005, Harmonic was organized into two
operating divisions, Broadband Access Networks, or BAN, for
fiber optic systems and Convergent Systems, or CS, for digital
headend systems. In the fourth quarter of 2005, Harmonic
announced a restructuring that included combining the two
divisions and the manufacturing operations into a single
segment, effective January&nbsp;1, 2006.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Harmonic&#146;s net sales increased 4% and 36% in 2005 and 2004,
respectively, and decreased 2% in 2003. Although industry
capital spending has been generally weak as compared to the
pre-merger levels that benefited Harmonic and Divicom in 1999
and early 2000, we believe that the sequential increases in net
sales in 2005 and 2004 reflected an improved industry capital
spending environment worldwide which favorably impacted
Harmonic. 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 HDTV, and in part the result of the entry of
telephone companies into the business of delivering video
services to their subscribers. We also believe that the
improvement is due to more favorable conditions in industry
capital markets and the completion or resolution of certain
major business combinations, financial restructurings and
regulatory issues.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Our quarterly and annual results may fluctuate significantly due
to revenue recognition policies and the timing of the receipt of
orders. For example, revenue from two significant customer
orders in the third quarter of 2004 was delayed due to these
factors until the fourth quarter of 2004.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
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. Sales to Comcast accounted for 18%, 17%
and 32% of net sales in 2005, 2004 and 2003, respectively.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
In 2005, 2004, and 2003, sales of BAN products accounted for
approximately 33%, 31%, and 38% of net sales, respectively,
while CS products accounted for approximately 67%, 69%, and 62%
of net sales, respectively.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Sales to customers outside of the U.S.&nbsp;in 2005, 2004, and
2003 represented 40%, 42%, and 29% 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. Sales denominated in foreign currencies
were approximately 7%, 4% and 4% of net sales in 2005, 2004 and
2003, respectively. We expect international sales to continue to
account for a significant portion of our net sales for the
foreseeable future.
</DIV>

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<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
In 2005, annual growth in net sales was 4% but our operating
results were negatively impacted by a decrease in the gross
margin percentage, primarily the result of lower margin on FTTP
sales and sales of third party products, as well as the
write-down of inventories, resulting in a net loss of
$5.7&nbsp;million for the year. Our operating results in 2005
also included a charge of $1.1&nbsp;million for severance costs
from the consolidation of the two divisions and the
manufacturing operation into a single operating segment, and a
benefit of $1.1&nbsp;million from the reversal of previously
recorded excess facility costs due to subleasing an excess
facility.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
In 2004, annual growth in net sales of 36%, improved gross
margins, and operating expense growth of 13% enabled Harmonic to
report net income of $1.6&nbsp;million, compared to a net loss
of $29.4&nbsp;million in 2003. Our operating results in 2004
included credits of $4.0&nbsp;million for products sold during
the year which had been written down in prior years.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
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. Our operating results for
2003 also included credits to operating expenses totaling
approximately $2.2&nbsp;million from the sale of our bankruptcy
claims against Adelphia Communications resulting in the reversal
of previously recorded bad debt provisions, and credits of
$4.7&nbsp;million for products sold during the year which had
been written down in prior years.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
As a result of uncertain market conditions and lower sales
during 2001 and 2002, we implemented a series of cost control
measures that included workforce reductions totaling
approximately 120 employees during the second half of 2002. We
recorded severance charges of $1.5&nbsp;million during the
second half of 2002 related to severance and other costs. This
followed a workforce reduction of approximately 30% during 2001
for which we recorded severance and other costs of
$2.5&nbsp;million. These actions reduced headcount from over
1,000 at the end of 2000 to 587 at the end of 2002. We further
reduced headcount to 557 in 2003, mainly by attrition, but the
improved business environment in 2004 led us to increase
headcount to 590 at the end of 2004. In 2005, we added 42
employees as a result of the acquisition of BTL. In the fourth
quarter of 2005, due to an organizational restructuring that
combined our product development, marketing and manufacturing
operations into a single segment, Harmonic reduced its workforce
by approximately 40 employees and recorded severance charges of
approximately $1.1&nbsp;million.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
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&nbsp;Francisco Bay
Area. The excess facilities charge recorded during the third
quarter of 2002 was for facilities that we no longer occupy, do
not intend to occupy, and have subleased, or plan to sublease,
and followed charges of $30.1&nbsp;million recorded for excess
facilities in 2001 when the initial accruals were established.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
A 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. We removed approximately
12,000&nbsp;square feet of space from the excess facilities
portfolio in order to eliminate a third-party offsite storage
arrangement. Based on the remaining lease term of
84&nbsp;months, this removal resulted in a reduction of
$3.3&nbsp;million in the required excess facilities reserve.
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. The
deferred rent liability was not adjusted for the change in the
lease term resulting in an understatement of rent expense and
the deferred rent liability at December&nbsp;31, 2001, 2002 and
2003. Because the effect of the correction on any quarter or
year was not material to these results of operations and
financial condition, the non-cash adjustment was recorded in
2003.
</DIV>

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<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
In the fourth quarter of 2005, the excess facilities liability
was decreased by $1.1&nbsp;million due to subleasing a portion
of the unoccupied portion of one building for the remainder of
the lease. Although we entered into new subleases for
approximately 60,000&nbsp;square feet of space in 2004 and
approximately 30,000&nbsp;square feet of space in 2005, 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.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Harmonic often recognizes a significant portion, or the
majority, of its revenues in the last month of the quarter.
Harmonic establishes its expenditure levels for product
development and other operating expenses based on projected
sales levels, and expenses are relatively fixed in the short
term. Accordingly, variations in timing of sales can cause
significant fluctuations in operating results. 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.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
In the fourth quarter of 2003, Harmonic sold and issued
10,350,000&nbsp;shares of common stock in a public offering at a
price of $7.40&nbsp;per share. The net proceeds to Harmonic were
approximately $71.4&nbsp;million, which was 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, strategic acquisitions
of businesses, general working capital and operating expenses.
The offering was made pursuant to our Registration Statement on
Form&nbsp;<FONT style="white-space: nowrap">S-3</FONT> (File
No.&nbsp;<FONT style="white-space: nowrap">333-84430)</FONT>
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. In April 2005, we filed another
registration statement on
Form&nbsp;<FONT style="white-space: nowrap">S-3</FONT> with the
SEC. Pursuant to these registration statements on
Form&nbsp;<FONT style="white-space: nowrap">S-3,</FONT> which
have been declared effective by the SEC, we are able to issue
various types of registered securities, including common stock,
preferred stock, debt securities, and warrants to purchase
common stock from time to time, up to an aggregate of
approximately $200&nbsp;million, subject to market conditions
and our capital needs.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
On February&nbsp;25, 2005, Harmonic purchased all of the issued
and outstanding shares of Broadcast&nbsp;Technology Ltd., a
private U.K. company, for a total purchase consideration of
&#163;4.0&nbsp;million, or approximately $7.6&nbsp;million. The
purchase consideration consisted of a payment of
&#163;3.0&nbsp;million in cash and the issuance of
169,112&nbsp;shares of Harmonic common stock. Broadcast
Technology Ltd. develops, manufactures and distributes
professional video/audio receivers and decoders and had 42
employees at the time of the acquisition.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Critical Accounting Policies, Judgments and Estimates</B>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
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&nbsp;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:
</DIV>

<DIV style="margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 5pt;color: #000000; background: #ffffff;">

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

<TR valign="top">
    <TD>&#149;</TD>
    <TD align="left">
    <FONT style="font-size: 10pt">revenue recognition;
    </FONT></TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&#149;</TD>
    <TD align="left">
    <FONT style="font-size: 10pt">allowances for doubtful accounts,
    returns and discounts;
    </FONT></TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&#149;</TD>
    <TD align="left">
    <FONT style="font-size: 10pt">valuation of inventories;
    </FONT></TD>
</TR>

</TABLE>

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<DIV style="margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

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

<TR valign="top">
    <TD>&#149;</TD>
    <TD align="left">
    <FONT style="font-size: 10pt">impairment of long-lived assets;
    </FONT></TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&#149;</TD>
    <TD align="left">
    <FONT style="font-size: 10pt">restructuring costs and accruals
    for excess facilities;
    </FONT></TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&#149;</TD>
    <TD align="left">
    <FONT style="font-size: 10pt">assessment of the probability of
    the outcome of current litigation;&nbsp;and
    </FONT></TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&#149;</TD>
    <TD align="left">
    <FONT style="font-size: 10pt">accounting for income taxes.
    </FONT></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<I>Revenue Recognition</I>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Harmonic&#146;s principal sources of revenue are from sales of
hardware products, software products, solution sales, services
and hardware and software maintenance agreements. 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, collection is
reasonably assured, and risk of loss and title have transferred
to the customer.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
We generally use contracts and customer purchase orders to
determine the existence of an arrangement. Shipping documents
and customer acceptance, when applicable, are used to verify
delivery. We assess whether the sales price is fixed or
determinable based on the payment terms associated with the
transaction and whether the price is subject to refund or
adjustment. We assess collectibility based primarily on the
creditworthiness of the customer as determined by credit checks
and analysis, as well as the customer&#146;s payment history.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
We evaluate our products to assess whether software is
more-than-incidental to a product. When we conclude that
software is more-than-incidental to a product, we account for
the product as a software product. Revenue on software products
and software-related elements is recognized in accordance with
SOP No.&nbsp;97-2, &#147;Software Revenue Recognition.&#148;
Significant judgment may be required in determining whether a
product is a software or hardware product.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Revenue from hardware product sales is recognized in accordance
with the provisions of Staff Accounting
Bulletin&nbsp;No.&nbsp;104, &#147;Revenue Recognition.&#148;
Subject to other revenue recognition provisions, revenue on
product sales is recognized when risk of loss and title has
transferred, which is generally upon shipment or delivery, based
on the terms of the arrangement. Revenue on shipments to
distributors, resellers and systems integrators is generally
recognized on delivery or sell-in. Allowances are provided for
estimated returns and discounts. Such allowances are adjusted
periodically to reflect actual and anticipated experience.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Distributors and systems integrators purchase our products for
specific capital equipment projects of the end-user and do not
hold inventory. They perform functions that include importation,
delivery to the end-customer, installation or integration, and
post-sales service and support. Our agreements with these
distributors and systems integrators have terms which are
generally consistent with the standard terms and conditions for
the sale of our equipment to end users and do not provide for
product rotation or pricing allowances, as are typically found
in agreements with stocking distributors. We have long-term
relationships with most of these distributors and systems
integrators and substantial experience with similar sales of
similar products. We have had extensive experience monitoring
product returns from our international distributors and
accordingly, we have concluded that the amount of future returns
can be reasonably estimated. With respect to these sales, we
evaluate the terms of sale and recognize revenue when persuasive
evidence of an arrangement exists, delivery has occurred or
services have been provided, the sales price is fixed or
determinable, collectibility is reasonably assured, and risk of
loss and title have transferred.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
When arrangements contain multiple elements, Harmonic evaluates
all deliverables in the arrangement at the outset of the
arrangement based on the guidance in Emerging Issues Task Force
(EITF)&nbsp;No.&nbsp;00-21, Accounting for Revenue Arrangements
with Multiple Deliverables. If the undelivered elements qualify
as separate units of accounting based on the criteria in
EITF&nbsp;<FONT style="white-space: nowrap">00-21,</FONT> which
include that the delivered elements have value to the customer
on a stand-alone basis and that objective and reliable evidence
of fair value exists for undelivered elements, Harmonic
allocates the arrangement fee based on the relative fair value
of the elements of the arrangement. If a delivered element does
not meet the
</DIV>

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<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff;">
criteria in
EITF&nbsp;<FONT style="white-space: nowrap">00-21</FONT> to be
considered a separate unit of accounting, revenue is deferred
until the undelivered elements are fulfilled. Accordingly, the
determination as to whether appropriate objective and reliable
evidence of fair value exists can impact the timing of revenue
recognition for an arrangement.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
For multiple element arrangements that include both hardware
products and software products, Harmonic evaluates the
arrangement based on
EITF&nbsp;<FONT style="white-space: nowrap">03-5,</FONT>
<I>&#147;Applicability of AICPA Statement of Position
<FONT style="white-space: nowrap">97-2</FONT> to Non-Software
Deliverables in an Arrangement Containing More-Than-Incidental
Software.&#148; </I>In accordance with the provisions of
EITF&nbsp;<FONT style="white-space: nowrap">03-5,</FONT> the
arrangement is divided between software-related elements and
non-software deliverables. Software-related elements are
accounted for as software. Software-related elements include all
non-software deliverables for which a software deliverable is
essential to its functionality. When software arrangements
contain multiple elements and vendor specific objective evidence
of fair value exists for all undelivered elements, Harmonic
accounts for the delivered elements in accordance with the
&#147;Residual Method&#148; prescribed by SOP No.&nbsp;98-9.
Fair value of software-related elements is based on separate
sales to other customers or upon renewal rates quoted in
contracts when the quoted renewal rates are deemed to be
substantive.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
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, including equipment acquired from
third parties to be integrated with Harmonic&#146;s products, is
generally recognized using the percentage of completion method
in accordance with Statement of Position (SOP)&nbsp;81-1,
<I>&#147;Accounting for Performance of Construction/ Production
Contracts.&#148;</I> 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. Deferred revenue includes billings in excess
of revenue recognized, net of deferred costs of sales. Our
application of
<FONT style="white-space: nowrap">percentage-of</FONT>-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 or cash flows
for a particular period could be adversely affected.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Revenue from hardware and software maintenance agreements is
recognized ratably over the term of the maintenance agreement.
First year maintenance typically is included in the original
arrangement and renewed on an annual basis thereafter. Services
revenue is recognized on performance of the services and costs
associated with services are recognized as incurred. Fair value
of services such as consulting and training is based upon
separate sales of these services.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Significant management judgments and estimates must be made in
connection with determination of the revenue to be recognized in
any accounting period. Because of the concentrated nature of our
customer base, different judgments or estimates made for any one
large contract or customer could result in material differences
in the amount and timing of revenue recognized in any particular
period.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<I>Allowances for Doubtful Accounts, Returns and Discounts</I>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
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, 2005, our allowances
for doubtful accounts, returns and discounts totaled
$3.2&nbsp;million.
</DIV>

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<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<I>Valuation of Inventories</I>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Harmonic states inventories at the lower of cost or market. We
writedown the cost of excess or obsolete inventory to net
realizable value based on future demand forecasts and historical
demand. If there were to be a sudden and significant decrease in
demand for our products, or if there were a higher incidence of
inventory obsolescence because of rapidly changing technology
and customer requirements, we could be required to record
additional charges for excess and obsolete inventory and our
gross margin could be adversely affected. Inventory management
is of critical importance in order to balance the need to
maintain strategic inventory levels to ensure competitive lead
times against the risk of inventory obsolescence because of
rapidly changing technology and customer requirements.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<I>Impairment of Goodwill or Long-lived Assets</I>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
We perform an evaluation of the carrying value of goodwill on an
annual basis and of intangibles and other 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, goodwill 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,
2005, our carrying values for goodwill and intangible assets
totaled $4.9&nbsp;million and $1.8&nbsp;million, respectively.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<I>Restructuring Costs and Accruals for Excess Facilities</I>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
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 or cash flows. At
December&nbsp;31, 2005, our accrual for excess facilities
totaled $23.6&nbsp;million.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<I>Assessment of the Probability of the Outcome of Current
Litigation</I>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
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 or cash flows.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<I>Accounting for Income Taxes</I>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
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 increased the valuation
allowance to $123.6&nbsp;million in 2003, decreased to
$122.9&nbsp;million in 2004 and increased to $130.7&nbsp;million
in 2005. At December&nbsp;31, 2005 we have fully reserved for
our net deferred tax assets related to temporary differences and
net operating loss and tax credit carryforwards.
</DIV>

<P align="center" style="font-size: 10pt;color: #000000; background: #ffffff;">40

</FONT>

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

<FONT face="helvetica,arial">

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
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.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Results of Operations</B>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Harmonic&#146;s historical consolidated statements of operations
data for each of the three years ended December&nbsp;31, 2005,
2004, and 2003 as a percentage of net sales, are as follows:
</DIV>
<FONT face="times new roman,times">

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10pt; margin-top: 12pt; ">

<TR style="font-size: 1pt;">
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="50%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="6%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="6%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
</TR>


<TR style="font-size: 8pt;">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="11" align="center" nowrap><B><FONT face="helvetica,arial">Fiscal Year Ended December&nbsp;31,</FONT></B></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="11" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD>
</TR>

<TR style="font-size: 8pt;">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="center" nowrap><B><FONT face="helvetica,arial">2005</FONT></B></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="center" nowrap><B><FONT face="helvetica,arial">2004</FONT></B></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="center" nowrap><B><FONT face="helvetica,arial">2003</FONT></B></TD>
</TR>


<TR valign="bottom" style="font-size: 1px">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="11" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Net sales
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">100</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">%</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">100</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">%</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">100</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">%</FONT></TD>
</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Cost of sales
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">64</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">58</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">67</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="3"><FONT style="font-size: 10pt">&nbsp;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD colspan="11" align="right" valign="bottom" style="border-top: 1pt solid #000000;">
    &nbsp;</TD>
</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Gross profit
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">36</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">42</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">33</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Operating expenses:
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Research and development
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">15</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">14</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">19</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Selling, general and administrative
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">24</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">24</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">27</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Amortization of intangibles
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">3</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">4</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="3"><FONT style="font-size: 10pt">&nbsp;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD colspan="11" align="right" valign="bottom" style="border-top: 1pt solid #000000;">
    &nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Total operating expenses
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">39</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">41</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">50</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="3"><FONT style="font-size: 10pt">&nbsp;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD colspan="11" align="right" valign="bottom" style="border-top: 1pt solid #000000;">
    &nbsp;</TD>
</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Income (loss) from operations
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(3</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">1</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(17</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Interest and other income, net
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">1</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">1</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="3"><FONT style="font-size: 10pt">&nbsp;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD colspan="11" align="right" valign="bottom" style="border-top: 1pt solid #000000;">
    &nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Income (loss) before income taxes
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(2</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">1</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(16</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Provision for income taxes
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="3"><FONT style="font-size: 10pt">&nbsp;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD colspan="11" align="right" valign="bottom" style="border-top: 1pt solid #000000;">
    &nbsp;</TD>
</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Net income (loss)
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(2</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)%</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">1</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">%</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(16</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">%)</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="3"><FONT style="font-size: 10pt">&nbsp;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD colspan="11" align="right" valign="bottom" style="border-top: 1pt solid #000000;">
    &nbsp;</TD>
</TR>

</TABLE>
</CENTER>
</FONT>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<I> Net Sales</I>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
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, 2005, 2004, and 2003, are
presented in the tables below. Also presented is the related
dollar and percentage increase (decrease) in consolidated,
segment, and international net sales as compared with the prior
year, for each of the two years ended December&nbsp;31, 2005 and
2004.
</DIV>
<FONT face="times new roman,times">

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10pt; margin-top: 12pt; ">

<TR style="font-size: 1pt;">
    <TD width="40%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="9%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="8%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="9%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="8%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
</TR>


<TR style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="10" align="center" nowrap><B><FONT face="helvetica,arial">Fiscal Year Ended December&nbsp;31,</FONT></B></TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="10" align="center" nowrap><B><FONT face="helvetica,arial">(in thousands, except percentages)</FONT></B></TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD align="center" nowrap><B><FONT face="helvetica,arial">Segmental Sales Data:</FONT></B></TD>
    <TD>&nbsp;</TD>
    <TD colspan="10" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">2005</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">2004</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">2003</FONT></B></TD><TD></TD>
</TR>


<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="10" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Convergent Systems
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">172,589</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">171,410</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">113,207</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Broadband Access Networks
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">84,789</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">76,896</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">69,069</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="11" align="right" valign="bottom" style="border-top: 1pt solid #000000;">
    &nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Net sales
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">257,378</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">248,306</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">182,276</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Convergent Systems increase
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">1,179</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">58,203</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Broadband Access Networks increase
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">7,893</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">7,827</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="7" align="right" valign="bottom" style="border-top: 1pt solid #000000;">
    &nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Total increase
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">9,072</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">66,030</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Convergent Systems percent change
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">0.7</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">%</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">51.4</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">%</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Broadband Access Networks percent
    change
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">10.3</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">%</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">11.3</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">%</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Total percent change
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">3.7</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">%</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">36.2</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">%</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

</TABLE>
</CENTER>
</FONT>

<P align="center" style="font-size: 10pt;color: #000000; background: #ffffff;">41

</FONT>

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

<FONT face="helvetica,arial">

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Net sales increased in the CS division in 2005 compared to 2004,
primarily due to increased spending by domestic cable customers
for major digital headend projects and the continued rollout of
new services, such as VOD and HDTV. The CS division sold
significantly more third party products that are integrated into
our systems in 2005 compared to 2004 because certain customers
requested that we provide complete integrated solutions. Sales
to satellite customers in 2005 were lower than 2004 primarily
due to the completion of a major upgrade by a Japanese customer
of its satellite facilities during 2004 and sales to another
customer for a new domestic satellite project in the fourth
quarter of 2004. Net sales increased in the BAN division in 2005
compared to 2004 principally due to increased revenue from
products sold to an integrator for a major telco for FTTP
projects, which was partially offset by lower shipments to
domestic cable customers.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Net sales increased in the CS division in 2004 compared to 2003,
primarily due to stronger spending by international customers
and to a lesser degree due to continued spending by domestic
customers for the rollout of new services. The CS division sold
significantly more encoders in 2004 compared to 2003, offset by
a reduction in sales of its NSG products for VOD due to the
substantial completion of initial deployments by certain
domestic cable customers. The increased sales of encoders in
2004 was due in part to the major upgrade by a Japanese customer
of their satellite facilities and a major new domestic project
during 2004, and in part to sales of headend equipment to two
major international telephone companies for video deployments.
Net sales increased in the BAN division in 2004 compared to 2003
as a result of stronger overall spending by U.S.&nbsp;cable
operators resulting in increased sales of transmitters and nodes
related to continuing network improvements such as node
segmentation, and to a lesser degree by an improvement in
spending by international cable operators.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
We experienced an increase of 4% in net sales for 2005 compared
to 2004 and we expect revenue in the first six months of 2006 to
be in the range of $115 to $125&nbsp;million compared to net
sales of $132.7&nbsp;million for the first six months of 2005.
Backlog decreased to $35.2&nbsp;million at December&nbsp;31,
2005 compared to $55.0&nbsp;million at December&nbsp;31, 2004.
</DIV>
<FONT face="times new roman,times">

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10pt; margin-top: 12pt; ">

<TR style="font-size: 1pt;">
    <TD width="46%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
</TR>


<TR style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="10" align="center" nowrap><B><FONT face="helvetica,arial">Fiscal Year Ended December&nbsp;31,</FONT></B></TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="10" align="center" nowrap><B><FONT face="helvetica,arial">(in thousands, except percentages)</FONT></B></TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD align="left" nowrap><B><FONT face="helvetica,arial">Geographic Sales Data:</FONT></B></TD>
    <TD>&nbsp;</TD>
    <TD colspan="10" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">2005</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">2004</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">2003</FONT></B></TD><TD></TD>
</TR>


<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="10" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">U.S.&nbsp;</FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">153,264</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">143,818</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">130,226</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">International
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">104,114</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">104,488</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">52,050</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="11" align="right" valign="bottom" style="border-top: 1pt solid #000000;">
    &nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Net sales
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">257,378</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">248,306</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">182,276</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">U.S.&nbsp;increase
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">9,446</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">13,592</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">International increase (decrease)
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(374</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">52,438</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="7" align="right" valign="bottom" style="border-top: 1pt solid #000000;">
    &nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Total increase
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">9,072</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">66,030</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">U.S.&nbsp;percent change
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">6.6</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">%</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">10.4</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">%</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">International percent change
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(0.04</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)%</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">100.7</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">%</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Total percent change
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">3.7</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">%</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">36.2</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">%</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

</TABLE>
</CENTER>
</FONT>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Net sales in the U.S.&nbsp;increased in 2005 compared to 2004
primarily due to stronger spending by domestic cable customers
for major digital headend projects and the continued rollout of
new services, such as VOD and HDTV. Also, revenue from sales for
a major telco increased in 2005 compared to 2004 as shipments of
our optical products for domestic FTTP projects increased. The
small decrease in international sales in 2005 as compared to
2004 was due to a major upgrade by a Japanese customer of its
satellite facilities in 2004 which was substantially offset by
increased international capital spending in 2005, primarily in
Europe. As a result of strong capital spending by customers in
international markets, we expect that international sales will
continue to account for a significant portion of our net sales
for the foreseeable future.
</DIV>

<P align="center" style="font-size: 10pt;color: #000000; background: #ffffff;">42

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

<FONT face="helvetica,arial">

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Net sales in the U.S.&nbsp;increased in 2004 compared to 2003
primarily due to stronger overall spending during 2004 by
domestic customers from the roll-out of new services, such as
VOD and HDTV programming, as well as from increased sales of
transmitters and nodes for major network upgrades related to
continuing network improvements, such as node segmentation. The
increased international sales in 2004 was due in part to the
impact from a major upgrade by a Japanese customer of its
satellite facilities, and in part to sales of headend equipment
to two major international telephone companies for video
deployments. The increased international sales in 2004 as
compared to 2003 was also due to increased international capital
spending primarily in Europe, Canada, Latin America, Asia and
the Caribbean.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<I>Gross Profit</I>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
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, 2005, 2004, and 2003 are presented in the
table below. Also presented is the related dollar and percentage
increase in gross profit as compared with the prior year, for
each of the two years ended December&nbsp;31, 2005 and 2004.
</DIV>
<FONT face="times new roman,times">

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10pt; margin-top: 12pt; ">

<TR style="font-size: 1pt;">
    <TD width="46%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
</TR>


<TR style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="10" align="center" nowrap><B><FONT face="helvetica,arial">Fiscal Year Ended December&nbsp;31,</FONT></B></TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="10" align="center" nowrap><B><FONT face="helvetica,arial">(in thousands, except percentages)</FONT></B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="10" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">2005</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">2004</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">2003</FONT></B></TD><TD></TD>
</TR>


<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="10" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Gross profit
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">93,948</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">104,495</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">60,603</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">As a % of net sales
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">36.5%</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">42.1%</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">33.2%</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Increase (decrease)
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(10,547</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">43,892</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Percent change
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(10.1</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)%</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">72.4%</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

</TABLE>
</CENTER>
</FONT>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
The decrease in gross profit in 2005 compared to 2004 was
primarily due to lower margins associated with the sales of FTTP
products for a major telco, the sales of third party products to
our end customers, which carry a significantly lower margin than
our average product margins, and to an increase of
$7.3&nbsp;million for the writedown of cost for obsolete and
excess inventory, primarily due to new product transitions. In
addition, our gross profit in 2005 was reduced because of higher
manufacturing costs due to the ramp up of FTTP product
manufacturing. Gross profit for 2005 included a benefit of
$0.9&nbsp;million related to products sold for which the cost
basis had been written down in prior years, as compared to a
benefit of $4.0&nbsp;million related to such products in 2004.
In 2005, $1.3&nbsp;million of amortization of intangibles was
included in cost of sales compared to $6.2&nbsp;million in 2004.
The lower amortization in 2005 was due to the intangibles
arising from the DiviCom acquisition becoming fully amortized.
We expect to record approximately $0.6&nbsp;million in
amortization of intangibles in cost of sales in 2006 related to
the acquisition of BTL in February 2005.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
The increase in gross profit in 2004 compared to 2003 was
primarily due to higher sales, lower third party manufacturing
costs, improvements in factory efficiencies, and a higher
proportion of CS division sales, which historically carry a more
favorable product margin. These factors, which contributed to
higher gross margins in 2004 compared to 2003, were partially
offset by a reduction in the benefit related to the sale of
products for which the cost basis had been written down in prior
years. This benefit was $4.0&nbsp;million in 2004, as compared
to a benefit of $4.7&nbsp;million in 2003. There was no change
in the amortization of intangibles of $6.2&nbsp;million in 2004
compared to 2003.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<I>Research and Development</I>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
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, 2005, 2004, and 2003 are presented
in the table below. Also presented is the
</DIV>

<P align="center" style="font-size: 10pt;color: #000000; background: #ffffff;">43

</FONT>

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

<FONT face="helvetica,arial">

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff;">
related dollar and percentage increase (decrease) in research
and development expense as compared with the prior year, for
each of the two years ended December&nbsp;31, 2005 and 2004.
</DIV>
<FONT face="times new roman,times">

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10pt; margin-top: 12pt; ">

<TR style="font-size: 1pt;">
    <TD width="37%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="10%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="9%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="10%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="9%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="6%">&nbsp;</TD>
</TR>


<TR style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="10" align="center" nowrap><B><FONT face="helvetica,arial">Fiscal Year Ended December&nbsp;31,</FONT></B></TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="10" align="center" nowrap><B><FONT face="helvetica,arial">(in thousands, except percentages)</FONT></B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="10" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">2005</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">2004</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">2003</FONT></B></TD><TD></TD>
</TR>


<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="10" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Research and development
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">38,168</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">35,585</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">35,107</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">As a % of net sales
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">14.8%</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">14.3%</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">19.3%</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Increase
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">2,583</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">478</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Percent change
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">7.3%</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">1.4%</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

</TABLE>
</CENTER>
</FONT>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
The increase in research and development expense in 2005
compared to 2004 was primarily the result of increased
compensation costs of $1.8&nbsp;million, primarily from
headcount increases, increased expenses for prototype materials
of $0.9&nbsp;million and, higher costs for services provided by
third parties of $0.5&nbsp;million, partially offset by lower
depreciation and overhead costs of $0.6&nbsp;million. The
headcount increases included the addition of BTL employees
resulting from the acquisition.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
The increase in research and development expense in 2004
compared to 2003 was as a result of higher compensation expenses
of $2.6&nbsp;million, resulting from increased headcount and
higher compensation costs, and increased outside services for
the development and qualification of FTTP products. Partially
offsetting these increases was lower depreciation of
$0.9&nbsp;million, lower prototype material costs of
$0.7&nbsp;million and lower facilities expenses of
$1.2&nbsp;million.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<I>Selling, General and Administrative</I>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
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, 2005, 2004, and 2003
are presented in the table below. Also presented is the related
dollar and percentage increase (decrease) in selling, general
and administrative expense as compared with the prior year, for
each of the two years ended December&nbsp;31, 2005 and 2004.
</DIV>
<FONT face="times new roman,times">

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10pt; margin-top: 12pt; ">

<TR style="font-size: 1pt;">
    <TD width="43%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="8%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="8%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="8%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="8%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="6%">&nbsp;</TD>
</TR>


<TR style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="10" align="center" nowrap><B><FONT face="helvetica,arial">Fiscal Year Ended December&nbsp;31,</FONT></B></TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="10" align="center" nowrap><B><FONT face="helvetica,arial">(in thousands, except percentages)</FONT></B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="10" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">2005</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">2004</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">2003</FONT></B></TD><TD></TD>
</TR>


<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="10" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Selling, general and administrative
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">61,475</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">59,742</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">48,309</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">As a % of net sales
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">23.9%</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">24.1%</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">26.5%</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Increase
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">1,733</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">11,433</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Percent change
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">2.9%</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">23.7%</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

</TABLE>
</CENTER>
</FONT>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
The increase in selling, general and administrative expenses in
2005 compared to 2004 was primarily due to higher marketing and
travel expenses of $1.7&nbsp;million, increased expenses
following the acquisition of BTL of $1.1&nbsp;million, increased
use of temporary labor and consulting services of
$1.1&nbsp;million, increased outside professional services
expenses of $0.7&nbsp;million, higher bad debts expenses of
$0.2&nbsp;million and increased corporate governance costs of
$0.4&nbsp;million, partially offset by decreased compensation
expenses of $2.6&nbsp;million. Also, in the fourth quarter of
2005, a benefit of $1.1&nbsp;million was recorded from the
reversal of previously recorded excess facility costs due to the
subleasing of an excess facility. Marketing and travel expenses
increased in 2005 compared to 2004 primarily from increased
trade show expenses. The decrease in compensation costs in 2005
compared to 2004 was primarily due to lower commission and
incentive related expenses, partially offset by increased
headcount in the sales and marketing areas.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
The increase in selling, general and administrative expenses in
2004 compared to 2003 was primarily due to increases in
compensation and incentive related expenses of
$6.7&nbsp;million, increased selling expenses of
$0.8&nbsp;million, increases in
</DIV>

<P align="center" style="font-size: 10pt;color: #000000; background: #ffffff;">44

</FONT>

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

<FONT face="helvetica,arial">

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff;">
corporate governance costs of $2.0&nbsp;million and increased
facilities and allocation expenses of $2.0&nbsp;million,
partially offset by lower depreciation expense of
$0.9&nbsp;million and lower legal expenses due to a charge of
$2.7&nbsp;million in 2003 related to the settlement of
litigation. In addition, in 2003, credits to bad debt expenses
totaling $4.3&nbsp;million were recorded, including
$2.2&nbsp;million due to the sale of Adelphia bankruptcy claims.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<I>Amortization of Intangibles</I>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Harmonic&#146;s amortization of intangibles expense charged to
operating expenses, and the expense as a percentage of
consolidated net sales, for each of the three years ended
December&nbsp;31, 2005, 2004, and 2003 are presented in the
table below. Also presented is the related dollar and percentage
increase (decrease) in amortization of intangibles expense as
compared with the prior year, for each of the two years ended
December&nbsp;31, 2005 and 2004.
</DIV>
<FONT face="times new roman,times">

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10pt; margin-top: 12pt; ">

<TR style="font-size: 1pt;">
    <TD width="44%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="8%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="8%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
</TR>


<TR style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="10" align="center" nowrap><B><FONT face="helvetica,arial">Fiscal Year Ended December&nbsp;31,</FONT></B></TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="10" align="center" nowrap><B><FONT face="helvetica,arial">(in thousands, except percentages)</FONT></B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="10" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">2005</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">2004</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">2003</FONT></B></TD><TD></TD>
</TR>


<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="10" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Amortization of intangibles
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">1,349</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">7,732</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">7,732</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">As a % of net sales
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">0.5%</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">3.1%</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">4.2%</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">(Decrease)
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(6,383</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Percent change
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(82.6%</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

</TABLE>
</CENTER>
</FONT>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
The decrease in amortization of intangibles in 2005 compared to
2004 was due to the completion of amortization of the DiviCom
intangible assets during the first quarter of 2005. Harmonic
expects to record a total of approximately $0.2&nbsp;million in
amortization of intangibles in operating expenses in 2006
related to the intangible assets resulting from the acquisition
of BTL in February 2005.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
There was no change in amortization of intangibles charged to
operating expenses in 2004 compared to 2003.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<I>Interest Income, Net</I>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Harmonic&#146;s interest income, net, and interest income, net
as a percentage of consolidated net sales, for each of the three
years ended December&nbsp;31, 2005, 2004, and 2003 are presented
in the table below. Also presented is the related dollar and
percentage increase (decrease) in interest income, net as
compared with the prior year, for each of the two years ended
December&nbsp;31, 2005 and 2004.
</DIV>
<FONT face="times new roman,times">

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10pt; margin-top: 12pt; ">

<TR style="font-size: 1pt;">
    <TD width="46%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
</TR>


<TR style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="10" align="center" nowrap><B><FONT face="helvetica,arial">Fiscal Year Ended December&nbsp;31,</FONT></B></TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="10" align="center" nowrap><B><FONT face="helvetica,arial">(in thousands, except percentages)</FONT></B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="10" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">2005</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">2004</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">2003</FONT></B></TD><TD></TD>
</TR>


<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="10" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Interest income, net
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">2,665</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">1,554</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">460</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">As a % of net sales
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">1.0%</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">0.6%</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">0.3%</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Increase (decrease)
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">1,111</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">1,094</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(636)</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Percent change
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">71.5%</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">237.8%</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(58.0%)</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

</TABLE>
</CENTER>
</FONT>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
The increase in interest income, net in 2005 compared to 2004
was due to a larger cash and short-term investment portfolio
during 2005 as compared to 2004 and higher interest rates
experienced on the investment portfolio in 2005 compared to 2004.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
The increase in 2004 compared to 2003 was due primarily to
larger cash and short-term investment balances during the
respective periods of 2004 as compared to 2003 principally due
to the investment of net proceeds of $71.4&nbsp;million from the
public offering of common stock in the fourth quarter of 2003.
</DIV>

<P align="center" style="font-size: 10pt;color: #000000; background: #ffffff;">45

</FONT>

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

<FONT face="helvetica,arial">

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<I>Other Income (Expense), Net</I>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Harmonic&#146;s other income (expense), net, as a percentage of
consolidated net sales, for each of the three years ended
December&nbsp;31, 2005, 2004, and 2003 are presented in the
table below. Also presented is the related dollar and percentage
increase (decrease) in interest and other income (expense), net,
as compared with the prior year, for each of the two years ended
December&nbsp;31, 2005 and 2004.
</DIV>
<FONT face="times new roman,times">

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10pt; margin-top: 12pt; ">

<TR style="font-size: 1pt;">
    <TD width="46%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
</TR>


<TR style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="10" align="center" nowrap><B><FONT face="helvetica,arial">Fiscal Year Ended December&nbsp;31,</FONT></B></TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="10" align="center" nowrap><B><FONT face="helvetica,arial">(in thousands, except percentages)</FONT></B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="10" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">2005</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">2004</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">2003</FONT></B></TD><TD></TD>
</TR>


<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="10" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Other income (expense), net
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(915</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(827</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">952</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">As a % of net sales
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(0.4%</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(0.3%</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">0.5%</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">(Decrease)
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(88</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(1,779</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Percent change
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(10.6%</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(186.9%</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

</TABLE>
</CENTER>
</FONT>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
The increase in other expense, net in 2005 compared to 2004 was
primarily due to the increase in losses on foreign exchange of
$0.1&nbsp;million in 2005.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
The decrease in other income, net in 2004 compared to 2003 was
primarily due to the effect from losses on foreign exchange of
$0.6&nbsp;million, compared to a gain from foreign exchange of
$1.1&nbsp;million in 2003.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<I>Income Taxes</I>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Harmonic&#146;s provision for income taxes, and provision for
income taxes as a percentage of consolidated net sales, for each
of the three years ended December&nbsp;31, 2005, 2004, and 2003
are presented in the table below. Also presented is the related
dollar and percentage increase (decrease) in provision for
income taxes as compared with the prior year, for each of the
two years ended December&nbsp;31, 2005 and 2004.
</DIV>
<FONT face="times new roman,times">

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10pt; margin-top: 12pt; ">

<TR style="font-size: 1pt;">
    <TD width="42%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="8%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="8%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="8%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="8%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
</TR>


<TR style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="10" align="center" nowrap><B><FONT face="helvetica,arial">Fiscal Year Ended December&nbsp;31,</FONT></B></TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="10" align="center" nowrap><B><FONT face="helvetica,arial">(in thousands, except percentages)</FONT></B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="10" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">2005</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">2004</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">2003</FONT></B></TD><TD></TD>
</TR>


<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="10" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Provision for (benefit from) income
    taxes
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">437</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">589</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">300</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">As a % of net sales
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">0.2%</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">0.2%</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">0.2%</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Increase (decrease)
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(152</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">289</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Percent change
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(25.8%</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">96.3%</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

</TABLE>
</CENTER>
</FONT>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Our effective tax rate was (8.3%) in 2005, 27.2% in 2004 and
(1.0%) in 2003. Harmonic recorded provisions for income taxes of
$0.4&nbsp;million, $0.6&nbsp;million and $0.3&nbsp;million in
2005, 2004 and 2003 principally due to foreign income taxes. The
valuation allowance was $123.6&nbsp;million in 2003, decreased
to $122.9&nbsp;million in 2004 and increased to
$130.7&nbsp;million in 2005. 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, 2005 and December&nbsp;31, 2004.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<I>Segments</I>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Through December&nbsp;31, 2005, Harmonic&#146;s management used
income from segment operations as its measure of segment
profitability. Income from segment operations excludes
intangible amortization expense, corporate expenses, including
excess facilities charges, and interest and other income, net.
See Note&nbsp;14 of Notes to Consolidated Financial
</DIV>

<P align="center" style="font-size: 10pt;color: #000000; background: #ffffff;">46

</FONT>

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

<FONT face="helvetica,arial">

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff;">
Statements. Effective January&nbsp;1, 2006, the Company&#146;s
new organizational structure is in place and will operate as a
single operating segment and report its financial results as a
single segment.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Fluctuations in net sales by operating segment are discussed
more extensively in the section above entitled Net Sales.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Harmonic&#146;s income (loss) from segment operations and the
income (loss) as a percentage of consolidated net sales, for
each of the three years ended December&nbsp;31, 2005, 2004, and
2003 are presented in the table below. Also presented is the
related dollar and percentage increase (decrease) in segment
operations results as compared with the prior year, for each of
the two years ended December&nbsp;31, 2005 and 2004.
</DIV>
<FONT face="times new roman,times">

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10pt; margin-top: 12pt; ">

<TR style="font-size: 1pt;">
    <TD width="46%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
</TR>


<TR style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="10" align="center" nowrap><B><FONT face="helvetica,arial">Fiscal Year Ended December&nbsp;31,</FONT></B></TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="10" align="center" nowrap><B><FONT face="helvetica,arial">(in thousands, except percentages)</FONT></B></TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD align="left" nowrap><B><FONT face="helvetica,arial">Convergent Systems (CS)</FONT></B></TD>
    <TD>&nbsp;</TD>
    <TD colspan="10" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">2005</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">2004</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">2003</FONT></B></TD><TD></TD>
</TR>


<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="10" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Income (loss) from segment
    operations
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">13,345</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">26,427</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(4,398</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">As a % of segment net sales
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">7.7%</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">15.4%</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(3.9%</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Increase (decrease)
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(13,082</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">30,825</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Percent change
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(49.5%</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

</TABLE>
</CENTER>
</FONT>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
The weaker CS segment results in 2005 compared to 2004 were due
to a lower gross margin and increased operating expenses. The
lower gross margin was primarily caused by the increase in the
sales of third party products, which have a significantly lower
gross margin than the average gross margin on sales of other
products, and the write-down of cost for obsolete and excess
inventory. The increase in operating expenses in 2005 was the
result of higher research and development expenses and selling
expenses as compared to 2004.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
The improved CS segment results in 2004 compared to 2003 were
due to a 51% increase in sales, lower third party manufacturing
costs, and a more favorable margin on the mix of products sold,
slightly offset by an increase in operating expenses as compared
to 2003. The 2004 increases in operating expenses were as a
result of higher selling expenses and slightly higher research
and development expenses as compared to 2003. CS segment results
included credits of $0.1&nbsp;million in 2004 related to
products sold in 2004 for which the cost basis had been written
down in prior years.
</DIV>
<FONT face="times new roman,times">

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10pt; margin-top: 12pt; ">

<TR style="font-size: 1pt;">
    <TD width="46%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
</TR>


<TR style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="10" align="center" nowrap><B><FONT face="helvetica,arial">Fiscal Year Ended December&nbsp;31,</FONT></B></TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="10" align="center" nowrap><B><FONT face="helvetica,arial">(in thousands, except percentages)</FONT></B></TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD align="left" nowrap><B><FONT face="helvetica,arial">Broadband Access Networks (BAN)</FONT></B></TD>
    <TD>&nbsp;</TD>
    <TD colspan="10" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">2005</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">2004</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">2003</FONT></B></TD><TD></TD>
</TR>


<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="10" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Income or (loss) from segment
    operations
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">768</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">8,110</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">1,102</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">As a % of segment net sales
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">0.9%</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">10.5%</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">1.6%</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Increase (decrease)
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(7,342</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">7,008</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Percent change
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(90.5%</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">635.9%</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

</TABLE>
</CENTER>
</FONT>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
The decreased BAN results in 2005 compared to 2004 were due to
lower gross margin on the sales of FTTP products for a major
telco, the writedown of cost for obsolete and excess inventories
and increased manufacturing costs caused by the ramp up of FTTP
product manufacturing. In addition, in 2005 there was a
reduction of $3.3&nbsp;million in the sales of products for
which the cost basis had been written down previously compared
to 2004.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
The improved BAN segment results in 2004 compared to 2003 were
due to an 11% increase in sales and a more favorable margin on
the mix of products sold during 2004. BAN segment results
included credits of $3.9&nbsp;million in 2004 related to
products sold in 2004 for which the cost basis had been written
down in prior years.
</DIV>

<P align="center" style="font-size: 10pt;color: #000000; background: #ffffff;">47

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

<FONT face="helvetica,arial">

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Liquidity and Capital Resources</B>
</DIV>
<FONT face="times new roman,times">

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10pt; margin-top: 6pt; ">

<TR style="font-size: 1pt;">
    <TD width="46%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
</TR>


<TR style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="10" align="center" nowrap><B><FONT face="helvetica,arial">Fiscal Year Ended December&nbsp;31,</FONT></B></TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="10" align="center" nowrap><B><FONT face="helvetica,arial">(in thousands, except percentages)</FONT></B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="10" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">2005</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">2004</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">2003</FONT></B></TD><TD></TD>
</TR>


<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="10" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Cash, cash equivalents and
    short-term investments
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">110,828</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">100,607</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">112,597</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Net cash provided by (used in)
    operating activities
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">16,054</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(9,022</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(5,559</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Net cash used in investing
    activities
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(10,321</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(10,065</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(46,369</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Net cash provided by financing
    activities
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">5,319</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">3,877</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">72,335</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

</TABLE>
</CENTER>
</FONT>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
As of December&nbsp;31, 2005, cash, cash equivalents and
short-term investments totaled $110.8&nbsp;million, compared to
$100.6&nbsp;million as of December&nbsp;31, 2004. Cash provided
by operations was $16.1&nbsp;million in 2005 compared to cash
used in operations of $9.0&nbsp;million in 2004. The increased
in cash provided by operations in 2005 was primarily due to
lower accounts receivable and inventories, which was partially
offset by a change to net loss in 2005 from net income in 2004,
lower amortization of intangibles, and lower accounts payable,
accrued liabilities and excess facilities liabilities. The lower
accounts receivable was due to the decrease in sales in the
fourth quarter of 2005 to $63.7&nbsp;million in 2005 compared to
$85.6&nbsp;million in the same period of 2004. The
Company&#146;s inventories decreased by $3.2&nbsp;million
between December&nbsp;31, 2005 and December&nbsp;31, 2004
principally from the write-down of cost for obsolete and excess
inventory resulting primarily from the introduction of new
products.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Additions to property, plant and equipment were
$5.7&nbsp;million during 2005 compared to $6.3&nbsp;million in
2004. The increases in 2005 and 2004 were due primarily to the
acquisition of test equipment. Harmonic currently expects
capital expenditures to be approximately $5 to $7&nbsp;million
during 2006.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
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&nbsp;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, strategic acquisitions of
businesses, general working capital and operating expenses.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Under the terms of the merger agreement with C-Cube, Harmonic is
generally liable for C-Cube&#146;s pre-merger tax liabilities.
Approximately $10.0&nbsp;million of pre-merger tax liabilities
remained outstanding at December&nbsp;31, 2005 and are included
in accrued liabilities. These liabilities represent estimates of
C-Cube&#146;s pre-merger tax obligations to various tax
authorities in 11 countries. We are working with LSI Logic,
which acquired the spun-off semiconductor business in June 2001
and assumed its obligations, to settle these obligations, a
process which has been underway since the merger in 2000.
Although we expect to make payments in 2006 for these tax
liabilities, Harmonic is unable to predict when the remaining
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 tax-sharing agreement, to
refund the difference to LSI Logic. Conversely, if the
settlements are more than the $10.0&nbsp;million pre-merger tax
liability, LSI is obligated to reimburse Harmonic.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Harmonic has a bank line of credit facility with Silicon Valley
Bank, which provides for borrowings of up to $23.7&nbsp;million,
including $3.7&nbsp;million for equipment under a secured term
loan. This facility, which was amended and restated in December
2005, expires in December 2006 and 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 $30.0&nbsp;million. If Harmonic is
unable to maintain this cash, cash equivalents and short-term
investments balance or
</DIV>

<P align="center" style="font-size: 10pt;color: #000000; background: #ffffff;">48

</FONT>

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<FONT face="helvetica,arial">

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff;">
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,
2005, Harmonic was in compliance with the covenants under this
line of credit facility. The December 2005 amendment resulted in
the company paying a fee of approximately $33,000 and requiring
payment of approximately $43,000 of additional fees if the
Company does not maintain an unrestricted deposit of
$20.0&nbsp;million with the bank. Future borrowings pursuant to
the line bear interest at the bank&#146;s prime rate (7.25% at
December&nbsp;31, 2005) or prime plus 0.5% for equipment
borrowings. Borrowings are repayable monthly and are
collateralized by all of Harmonic&#146;s assets except
intellectual property. As of December&nbsp;31, 2005,
$1.3&nbsp;million was outstanding under the equipment term loan
portion of this facility and there were no borrowings in 2005.
The term loan is payable monthly, including principal and
interest at 7.75%&nbsp;per annum on outstanding borrowings as of
December&nbsp;31, 2005 and matures at various dates through
December 2007. Other than standby letters of credit and
guarantees (Note&nbsp;16), there were no other outstanding
borrowings or commitments under the line of credit facility as
of December&nbsp;31, 2005.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Harmonic&#146;s cash and investment balances at
December&nbsp;31, 2005 were $110.8&nbsp;million. We currently
believe that our existing liquidity sources, including our bank
line of credit facility, will satisfy our requirements for at
least the next twelve months, including the final settlement and
payment of C-Cube 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;<FONT style="white-space: nowrap">S-3</FONT> declared
effective by the SEC in April 2002. In April 2005, we filed
another registration statement on
Form&nbsp;<FONT style="white-space: nowrap">S-3</FONT> with the
SEC. Pursuant to these registration statements on
Form&nbsp;<FONT style="white-space: nowrap">S-3,</FONT> which
have been declared effective by the SEC, we are able to issue
various types of registered securities, including common stock,
preferred stock, debt securities, and warrants to purchase
common stock from time to time, up to an aggregate of
approximately $200&nbsp;million, subject to market conditions
and our capital needs.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Off-Balance Sheet Arrangements</B>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
None as of December&nbsp;31, 2005.
</DIV>

<P align="center" style="font-size: 10pt;color: #000000; background: #ffffff;">49

</FONT>

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<FONT face="helvetica,arial">

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Contractual Obligations and Commitments</B>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Future payments under contractual obligations, and other
commercial commitments, as of December&nbsp;31, 2005, were as
follows (in thousands):
</DIV>
<FONT face="times new roman,times">

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10pt; margin-top: 12pt; ">

<TR style="font-size: 1pt;">
    <TD width="31%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="6%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="6%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="6%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="6%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
</TR>


<TR style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="18" align="center" nowrap><B><FONT face="helvetica,arial">Payments Due by Period</FONT></B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="18" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">Total</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="15">&nbsp;</TD>
</TR>

<TR style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">Amounts</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">1&nbsp;year or</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="11">&nbsp;</TD>
</TR>

<TR style="font-size: 8pt;">
    <TD align="left" nowrap><B><FONT face="helvetica,arial">Contractual Obligations</FONT></B></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">Committed</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">less</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">2&nbsp;&#150;&nbsp;3&nbsp;Years</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">4&nbsp;&#150;&nbsp;5&nbsp;Years</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">Over 5&nbsp;Years</FONT></B></TD><TD></TD>
</TR>


<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="18" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Operating
    Leases<SUP style="font-size: 85%; vertical-align: text-top">(1)</SUP>
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">$59,746</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">$11,616</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">$25,582</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">$22,548</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">$&#151;</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Inventory Purchase Commitment
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">14,079</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">14,079</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">C-Cube Pre-Merger Tax Liabilities
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">10,009</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">10,009</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Long-Term Debt
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">1,272</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">812</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">460</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Interest payments on long-term debt
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">82</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">67</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">15</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Foreign currency forward exchange
    contracts
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">5,285</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">5,285</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Capital lease obligations
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">154</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">82</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">72</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Total Contractual Obligations
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">$90,627</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">$41,950</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">$26,129</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">$22,548</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">$&#151;</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

</TABLE>
</CENTER>
</FONT>
<FONT face="times new roman,times">

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10pt; margin-top: 12pt; ">

<TR style="font-size: 1pt;">
    <TD width="34%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
</TR>


<TR style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="18" align="center" nowrap><B><FONT face="helvetica,arial">Amount of Commitment Expiration Per Period</FONT></B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="18" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">Total</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="15">&nbsp;</TD>
</TR>

<TR style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">Amounts</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">1&nbsp;year or</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="11">&nbsp;</TD>
</TR>

<TR style="font-size: 8pt;">
    <TD align="left" nowrap><B><FONT face="helvetica,arial">Other Commercial Commitments</FONT></B></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">Committed</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">less</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">2&nbsp;&#150; 3&nbsp;Years</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">4&nbsp;&#150; 5&nbsp;Years</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">Over 5&nbsp;Years</FONT></B></TD><TD></TD>
</TR>


<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="18" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Standby Letters of Credit
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">$871</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">$871</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">$&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">$&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">$&#151;</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Indemnifications<SUP style="font-size: 85%; vertical-align: text-top">(2)</SUP>
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Guarantees
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Total Commercial Commitments
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">$871</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">$871</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">$&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">$&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">$&#151;</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

</TABLE>
</CENTER>
</FONT>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
1)&nbsp;Operating lease commitments include $23.7&nbsp;million
of accrued excess facilities costs.
</DIV>

<DIV style="margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;color: #000000; background: #ffffff;">

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

<TR valign="top">
    <TD>2)&nbsp;</TD>
    <TD align="left">
    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, 2005.</TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
In addition, we actively 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.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
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.&nbsp;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.
</DIV>

<P align="center" style="font-size: 10pt;color: #000000; background: #ffffff;">50

</FONT>

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<FONT face="helvetica,arial">

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>New Accounting Pronouncements</B>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
In November 2004, the Financial Accounting Standards Board,
&#147;FASB,&#148; issued Statement of Financial Accounting
Standard, &#147;SFAS&#148;, No.&nbsp;151, <I>Inventory
Costs,</I> to amend the guidance in Chapter&nbsp;4, <I>Inventory
Pricing,</I> of FASB Accounting Research
Bulletin&nbsp;No.&nbsp;43, <I>Restatement and Revision of
Accounting Research Bulletins.</I> SFAS&nbsp;No.&nbsp;151
clarifies the accounting for abnormal amounts of idle facility
expense, freight, handling costs, and wasted material
(spoilage)&nbsp;and requires these costs be treated as current
period charges. Additionally, SFAS&nbsp;No.&nbsp;151 requires
that allocation of fixed production overhead to the costs of
conversion be based on the normal capacity of the production
facilities. The provisions of SFAS&nbsp;No.&nbsp;151 are
effective for inventory costs incurred during fiscal years
beginning after June&nbsp;15, 2005. The Company does not
currently believe that SFAS&nbsp;No.&nbsp;151 will have a
significant impact on its financial condition or results of
operations.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
In December 2004, the FASB issued SFAS&nbsp;No.&nbsp;123
(revised 2004), <I>Share-Based Payment.</I>
SFAS&nbsp;No.&nbsp;123R is a revision of FASB
SFAS&nbsp;No.&nbsp;123, <I>Accounting for Stock-Based
Compensation </I>and supersedes APB Opinion No.&nbsp;25,
<I>Accounting for Stock Issued to Employees,</I> and its related
implementation guidance. As noted in our stock-based
compensation accounting policy, the Company does not record
compensation expense for stock-based compensation. Under
SFAS&nbsp;No.&nbsp;123(R), the Company will be required to
measure the cost of employee services received in exchange for
stock-based compensation based on the grant-date fair value
(with limited exceptions). That cost will be recognized over the
period during which an employee is required to provide services
in exchange for the award (usually the vesting period). The fair
value will be estimated using an option-pricing model. This is
effective as of the beginning of the first annual reporting
period that begins after June&nbsp;15, 2005. The Company will
adopt SFAS&nbsp;No.&nbsp;123(R) at the beginning of fiscal year
2006. The Company plans to use the modified prospective approach
upon adoption and to continue to use the Black-Scholes-Merton
option pricing model.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
On March&nbsp;29, 2005, the SEC issued Staff Accounting
Bulletin&nbsp;No.&nbsp;107 (SAB&nbsp;107) regarding the
Staff&#146;s interpretation of SFAS&nbsp;No.&nbsp;123(R). This
interpretation expresses the views of the Staff regarding the
interaction between SFAS&nbsp;No.&nbsp;123(R) and certain SEC
rules and regulations and provides the Staff&#146;s views
regarding the valuation of share-based payment arrangements for
public companies. This SAB provides guidance related to
share-based payment transactions with nonemployees, the
transition from nonpublic to public entity status, valuation
methods, the accounting for certain redeemable financial
instruments issued under share-based payment arrangements, the
classification of compensation expense, non-GAAP financial
measures, first-time adoption of SFAS&nbsp;No.&nbsp;123(R) in an
interim period, capitalization of compensation cost related to
share-based payment arrangements, the accounting for income tax
effects of share-based payment arrangements upon adoption of
SFAS&nbsp;No.&nbsp;123(R), the modification of employee share
options prior to adoption of SFAS&nbsp;No.&nbsp;123(R) and
disclosures in Management&#146;s Discussion and Analysis of
Financial Condition and Results of Operations subsequent to
adoption of SFAS&nbsp;No.&nbsp;123(R). The Company will adopt
SAB&nbsp;107 in connection with its adoption of
SFAS&nbsp;No.&nbsp;123(R) at the beginning of fiscal year 2006,
both of which could have a material impact on our results of
operations.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
In May 2005, FASB issued SFAS&nbsp;No.&nbsp;154, <I>Accounting
Changes and Error Corrections &#150; a replacement of APB
Opinion No.&nbsp;20 and FASB Statement No.&nbsp;3.</I>
SFAS&nbsp;No.&nbsp;154 changes the requirements for the
accounting for and reporting of a change in accounting
principle, and applies to all voluntary changes in accounting
principle. It also applies to changes required by an accounting
pronouncement in the unusual instance that the pronouncement
does not include specific transition provisions. This statement
requires retrospective application to prior periods&#146;
financial statements of changes in accounting principle, unless
it is impracticable to determine either the period-specific
effects or the cumulative effect of the change.
SFAS&nbsp;No.&nbsp;154 is effective for accounting change made
in fiscal years beginning after December&nbsp;15, 2005. We do
not expect that adoption of this statement will have a material
impact on our results of operations or financial condition.
</DIV>

<P align="center" style="font-size: 10pt;color: #000000; background: #ffffff;">51

</FONT>

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

<FONT face="helvetica,arial">

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="7%"></TD>
    <TD width="93%"></TD>
</TR>

<TR valign="top">
    <TD><B>Item&nbsp;7A.<I>&nbsp;</I></B></TD>
    <TD>
    <B><I>Quantitative and Qualitative Disclosures About Market
    Risk.</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
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.&nbsp;Dollar and currencies of Harmonic&#146;s subsidiaries.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<I> Foreign Currency Exchange Risk</I>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
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 7% of
net sales in 2005 and 4% of net sales in 2004. In addition, the
Company has various international branch offices that provide
sales support and systems integration services. Periodically,
Harmonic enters into foreign currency forward exchange contracts
(&#147;forward contracts&#148;) to manage exposure related to
accounts receivable denominated in foreign currencies. Harmonic
does not enter into derivative financial instruments for trading
purposes. At December&nbsp;31, 2005, we had a forward exchange
contract to sell Euros totaling $5.3&nbsp;million that matures
within the first quarter of 2006. 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.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<I> Interest Rate Risk</I>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
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 had a material
impact on financial conditions, results of operations or cash
flows for either 2005 or 2004.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="6%"></TD>
    <TD width="94%"></TD>
</TR>

<TR valign="top">
    <TD><B>Item&nbsp;8.<I>&nbsp;</I></B></TD>
    <TD>
    <B><I>Financial Statements and Supplementary Data</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Management&#146;s Report on Internal Control Over Financial
Reporting
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Our management is responsible for establishing and maintaining
adequate internal control over financial reporting as defined in
Rule&nbsp;<FONT style="white-space: nowrap">13a-15(f)</FONT> of
the Exchange Act. Because of its inherent limitations, internal
control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions
or that the degree of compliance with the policies or procedures
may deteriorate. We assessed the effectiveness of
Harmonic&#146;s internal control over financial reporting as of
December&nbsp;31, 2005. In making this assessment, we used the
criteria set forth by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO)&nbsp;in Internal
Control&nbsp;- Integrated Framework. Based on our assessment
using those criteria, we concluded that as of December&nbsp;31,
2005, Harmonic&#146;s internal control over financial reporting
was effective. Our management&#146;s assessment of the
effectiveness of our internal control over financial reporting
as of December&nbsp;31, 2005 has been audited by
PricewaterhouseCoopers LLP, an independent registered public
accounting firm, as stated in their report which appears on
page&nbsp;54 of this Annual Report on
Form&nbsp;<FONT style="white-space: nowrap">10-K.
</FONT>
</DIV>

<P align="center" style="font-size: 10pt;color: #000000; background: #ffffff;">52

</FONT>

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

<FONT face="helvetica,arial">

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
(a)&nbsp;Index to Consolidated Financial Statements
</DIV>
<FONT face="times new roman,times">

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10pt; ">

<TR style="font-size: 1pt;">
    <TD width="90%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
</TR>

<TR style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">Page</FONT></B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Report of Independent Registered
    Public Accounting Firm
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">54</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Consolidated Balance Sheets as of
    December&nbsp;31, 2005, and 2004
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">56</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Consolidated Statements of
    Operations for the years ended December&nbsp;31, 2005, 2004, and
    2003
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">57</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Consolidated Statements of
    Stockholders&#146; Equity for the years ended December&nbsp;31,
    2005, 2004, and 2003
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">58</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Consolidated Statements of Cash
    Flows for the years ended December&nbsp;31, 2005, 2004, 2003
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">59</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Notes to Consolidated Financial
    Statements
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">60</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

</TABLE>
</CENTER>
</FONT>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
(b)&nbsp;Financial Statement Schedules:
</DIV>

<DIV style="margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;color: #000000; background: #ffffff;">

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

<TR valign="top">
    <TD></TD>
    <TD align="left">
    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.</TD>
</TR>

</TABLE>

<DIV style="margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;color: #000000; background: #ffffff;">

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

<TR valign="top">
    <TD>(c)&nbsp;</TD>
    <TD align="left">
    Selected Quarterly Financial Data: The following table sets
    forth for the period indicated selected quarterly financial data
    for the Company.</TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Quarterly Data (Unaudited)</B>
</DIV>
<FONT face="times new roman,times">

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10pt; margin-top: 6pt; ">

<TR style="font-size: 1pt;">
    <TD width="35%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
</TR>


<TR style="font-size: 7pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="14" align="center" nowrap><B><FONT face="helvetica,arial">2005</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="14" align="center" nowrap><B><FONT face="helvetica,arial">2004</FONT></B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="14" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="14" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR style="font-size: 7pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">4th</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">3rd</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">2nd</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">1st</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">4th</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">3rd</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">2nd</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">1st</FONT></B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>


<TR style="font-size: 7pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="30" align="center" nowrap><B><FONT face="helvetica,arial">(In thousands, except per share data)</FONT></B></TD><TD></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <B><FONT face="helvetica,arial">Quarterly Data:</FONT></B></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Net sales
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">63,740</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">60,960</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">59,763</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">72,915</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">85,579</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">50,610</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">57,011</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">55,106</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Gross
    profit<SUP style="font-size: 85%; vertical-align: text-top">(1)</SUP>
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">22,107</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">21,396</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">23,398</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">27,047</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">39,773</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">20,538</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">22,296</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">21,887</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Income (loss) from
    operations<SUP style="font-size: 85%; vertical-align: text-top">(1)</SUP>
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(2,168</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(3,283</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(2,898</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">1,305</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">9,964</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(4,161</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(1,477</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(2,890</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Net income
    (loss)<SUP style="font-size: 85%; vertical-align: text-top">(1)</SUP>
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(2,016</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(2,891</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(2,530</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">1,706</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">10,158</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(4,238</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(1,768</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(2,577</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Basic net income (loss) per share
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(0.03</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(0.04</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(0.03</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">0.02</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">0.14</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(0.06</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(0.02</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(0.04</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Diluted net income (loss) per share
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(0.03</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(0.04</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(0.03</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">0.02</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">0.14</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(0.06</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(0.02</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(0.04</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
</TR>

</TABLE>
</CENTER>
</FONT>

<DIV align="left" style="font-size: 3pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<DIV style="width: 18%; border-top: 1.0pt solid black; font-size: 1pt">&nbsp;</DIV>
</DIV>

<DIV style="margin-top: 3pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;color: #000000; background: #ffffff;">

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

<TR valign="top">
    <TD>1)&nbsp;</TD>
    <TD align="left">
    The 2004 gross profit, income from operations and net income
    include credits to cost of sales of $0.7&nbsp;million,
    $1.2&nbsp;million, $1.2&nbsp;million, and $1.0&nbsp;million in
    the first, second, third and fourth quarters, respectively, for
    products sold during the year which had been written down in
    prior years.</TD>
</TR>

</TABLE>

<P align="center" style="font-size: 10pt;color: #000000; background: #ffffff;">53

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

<FONT face="helvetica,arial">

<!-- link1 "REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM" -->
<DIV align="left"><A NAME="002"></A></DIV>

<DIV align="center" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 18pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM</B>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
To the Board of Directors and Stockholders of Harmonic Inc.:
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
We have completed integrated audits of Harmonic Inc.&#146;s 2005
and 2004 consolidated financial statements and of its internal
control over financial reporting as of December&nbsp;31, 2005,
and an audit of its 2003 consolidated financial statements in
accordance with the standards of the Public Company Accounting
Oversight Board (United States). Our opinions, based on our
audits, are presented below.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<I>Consolidated financial statements</I>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
In our opinion, the consolidated financial statements listed in
the index appearing under Item&nbsp;8 (a)&nbsp;present fairly,
in all material respects, the financial position of Harmonic
Inc. and its subsidiaries at December&nbsp;31, 2005 and 2004,
and the results of their operations and their cash flows for
each of the three years in the period ended December&nbsp;31,
2005 in conformity with accounting principles generally accepted
in the United States of America. These financial statements are
the responsibility of the Company&#146;s management. Our
responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these
statements in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit of financial statements
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.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<I>Internal control over financial reporting</I>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Also, in our opinion, management&#146;s assessment, included in
Management&#146;s Report on Internal Control over Financial
Reporting appearing under Item&nbsp;8, that the Company
maintained effective internal control over financial reporting
as of December&nbsp;31, 2005 based on criteria established in
<I>Internal Control&nbsp;- Integrated Framework </I>issued by
the Committee of Sponsoring Organizations of the Treadway
Commission (COSO), is fairly stated, in all material respects,
based on those criteria. Furthermore, in our opinion, the
Company maintained, in all material respects, effective internal
control over financial reporting as of December&nbsp;31, 2005,
based on criteria established in <I>Internal Control&nbsp;&#151;
Integrated Framework </I>issued by the COSO. The Company&#146;s
management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting. Our
responsibility is to express opinions on management&#146;s
assessment and on the effectiveness of the Company&#146;s
internal control over financial reporting based on our audit. We
conducted our audit of internal control over financial reporting
in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable
assurance about whether effective internal control over
financial reporting was maintained in all material respects. An
audit of internal control over financial reporting includes
obtaining an understanding of internal control over financial
reporting, evaluating management&#146;s assessment, testing and
evaluating the design and operating effectiveness of internal
control, and performing such other procedures as we consider
necessary in the circumstances. We believe that our audit
provides a reasonable basis for our opinions.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
A company&#146;s internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A company&#146;s
internal control over financial reporting includes those
policies and procedures that (i)&nbsp;pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (ii)&nbsp;provide reasonable assurance that
transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted
accounting
</DIV>

<P align="center" style="font-size: 10pt;color: #000000; background: #ffffff;">54

</FONT>

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

<FONT face="helvetica,arial">

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff;">
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (iii)&nbsp;provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
company&#146;s assets that could have a material effect on the
financial statements.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
</DIV>

<DIV style="margin-top: 24pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="60%"></TD>
    <TD width="40%"></TD>
</TR>

<TR valign="top">
    <TD align="left">
    /s/ PRICEWATERHOUSECOOPERS LLP</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD align="left">
    <DIV style="border-top: 1pt solid black; font-size: 1pt; margin-top: 2pt" align="left">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD align="left">
    PRICEWATERHOUSECOOPERS LLP</TD>
    <TD>&nbsp;</TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
San&nbsp;Jose, California
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff;">
March&nbsp;13, 2006
</DIV>

<P align="center" style="font-size: 10pt;color: #000000; background: #ffffff;">55

</FONT>

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

<FONT face="helvetica,arial">

<DIV align="center" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 18pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>HARMONIC INC.</B>
</DIV>

<!-- link1 "CONSOLIDATED BALANCE SHEETS" -->
<DIV align="left"><A NAME="003"></A></DIV>

<DIV align="center" style="font-size: 10pt;color: #000000; background: #ffffff;">
<B>CONSOLIDATED BALANCE SHEETS</B>
</DIV>
<FONT face="times new roman,times">

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10pt; margin-top: 12pt; ">

<TR style="font-size: 1pt;">
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="51%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="9%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="9%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="9%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="8%">&nbsp;</TD>
</TR>


<TR style="font-size: 8pt;">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap><B><FONT face="helvetica,arial">December&nbsp;31,</FONT></B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">2005</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">2004</FONT></B></TD><TD></TD>
</TR>



<TR valign="bottom" style="font-size: 1px">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap><B><FONT face="helvetica,arial">(In thousands, except</FONT></B></TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap><B><FONT face="helvetica,arial">par value amounts)</FONT></B></TD><TD></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="3" align="center" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">ASSETS
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Current assets:
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Cash and cash equivalents
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;&nbsp;<FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">37,818</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;&nbsp;<FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">26,603</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Short-term investments
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">73,010</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">74,004</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Accounts receivable, net
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">43,433</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">64,148</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Inventories
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">38,552</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">41,763</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Prepaid expenses and other current
    assets
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">8,335</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">8,504</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="7" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>

</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Total current assets
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">201,148</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">215,022</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Property and equipment, net
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">17,040</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">19,611</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Intangibles and other assets
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">8,109</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">7,723</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="7" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>

</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Total assets
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;&nbsp;<FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">226,297</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;&nbsp;<FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">242,356</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="7" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>

</TR>

<TR>
    <TD colspan="11">&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="3" align="center" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">LIABILITIES AND STOCKHOLDERS&#146;
    EQUITY
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="11">&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Current liabilities:
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Current portion of long-term debt
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;&nbsp;<FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">812</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;&nbsp;<FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">1,067</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Accounts payable
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">19,378</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">22,381</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Income taxes payable
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">6,480</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">7,099</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Deferred revenue
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">19,687</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">15,469</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Accrued liabilities
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">37,438</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">51,894</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="7" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>

</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Total current liabilities
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">83,795</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">97,910</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Long-term debt, less current portion
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">460</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">1,272</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Accrued excess facilities costs,
    long-term
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">18,357</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">24,085</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Other non-current liabilities
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">10,703</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">8,532</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="7" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>

</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Total liabilities
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">113,315</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">131,799</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="7" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>

</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Commitments and contingencies
    (Notes&nbsp;16, 17 and 18)
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Stockholders&#146; equity:
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Preferred stock, $0.001&nbsp;par
    value, 5,000&nbsp;shares authorized; no shares issued or
    outstanding
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Common stock, $0.001&nbsp;par
    value, 150,000&nbsp;shares authorized; 73,636 and
    72,286&nbsp;shares issued and outstanding
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">74</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">72</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Capital in excess of par value
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">2,048,090</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">2,039,738</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Accumulated deficit
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(1,934,715</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(1,928,984</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Accumulated other comprehensive loss
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(467</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(269</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="7" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>

</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Total stockholders&#146; equity
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">112,982</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">110,557</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="7" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>

</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Total liabilities and
    stockholders&#146; equity
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;&nbsp;<FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">226,297</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;&nbsp;<FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">242,356</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="7" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>

</TR>

</TABLE>
</CENTER>
</FONT>

<DIV align="center" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 9pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
The accompanying notes are an integral part of these
consolidated financial statements.
</DIV>

<P align="center" style="font-size: 10pt;color: #000000; background: #ffffff;">56

</FONT>

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

<FONT face="helvetica,arial">

<DIV align="center" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 18pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>HARMONIC INC.</B>
</DIV>

<!-- link1 "CONSOLIDATED STATEMENTS OF OPERATIONS" -->
<DIV align="left"><A NAME="004"></A></DIV>

<DIV align="center" style="font-size: 10pt;color: #000000; background: #ffffff;">
<B>CONSOLIDATED STATEMENTS OF OPERATIONS</B>
</DIV>
<FONT face="times new roman,times">

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10pt; margin-top: 12pt; ">

<TR style="font-size: 1pt;">
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="60%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
</TR>


<TR style="font-size: 8pt;">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="10" align="center" nowrap><B><FONT face="helvetica,arial">Year Ended December&nbsp;31,</FONT></B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="10" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">2005</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">2004</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">2003</FONT></B></TD><TD></TD>
</TR>



<TR valign="bottom" style="font-size: 1px">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="10" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="10" align="center" nowrap><B><FONT face="helvetica,arial">(In thousands, except per</FONT></B></TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="10" align="center" nowrap><B><FONT face="helvetica,arial">share data)</FONT></B></TD><TD></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Net sales
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">257,378</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">248,306</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">182,276</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Cost of sales
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">163,430</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">143,811</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">121,673</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="11" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>

</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Gross profit
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">93,948</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">104,495</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">60,603</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="11" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>

</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Operating expenses:
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Research and development
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">38,168</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">35,585</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">35,107</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Selling, general and administrative
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">61,475</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">59,742</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">48,309</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Amortization of intangibles
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">1,349</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">7,732</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">7,732</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="11" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>

</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Total operating expenses
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">100,992</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">103,059</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">91,148</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="11" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>

</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Income (loss) from operations
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(7,044</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">1,436</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(30,545</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Interest income, net
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">2,665</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">1,554</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">460</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Other income (expense), net
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(915</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(827</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">952</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="11" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>

</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Income (loss) before income taxes
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(5,294</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">2,163</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(29,133</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Provision for income taxes
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">437</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">589</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">300</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="11" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>

</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Net income (loss)
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(5,731</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">1,574</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(29,433</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="11" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>

</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Net income (loss) per share:
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Basic
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(0.08</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">0.02</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(0.47</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="11" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>

</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Diluted
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(0.08</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">0.02</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(0.47</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="11" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>

</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Weighted average shares:
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Basic
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">73,279</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">72,015</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">62,288</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="11" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>

</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Diluted
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">73,279</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">73,043</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">62,288</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="11" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>

</TR>

</TABLE>
</CENTER>
</FONT>

<DIV align="center" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
The accompanying notes are an integral part of these
consolidated financial statements.
</DIV>

<P align="center" style="font-size: 10pt;color: #000000; background: #ffffff;">57

</FONT>

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

<FONT face="helvetica,arial">

<DIV align="center" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 18pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>HARMONIC INC.</B>
</DIV>

<!-- link1 "CONSOLIDATED STATEMENTS OF STOCKHOLDERS&#146; EQUITY (IN THOUSANDS)" -->
<DIV align="left"><A NAME="005"></A></DIV>

<DIV align="center" style="font-size: 10pt;color: #000000; background: #ffffff;">
<B>CONSOLIDATED STATEMENTS OF STOCKHOLDERS&#146; EQUITY</B>
</DIV>

<DIV align="center" style="font-size: 10pt;color: #000000; background: #ffffff;">
<B>(IN THOUSANDS)</B>
</DIV>
<FONT face="times new roman,times">

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 9pt; margin-top: 12pt; ">

<TR style="font-size: 1pt;">
    <TD width="3%">&nbsp;</TD>
    <TD width="38%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
</TR>

<TR style="font-size: 7pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="7">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="center" nowrap><B><FONT face="helvetica,arial">Accumulated</FONT></B></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
</TR>

<TR style="font-size: 7pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="7" align="center" nowrap><B><FONT face="helvetica,arial">Common Stock</FONT></B></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="center" nowrap><B><FONT face="helvetica,arial">Capital in</FONT></B></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="center" nowrap><B><FONT face="helvetica,arial">Other</FONT></B></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
</TR>

<TR style="font-size: 7pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="7" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="center" nowrap><B><FONT face="helvetica,arial">Excess of Par</FONT></B></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="center" nowrap><B><FONT face="helvetica,arial">Accumulated</FONT></B></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="center" nowrap><B><FONT face="helvetica,arial">Comprehensive</FONT></B></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="center" nowrap><B><FONT face="helvetica,arial">Stockholders&#146;</FONT></B></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="center" nowrap><B><FONT face="helvetica,arial">Comprehensive</FONT></B></TD>
</TR>

<TR style="font-size: 7pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="center" nowrap><B><FONT face="helvetica,arial">Shares</FONT></B></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="center" nowrap><B><FONT face="helvetica,arial">Amount</FONT></B></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="center" nowrap><B><FONT face="helvetica,arial">Value</FONT></B></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="center" nowrap><B><FONT face="helvetica,arial">Deficit</FONT></B></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="center" nowrap><B><FONT face="helvetica,arial">Income (Loss)</FONT></B></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="center" nowrap><B><FONT face="helvetica,arial">Equity</FONT></B></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="center" nowrap><B><FONT face="helvetica,arial">Income&nbsp;(Loss)</FONT></B></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Balance at December&nbsp;31, 2002
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">60,064</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">60</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">1,963,234</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(1,901,125</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">14</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">62,183</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Net loss
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(29,433</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(29,433</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(29,433</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <FONT face="helvetica,arial">Unrealized gain on investments, net
    of tax
    </FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">61</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">61</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">61</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Currency translation
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">51</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">51</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">51</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2"><FONT style="font-size: 9pt">&nbsp;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Comprehensive loss
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(29,321</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2"><FONT style="font-size: 9pt">&nbsp;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Stock-based compensation
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">49</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">49</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Issuance of Common Stock under
    option and purchase plans
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">826</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">1</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">1,822</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">1,823</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <FONT face="helvetica,arial">Issuance of Common Stock in public
    offering, net
    </FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">10,350</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">10</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">71,417</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">71,427</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="23" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD></TD>
    <TD>&nbsp;</TD>

</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Balance at December&nbsp;31, 2003
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">71,240</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">71</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">2,036,522</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(1,930,558</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">126</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">106,161</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Net income
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">1,574</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">1,574</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">1,574</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <FONT face="helvetica,arial">Unrealized loss on investments, net
    of tax
    </FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(287</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(287</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(287</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Currency translation
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(108</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(108</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(108</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2"><FONT style="font-size: 9pt">&nbsp;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Comprehensive income
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">1,179</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2"><FONT style="font-size: 9pt">&nbsp;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Stock-based compensation
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">23</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">23</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Issuance of Common Stock under
    option and purchase plans
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">1,046</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">1</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">3,193</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">3,194</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="23" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD></TD>
    <TD>&nbsp;</TD>

</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Balance at December&nbsp;31, 2004
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">72,286</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">72</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">2,039,738</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(1,928,984</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(269</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">110,557</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Net loss
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(5,731</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(5,731</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(5,731</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <FONT face="helvetica,arial">Unrealized gain on investments, net
    of tax
    </FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">7</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">7</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">7</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Currency translation
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(205</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(205</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(205</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><FONT style="font-size: 9pt">&nbsp;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Comprehensive loss
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(5,929</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><FONT style="font-size: 9pt">&nbsp;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Stock-based compensation
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">35</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">35</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <FONT face="helvetica,arial">Issuance of Common Stock under
    option and purchase plans
    </FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">1,181</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">2</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">6,486</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">6,488</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <FONT face="helvetica,arial">Issuance of Common Stock for
    acquisition of BTL
    </FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">169</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">1,831</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">1,831</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="23" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD></TD>
    <TD>&nbsp;</TD>

</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Balance at December&nbsp;31, 2005
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">73,636</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">74</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">2,048,090</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(1,934,715</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(467</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">112,982</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="23" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD></TD>
    <TD>&nbsp;</TD>

</TR>

</TABLE>
</CENTER>
</FONT>

<DIV align="center" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
The accompanying notes are an integral part of these
consolidated financial statements.
</DIV>

<P align="center" style="font-size: 10pt;color: #000000; background: #ffffff;">58

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

<FONT face="helvetica,arial">

<DIV align="center" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 18pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>HARMONIC INC.</B>
</DIV>

<!-- link1 "CONSOLIDATED STATEMENTS OF CASH FLOWS" -->
<DIV align="left"><A NAME="006"></A></DIV>

<DIV align="center" style="font-size: 10pt;color: #000000; background: #ffffff;">
<B>CONSOLIDATED STATEMENTS OF CASH FLOWS</B>
</DIV>
<FONT face="times new roman,times">

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 9pt; margin-top: 12pt; ">

<TR style="font-size: 1pt;">
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="42%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="6%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="6%">&nbsp;</TD>
</TR>


<TR style="font-size: 8pt;">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="10" align="center" nowrap><B><FONT face="helvetica,arial">Year Ended December&nbsp;31,</FONT></B></TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">2005</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">2004</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">2003</FONT></B></TD><TD></TD>
</TR>


<TR valign="bottom" style="font-size: 1px">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="10" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>


<TR style="font-size: 8pt;">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="10" align="center" nowrap><B><FONT face="helvetica,arial">(In thousands)</FONT></B></TD><TD></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Cash flows from operating
    activities:
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Net income (loss)
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(5,731)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">1,574</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(29,433)</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Adjustments to reconcile net loss
    to net cash provided by (used in) operating activities:
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Amortization of intangibles
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">2,603</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">13,894</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">13,894</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Depreciation and amortization
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">8,676</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">9,408</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">12,274</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Stock-based compensation
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">35</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">23</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">49</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Impairment and loss on disposal of
    fixed assets
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">114</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">1,002</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">88</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Deferred income taxes
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(366)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Changes in assets and liabilities,
    net of effect of acquisition:
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Accounts receivable
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">21,804</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(26,490)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(13,598)</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Inventories
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">4,581</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(19,333)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">3,516</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Prepaid expenses and other assets
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">1,182</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(1,804)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(355)</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Accounts payable
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(3,347)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">7,518</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">7,605</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Deferred revenue
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">5,234</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">6,160</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">2,743</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Income taxes payable
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(624)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">339</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Accrued and other liabilities
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(12,261)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">3,933</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">4,585</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Accrued excess facilities costs
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(5,846)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(5,246)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(6,927)</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="3"><FONT style="font-size: 9pt">&nbsp;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD colspan="11" align="right" valign="bottom" style="border-top: 1pt solid #000000;">
    &nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Net cash provided by (used in)
    operating activities
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">16,054</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(9,022)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(5,559)</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="3"><FONT style="font-size: 9pt">&nbsp;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD colspan="11" align="right" valign="bottom" style="border-top: 1pt solid #000000;">
    &nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Cash flows used in investing
    activities:
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Purchases of investments
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(63,328)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(85,457)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(67,914)</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Proceeds from sales of investments
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">64,334</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">81,710</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">24,909</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Acquisition of property and
    equipment
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(5,666)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(6,318)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(3,364)</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Acquisition of BTL, net of cash
    received
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(5,661)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="3"><FONT style="font-size: 9pt">&nbsp;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD colspan="11" align="right" valign="bottom" style="border-top: 1pt solid #000000;">
    &nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Net cash used in investing
    activities
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(10,321)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(10,065)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(46,369)</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="3"><FONT style="font-size: 9pt">&nbsp;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD colspan="11" align="right" valign="bottom" style="border-top: 1pt solid #000000;">
    &nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Cash flows from financing
    activities:
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Proceeds from issuance of common
    stock, net
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">6,478</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">3,194</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">73,251</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Borrowings under bank line and term
    loan
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">1,904</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">1,001</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Repayments under bank line and term
    loan
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(1,067)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(1,221)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(1,917)</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Repayments of capital lease
    obligations
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(92)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="3"><FONT style="font-size: 9pt">&nbsp;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD colspan="11" align="right" valign="bottom" style="border-top: 1pt solid #000000;">
    &nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Net cash provided by financing
    activities
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">5,319</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">3,877</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">72,335</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="3"><FONT style="font-size: 9pt">&nbsp;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD colspan="11" align="right" valign="bottom" style="border-top: 1pt solid #000000;">
    &nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Effect of exchange rate changes on
    cash and cash equivalents
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">163</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(64)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(72)</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="3"><FONT style="font-size: 9pt">&nbsp;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD colspan="11" align="right" valign="bottom" style="border-top: 1pt solid #000000;">
    &nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Net increase (decrease) in cash and
    cash equivalents
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">11,215</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(15,274)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">20,335</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Cash and cash equivalents at
    beginning of period
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">26,603</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">41,877</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">21,542</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="3"><FONT style="font-size: 9pt">&nbsp;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD colspan="11" align="right" valign="bottom" style="border-top: 1pt solid #000000;">
    &nbsp;</TD>
</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Cash and cash equivalents at end of
    period
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">37,818</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">26,603</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">41,877</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="3"><FONT style="font-size: 9pt">&nbsp;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD colspan="11" align="right" valign="bottom" style="border-top: 3pt double #000000;">
    &nbsp;</TD>
</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Supplemental disclosure of cash
    flow information:
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Income tax payments, net
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">355</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">479</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">211</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Interest paid during the period
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">153</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">103</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">154</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Non-cash investing and financing
    activities:
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Issuance of restricted common stock
    from BTL acquisition
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">1,831</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

</TABLE>
</CENTER>
</FONT>

<DIV align="center" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
The accompanying notes are an integral part of these
consolidated financial statements.
</DIV>

<P align="center" style="font-size: 10pt;color: #000000; background: #ffffff;">59

</FONT>

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

<FONT face="helvetica,arial">

<DIV align="center" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 18pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>HARMONIC INC.</B>
</DIV>

<!-- link1 "NOTES TO CONSOLIDATED FINANCIAL STATEMENTS" -->
<DIV align="left"><A NAME="007"></A></DIV>

<DIV align="center" style="font-size: 10pt;color: #000000; background: #ffffff;">
<B>NOTES TO CONSOLIDATED FINANCIAL STATEMENTS</B>
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="6%"></TD>
    <TD width="94%"></TD>
</TR>

<TR valign="top">
    <TD><B>Note&nbsp;1:&nbsp;</B></TD>
    <TD>
    <B>Organization, Basis of Presentation and Summary of
    Significant Accounting Policies</B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
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
<FONT style="white-space: nowrap">video-on</FONT>-demand (VOD).
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Prior to 1997, 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.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
In order to further expand our digital systems capability,
Harmonic acquired the DiviCom business, which provides encoding
products and systems for digital television of C-Cube
Microsystems Inc. in May 2000. 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. Through
December&nbsp;31, 2005, Harmonic had been organized into two
operating divisions, Broadband Access Networks, or BAN, for
fiber optic systems and Convergent Systems, or CS, for digital
headend systems. In the fourth quarter of 2005, an
organizational restructuring combined the product development,
marketing and manufacturing operations into a single segment.
Effective January&nbsp;1, 2006, the Company&#146;s new operating
segment is in place and the Company intends to manage and report
its financial results as a single segment.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<I>Basis of Presentation.</I> 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.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<I>Use of Estimates.</I> 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.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<I>Cash and Cash Equivalents.</I> 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.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<I>Investments.</I> Harmonic&#146;s short-term investments are
stated at fair value, and are principally comprised of
U.S.&nbsp;government, U.S.&nbsp;government agencies and
corporate debt securities. The Company classifies its
investments as available for sale in accordance with
SFAS&nbsp;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 accumulated other comprehensive income (loss). The
specific identification method is used to determine the cost of
securities disposed of, with realized gains and losses reflected
in interest income, net. Investments are anticipated to be used
for current operations and are, therefore, classified as current
assets, even though maturities may extend beyond one year.
</DIV>

<P align="center" style="font-size: 10pt;color: #000000; background: #ffffff;">60

</FONT>

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

<FONT face="helvetica,arial">

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<I>Fair Value of Financial Instruments.</I> The carrying value
of Harmonic&#146;s financial instruments, including cash, cash
equivalents, short-term investments, accounts receivable,
accounts payable, accrued liabilities, capital lease obligations
and long-term debt approximate fair value due to their short
maturities.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<I>Concentrations of Credit Risk.</I> 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.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<I>Revenue Recognition.</I> Harmonic&#146;s principal sources of
revenue are from hardware products, software products, solution
sales, services and hardware and software 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.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Revenue from product sales, excluding the revenue generated from
service-related solutions, which are discussed below, is
recognized upon shipment, or once all applicable criteria have
been met. Allowances are provided for estimated returns,
discounts and trade-ins. Such allowances are adjusted
periodically to reflect actual and anticipated experience.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
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, including equipment 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.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
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 unrecognized revenue portion of
maintenance agreements billed is recorded as deferred revenue.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
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 and when revenue
recognition criteria are met. 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.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Revenue on software products and software-related elements is
recognized in accordance with SOP No.&nbsp;97-2, &#147;Software
Revenue Recognition.&#148; For arrangements that include both
hardware products and software products, Harmonic evaluates the
arrangement based on
EITF&nbsp;<FONT style="white-space: nowrap">03-5,</FONT>
<I>&#147;Applicability of AICPA Statement of Position 97-2 to
Non-Software Deliverables in an Arrangement Containing
More-Than-Incidental Software.&#148; </I>In accordance with the
provisions of
</DIV>

<P align="center" style="font-size: 10pt;color: #000000; background: #ffffff;">61

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<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff;">
EITF&nbsp;<FONT style="white-space: nowrap">03-5,</FONT> the
arrangement is divided between software-related elements and
non-software deliverables. Software-related elements are
accounted for as software. Software-related elements include all
non-software deliverables for which a software deliverable is
essential to its functionality. When software arrangements
contain multiple elements and vendor specific objective evidence
of fair value exists for all undelivered elements, Harmonic
accounts for the delivered elements in accordance with the
&#147;Residual Method&#148; prescribed by SOP No.&nbsp;98-9.
Fair value of software-related elements is based on separate
sales to other customers or upon renewal rates quoted in
contracts when the quoted renewal rates are deemed to be
substantive.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
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.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Revenue from distributors and system integrators is recognized
on delivery provided that the criteria for revenue recognition
have been met. The Company accrues for sales returns and other
allowances based on its historical experience.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<I>Shipping and Handling Costs.</I> 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.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<I>Inventories.</I> 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.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<I>Capitalized Software Development Costs.</I> 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.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<I>Property and Equipment.</I> 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, 2005, 2004 and 2003 were $8.7&nbsp;million,
$9.4&nbsp;million and $12.3&nbsp;million, respectively. As a
result of a verification in 2004 the Company wrote-off
approximately $0.8&nbsp;million in net book value of property
and equipment in 2004.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<I>Goodwill and Intangible Assets.</I> 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. See
Note&nbsp;4, &#147;Goodwill and Identified Intangibles&#148;.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<I>Impairment of Long-Lived Assets.</I> Long-lived assets, such
as other intangibles and property and equipment, are evaluated
for recoverability when indicators of impairment are present.
The Company evaluates the recoverability of other intangible
assets and long-lived assets on the basis of undiscounted cash
flows for each asset group. 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.
</DIV>

<P align="center" style="font-size: 10pt;color: #000000; background: #ffffff;">62

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<FONT face="helvetica,arial">

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<I>Restructuring Costs and Accruals for Excess Facilities.</I>
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 incurred.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<I>Accrued warranties.</I> The Company accrues for estimated
warranty at the time of revenue recognition 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.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<I>Currency Translation.</I> 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) in stockholders&#146; equity. For subsidiaries where the
functional currency is the U.S.&nbsp;dollar, gains and losses
resulting from re-measuring foreign currency denominated
balances into U.S.&nbsp;dollars are included in other
income/(expense), net and have been insignificant for all
periods presented.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<I>Income Taxes.</I> 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.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<I>Advertising Expenses.</I> Harmonic expenses the cost of
advertising as incurred. During 2005, 2004 and 2003, advertising
expenses were not material to the results of operations.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<I>Stock Based Compensation.</I> Harmonic accounts for employee
stock option plans in accordance with Accounting Principles
Board No.&nbsp;25 (APB&nbsp;25), &#147;Accounting for Stock
Issued to Employees&#148;, and has adopted the disclosure
requirements under SFAS&nbsp;No.&nbsp;148, &#147;Accounting for
Stock-Based Compensation&nbsp;&#151; Transition and
Disclosure&#148;, which was issued in December 2002. If these
non-cash charges for Harmonic&#146;s stock plans had been
determined based on the fair value method at the grant dates, as
prescribed in SFAS&nbsp;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:
</DIV>
<FONT face="times new roman,times">

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10pt; margin-top: 12pt; ">

<TR style="font-size: 1pt;">
    <TD width="3%">&nbsp;</TD>
    <TD width="37%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="9%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="8%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="9%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="8%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
</TR>


<TR style="font-size: 8pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="10" align="center" nowrap><B><FONT face="helvetica,arial">Year Ended December&nbsp;31,</FONT></B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="10" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">2005</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">2004</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">2003</FONT></B></TD><TD></TD>
</TR>


<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="10" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>


<TR style="font-size: 8pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="10" align="center" nowrap><B><FONT face="helvetica,arial">(In thousands, except per share data)</FONT></B></TD><TD></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Net income (loss) as reported
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(5,731</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">1,574</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(29,433</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <FONT face="helvetica,arial">Add: Total stock expense determined
    under fair value based method for all awards, net of related tax
    effects
    </FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(8,936</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(11,240</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(10,539</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2"><FONT style="font-size: 10pt">&nbsp;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD colspan="11" align="right" valign="bottom" style="border-top: 1pt solid #000000;">
    &nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Pro forma net loss
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(14,667</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(9,666</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(39,972</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2"><FONT style="font-size: 10pt">&nbsp;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD colspan="11" align="right" valign="bottom" style="border-top: 3pt double #000000;">
    &nbsp;</TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Basic and Diluted net income (loss)
    per share:
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">As reported
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(0.08</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">0.02</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(0.47</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><FONT style="font-size: 10pt">&nbsp;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD colspan="11" align="right" valign="bottom" style="border-top: 1pt solid #000000;">
    &nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Pro forma
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(0.20</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(0.13</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(0.64</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><FONT style="font-size: 10pt">&nbsp;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD colspan="11" align="right" valign="bottom" style="border-top: 3pt double #000000;">
    &nbsp;</TD>
</TR>

</TABLE>
</CENTER>
</FONT>

<P align="center" style="font-size: 10pt;color: #000000; background: #ffffff;">63

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<FONT face="helvetica,arial">

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
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:
</DIV>
<FONT face="times new roman,times">

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10pt; margin-top: 12pt; ">

<TR style="font-size: 1pt;">
    <TD width="36%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
</TR>


<TR style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="10" align="center" nowrap><B><FONT face="helvetica,arial">Employee Stock Options</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="10" align="center" nowrap><B><FONT face="helvetica,arial">Employee Stock Purchase&nbsp;Plan</FONT></B></TD><TD></TD>
</TR>


<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="22" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">2005</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">2004</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">2003</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">2005</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">2004</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">2003</FONT></B></TD><TD></TD>
</TR>


<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="22" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Dividend yield
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">0.0%</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">0.0%</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">0.0%</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">0.0%</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">0.0%</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">0.0%</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Volatility
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">96%</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">123%</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">126%</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">69%</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">87%</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">131%</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Risk-free interest rate
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">3.8%</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">2.3%</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">2.3%</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">3.7%</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">2.2%</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">1.7%</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Expected life (years)
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">3.6</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">3.5</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">3.6</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">0.8</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">1.3</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">1.3</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

</TABLE>
</CENTER>
</FONT>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<I>Comprehensive Income (Loss).</I> Comprehensive income (loss)
includes net income (loss) and other comprehensive income
(loss). Other comprehensive income (loss) includes cumulative
translation adjustments and unrealized gains and losses on
available-for-sale securities. Harmonic&#146;s comprehensive
income (loss) has been presented in the Consolidated Statement
of Stockholders&#146; Equity.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Total comprehensive income (loss) of fiscal years 2005, 2004 and
2003 are presented in the accompanying Consolidated Statement of
Stockholders&#146; Equity. Total accumulated other comprehensive
income (loss) is displayed as a separate component of
stockholders&#146; equity in the accompanying Consolidated
Balance Sheets. The accumulated balances for each component of
other comprehensive income (loss) consist of the following, net
of taxes (in thousands):
</DIV>
<FONT face="times new roman,times">

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10pt; margin-top: 12pt; ">

<TR style="font-size: 1pt;">
    <TD width="53%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="6%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="6%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="6%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
</TR>

<TR style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">Unrealized</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">Accumulated</FONT></B></TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">Gain (Loss)</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">Other</FONT></B></TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">in Available-</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">Foreign</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">Comprehensive</FONT></B></TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">for-Sale</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">Currency</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">Income</FONT></B></TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">Securities</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">Translation</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">(Loss)</FONT></B></TD><TD></TD>
</TR>


<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="10" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Balance as of December&nbsp;31, 2002
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">14</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">14</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Change during year
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">61</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">51</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">112</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="11" align="right" valign="bottom" style="border-top: 1pt solid #000000;">
    &nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Balance as of December&nbsp;31, 2003
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">61</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">65</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">126</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Change during year
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(287</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(108</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(395</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="11" align="right" valign="bottom" style="border-top: 1pt solid #000000;">
    &nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Balance as of December&nbsp;31, 2004
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(226</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(43</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(269</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Change during year
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">7</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(205</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(198</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="11" align="right" valign="bottom" style="border-top: 1pt solid #000000;">
    &nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Balance as of December&nbsp;31, 2005
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(219</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(248</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(467</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="11" align="right" valign="bottom" style="border-top: 3pt double #000000;">
    &nbsp;</TD>
</TR>

</TABLE>
</CENTER>
</FONT>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<I>Accounting for Derivatives and Hedging Activities.</I>
Harmonic accounts for derivative financial instruments and
hedging contracts in accordance with SFAS&nbsp;No.&nbsp;133,
&#147;Accounting for Derivative Instruments and Hedging
Activities&#148; and SFAS&nbsp;No.&nbsp;149, &#147;Amendment of
Statement&nbsp;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.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Periodically, Harmonic enters into foreign currency forward
exchange contracts (&#147;forward exchange 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. At December&nbsp;31,
2005, the Company had a forward exchange contract to sell Euros
totaling $5.3&nbsp;million. This foreign exchange contract
matures within the first quarter of 2006. At December&nbsp;31,
2004, the Company had a forward exchange contract to sell Euros
totaling $0.9&nbsp;million. This foreign exchange contract
matured in the first quarter of 2005 and the fair value of this
contract was approximately $0.9&nbsp;million as of
December&nbsp;31, 2004.
</DIV>

<P align="center" style="font-size: 10pt;color: #000000; background: #ffffff;">64

</FONT>

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

<FONT face="helvetica,arial">

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<I>Reclassification.</I> Certain amounts in prior years&#146;
financial statements and related notes have been reclassified to
conform to the 2005 presentation. These reclassifications have
no material impact on previously reported net loss or cash flows.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="6%"></TD>
    <TD width="94%"></TD>
</TR>

<TR valign="top">
    <TD><B>Note&nbsp;2:&nbsp;</B></TD>
    <TD>
    <B>Recent Accounting Pronouncements</B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
In November 2004, the Financial Accounting Standards Board,
&#147;FASB,&#148; issued Statement of Financial Accounting
Standard, &#147;SFAS&#148;, No.&nbsp;151, <I>Inventory
Costs</I>, to amend the guidance in Chapter&nbsp;4, <I>Inventory
Pricing</I>, of FASB Accounting Research
Bulletin&nbsp;No.&nbsp;43, <I>Restatement and Revision of
Accounting Research Bulletins.</I> SFAS&nbsp;No.&nbsp;151
clarifies the accounting for abnormal amounts of idle facility
expense, freight, handling costs, and wasted material
(spoilage)&nbsp;and requires these costs be treated as current
period charges. Additionally, SFAS&nbsp;No.&nbsp;151 requires
that allocation of fixed production overhead to the costs of
conversion be based on the normal capacity of the production
facilities. The provisions of SFAS&nbsp;No.&nbsp;151 are
effective for inventory costs incurred during fiscal years
beginning after June&nbsp;15, 2005. The Company does not
currently believe that SFAS&nbsp;No.&nbsp;151 will have a
significant impact on its financial condition or results of
operations.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
In December 2004, the FASB issued SFAS&nbsp;No.&nbsp;123
(revised 2004), <I>Share-Based Payment.</I>
SFAS&nbsp;No.&nbsp;123R is a revision of FASB
SFAS&nbsp;No.&nbsp;123, <I>Accounting for Stock-Based
Compensation </I>and supersedes APB Opinion No.&nbsp;25,
<I>Accounting for Stock Issued to Employees</I>, and its related
implementation guidance. As noted in our stock-based
compensation accounting policy, the Company does not record
compensation expense for stock-based compensation. Under
SFAS&nbsp;No.&nbsp;123(R), the Company will be required to
measure the cost of employee services received in exchange for
stock-based compensation based on the grant-date fair value
(with limited exceptions). That cost will be recognized over the
period during which an employee is required to provide services
in exchange for the award (usually the vesting period). The fair
value will be estimated using an option-pricing model. This is
effective as of the beginning of the first annual reporting
period that begins after June&nbsp;15, 2005. The Company will
adopt SFAS&nbsp;No.&nbsp;123(R) at the beginning of fiscal year
2006. The Company plans to use the modified prospective approach
upon adoption and to continue to use the Black-Scholes-Merton
option pricing model.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
On March&nbsp;29, 2005, the SEC issued Staff Accounting
Bulletin&nbsp;No.&nbsp;107 (SAB&nbsp;107) regarding the
Staff&#146;s interpretation of SFAS&nbsp;No.&nbsp;123(R). This
interpretation expresses the views of the staff regarding the
interaction between SFAS&nbsp;No.&nbsp;123(R) and certain SEC
rules and regulations and provides the staff&#146;s views
regarding the valuation of share-based payment arrangements for
public companies. This SAB provides guidance related to
share-based payment transactions with nonemployees, the
transition from nonpublic to public entity status, valuation
methods, the accounting for certain redeemable financial
instruments issued under share-based payment arrangements, the
classification of compensation expense, non-GAAP financial
measures, first-time adoption of SFAS&nbsp;No.&nbsp;123(R) in an
interim period, capitalization of compensation cost related to
share-based payment arrangements, the accounting for income tax
effects of share-based payment arrangements upon adoption of
SFAS&nbsp;No.&nbsp;123(R), the modification of employee share
options prior to adoption of SFAS&nbsp;No.&nbsp;123(R) and
disclosures in Management&#146;s Discussion and Analysis
subsequent to adoption of SFAS&nbsp;No.&nbsp;123(R). The Company
will adopt SAB&nbsp;107 in connection with its adoption of
SFAS&nbsp;No.&nbsp;123(R) at the beginning of fiscal year 2006,
both of which could have a material impact on our results of
operations.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
In May 2005, FASB issued SFAS&nbsp;No.&nbsp;154, <I>Accounting
Changes and Error Corrections&nbsp;&#151; a replacement of APB
Opinion No.&nbsp;20 and FASB Statement No.&nbsp;3.</I>
SFAS&nbsp;No.&nbsp;154 changes the requirements for the
accounting for and reporting of a change in accounting
principle, and applies to all voluntary changes in accounting
principle. It also applies to changes required by an accounting
pronouncement in the unusual instance that the pronouncement
does not include specific transition provisions. This statement
requires retrospective application to prior periods&#146;
financial statements of changes in accounting principle, unless
it is impracticable to determine either the period-specific
effects or the cumulative effect of the change.
SFAS&nbsp;No.&nbsp;154 is effective for accounting change made
in fiscal years beginning after December&nbsp;15, 2005.
</DIV>

<P align="center" style="font-size: 10pt;color: #000000; background: #ffffff;">65

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<FONT face="helvetica,arial">

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff;">
We do not expect that adoption of this statement will have a
material impact on our results of operations or financial
condition.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="6%"></TD>
    <TD width="94%"></TD>
</TR>

<TR valign="top">
    <TD><B>Note&nbsp;3:&nbsp;</B></TD>
    <TD>
    <B>BTL Acquisition</B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
On February&nbsp;25, 2005, Harmonic purchased all of the issued
and outstanding shares of
Broadcast&nbsp;Technology&nbsp;Limited, or BTL, a private U.K.
company, for a purchase consideration of &#163;4.0&nbsp;million,
or approximately $7.6&nbsp;million. The purchase consideration
consisted of a payment of &#163;3.0&nbsp;million in cash and the
issuance of 169,112&nbsp;shares of Harmonic common stock. In
addition, Harmonic paid approximately $0.3&nbsp;million in
transaction costs for a total transaction price of approximately
$7.9&nbsp;million. The addition of BTL has expanded
Harmonic&#146;s product line to include professional video/audio
receivers and decoders. This enabled us to expand the scope of
solutions we provide for existing and emerging cable, satellite,
terrestrial broadcast and telecom applications. These factors
contributed to a purchase price exceeding the fair value of
BTL&#146;s net tangible and intangible assets acquired; as a
result, we have recorded goodwill in connection with this
transaction.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
The BTL acquisition was accounted for under
SFAS&nbsp;No.&nbsp;141 and certain specified provisions of
SFAS&nbsp;No.&nbsp;142. The results of operations of BTL are
included in Harmonic&#146;s Condensed Consolidated Statements of
Operations from February&nbsp;25, 2005, the date of acquisition.
The following table summarizes the allocation of the purchase
price based on the estimated fair value of the tangible assets
acquired and the liabilities assumed at the date of acquisition
(in thousands):
</DIV>
<FONT face="times new roman,times">

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10pt; margin-top: 12pt; ">

<TR style="font-size: 1pt;">
    <TD width="3%">&nbsp;</TD>
    <TD width="71%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="11%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="11%">&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Cash acquired
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">149</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Other tangible assets acquired
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">2,508</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Amortizable intangible assets:
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Existing technology
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">2,050</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Customer relationships
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">540</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Tradenames/trademarks
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">320</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Order backlog
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">60</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Goodwill
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">3,745</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Total assets acquired
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">9,372</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Liabilities assumed
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(568)</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Deferred tax liability for acquired
    intangibles
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(891)</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Net assets acquired
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">7,913</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

</TABLE>
</CENTER>
</FONT>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Identified intangible assets, including existing technology and
customer relationships are being amortized over their useful
lives of three years; tradename/trademarks are being amortized
over their useful lives of two years; and order backlog is being
amortized over its useful life of three months.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
The residual purchase price of $3.7&nbsp;million has been
recorded as goodwill and allocated to the Convergent Systems
reporting unit. The goodwill as a result of this acquisition is
not expected to be deductible for tax purposes. In accordance
with SFAS&nbsp;No.&nbsp;142, &#147;Goodwill and Other Intangible
Assets,&#148; goodwill relating to the acquisition of BTL is not
being amortized and will be tested for impairment annually or
whenever events indicate that an impairment may have occurred.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Supplemental pro forma information is not provided because the
acquisition of BTL was not material to the Company&#146;s
financial statements for all periods presented.
</DIV>

<P align="center" style="font-size: 10pt;color: #000000; background: #ffffff;">66

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<FONT face="helvetica,arial">

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="6%"></TD>
    <TD width="94%"></TD>
</TR>

<TR valign="top">
    <TD><B>Note&nbsp;4:&nbsp;</B></TD>
    <TD>
    <B>Goodwill and Identified Intangibles</B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
For purposes of applying SFAS&nbsp;No.&nbsp;142, management
believed the operating divisions, BAN and CS, represented the
Company&#146;s reporting units prior to January&nbsp;1, 2006. 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 2003, 2004 and 2005. 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.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
For the years ended December&nbsp;31, 2005, 2004 and 2003, the
Company recorded a total of $2.6&nbsp;million,
$13.9&nbsp;million and $13.9&nbsp;million, respectively, of
amortization expense for identified intangibles, of which
$1.3&nbsp;million, $6.2&nbsp;million and $6.2&nbsp;million,
respectively, was included in cost of sales. Estimated future
amortization expense for identified intangibles is
$0.8&nbsp;million for 2006, of which $0.6&nbsp;million will be
included in cost of sales, $0.8&nbsp;million for 2007, of which
$0.6&nbsp;million will be included in cost of sales and
$0.1&nbsp;million for 2008, of which $0.1&nbsp;million will be
included in cost of sales. The following is a summary of
goodwill and intangible assets as of December&nbsp;31, 2005 and
December&nbsp;31, 2004:
</DIV>
<FONT face="times new roman,times">

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10pt; margin-top: 12pt; ">

<TR style="font-size: 1pt;">
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="23%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
</TR>


<TR style="font-size: 8pt;">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="10" align="center" nowrap><B><FONT face="helvetica,arial">December&nbsp;31, 2005</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="10" align="center" nowrap><B><FONT face="helvetica,arial">December&nbsp;31, 2004</FONT></B></TD><TD></TD>
</TR>


<TR valign="bottom" style="font-size: 1px">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="22" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">Gross</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="7">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">Gross</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="7">&nbsp;</TD>
</TR>

<TR style="font-size: 8pt;">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">Carrying</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">Accumulated</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">Net Carrying</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">Carrying</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">Accumulated</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">Net Carrying</FONT></B></TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">Amount*</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">Amortization</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">Amount</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">Amount</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">Amortization</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">Amount</FONT></B></TD><TD></TD>
</TR>


<TR valign="bottom" style="font-size: 1px">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="22" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>


<TR style="font-size: 8pt;">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="22" align="center" nowrap><B><FONT face="helvetica,arial">(In thousands)</FONT></B></TD><TD></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Identified intangibles:
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Developed core technology
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">29,663</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(28,315</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">1,348</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">29,059</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(27,220</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">1,839</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Customer base
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">31,904</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(31,904</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">33,295</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(31,000</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">2,295</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Trademark and tradename
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">4,190</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(4,142</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">48</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">4,076</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(3,794</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">282</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Supply agreement
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">3,464</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(3,109</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">355</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">3,107</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(2,892</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">215</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="23" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>

</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <FONT face="helvetica,arial">Subtotal of identified intangibles
    </FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">69,221</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(67,470</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">1,751</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">69,537</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(64,906</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">4,631</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Goodwill
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">4,896</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">4,896</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">1,780</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">1,780</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="23" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>

</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Total goodwill and other intangibles
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">74,117</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(67,470</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">6,647</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">71,317</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(64,906</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">6,411</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="23" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>

</TR>

</TABLE>
</CENTER>
</FONT>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Foreign currency translation adjustments, reflecting movement in
the currencies of the underlying entities, totaled approximately
$0.3&nbsp;million for intangible assets and approximately
$0.3&nbsp;million for goodwill as of December&nbsp;31, 2005.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
The acquisition of BTL resulted in an increase in goodwill and
intangible assets of $3.5&nbsp;million and $2.7&nbsp;million,
respectively, during 2005. In addition, intangible assets
decreased by $3.0&nbsp;million in 2005 from the reversal of a
reserve for a DiviCom pre-acquisition uncertain tax provision.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="6%"></TD>
    <TD width="94%"></TD>
</TR>

<TR valign="top">
    <TD><B>Note&nbsp;5:&nbsp;</B></TD>
    <TD>
    <B>Restructuring, Excess Facilities and Inventory Provisions</B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
During 2001, Harmonic recorded a charge for excess facilities
costs of $21.8&nbsp;million. As a result of uncertain market
conditions and lower sales during the second half of 2002, the
Company changed its estimates related to accrued excess
facilities with regard to the expected timing and amount of
sublease income due to the substantial surplus of vacant
commercial space in the San&nbsp;Francisco Bay Area. In
connection with these actions, Harmonic recorded an additional
excess facilities charge of $22.5&nbsp;million, net of sublease
income, to selling, general and administrative expenses during
the second half of 2002.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
As of December&nbsp;31, 2004, accrued excess facilities cost
totaled $29.4&nbsp;million of which $5.3&nbsp;million was
included in current accrued liabilities and $24.1&nbsp;million
in other non-current liabilities. The Company incurred cash
outlays of
</DIV>

<P align="center" style="font-size: 10pt;color: #000000; background: #ffffff;">67

</FONT>

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

<FONT face="helvetica,arial">

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff;">
$5.2&nbsp;million during 2004 principally for lease payments,
property taxes, insurance and other maintenance fees related to
vacated facilities. As of December&nbsp;31, 2005, accrued excess
facilities cost totaled $23.6&nbsp;million of which
$5.2&nbsp;million was included in current accrued liabilities
and $18.4&nbsp;million in other non-current liabilities. The
Company incurred cash outlays of $4.7&nbsp;million, net of
$0.7&nbsp;million of sublease income, during 2005 principally
for lease payments, property taxes, insurance and other
maintenance fees related to vacated facilities. In 2006,
Harmonic expects to pay approximately $5.2&nbsp;million of
excess facility lease costs, net of estimated sublease income,
and to pay the remaining $18.4&nbsp;million, net of estimated
sublease income, over the remaining lease terms through
September 2010.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Harmonic reassesses this liability quarterly and adjust as
necessary based on changes in the timing and amounts of expected
sublease rental income. In the fourth quarter of 2005 the excess
facilities liability was decreased by $1.1&nbsp;million due to
subleasing a portion of an unoccupied building for the remainder
of the lease.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
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. The Company removed approximately 12,000&nbsp;square
feet of space from the excess facilities portfolio in order to
eliminate a third-party offsite storage arrangement. Based on
the remaining lease term of 84&nbsp;months, this removal
resulted in a reduction of $3.3&nbsp;million in the required
excess facilities reserve. 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. The deferred rent liability was not adjusted
for the change in lease term resulting in an understatement of
rent expense and the deferred rent liability at
December&nbsp;31, 2001, 2002 and 2003. 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 2003.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
If facilities rental rates decrease in these markets or if it
takes longer than expected to sublease these facilities, the
maximum amount by which the actual loss could exceed the
December&nbsp;31, 2005 balance is approximately
$0.6&nbsp;million.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
During the fourth quarter of 2005, in response to the
consolidation of the Company&#146;s two operating segments into
a single segment as of January&nbsp;1, 2006, the Company
implemented workforce reductions of approximately
40&nbsp;full-time employees across all functions and primarily
in our U.S. operations, and recorded severance and other costs
of approximately $1.1&nbsp;million. We expect to utilize the
remaining accrual by the end of the third quarter of 2006.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
The following table summarizes restructuring activities:
</DIV>
<FONT face="times new roman,times">

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10pt; margin-top: 12pt; ">

<TR style="font-size: 1pt;">
    <TD width="31%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="10%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="9%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="10%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="10%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="9%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="9%">&nbsp;</TD>
</TR>

<TR style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">Workforce</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">Excess</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
</TR>

<TR style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">Reduction</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">Facilities</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">Total</FONT></B></TD><TD></TD>
</TR>


<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="10" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>


<TR style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="10" align="center" nowrap><B><FONT face="helvetica,arial">(In thousands)</FONT></B></TD><TD></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Balance at January&nbsp;1, 2004
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">34</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">34,667</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">34,701</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Provisions
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Cash payments, net of sublease
    income
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(34</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(5,246</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(5,280</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="11" align="right" valign="bottom" style="border-top: 1pt solid #000000;">
    &nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Balance at December&nbsp;31, 2004
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">29,421</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">29,421</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Provisions/(recoveries)
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">1,100</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(1,118</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(18</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Cash payments, net of sublease
    income
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(465</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(4,727</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(5,193</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="11" align="right" valign="bottom" style="border-top: 1pt solid #000000;">
    &nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Balance at December&nbsp;31, 2005
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">635</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">23,576</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">24,210</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="11" align="right" valign="bottom" style="border-top: 3pt double #000000;">
    &nbsp;</TD>
</TR>

</TABLE>
</CENTER>
</FONT>

<P align="center" style="font-size: 10pt;color: #000000; background: #ffffff;">68

</FONT>

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

<FONT face="helvetica,arial">

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="6%"></TD>
    <TD width="94%"></TD>
</TR>

<TR valign="top">
    <TD><B>Note&nbsp;6:&nbsp;</B></TD>
    <TD>
    <B>Cash, Cash Equivalents and Investments</B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
At December&nbsp;31, 2005 and 2004, cash, cash equivalents and
short-term investments are summarized as follows:
</DIV>
<FONT face="times new roman,times">

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10pt; margin-top: 12pt; ">

<TR style="font-size: 1pt;">
    <TD width="3%">&nbsp;</TD>
    <TD width="55%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="9%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="8%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="9%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="8%">&nbsp;</TD>
</TR>


<TR style="font-size: 8pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap><B><FONT face="helvetica,arial">December&nbsp;31,</FONT></B></TD><TD></TD>
</TR>


<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">2005</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">2004</FONT></B></TD><TD></TD>
</TR>


<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>


<TR style="font-size: 8pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap><B><FONT face="helvetica,arial">(In thousands)</FONT></B></TD><TD></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Cash and cash equivalents
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">37,818</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">26,603</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="7" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>

</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Short-term investments:
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Less than one year
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">56,605</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">49,373</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Due in 1-2&nbsp;years
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">16,405</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">24,631</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="7" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>

</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Total short-term investments
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">73,010</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">74,004</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Total cash, cash equivalents and
    short-term investments
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">110,828</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">100,607</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="7" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>

</TR>

</TABLE>
</CENTER>
</FONT>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
The following is a summary of available-for-sale securities (in
thousands).
</DIV>
<FONT face="times new roman,times">

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10pt; margin-top: 6pt; ">

<TR style="font-size: 1pt;">
    <TD width="3%">&nbsp;</TD>
    <TD width="21%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="8%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="6%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="8%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="8%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
</TR>

<TR style="font-size: 8pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">Gross Unrealized</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">Gross Unrealized</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">Estimated Fair</FONT></B></TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">Amortized Cost</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">Gains</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">Losses</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">Value</FONT></B></TD><TD></TD>
</TR>


<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="14" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <B><FONT face="helvetica,arial">December&nbsp;31, 2005</FONT></B></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="18">&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">U.S.&nbsp;government debt securities
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">20,264</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(146</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">20,118</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Corporate debt securities
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">46,873</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">3</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(209</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">46,667</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Other debt securities
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">6,225</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">6,225</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="15" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>

</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Total
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">73,362</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">3</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(355</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">73,010</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="15" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>

</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <B><FONT face="helvetica,arial">December&nbsp;31, 2004</FONT></B></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="18">&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">U.S.&nbsp;government debt securities
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">23,526</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(111</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">23,415</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Corporate debt securities
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">43,341</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(252</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">43,089</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Other debt securities
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">7,500</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">7,500</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="15" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>

</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Total
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">74,367</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(363</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">74,004</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="15" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>

</TR>

</TABLE>
</CENTER>
</FONT>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Impairment of Investments</B>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
We monitor our investment portfolio for impairment on a periodic
basis. In the event that the carrying value of an investment
exceeds its fair value and the decline in value is determined to
be other-than-temporary, an impairment charge is recorded and a
new cost basis for the investment is established. In order to
determine whether a decline in value is other-than-temporary, we
evaluate, among other factors: the duration and extent to which
the fair value has been less than the carrying value; our
financial condition and business outlook, including key
operational and cash flow metrics, current market conditions and
future trends in the company&#146;s industry; our relative
competitive position within the industry; and our intent and
ability to retain the investment for a period of time sufficient
to allow any anticipated recovery in fair value.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
In accordance with FASB Staff Position Nos. 115-1 and
FAS&nbsp;124-1, &#147;The Meaning of Other-Than-Temporary
Impairment and Its Application to Certain Investments&#148;
(&#147;FSP FAS&nbsp;115-1&#148;), the following table summarizes
the fair value and gross
</DIV>

<P align="center" style="font-size: 10pt;color: #000000; background: #ffffff;">69

</FONT>

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

<FONT face="helvetica,arial">

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff;">
unrealized losses related to available-for-sale securities,
aggregated by investment category and length of time that
individual securities have been in a continuous unrealized loss
position, as of December&nbsp;31, 2005 (in thousands):
</DIV>
<FONT face="times new roman,times">

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10pt; margin-top: 12pt; ">

<TR style="font-size: 1pt;">
    <TD width="3%">&nbsp;</TD>
    <TD width="18%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
</TR>


<TR style="font-size: 8pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap><B><FONT face="helvetica,arial">Less than 12 months</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap><B><FONT face="helvetica,arial">Greater than 12 months</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap><B><FONT face="helvetica,arial">Total</FONT></B></TD><TD></TD>
</TR>


<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="22" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">Gross</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">Gross</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">Gross</FONT></B></TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">Unrealized</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">Unrealized</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">Unrealized</FONT></B></TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">Fair Value</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">Losses</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">Fair Value</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">Losses</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">Fair Value</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">Losses</FONT></B></TD><TD></TD>
</TR>


<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="22" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">U.S.&nbsp;Government debt securities
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">12,873</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(93</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">7,245</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(53</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">20,118</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(146</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Corporate debt securities
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">27,008</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(129</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">16,403</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(80</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">43,411</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(209</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2"><FONT style="font-size: 10pt">&nbsp;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD colspan="23" align="right" valign="bottom" style="border-top: 1pt solid #000000;">
    &nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Total
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">39,881</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(222</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">23,648</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(133</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">63,529</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(355</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2"><FONT style="font-size: 10pt">&nbsp;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD colspan="23" align="right" valign="bottom" style="border-top: 3pt double #000000;">
    &nbsp;</TD>
</TR>

</TABLE>
</CENTER>
</FONT>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
The decline in the estimated fair value of these investments
relative to amortized cost is primarily related to changes in
interest rates and is considered to be temporary in nature.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="6%"></TD>
    <TD width="94%"></TD>
</TR>

<TR valign="top">
    <TD><B>Note&nbsp;7:&nbsp;</B></TD>
    <TD>
    <B>Accounts Receivable and Allowances for Doubtful Accounts,
    Returns, Discounts and Trade-ins</B></TD>
</TR>

</TABLE>
<FONT face="times new roman,times">

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10pt; margin-top: 12pt; ">

<TR style="font-size: 1pt;">
    <TD width="61%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="9%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="8%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
</TR>


<TR style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap><B><FONT face="helvetica,arial">December&nbsp;31,</FONT></B></TD><TD></TD>
</TR>


<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">2005</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">2004</FONT></B></TD><TD></TD>
</TR>


<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>


<TR style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap><B><FONT face="helvetica,arial">(In thousands)</FONT></B></TD><TD></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Accounts receivable
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">46,663</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">69,274</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Less: allowance for doubtful
    accounts, returns and discounts
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(3,230</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(5,126</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="7" align="right" valign="bottom" style="border-top: 1pt solid #000000;">
    &nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">43,433</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">64,148</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="7" align="right" valign="bottom" style="border-top: 3pt double #000000;">
    &nbsp;</TD>
</TR>

</TABLE>
</CENTER>
</FONT>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Trade accounts receivable are recorded at invoiced amounts and
do not bear interest. 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, 2005, receivables from one customer
represented 11% of total receivables. At December&nbsp;31, 2004,
receivables from two customers represented 22%, and 12% of total
receivables.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
The following is a summary of activities in allowances for
doubtful accounts, returns and discounts for the periods
indicated (in thousands):
</DIV>
<FONT face="times new roman,times">

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10pt; margin-top: 12pt; ">

<TR style="font-size: 1pt;">
    <TD width="20%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="9%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="8%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="6%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="6%">&nbsp;</TD>
</TR>


<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="18" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">Balance at Beginning</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">Charges to</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">Charges to</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">Deduction from</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">Balance at End</FONT></B></TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">of Period</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">Revenue</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">Expense</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">Reserves</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">of Period</FONT></B></TD><TD></TD>
</TR>


<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="18" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="18" align="center" nowrap><B><FONT face="helvetica,arial">(In thousands)</FONT></B></TD><TD></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">2005
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">5,126</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">3,077</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(4,973</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">3,230</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">2004
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">5,318</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">5,336</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(242</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(5,286</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">5,126</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">2003
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">6,641</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">2,721</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(4,269</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">225</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">5,318</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

</TABLE>
</CENTER>
</FONT>

<P align="center" style="font-size: 10pt;color: #000000; background: #ffffff;">70

</FONT>

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

<FONT face="helvetica,arial">

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="6%"></TD>
    <TD width="94%"></TD>
</TR>

<TR valign="top">
    <TD><B>Note&nbsp;8:&nbsp;</B></TD>
    <TD>
    <B>Balance Sheet Details</B></TD>
</TR>

</TABLE>
<FONT face="times new roman,times">

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10pt; margin-top: 6pt; ">

<TR style="font-size: 1pt;">
    <TD width="3%">&nbsp;</TD>
    <TD width="61%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
</TR>


<TR style="font-size: 8pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap><B><FONT face="helvetica,arial">December&nbsp;31,</FONT></B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">2005</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">2004</FONT></B></TD><TD></TD>
</TR>


<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>


<TR style="font-size: 8pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap><B><FONT face="helvetica,arial">(In thousands)</FONT></B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Inventories:
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Raw materials
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">14,392</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">13,171</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Work-in-process
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">4,131</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">4,085</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Finished goods
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">20,029</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">24,507</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2"><FONT style="font-size: 10pt">&nbsp;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD colspan="7" align="right" valign="bottom" style="border-top: 1pt solid #000000;">
    &nbsp;</TD>
</TR>

<TR>
    <TD colspan="2"><FONT style="font-size: 10pt">&nbsp;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">38,552</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">41,763</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2"><FONT style="font-size: 10pt">&nbsp;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD colspan="7" align="right" valign="bottom" style="border-top: 3pt double #000000;">
    &nbsp;</TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Property and equipment:
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Furniture and fixtures
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">7,015</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">6,856</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Machinery and equipment
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">57,162</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">52,148</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Leasehold improvements
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">26,355</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">26,354</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="2"><FONT style="font-size: 10pt">&nbsp;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD colspan="7" align="right" valign="bottom" style="border-top: 1pt solid #000000;">
    &nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2"><FONT style="font-size: 10pt">&nbsp;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">90,532</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">85,358</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Less: accumulated depreciation and
    amortization
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(73,492</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(65,747</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2"><FONT style="font-size: 10pt">&nbsp;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD colspan="7" align="right" valign="bottom" style="border-top: 1pt solid #000000;">
    &nbsp;</TD>
</TR>

<TR>
    <TD colspan="2"><FONT style="font-size: 10pt">&nbsp;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">17,040</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">19,611</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2"><FONT style="font-size: 10pt">&nbsp;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD colspan="7" align="right" valign="bottom" style="border-top: 3pt double #000000;">
    &nbsp;</TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Intangibles and other assets:
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Identified intangibles, net of
    amortization
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">1,751</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">4,631</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Goodwill
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">4,896</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">1,780</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Other assets
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">1,462</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">1,312</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="2"><FONT style="font-size: 10pt">&nbsp;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD colspan="7" align="right" valign="bottom" style="border-top: 1pt solid #000000;">
    &nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2"><FONT style="font-size: 10pt">&nbsp;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">8,109</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">7,723</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="2"><FONT style="font-size: 10pt">&nbsp;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD colspan="7" align="right" valign="bottom" style="border-top: 3pt double #000000;">
    &nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Accrued liabilities:
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Pre-merger tax liability and other
    taxes
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">10,660</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">19,827</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Accrued excess facilities
    costs&nbsp;&#151; current
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">5,219</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">5,336</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Accrued compensation
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">5,835</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">13,710</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Accrued warranty
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">6,166</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">5,429</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Capital lease
    obligations&nbsp;&#151; current
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">82</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">84</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Other
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">9,476</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">7,508</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="2"><FONT style="font-size: 10pt">&nbsp;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD colspan="7" align="right" valign="bottom" style="border-top: 1pt solid #000000;">
    &nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2"><FONT style="font-size: 10pt">&nbsp;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">37,438</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">51,894</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="2"><FONT style="font-size: 10pt">&nbsp;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD colspan="7" align="right" valign="bottom" style="border-top: 3pt double #000000;">
    &nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Other non-current liabilities
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Deferred rent liability
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">6,937</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">5,967</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Deferred revenue
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">3,419</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">2,403</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Deferred taxes
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">275</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Capital lease obligations
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">72</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">162</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="2"><FONT style="font-size: 10pt">&nbsp;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD colspan="7" align="right" valign="bottom" style="border-top: 1pt solid #000000;">
    &nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2"><FONT style="font-size: 10pt">&nbsp;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">10,703</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">8,532</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="2"><FONT style="font-size: 10pt">&nbsp;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD colspan="7" align="right" valign="bottom" style="border-top: 3pt double #000000;">
    &nbsp;</TD>
</TR>

</TABLE>
</CENTER>
</FONT>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="6%"></TD>
    <TD width="94%"></TD>
</TR>

<TR valign="top">
    <TD><B>Note&nbsp;9:&nbsp;</B></TD>
    <TD>
    <B>Net Income (Loss) Per Share</B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
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. Diluted net loss per share is the same as basic net
loss per share for 2005 and 2003 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 2005, 2004 and 2003,
</DIV>

<P align="center" style="font-size: 10pt;color: #000000; background: #ffffff;">71

</FONT>

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

<FONT face="helvetica,arial">

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff;">
10,352,996, 8,473,606 and 8,799,037 of potentially dilutive
shares, consisting of options, were excluded from the net income
(loss) per share computations, respectively, because their
effect was antidilutive.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Following is a reconciliation of the numerators and denominators
of the basic and diluted net loss per share computations:
</DIV>
<FONT face="times new roman,times">

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10pt; margin-top: 12pt; ">

<TR style="font-size: 1pt;">
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="37%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="8%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="8%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="8%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="8%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="6%">&nbsp;</TD>
</TR>


<TR style="font-size: 8pt;">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="10" align="center" nowrap><B><FONT face="helvetica,arial">Year ended December&nbsp;31,</FONT></B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="10" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">2005</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">2004</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">2003</FONT></B></TD><TD></TD>
</TR>


<TR valign="bottom" style="font-size: 1px">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="10" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>


<TR style="font-size: 8pt;">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="10" align="center" nowrap><B><FONT face="helvetica,arial">(In thousands, except per share data)</FONT></B></TD><TD></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Net income (loss) (numerator)
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(5,731</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">1,574</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(29,433</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT style="font-size: 10pt">&nbsp;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD colspan="11" align="right" valign="bottom" style="border-top: 3pt double #000000;">
    &nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Shares calculation (denominator):
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Weighted average shares
    outstanding&nbsp;&#151; basic
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">73,279</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">72,015</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">62,288</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Effect of Dilutive Securities:
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Potential Common Stock relating to
    stock options
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">1,028</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="3"><FONT style="font-size: 10pt">&nbsp;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD colspan="11" align="right" valign="bottom" style="border-top: 1pt solid #000000;">
    &nbsp;</TD>
</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Average shares
    outstanding&nbsp;&#151; diluted
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">73,279</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">73,043</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">62,288</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="3"><FONT style="font-size: 10pt">&nbsp;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD colspan="11" align="right" valign="bottom" style="border-top: 3pt double #000000;">
    &nbsp;</TD>
</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Net income (loss) per
    share&nbsp;&#151; basic
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(0.08</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">0.02</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(0.47</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="3"><FONT style="font-size: 10pt">&nbsp;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD colspan="11" align="right" valign="bottom" style="border-top: 3pt double #000000;">
    &nbsp;</TD>
</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Net income (loss) per
    share&nbsp;&#151; diluted
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(0.08</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">0.02</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(0.47</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="3"><FONT style="font-size: 10pt">&nbsp;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD colspan="11" align="right" valign="bottom" style="border-top: 3pt double #000000;">
    &nbsp;</TD>
</TR>

</TABLE>
</CENTER>
</FONT>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="7%"></TD>
    <TD width="93%"></TD>
</TR>

<TR valign="top">
    <TD><B>Note&nbsp;10:&nbsp;</B></TD>
    <TD>
    <B>Credit Facilities and Long-Term Debt</B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Harmonic has a bank line of credit facility with Silicon Valley
Bank, which provides for borrowings of up to $23.7&nbsp;million,
including $3.7&nbsp;million for equipment under a secured term
loan. This facility, which was amended and restated in December
2005, expires in December 2006, and 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 $30.0&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, 2005, Harmonic was in compliance with the
covenants under this line of credit facility. The December 2005
amendment resulted in the company paying a fee of approximately
$33,000 and requiring payment of approximately $43,000 of
additional fees if the company does not maintain an unrestricted
deposit of $20.0&nbsp;million with the bank. Future borrowings
pursuant to the line bear interest at the bank&#146;s prime rate
(7.25% at December&nbsp;31, 2005) or prime plus 0.5% for
equipment borrowings. Borrowings are payable monthly and are
collateralized by all of Harmonic&#146;s assets except
intellectual property. As of December&nbsp;31, 2005,
$1.3&nbsp;million was outstanding under the equipment term loan
portion of this facility and there were no borrowings in 2005.
The term loan is repayable monthly, including principal and
interest at 7.75%&nbsp;per annum on outstanding borrowings as of
December&nbsp;31, 2005 and matures at various dates through
December 2007. Other than standby letters of credit and
guarantees (Note&nbsp;16), there were no other outstanding
borrowings or commitments under the line of credit facility as
of December&nbsp;31, 2005.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="7%"></TD>
    <TD width="93%"></TD>
</TR>

<TR valign="top">
    <TD><B>Note&nbsp;11:&nbsp;</B></TD>
    <TD>
    <B>Capital Stock</B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<I>Preferred Stock.</I> 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
</DIV>

<P align="center" style="font-size: 10pt;color: #000000; background: #ffffff;">72

</FONT>

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<FONT face="helvetica,arial">

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff;">
share of Series&nbsp;A Participating Preferred Stock, par value
$0.001&nbsp;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.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<I>Stock Issuances.</I> During 2005, Harmonic issued
169,112&nbsp;shares of common stock as part of the consideration
for the purchase of all the outstanding shares of BTL. The
shares had a value of &#163;1.0&nbsp;million, or approximately
$1.8&nbsp;million, at the time of issuance. See Note&nbsp;3 for
additional information regarding the acquisition of BTL. 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&nbsp;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 completed stock offering in
the fourth quarter of 2003 was part of a registration statement
on Form <FONT style="white-space: nowrap">S-3</FONT> declared
effective by the SEC in April 2002. In April 2005, we filed
another registration statement on Form
<FONT style="white-space: nowrap">S-3</FONT> with the SEC.
Pursuant to these registration statements on Form
<FONT style="white-space: nowrap">S-3,</FONT> which have been
declared effective by the SEC, we are able to issue various
types of registered securities, including common stock,
preferred stock, debt securities and warrants to purchase common
stock from time to time, up to an aggregate of approximately
$200&nbsp;million, subject to market conditions and our capital
needs.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="7%"></TD>
    <TD width="93%"></TD>
</TR>

<TR valign="top">
    <TD><B>Note&nbsp;12:&nbsp;</B></TD>
    <TD>
    <B>Benefit Plans</B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<I>Stock Option Plans.</I> Harmonic has reserved
12,620,000&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&nbsp;per month
thereafter. Stock options are granted at the fair market value
of the stock at the date of grant.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<I>Director Option Plans.</I> In May 2002, Harmonic&#146;s
stockholders approved the 2002&nbsp;Director Option Plan,
replacing the 1995&nbsp;Director Option Plan. Harmonic has a
total of 428,000&nbsp;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.
</DIV>

<P align="center" style="font-size: 10pt;color: #000000; background: #ffffff;">73

</FONT>

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

<FONT face="helvetica,arial">

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
The following table summarizes activities under the Plans:
</DIV>
<FONT face="times new roman,times">

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10pt; margin-top: 12pt; ">

<TR style="font-size: 1pt;">
    <TD width="3%">&nbsp;</TD>
    <TD width="40%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="8%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="8%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="6%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="8%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="8%">&nbsp;</TD>
</TR>

<TR style="font-size: 8pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">Shares Available</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">Stock Options</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">Weighted Average</FONT></B></TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">for Grant</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">Outstanding</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">Exercise Price</FONT></B></TD><TD></TD>
</TR>


<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="10" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>


<TR style="font-size: 8pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="10" align="center" nowrap><B><FONT face="helvetica,arial">(In thousands except exercise price)</FONT></B></TD><TD></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Balance at December&nbsp;31, 2002
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">2,764</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">7,304</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">16.91</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Shares authorized
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">1,500</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Options granted
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(1,495</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">1,495</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">3.61</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Options exercised
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(85</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">2.32</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Options canceled
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">635</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(635</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">13.11</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Options expired
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(132</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">42.71</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2"><FONT style="font-size: 10pt">&nbsp;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD colspan="7" align="right" valign="bottom" style="border-top: 1pt solid #000000;">
    &nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Balance at December&nbsp;31, 2003
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">3,404</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">7,947</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">14.44</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Shares authorized
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">2,500</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Options granted
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(1,583</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">1,583</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">8.66</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Options exercised
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(272</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">5.16</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Options canceled
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">282</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(282</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">14.12</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Options expired
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(36</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">31.49</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="2"><FONT style="font-size: 10pt">&nbsp;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD colspan="7" align="right" valign="bottom" style="border-top: 1pt solid #000000;">
    &nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Balance at December&nbsp;31, 2004
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">4,603</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">8,940</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">13.64</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Shares authorized
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Options granted
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(1,416</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">1,416</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">6.05</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Options exercised
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(476</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">6.13</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Options canceled
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">797</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(797</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">10.54</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Options expired
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(19</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">45.90</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2"><FONT style="font-size: 10pt">&nbsp;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD colspan="7" align="right" valign="bottom" style="border-top: 1pt solid #000000;">
    &nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Balance at December&nbsp;31, 2005
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">3,984</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">9,064</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">13.05</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2"><FONT style="font-size: 10pt">&nbsp;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD colspan="7" align="right" valign="bottom" style="border-top: 3pt double #000000;">
    &nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

</TABLE>
</CENTER>
</FONT>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
The following table summarizes information regarding stock
options outstanding at December&nbsp;31, 2005:
</DIV>
<FONT face="times new roman,times">

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10pt; margin-top: 12pt; ">

<TR style="font-size: 1pt;">
    <TD width="11%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="11%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="6%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="6%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="6%">&nbsp;</TD>
</TR>


<TR style="font-size: 8pt;">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap><B><FONT face="helvetica,arial">Stock Options Outstanding</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="10" align="center" nowrap><B><FONT face="helvetica,arial">Stock Options Exercisable</FONT></B></TD><TD></TD>
</TR>


<TR valign="bottom" style="font-size: 1px">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="18" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">Number</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">Weighted-Average</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">Number</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
</TR>

<TR style="font-size: 8pt;">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">Outstanding at</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">Remaining</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">Exercisable at</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
</TR>

<TR style="font-size: 8pt;">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">December&nbsp;31,</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">Contractual Life</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">Weighted-Average</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">December&nbsp;31,</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">Weighted Average</FONT></B></TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD colspan="2" align="left" nowrap><B><FONT face="helvetica,arial">Range of Exercise Prices</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">2005</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">(Years)</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">Exercise Price</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">2005</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">Exercise Price</FONT></B></TD><TD></TD>
</TR>


<TR valign="bottom" style="font-size: 1px">
    <TD colspan="22" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>


<TR style="font-size: 8pt;">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="18" align="center" nowrap><B><FONT face="helvetica,arial">(In thousands, except exercise price and life)</FONT></B></TD><TD></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT face="helvetica,arial">&nbsp;1.75&nbsp;-&nbsp;&nbsp;&nbsp;5.73</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">1,311</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">6.9</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">3.69</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">898</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">3.60</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD align="right" valign="top" nowrap><FONT face="helvetica,arial">5.74&nbsp;-&nbsp;&nbsp;&nbsp;6.40</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">1,371</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">8.7</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">5.94</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">262</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">6.21</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD align="right" valign="top" nowrap><FONT face="helvetica,arial">6.41&nbsp;-&nbsp;&nbsp;&nbsp;8.93</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">1,458</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">6.4</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">8.45</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">963</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">8.32</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD align="right" valign="top" nowrap><FONT face="helvetica,arial">9.00&nbsp;-&nbsp;&nbsp;&nbsp;9.29</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">1,330</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">5.8</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">9.17</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">1,147</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">9.15</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD align="right" valign="top" nowrap><FONT face="helvetica,arial">9.37&nbsp;-&nbsp;&nbsp;11.50</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">1,373</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">5.5</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">10.44</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">1,309</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">10.44</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD align="right" valign="top" nowrap><FONT face="helvetica,arial">11.53&nbsp;-&nbsp;&nbsp;23.57</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">1,395</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">4.5</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">21.56</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">1,382</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">21.66</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap><FONT face="helvetica,arial">23.75&nbsp;-&nbsp;121.68</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">826</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">3.7</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">44.07</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">826</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">44.07</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">9,064</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">6.1</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">13.05</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">6,787</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">15.23</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

</TABLE>
</CENTER>
</FONT>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
The weighted-average fair value of options granted was $3.93,
$6.42, and $2.74 for 2005, 2004, and 2003, respectively.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<I>Employee Stock Purchase Plan.</I> 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. In May 2004,
Harmonic&#146;s stockholders approved an amendment to the 2002
Purchase Plan and increased the maximum number of shares of
common stock authorized for issuance over the term of the 2002
Purchase Plan by an additional 2,000,000&nbsp;shares to
3,500,000&nbsp;shares. The 2002 Purchase Plan enables employees
to purchase
</DIV>

<P align="center" style="font-size: 10pt;color: #000000; background: #ffffff;">74

</FONT>

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

<FONT face="helvetica,arial">

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff;">
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 January 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 2005,
2004, and 2003, the number of shares of stock issued under the
purchase plans were 705,171, 774,683, and 725,086&nbsp;shares at
weighted average prices of $5.05, $2.32, and $2.24,
respectively. The weighted-average fair value of each right to
purchase shares of common stock granted under the purchase plans
were $1.82, $2.68, and $2.15 for 2005, 2004, and 2003,
respectively. At December&nbsp;31, 2005, 1,295,341&nbsp;shares
were reserved for future issuances under the 2002 Purchase Plan.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<I>Retirement/ Savings Plan.</I> 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&nbsp;per
year. This amount has been increased to $1,000 effective
January&nbsp;1, 2006. Such amounts totaled $0.3&nbsp;million in
2005, $0.3&nbsp;million in 2004, and $0.2&nbsp;million in 2003.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="7%"></TD>
    <TD width="93%"></TD>
</TR>

<TR valign="top">
    <TD><B>Note&nbsp;13:&nbsp;</B></TD>
    <TD>
    <B>Income Taxes</B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
The provision for (benefit from) income taxes consists of the
following:
</DIV>
<FONT face="times new roman,times">

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10pt; margin-top: 12pt; ">

<TR style="font-size: 1pt;">
    <TD width="3%">&nbsp;</TD>
    <TD width="40%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="8%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="8%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="8%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="8%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="6%">&nbsp;</TD>
</TR>


<TR style="font-size: 8pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="10" align="center" nowrap><B><FONT face="helvetica,arial">December&nbsp;31,</FONT></B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="10" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">2005</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">2004</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">2003</FONT></B></TD><TD></TD>
</TR>


<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="10" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>


<TR style="font-size: 8pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="10" align="center" nowrap><B><FONT face="helvetica,arial">(In thousands)</FONT></B></TD><TD></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Current:
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Federal
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Foreign
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">437</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">589</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">300</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">State
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2"><FONT style="font-size: 10pt">&nbsp;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD colspan="11" align="right" valign="bottom" style="border-top: 1pt solid #000000;">
    &nbsp;</TD>
</TR>

<TR>
    <TD colspan="2"><FONT style="font-size: 10pt">&nbsp;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">437</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">589</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">300</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Deferred:
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Federal
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Foreign
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">State
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2"><FONT style="font-size: 10pt">&nbsp;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD colspan="11" align="right" valign="bottom" style="border-top: 1pt solid #000000;">
    &nbsp;</TD>
</TR>

<TR>
    <TD colspan="2"><FONT style="font-size: 10pt">&nbsp;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2"><FONT style="font-size: 10pt">&nbsp;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD colspan="11" align="right" valign="bottom" style="border-top: 1pt solid #000000;">
    &nbsp;</TD>
</TR>

<TR>
    <TD colspan="2"><FONT style="font-size: 10pt">&nbsp;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">437</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">589</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">300</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2"><FONT style="font-size: 10pt">&nbsp;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD colspan="11" align="right" valign="bottom" style="border-top: 3pt double #000000;">
    &nbsp;</TD>
</TR>

</TABLE>
</CENTER>
</FONT>

<P align="center" style="font-size: 10pt;color: #000000; background: #ffffff;">75

</FONT>

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

<FONT face="helvetica,arial">

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
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:
</DIV>
<FONT face="times new roman,times">

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10pt; margin-top: 12pt; ">

<TR style="font-size: 1pt;">
    <TD width="3%">&nbsp;</TD>
    <TD width="40%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="8%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="8%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="8%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="8%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="6%">&nbsp;</TD>
</TR>


<TR style="font-size: 8pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="10" align="center" nowrap><B><FONT face="helvetica,arial">December&nbsp;31,</FONT></B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="10" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">2005</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">2004</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">2003</FONT></B></TD><TD></TD>
</TR>


<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="10" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>


<TR style="font-size: 8pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="10" align="center" nowrap><B><FONT face="helvetica,arial">(In thousands)</FONT></B></TD><TD></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Provision for (benefit from) income
    taxes at statutory rate
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(1,853</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">757</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(10,161</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Differential in rates on foreign
    earnings
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(123</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(86</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">92</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Losses for which no benefit,
    (benefit) is taken
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">2,173</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(226</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">10,306</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Non-deductible meals and
    entertainment
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">177</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">144</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">123</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Other
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">63</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(60</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><FONT style="font-size: 10pt">&nbsp;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD colspan="11" align="right" valign="bottom" style="border-top: 1pt solid #000000;">
    &nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Net provision for (benefit from)
    income taxes
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">437</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">589</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">300</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="2"><FONT style="font-size: 10pt">&nbsp;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD colspan="11" align="right" valign="bottom" style="border-top: 3pt double #000000;">
    &nbsp;</TD>
</TR>

</TABLE>
</CENTER>
</FONT>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Deferred tax assets (liabilities)&nbsp;comprise the following:
</DIV>
<FONT face="times new roman,times">

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10pt; margin-top: 12pt; ">

<TR style="font-size: 1pt;">
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="34%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="8%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="8%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="8%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="8%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="6%">&nbsp;</TD>
</TR>


<TR style="font-size: 8pt;">
    <TD colspan="4">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="10" align="center" nowrap><B><FONT face="helvetica,arial">December&nbsp;31,</FONT></B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="4">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="10" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD colspan="4">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">2005</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">2004</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">2003</FONT></B></TD><TD></TD>
</TR>


<TR valign="bottom" style="font-size: 1px">
    <TD colspan="4">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="10" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>


<TR style="font-size: 8pt;">
    <TD colspan="4">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="10" align="center" nowrap><B><FONT face="helvetica,arial">(In thousands)</FONT></B></TD><TD></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="4" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Deferred tax assets:
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Reserves and accruals
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">30,446</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">33,491</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">41,219</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Net operating loss carryovers
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">78,687</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">67,484</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">64,918</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Depreciation and amortization
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">10,849</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">3,921</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">4,445</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Research and development credit
    carryovers
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">9,482</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">12,474</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">12,408</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Other
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">1,275</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">7,377</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">8,182</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="4"><FONT style="font-size: 10pt">&nbsp;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD colspan="11" align="right" valign="bottom" style="border-top: 1pt solid #000000;">
    &nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Total deferred tax assets
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">130,739</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">124,747</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">131,172</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="4" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Valuation allowance
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(130,739</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(122,924</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(123,615</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
</TR>

<TR>
    <TD colspan="4"><FONT style="font-size: 10pt">&nbsp;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD colspan="11" align="right" valign="bottom" style="border-top: 1pt solid #000000;">
    &nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Net deferred tax assets
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">1,823</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">7,557</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="4" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Deferred tax liabilities:
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Intangibles
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(525</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(1,823</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(7,557</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
</TR>

<TR>
    <TD colspan="4"><FONT style="font-size: 10pt">&nbsp;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD colspan="11" align="right" valign="bottom" style="border-top: 1pt solid #000000;">
    &nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Net deferred tax assets
    (liabilities)
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(525</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="4"><FONT style="font-size: 10pt">&nbsp;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD colspan="11" align="right" valign="bottom" style="border-top: 3pt double #000000;">
    &nbsp;</TD>
</TR>

</TABLE>
</CENTER>
</FONT>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
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
$7.8&nbsp;million, decreased by $0.7&nbsp;million and increased
by $18.7&nbsp;million for the years ended December&nbsp;31,
2005, 2004 and 2003, respectively.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
As of December&nbsp;31, 2005, the Company had tax net operating
loss carryforwards for federal income tax purposes of
approximately $193.0&nbsp;million, which expire beginning in the
year 2020. The Company also has state net operating loss
carryforwards of approximately $54.0&nbsp;million, which expire
beginning in 2006. As of December&nbsp;31, 2005, the Company
also had federal and state tax R&#38;D credit carryovers of
approximately $4.8&nbsp;million and $7.2&nbsp;million,
respectively, available to offset future taxable income. The
federal credits expire beginning 2006, while the state credits
will not expire.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
As of December&nbsp;31, 2005, the Company has foreign tax
operating loss carryforwards of approximately $23.2&nbsp;million
which have no expiration periods.
</DIV>

<P align="center" style="font-size: 10pt;color: #000000; background: #ffffff;">76

</FONT>

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

<FONT face="helvetica,arial">

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
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.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
U.S. income taxes were not provided for on a cumulative total of
approximately $9.5&nbsp;million of undistributed earnings for
certain non-U.S. subsidiaries. Determination of the amount of
unrecognized deferred tax liability for temporary differences
related to investments in these non-U.S. subsidiaries that are
essentially permanent in duration is not practicable. The
Company intends to reinvest these earnings in operations outside
the U.S.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Under the terms of the merger agreement with C-Cube, Harmonic is
generally liable for C-Cube&#146;s pre-merger tax liabilities.
Approximately $10.0&nbsp;million of pre-merger tax liabilities
remain outstanding and Harmonic expects final settlement of
certain of these obligations to a variety of taxing authorities
and LSI Logic during 2006. These amounts have been included in
accrued liabilities.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="7%"></TD>
    <TD width="93%"></TD>
</TR>

<TR valign="top">
    <TD><B>Note&nbsp;14:&nbsp;</B></TD>
    <TD>
    <B>Segment Information</B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
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.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
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 measured
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)
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, and intercompany
eliminations. Net income or loss, and assets and liabilities are
not internally reported by business segment.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
The Company restructured its CS and BAN segments into one
consolidated group in the fourth quarter of 2005 and starting on
January&nbsp;1, 2006 will no longer have two operating segments.
The restructuring involving merging the manufacturing
operations, research and development, and marketing departments
into one segment.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<I>Segment Sales and Profit:</I>
</DIV>
<FONT face="times new roman,times">

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10pt; margin-top: 6pt; ">

<TR style="font-size: 1pt;">
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="58%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
</TR>


<TR style="font-size: 8pt;">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="10" align="center" nowrap><B><FONT face="helvetica,arial">Year Ended December&nbsp;31,</FONT></B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="10" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">2005</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">2004</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">2003</FONT></B></TD><TD></TD>
</TR>


<TR valign="bottom" style="font-size: 1px">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="10" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>


<TR style="font-size: 8pt;">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="10" align="center" nowrap><B><FONT face="helvetica,arial">(In thousands)</FONT></B></TD><TD></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Net sales:
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Convergent Systems (CS)
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">172,589</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">171,410</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">113,207</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Broadband Access Networks (BAN)
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">84,789</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">76,896</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">69,069</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="11" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>

</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Total net sales
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">257,378</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">248,306</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">182,276</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="11" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>

</TR>

</TABLE>
</CENTER>
</FONT>

<P align="center" style="font-size: 10pt;color: #000000; background: #ffffff;">77

</FONT>

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

<FONT face="helvetica,arial">
<FONT face="times new roman,times">

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10pt; margin-top: 6pt; ">

<TR style="font-size: 1pt;">
    <TD width="3%">&nbsp;</TD>
    <TD width="40%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="8%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="8%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="8%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="8%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="6%">&nbsp;</TD>
</TR>


<TR style="font-size: 8pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="10" align="center" nowrap><B><FONT face="helvetica,arial">Year Ended December&nbsp;31,</FONT></B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="10" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">2005</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">2004</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">2003</FONT></B></TD><TD></TD>
</TR>


<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="10" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>


<TR style="font-size: 8pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="10" align="center" nowrap><B><FONT face="helvetica,arial">(In thousands)</FONT></B></TD><TD></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Income (loss) from segment
    operations:
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Convergent Systems
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;&nbsp;<FONT face="helvetica,arial">13,345</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;&nbsp;&nbsp;<FONT face="helvetica,arial">26,427</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;&nbsp;&nbsp;<FONT face="helvetica,arial">(4,398</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Broadband Access Networks
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">768</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">8,110</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">1,102</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="2"><FONT style="font-size: 10pt">&nbsp;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD colspan="11" align="right" valign="bottom" style="border-top: 1pt solid #000000;">
    &nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Income (loss) from segment
    operations
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">14,113</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">34,537</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(3,296</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Amortization of intangibles
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(2,603</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(13,894</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(13,894</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Interest and other income, net
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">1,750</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">727</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">1,412</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Facilities adjustments
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">1,118</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">1,376</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Corporate expenses and eliminations
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(19,672</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(19,207</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(14,731</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><FONT style="font-size: 10pt">&nbsp;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD colspan="11" align="right" valign="bottom" style="border-top: 1pt solid #000000;">
    &nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Income (loss) before income taxes
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;&nbsp;<FONT face="helvetica,arial">(5,294</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;&nbsp;&nbsp;<FONT face="helvetica,arial">2,163</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;&nbsp;<FONT face="helvetica,arial">(29,133</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><FONT style="font-size: 10pt">&nbsp;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD colspan="11" align="right" valign="bottom" style="border-top: 3pt double #000000;">
    &nbsp;</TD>
</TR>

<TR>
    <TD colspan="14">&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <I><FONT face="helvetica,arial">Geographic
    Information:</FONT></I></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

</TABLE>
</CENTER>
</FONT>
<FONT face="times new roman,times">

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10pt; margin-top: 6pt; ">

<TR style="font-size: 1pt;">
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="37%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="8%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="8%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="8%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="8%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="6%">&nbsp;</TD>
</TR>


<TR style="font-size: 8pt;">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="10" align="center" nowrap><B><FONT face="helvetica,arial">Year Ended December&nbsp;31,</FONT></B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="10" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">2005</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">2004</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">2003</FONT></B></TD><TD></TD>
</TR>


<TR valign="bottom" style="font-size: 1px">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="10" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>


<TR style="font-size: 8pt;">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="10" align="center" nowrap><B><FONT face="helvetica,arial">(In thousands)</FONT></B></TD><TD></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Net sales:
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">United States
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;&nbsp;<FONT face="helvetica,arial">153,264</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;&nbsp;<FONT face="helvetica,arial">143,818</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;&nbsp;<FONT face="helvetica,arial">130,226</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">International
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">104,114</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">104,488</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">52,050</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="3"><FONT style="font-size: 10pt">&nbsp;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD colspan="11" align="right" valign="bottom" style="border-top: 1pt solid #000000;">
    &nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Total
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;&nbsp;<FONT face="helvetica,arial">257,378</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;&nbsp;<FONT face="helvetica,arial">248,306</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;&nbsp;<FONT face="helvetica,arial">182,276</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="3"><FONT style="font-size: 10pt">&nbsp;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD colspan="11" align="right" valign="bottom" style="border-top: 3pt double #000000;">
    &nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Property and equipment:
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">United States
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;&nbsp;&nbsp;<FONT face="helvetica,arial">14,994</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;&nbsp;&nbsp;<FONT face="helvetica,arial">17,730</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;&nbsp;&nbsp;<FONT face="helvetica,arial">21,600</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">International
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">2,046</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">1,881</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">1,858</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="3"><FONT style="font-size: 10pt">&nbsp;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD colspan="11" align="right" valign="bottom" style="border-top: 1pt solid #000000;">
    &nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Total
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;&nbsp;&nbsp;<FONT face="helvetica,arial">17,040</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;&nbsp;&nbsp;<FONT face="helvetica,arial">19,611</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;&nbsp;&nbsp;<FONT face="helvetica,arial">23,458</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="3"><FONT style="font-size: 10pt">&nbsp;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD colspan="11" align="right" valign="bottom" style="border-top: 3pt double #000000;">
    &nbsp;</TD>
</TR>

</TABLE>
</CENTER>
</FONT>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<I>Major Customers.</I> 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 2005, 2004 and 2003, sales to Comcast
accounted for 18%, 17% and 32% of net sales, respectively.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="7%"></TD>
    <TD width="93%"></TD>
</TR>

<TR valign="top">
    <TD><B>Note&nbsp;15:&nbsp;</B></TD>
    <TD>
    <B>Related Party</B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
A director of Harmonic 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 2005 and 2004, the Company purchased approximately
$20.4&nbsp;million and $7.0&nbsp;million, respectively, in
products from Terayon. As of December&nbsp;31, 2005 and 2004,
Harmonic had liabilities to Terayon of approximately
$0.7&nbsp;million and $0.2&nbsp;million, respectively, for
inventory purchases.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="7%"></TD>
    <TD width="93%"></TD>
</TR>

<TR valign="top">
    <TD><B>Note&nbsp;16:&nbsp;</B></TD>
    <TD>
    <B>Guarantees</B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<I>Warranties.</I> 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
</DIV>

<P align="center" style="font-size: 10pt;color: #000000; background: #ffffff;">78

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<FONT face="helvetica,arial">

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff;">
specified warranty claims. Activity for the Company&#146;s
warranty accrual, which is included in accrued liabilities is
summarized below (in thousands):
</DIV>
<FONT face="times new roman,times">

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10pt; margin-top: 12pt; ">

<TR style="font-size: 1pt;">
    <TD width="61%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="9%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="8%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
</TR>

<TR style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">2005</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">2004</FONT></B></TD><TD></TD>
</TR>


<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Balance as of January 1
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;&nbsp;&nbsp;<FONT face="helvetica,arial">5,429</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;&nbsp;&nbsp;<FONT face="helvetica,arial">4,886</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Accrual for warranties
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">5,506</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">5,715</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Warranty costs incurred
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(4,769</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(5,172</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="7" align="right" valign="bottom" style="border-top: 1pt solid #000000;">
    &nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Balance as of December&nbsp;31
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;&nbsp;&nbsp;<FONT face="helvetica,arial">6,166</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;&nbsp;&nbsp;<FONT face="helvetica,arial">5,429</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="7" align="right" valign="bottom" style="border-top: 3pt double #000000;">
    &nbsp;</TD>
</TR>

</TABLE>
</CENTER>
</FONT>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 9pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<I>Standby Letters of Credit.</I> As of December&nbsp;31, 2005
the Company&#146;s financial guarantees consisted of standby
letters of credit outstanding, which were principally related to
customs bond requirements, performance bonds and state
requirements imposed on employers. The maximum amount of
potential future payments under these arrangements was
$0.9&nbsp;million.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<I>Indemnifications.</I> Harmonic is obligated to indemnify its
officers and the members of its Board of Directors pursuant to
its bylaws and contractual indemnity agreements. Harmonic also
indemnifies some of its suppliers and customers for specified
intellectual property matters pursuant to certain contractual
arrangements, subject to certain limitations. 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 against us for
indemnification pursuant to any of these arrangements and,
accordingly, no amounts have been accrued in respect of the
indemnifications provisions through December&nbsp;31, 2005.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<I>Guarantees.</I> As of December&nbsp;31, 2005, Harmonic had no
other guarantees outstanding.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="7%"></TD>
    <TD width="93%"></TD>
</TR>

<TR valign="top">
    <TD><B>Note&nbsp;17:&nbsp;</B></TD>
    <TD>
    <B>Commitments and Contingencies</B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<I>Commitments&nbsp;&#151; Leases.</I> Harmonic leases its
facilities under noncancelable operating leases which expire at
various dates through September 2010. In addition, Harmonic
leases vehicles in several foreign countries under noncancelable
operating leases which expire in 2006 and 2008. Total lease
payments related to these operating leases were
$12.0&nbsp;million, $11.5&nbsp;million and $10.4&nbsp;million
for 2005, 2004 and 2003, respectively. Future minimum lease
payments under noncancelable operating leases at
December&nbsp;31, 2005, are as follows (in thousands):
</DIV>
<FONT face="times new roman,times">

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10pt; margin-top: 6pt; ">

<TR style="font-size: 1pt;">
    <TD width="72%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="12%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="12%">&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">2006
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">11,616</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">2007
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">12,924</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">2008
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">12,658</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">2009
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">12,876</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">2010
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">9,672</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Thereafter
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">59,746</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

</TABLE>
</CENTER>
</FONT>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
As of December&nbsp;31, 2005, $23.7&nbsp;million of these future
lease payments were accrued for as part of accrued excess
facility costs. See Note&nbsp;5 &#147;Restructuring, Excess
Facilities and Inventory Provisions.&#148;
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<I>Commitments&nbsp;&#151; Royalties.</I> Harmonic has licensed
certain technologies from various companies and incorporates
this technology into its own products and is required to pay
royalties usually based on shipment of products. In addition,
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 2005, 2004 and 2003 royalty expenses were
$1.1&nbsp;million, $0.7&nbsp;million and $0.6&nbsp;million,
respectively.
</DIV>

<P align="center" style="font-size: 10pt;color: #000000; background: #ffffff;">79

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<FONT face="helvetica,arial">

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<I>Purchase Commitments with Contract Manufacturers and
Suppliers.</I> The Company relies on a limited number of
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 allow them to procure inventory based upon
criteria as defined by the Company.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<I>Commitments&nbsp;&#151; Contingencies.</I> 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
or cash flows.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="7%"></TD>
    <TD width="93%"></TD>
</TR>

<TR valign="top">
    <TD><B>Note&nbsp;18:&nbsp;</B></TD>
    <TD>
    <B>Legal Proceedings</B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Between June 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 (the &#147;District Court&#148;) for the
Northern District of California. The actions subsequently were
consolidated.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
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 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 19 and May&nbsp;3, 2000. In addition
to Harmonic and certain of its officers and directors, the
complaint also named C-Cube Microsystems Inc. and several of its
officers and directors as defendants. The complaint alleged
that, by making false or misleading statements regarding
Harmonic&#146;s prospects and customers and its acquisition of
C-Cube, certain defendants violated sections 10(b) and 20(a) of
the Securities Exchange Act of 1934 (the &#147;Exchange
Act&#148;). 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
(the &#147;Securities Act&#148;) by filing a false or misleading
registration statement, prospectus, and joint proxy in
connection with the C-Cube acquisition.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
On July&nbsp;3, 2001, the District 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 District 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 District 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. The appeal was heard by a panel of three
judges of the United States Court of Appeals for the Ninth
Circuit (the &#147;Ninth Circuit&#148;) on February&nbsp;17,
2005.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
On November&nbsp;8, 2005, the Ninth Circuit panel affirmed in
part, reversed in part, and remanded for further proceedings the
decision of the District Court. The Ninth Circuit affirmed the
District Court&#146;s dismissal of the plaintiffs&#146; fraud
claims under Sections&nbsp;10(b), 14(a), and 20(a) of the
Exchange Act with prejudice, finding that the plaintiffs failed
to adequately plead their allegations of fraud. The Ninth
Circuit reversed the District Court&#146;s dismissal of the
plaintiffs&#146; claims under Sections&nbsp;11 and 12(a)(2) of
the Securities Act, however, finding that those claims did not
allege fraud and therefore
</DIV>

<P align="center" style="font-size: 10pt;color: #000000; background: #ffffff;">80

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<FONT face="helvetica,arial">

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff;">
were subject to only minimal pleading standards. Regarding the
secondary liability claim under Section&nbsp;15 of the
Securities Act, the Ninth Circuit reversed the dismissal of that
claim against Anthony J. Ley, Harmonic&#146;s Chairman and Chief
Executive Officer, and affirmed the dismissal of that claim
against Harmonic, while granting leave to amend. The Ninth
Circuit remanded the surviving claims to the District Court for
further proceedings.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
On November&nbsp;22, 2005, both the Harmonic defendants and the
plaintiffs petitioned the Ninth Circuit for a rehearing of the
appeal. On February&nbsp;16, 2006 the Ninth Circuit denied both
petitions.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
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&nbsp;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.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
A second derivative action purporting to be on behalf of
Harmonic was filed in the Superior Court for the County of
Santa&nbsp;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.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Based on its review of the surviving claims in the securities
class actions, 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
or cash flows.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
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.&nbsp;Patent No.&nbsp;4859016. This patent expired in
September 2003. The complaint seeks injunctive relief, royalties
and damages. Harmonic has not been served in the case. 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
or cash flows.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Harmonic is involved in other litigation and may be subject to
claims arising in the normal course of business. In the opinion
of management the amount of ultimate liability with respect to
these matters in the aggregate will not have a material adverse
effect on the Company or its operating results, financial
position or cash flows.
</DIV>

<P align="center" style="font-size: 10pt;color: #000000; background: #ffffff;">81

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<FONT face="helvetica,arial">

<!-- link2 "Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure" -->
<DIV align="left"><A NAME="008"></A></DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Item&nbsp;9.<I>&nbsp;Changes in and Disagreements With
Accountants on Accounting and Financial Disclosure</I></B>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
None.
</DIV>

<!-- link2 "Item 9A. Controls and Procedures" -->
<DIV align="left"><A NAME="009"></A></DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Item&nbsp;9A.<I>&nbsp;Controls and Procedures</I></B>
</DIV>

<DIV style="margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="1%"></TD>
    <TD width="99%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <I>Evaluation of disclosure controls and procedures.</I></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Our chief executive officer and our chief financial officer
participated in the evaluation of the effectiveness of the
Company&#146;s disclosure controls and procedures (as defined in
the Securities Exchange Act of 1934, as amended (the Exchange
Act ),
Rules&nbsp;<FONT style="white-space: nowrap">13a-15(e)</FONT> or
<FONT style="white-space: nowrap">15d-15(e))</FONT> as of the
end of the period covered by this annual report, and have
concluded that our disclosure controls and procedures were
effective as of this date based on their evaluation of these
controls and procedures required by paragraph&nbsp;(b)&nbsp;of
Exchange Act
Rules&nbsp;<FONT style="white-space: nowrap">13a-15</FONT> or
<FONT style="white-space: nowrap">15d-15.
</FONT>
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="1%"></TD>
    <TD width="99%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <I>Changes in internal controls over financial reporting.</I></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
There were no changes in our internal control over financial
reporting identified in connection with the evaluation required
by paragraph&nbsp;(d)&nbsp;of Exchange Act
Rules&nbsp;<FONT style="white-space: nowrap">13a-15</FONT> or
<FONT style="white-space: nowrap">15d-15</FONT> that occurred
during the fourth quarter of the fiscal year ended
December&nbsp;31, 2005 that have materially affected, or are
reasonably likely to materially affect, our internal control
over financial reporting.
</DIV>

<!-- link2 "Item 9B. Other Information" -->
<DIV align="left"><A NAME="010"></A></DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Item&nbsp;9B.<I>&nbsp;Other Information</I></B>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
None.
</DIV>

<!-- link1 "PART III" -->
<DIV align="left"><A NAME="011"></A></DIV>

<DIV align="center" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 18pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>PART&nbsp;III</B>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Certain information required by Part&nbsp;III is omitted from
this Report on
Form&nbsp;<FONT style="white-space: nowrap">10-K</FONT> pursuant
to Instruction&nbsp;G to Exchange Act
Form&nbsp;<FONT style="white-space: nowrap">10-K,</FONT> and the
Registrant will file its definitive Proxy Statement for its 2006
Annual Meeting of Stockholders, pursuant to Regulation&nbsp;14A
of the Securities Exchange Act of 1934, as amended (the
&#147;2006 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 2006 Proxy Statement is
incorporated herein by reference.
</DIV>

<!-- link2 "Item 10. Directors and Executive Officers of Registrant" -->
<DIV align="left"><A NAME="012"></A></DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Item&nbsp;10.<I>&nbsp;Directors and Executive Officers of
Registrant</I></B>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Information concerning our directors required by this Item will
be set forth in the 2006 Proxy Statement under the caption
&#147;Election of Directors&#148; and is incorporated herein by
reference.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
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;.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Information relating to compliance with Section&nbsp;16(a) of
the Securities Exchange Act of 1934 will be set forth in the
2006 Proxy Statement under the caption &#147;Section&nbsp;16(a)
Beneficial Ownership Reporting Compliance&#148; and is
incorporated herein by reference.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Information concerning our audit committee and our audit
committee financial expert will be set forth in our 2006 Proxy
Statement under the caption &#147;Board Meetings and
Committees&#148; and is incorporated herein by reference.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
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 other senior operational and financial
management. The Code is available on the Company&#146;s website
at<U> www.harmonicinc.com</U>.
</DIV>

<P align="center" style="font-size: 10pt;color: #000000; background: #ffffff;">82

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<FONT face="helvetica,arial">

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Harmonic intends to satisfy the disclosure requirement under
Item&nbsp;10 of
Form&nbsp;<FONT style="white-space: nowrap">8-K</FONT> 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;<FONT style="white-space: nowrap">8-K</FONT> with the
Securities and Exchange Commission disclosing such information.
</DIV>

<!-- link2 "Item 11. Executive Compensation" -->
<DIV align="left"><A NAME="013"></A></DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Item&nbsp;11.<I>&nbsp;Executive Compensation</I></B>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
The information required by this Item will be set forth in the
2006 Proxy Statement under the caption &#147;Executive
Compensation&#148; and is incorporated herein by reference.
</DIV>

<!-- link2 "Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters" -->
<DIV align="left"><A NAME="014"></A></DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Item&nbsp;12.<I>&nbsp;Security Ownership of Certain
Beneficial Owners and Management and Related Stockholder
Matters</I></B>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Information related to security ownership of certain beneficial
owners and security ownership of management and related
stockholder matters will be set forth in the 2006 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.
</DIV>

<!-- link2 "Item 13. Certain Relationships and Related Transactions" -->
<DIV align="left"><A NAME="015"></A></DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Item&nbsp;13.<I>&nbsp;Certain Relationships and Related
Transactions</I></B>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
None.
</DIV>

<!-- link2 "Item 14. Principal Accounting Fees and Services" -->
<DIV align="left"><A NAME="016"></A></DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Item&nbsp;14.<I>&nbsp;Principal Accounting Fees and
Services</I></B>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
The information required for this item will be set forth in the
2006 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.
</DIV>

<P align="center" style="font-size: 10pt;color: #000000; background: #ffffff;">83

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<FONT face="helvetica,arial">

<!-- link1 "PART IV" -->
<DIV align="left"><A NAME="017"></A></DIV>

<DIV align="center" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 18pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>PART&nbsp;IV</B>
</DIV>

<DIV style="margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<!-- link2 "Item 15. Exhibits and Financial Statement Schedules" -->
<DIV align="left"><A NAME="018"></A></DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff;">
<B>Item&nbsp;15.<I>&nbsp;Exhibits and Financial Statement
Schedules</I></B>
</DIV>

<DIV style="margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;color: #000000; background: #ffffff;">

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

<TR valign="top">
    <TD>(1)&nbsp;</TD>
    <TD align="left">
    <I>Financial Statements.</I> See Index to Consolidated Financial
    Statements at Item&nbsp;8 on page&nbsp;53 of this Annual Report
    on Form&nbsp;<FONT style="white-space: nowrap">10-K.
    </FONT></TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>(2)&nbsp;</TD>
    <TD align="left">
    <I>Financial Statement Schedules.</I> 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.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>(3)&nbsp;</TD>
    <TD align="left">
    <I>Exhibits.</I> The documents listed in the Exhibit&nbsp;Index
    of this Annual Report on
    Form&nbsp;<FONT style="white-space: nowrap">10-K</FONT> are
    filed herewith or are incorporated by reference in this Annual
    Report on
    Form&nbsp;<FONT style="white-space: nowrap">10-K,</FONT> in each
    case as indicated therein.</TD>
</TR>

</TABLE>

<P align="center" style="font-size: 10pt;color: #000000; background: #ffffff;">84

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<!-- link1 "SIGNATURES" -->
<DIV align="left"><A NAME="019"></A></DIV>

<DIV align="center" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 18pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>SIGNATURES</B>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
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;<FONT style="white-space: nowrap">10-K</FONT> to be
signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Sunnyvale, State of California, on
March&nbsp;13, 2006.
</DIV>

<DIV style="margin-top: 24pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="40%"></TD>
    <TD width="54%"></TD>
    <TD width="6%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD align="left">
    HARMONIC INC.</TD>
    <TD>&nbsp;</TD>
</TR>

</TABLE>

<DIV style="margin-top: 16pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="40%"></TD>
    <TD width="2%"></TD>
    <TD width="52%"></TD>
    <TD width="6%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>By:&nbsp;</TD>
    <TD align="left">
    /s/ <FONT style="font-variant:SMALL-CAPS">ANTHONY J. LEY
    </FONT></TD>
    <TD>&nbsp;</TD>
</TR>

</TABLE>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 3pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="40%"></TD>
    <TD width="54%"></TD>
    <TD width="6%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD align="left">
    <DIV style="border-top: 1pt solid black; font-size: 1pt; margin-top: 2pt" align="left">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD align="left">
    <FONT style="font-size: 10pt">Anthony J. Ley
    </FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD align="left">
    <FONT style="font-size: 10pt">Chairman, President and Chief
    Executive Officer
    </FONT></TD>
    <TD>&nbsp;</TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 18pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Pursuant to the requirements of the Securities Exchange Act of
1934, this Annual Report on
Form&nbsp;<FONT style="white-space: nowrap">10-K,</FONT> has
been signed by the following persons on behalf of the Registrant
in the capacities and on the dates indicated:
</DIV>
<FONT face="times new roman,times">

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10pt; margin-top: 6pt; ">

<TR style="font-size: 1pt;">
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="38%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="36%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="12%">&nbsp;</TD>
</TR>


<TR style="font-size: 8pt;">
    <TD colspan="3" align="center" nowrap><B><FONT face="helvetica,arial">Signature</FONT></B></TD>
    <TD>&nbsp;</TD>
    <TD align="center" nowrap><B><FONT face="helvetica,arial">Title</FONT></B></TD>
    <TD>&nbsp;</TD>
    <TD align="center" nowrap><B><FONT face="helvetica,arial">Date</FONT></B></TD>
</TR>


<TR valign="bottom" style="font-size: 1px">
    <TD colspan="7" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD>
</TR>

<TR>
    <TD colspan="7">&nbsp;</TD>
</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <FONT face="helvetica,arial">/s/
    <FONT style="font-variant:SMALL-CAPS">ANTHONY J. LEY<BR>
    <HR size="1" noshade></FONT></FONT><FONT face="helvetica,arial">(Anthony
    J. Ley)
    </FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">
    <FONT face="helvetica,arial">Chairman, President&nbsp;&#38;
    Chief<BR>
    Executive Officer<BR>
    (Principal Executive Officer)
    </FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">
    <FONT face="helvetica,arial">March&nbsp;13, 2006
    </FONT></TD>
</TR>

<TR>
    <TD colspan="7">&nbsp;</TD>
</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <FONT face="helvetica,arial">/s/
    <FONT style="font-variant:SMALL-CAPS">ROBIN N. DICKSON<BR>
    <HR size="1" noshade></FONT></FONT><FONT face="helvetica,arial">(Robin
    N. Dickson)
    </FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">
    <FONT face="helvetica,arial">Chief Financial Officer<BR>
    (Principal Financial and Accounting<BR>
    Officer)
    </FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">
    <FONT face="helvetica,arial">March&nbsp;13, 2006
    </FONT></TD>
</TR>

<TR>
    <TD colspan="7">&nbsp;</TD>
</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <FONT face="helvetica,arial">/s/
    <FONT style="font-variant:SMALL-CAPS">E. FLOYD KVAMME<BR>
    <HR size="1" noshade></FONT></FONT><FONT face="helvetica,arial">(E.
    Floyd Kvamme)
    </FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">
    <FONT face="helvetica,arial">Director
    </FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">
    <FONT face="helvetica,arial">March&nbsp;13, 2006
    </FONT></TD>
</TR>

<TR>
    <TD colspan="7">&nbsp;</TD>
</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <FONT face="helvetica,arial">/s/
    <FONT style="font-variant:SMALL-CAPS">WILLIAM REDDERSEN<BR>
    <HR size="1" noshade></FONT></FONT><FONT face="helvetica,arial">(William
    Reddersen)
    </FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">
    <FONT face="helvetica,arial">Director
    </FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">
    <FONT face="helvetica,arial">March&nbsp;13, 2006
    </FONT></TD>
</TR>

<TR>
    <TD colspan="7">&nbsp;</TD>
</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <FONT face="helvetica,arial">/s/
    <FONT style="font-variant:SMALL-CAPS">LEWIS SOLOMON<BR>
    <HR size="1" noshade></FONT></FONT><FONT face="helvetica,arial">(Lewis
    Solomon)
    </FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">
    <FONT face="helvetica,arial">Director
    </FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">
    <FONT face="helvetica,arial">March&nbsp;13, 2006
    </FONT></TD>
</TR>

<TR>
    <TD colspan="7">&nbsp;</TD>
</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <FONT face="helvetica,arial">/s/
    <FONT style="font-variant:SMALL-CAPS">MICHEL L. VAILLAUD<BR>
    <HR size="1" noshade></FONT></FONT><FONT face="helvetica,arial">(Michel
    L. Vaillaud)
    </FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">
    <FONT face="helvetica,arial">Director
    </FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">
    <FONT face="helvetica,arial">March&nbsp;13, 2006
    </FONT></TD>
</TR>

<TR>
    <TD colspan="7">&nbsp;</TD>
</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <FONT face="helvetica,arial">/s/
    <FONT style="font-variant:SMALL-CAPS">DAVID VAN VALKENBURG<BR>
    <HR size="1" noshade></FONT></FONT><FONT face="helvetica,arial">(David
    Van Valkenburg)
    </FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">
    <FONT face="helvetica,arial">Director
    </FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">
    <FONT face="helvetica,arial">March&nbsp;13, 2006
    </FONT></TD>
</TR>

</TABLE>
</CENTER>
</FONT>

<P align="center" style="font-size: 10pt;color: #000000; background: #ffffff;">85

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<FONT face="helvetica,arial">

<!-- link1 "EXHIBIT INDEX" -->
<DIV align="left"><A NAME="020"></A></DIV>

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<B>EXHIBIT INDEX</B>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
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.
</DIV>
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<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10pt; margin-top: 6pt; ">

<TR style="font-size: 1pt;">
    <TD width="11%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="10%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="75%">&nbsp;</TD>
</TR>

<TR>
    <TD colspan="3" align="center" nowrap><B><FONT face="helvetica,arial">Exhibit Number</FONT></B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="3" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap><FONT face="helvetica,arial">2</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT face="helvetica,arial">.1(v)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <FONT face="helvetica,arial">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 align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap><FONT face="helvetica,arial">3</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT face="helvetica,arial">.1(ix)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <FONT face="helvetica,arial">Certificate of Incorporation of
    Registrant as amended
    </FONT></TD>
</TR>

<TR>
    <TD colspan="5">&nbsp;</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap><FONT face="helvetica,arial">3</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT face="helvetica,arial">.3(x)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <FONT face="helvetica,arial">Amended and Restated Bylaws of
    Registrant
    </FONT></TD>
</TR>

<TR>
    <TD colspan="5">&nbsp;</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap><FONT face="helvetica,arial">4</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT face="helvetica,arial">.1(i)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <FONT face="helvetica,arial">Form of Common Stock Certificate
    </FONT></TD>
</TR>

<TR>
    <TD colspan="5">&nbsp;</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap><FONT face="helvetica,arial">4</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT face="helvetica,arial">.2(x)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <FONT face="helvetica,arial">Preferred Stock Rights Agreement
    dated July&nbsp;24, 2002 between the Registrant and Mellon
    Investor Services LLC
    </FONT></TD>
</TR>

<TR>
    <TD colspan="5">&nbsp;</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap><FONT face="helvetica,arial">4</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT face="helvetica,arial">.3(x)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <FONT face="helvetica,arial">Certificate of Designation of
    Rights, Preferences and Privileges of Series&nbsp;A
    Participating in Preferred Stock of Registrant
    </FONT></TD>
</TR>

<TR>
    <TD colspan="5">&nbsp;</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap><FONT face="helvetica,arial">4</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT face="helvetica,arial">.4(i)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <FONT face="helvetica,arial">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 colspan="5">&nbsp;</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap><FONT face="helvetica,arial">10</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT face="helvetica,arial">.1(i)*</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <FONT face="helvetica,arial">Form of Indemnification Agreement
    </FONT></TD>
</TR>

<TR>
    <TD colspan="5">&nbsp;</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap><FONT face="helvetica,arial">10</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT face="helvetica,arial">.2(i)*</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <FONT face="helvetica,arial">1988 Stock Option Plan and form of
    Stock Option Agreement
    </FONT></TD>
</TR>

<TR>
    <TD colspan="5">&nbsp;</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap><FONT face="helvetica,arial">10</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT face="helvetica,arial">.3(i)*</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <FONT face="helvetica,arial">1995 Stock Plan and form of Stock
    Option Agreement
    </FONT></TD>
</TR>

<TR>
    <TD colspan="5">&nbsp;</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap><FONT face="helvetica,arial">10</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT face="helvetica,arial">.4(i)*</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <FONT face="helvetica,arial">1995 Employee Stock Purchase Plan
    and form of Subscription Agreement
    </FONT></TD>
</TR>

<TR>
    <TD colspan="5">&nbsp;</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap><FONT face="helvetica,arial">10</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT face="helvetica,arial">.5(i)*</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <FONT face="helvetica,arial">1995&nbsp;Director Option Plan and
    form of Director Option Agreement
    </FONT></TD>
</TR>

<TR>
    <TD colspan="5">&nbsp;</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap><FONT face="helvetica,arial">10</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT face="helvetica,arial">.7(ii)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <FONT face="helvetica,arial">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 colspan="5">&nbsp;</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap><FONT face="helvetica,arial">10</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT face="helvetica,arial">.8(ii)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <FONT face="helvetica,arial">Facility lease dated as of
    January&nbsp;12, 1996 by and between Eastrich No.&nbsp;137
    Corporation and Company
    </FONT></TD>
</TR>

<TR>
    <TD colspan="5">&nbsp;</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap><FONT face="helvetica,arial">10</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT face="helvetica,arial">.9(xii)*</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <FONT face="helvetica,arial">Change of Control Severance
    Agreement dated February&nbsp;20, 2004 between Registrant and
    Anthony&nbsp;J. Ley
    </FONT></TD>
</TR>

<TR>
    <TD colspan="5">&nbsp;</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap><FONT face="helvetica,arial">10</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT face="helvetica,arial">.10(xii)*</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <FONT face="helvetica,arial">Form of Change of Control Severance
    Agreement between Registrant and certain executive officers of
    Registrant
    </FONT></TD>
</TR>

<TR>
    <TD colspan="5">&nbsp;</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap><FONT face="helvetica,arial">10</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT face="helvetica,arial">.11(iv)*</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <FONT face="helvetica,arial">1997 Nonstatutory Stock Option Plan
    </FONT></TD>
</TR>

<TR>
    <TD colspan="5">&nbsp;</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap><FONT face="helvetica,arial">10</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT face="helvetica,arial">.12(vi)*</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <FONT face="helvetica,arial">1999 Nonstatutory Stock Option Plan
    </FONT></TD>
</TR>

<TR>
    <TD colspan="5">&nbsp;</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap><FONT face="helvetica,arial">10</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT face="helvetica,arial">.13(vii)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <FONT face="helvetica,arial">Lease Agreement for 603-611 Baltic
    Way, Sunnyvale, California
    </FONT></TD>
</TR>

<TR>
    <TD colspan="5">&nbsp;</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap><FONT face="helvetica,arial">10</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT face="helvetica,arial">.14(vii)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <FONT face="helvetica,arial">Lease Agreement for 1322 Crossman
    Avenue, Sunnyvale, California
    </FONT></TD>
</TR>

<TR>
    <TD colspan="5">&nbsp;</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap><FONT face="helvetica,arial">10</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT face="helvetica,arial">.15(vii)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <FONT face="helvetica,arial">Lease Agreement for 646 Caribbean
    Drive, Sunnyvale, California
    </FONT></TD>
</TR>

<TR>
    <TD colspan="5">&nbsp;</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap><FONT face="helvetica,arial">10</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT face="helvetica,arial">.16(vii)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <FONT face="helvetica,arial">Lease Agreement for 632 Caribbean
    Drive, Sunnyvale, California
    </FONT></TD>
</TR>

<TR>
    <TD colspan="5">&nbsp;</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap><FONT face="helvetica,arial">10</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT face="helvetica,arial">.17(vii)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <FONT face="helvetica,arial">First Amendment to the Lease
    Agreement for 549 Baltic Way, Sunnyvale, California
    </FONT></TD>
</TR>

<TR>
    <TD colspan="5">&nbsp;</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap><FONT face="helvetica,arial">10</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT face="helvetica,arial">.18(ix)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <FONT face="helvetica,arial">Restated Non-Recourse Receivables
    Purchase Agreement dated September&nbsp;25, 2001 between
    Registrant and Silicon Valley Bank
    </FONT></TD>
</TR>

<TR>
    <TD colspan="5">&nbsp;</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap><FONT face="helvetica,arial">10</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT face="helvetica,arial">.19(ix)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <FONT face="helvetica,arial">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 colspan="5">&nbsp;</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap><FONT face="helvetica,arial">10</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT face="helvetica,arial">.21(xi)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <FONT face="helvetica,arial">Amendment to Loan Documents, dated
    September&nbsp;26, 2003, by and between Silicon Valley Bank and
    Harmonic Inc.
    </FONT></TD>
</TR>

<TR>
    <TD colspan="5">&nbsp;</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap><FONT face="helvetica,arial">10</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT face="helvetica,arial">.22(xii)*</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <FONT face="helvetica,arial">2002&nbsp;Director Option Plan and
    Form of Stock Option Agreement
    </FONT></TD>
</TR>

<TR>
    <TD colspan="5">&nbsp;</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap><FONT face="helvetica,arial">10</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT face="helvetica,arial">.23(xii)*</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <FONT face="helvetica,arial">2002 Employee Stock Purchase Plan
    and Form of Subscription Agreement
    </FONT></TD>
</TR>

<TR>
    <TD colspan="5">&nbsp;</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap><FONT face="helvetica,arial">10</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT face="helvetica,arial">.24(viii)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <FONT face="helvetica,arial">Supply License and Development
    Agreement, dated as of October&nbsp;27, 1999, by and between
    C-Cube Microsystems and Harmonic
    </FONT></TD>
</TR>

</TABLE>
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<P align="center" style="font-size: 10pt;color: #000000; background: #ffffff;">86

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

<FONT face="helvetica,arial">
<FONT face="times new roman,times">

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10pt; ">

<TR style="font-size: 1pt;">
    <TD width="11%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="10%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="75%">&nbsp;</TD>
</TR>

<TR>
    <TD colspan="3" align="center" nowrap><B><FONT face="helvetica,arial">Exhibit Number</FONT></B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="3" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="5">&nbsp;</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap><FONT face="helvetica,arial">10</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT face="helvetica,arial">.25(xiv)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <FONT face="helvetica,arial">First Amendment to Second 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;16, 2005
    </FONT></TD>
</TR>

<TR>
    <TD colspan="5">&nbsp;</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap><FONT face="helvetica,arial">21</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT face="helvetica,arial">.1</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <FONT face="helvetica,arial">Subsidiaries of Registrant
    </FONT></TD>
</TR>

<TR>
    <TD colspan="5">&nbsp;</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap><FONT face="helvetica,arial">23</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT face="helvetica,arial">.1</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <FONT face="helvetica,arial">Consent of Independent Registered
    Public Accounting Firm
    </FONT></TD>
</TR>

<TR>
    <TD colspan="5">&nbsp;</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap><FONT face="helvetica,arial">31</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT face="helvetica,arial">.1</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <FONT face="helvetica,arial">Certification of Principal
    Executive Officer Pursuant to Section&nbsp;302 of the
    Sarbanes-Oxley Act of 2002
    </FONT></TD>
</TR>

<TR>
    <TD colspan="5">&nbsp;</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap><FONT face="helvetica,arial">31</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT face="helvetica,arial">.2</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <FONT face="helvetica,arial">Certification of Principal
    Financial Officer Pursuant to Section&nbsp;302 of the
    Sarbanes-Oxley Act of 2002
    </FONT></TD>
</TR>

<TR>
    <TD colspan="5">&nbsp;</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap><FONT face="helvetica,arial">32</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT face="helvetica,arial">.1</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <FONT face="helvetica,arial">Certification of Chief Executive
    Officer pursuant to 18&nbsp;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 colspan="5">&nbsp;</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap><FONT face="helvetica,arial">32</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT face="helvetica,arial">.2</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <FONT face="helvetica,arial">Certification of Chief Financial
    Officer pursuant to 18&nbsp;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>
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<DIV align="left" style="font-size: 3pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<DIV style="width: 16%; border-top: 1.0pt solid black; font-size: 1pt">&nbsp;</DIV>
</DIV>
<FONT face="times new roman,times">

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10pt; ">

<TR style="font-size: 1pt;">
    <TD width="16%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="81%">&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">*
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <FONT face="helvetica,arial">Indicates a management contract or
    compensatory plan or arrangement relating to executive officers
    or directors of the Company.
    </FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">(i)
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <FONT face="helvetica,arial">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 align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">(ii)
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <FONT face="helvetica,arial">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 align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">(iii)
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <FONT face="helvetica,arial">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 align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">(iv)
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <FONT face="helvetica,arial">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 align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">(v)
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <FONT face="helvetica,arial">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 align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">(vi)
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <FONT face="helvetica,arial">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 align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">(vii)
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <FONT face="helvetica,arial">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 align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">(viii)
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <FONT face="helvetica,arial">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 align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">(ix)
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <FONT face="helvetica,arial">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 align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">(x)
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <FONT face="helvetica,arial">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 align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">(xi)
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <FONT face="helvetica,arial">Previously filed as an Exhibit to
    the Company&#146;s Annual Report on Form&nbsp;10-K for the year
    ended December&nbsp;31, 2002.
    </FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">(xii)
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <FONT face="helvetica,arial">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, 2003.
    </FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">(xiii)
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <FONT face="helvetica,arial">Previously filed as an Exhibit to
    the Company&#146;s Definitive Proxy Statement dated
    April&nbsp;21, 2004.
    </FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">(xiv)
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <FONT face="helvetica,arial">Previously filed as an Exhibit to
    the Company&#146;s Current Report on Form&nbsp;8-K dated
    December&nbsp;22, 2005.
    </FONT></TD>
</TR>

</TABLE>
</CENTER>
</FONT>

<P align="center" style="font-size: 10pt;color: #000000; background: #ffffff;">87

</FONT>
</BODY>
</HTML>
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-21.1
<SEQUENCE>2
<FILENAME>f18224exv21w1.htm
<DESCRIPTION>EXHIBIT 21.1
<TEXT>
<HTML>
<HEAD>
<TITLE>exv21w1</TITLE>
</HEAD>
<BODY bgcolor="#FFFFFF">
<!-- PAGEBREAK -->
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>
<DIV style="font-family: 'Times New Roman',Times,serif">



<DIV align="right" style="font-size: 10pt; margin-top: 12pt">Exhibit&nbsp;21.1
</DIV>


<DIV align="center" style="font-size: 10pt; margin-top: 18pt"><B>Harmonic Inc. and Subsidiaries</B>
</DIV>


<DIV align="center" style="font-size: 10pt; margin-top: 18pt"><B>Subsidiaries of the Registrant</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">The following table shows certain information with respect to the active subsidiaries of the
Company as of December&nbsp;31, 2005:
</DIV>

<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="48%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="25%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="25%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center"><B>State or Other Jurisdiction</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center"><B>Percent of Voting Securities</B></TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD nowrap align="center" style="border-bottom: 1px solid #000000"><B>Name</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" style="border-bottom: 1px solid #000000"><B>of Incorporation</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" style="border-bottom: 1px solid #000000"><B>Owned by Harmonic</B></TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Harmonic (Asia Pacific) Ltd.</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Hong Kong</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">100%</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Harmonic Video Systems Ltd.</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Israel</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">100%</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Harmonic Europe S.A.S.</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">France</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">100%</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Harmonic Germany GmbH</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Germany</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">100%</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Harmonic International Inc.</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">U.S.A.</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">100%</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Harmonic International Limited</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Bermuda</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">100%</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Harmonic Lightwaves (Israel) Ltd.</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Israel</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">100%</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Harmonic (UK)&nbsp;Ltd.</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">United Kingdom</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">100%</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<P align="center" style="font-size: 10pt">&nbsp;
</DIV>

</BODY>
</HTML>
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-23.1
<SEQUENCE>3
<FILENAME>f18224exv23w1.htm
<DESCRIPTION>EXHIBIT 23.1
<TEXT>
<HTML>
<HEAD>
<TITLE>exv23w1</TITLE>
</HEAD>
<BODY bgcolor="#FFFFFF">
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<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">


<DIV align="right" style="font-size: 10pt; margin-top: 12pt">Exhibit&nbsp;23.1
</DIV>


<DIV align="center" style="font-size: 10pt; margin-top: 18pt"><B>CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTANTS</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">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&nbsp;S-3 (Nos.&nbsp;333-84430 and 333-123823) of Harmonic Inc. of our report
dated March&nbsp;13, 2006, relating to the financial statements, financial statement schedule and
management&#146;s assessment of the effectiveness of internal control over financial reporting, which
appears in this Form 10-K.
</DIV>

<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="50%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="68%">&nbsp;</TD>
</TR>
<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">/s/ PRICEWATERHOUSECOOPERS LLP
<DIV style="font-size: 1pt; border-top: 1px solid #000000">&nbsp;</DIV>
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">PRICEWATERHOUSECOOPERS LLP</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">San Jose, California<BR>
March&nbsp;13, 2006

</DIV>

<P align="center" style="font-size: 10pt">&nbsp;
</DIV>

</BODY>
</HTML>
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-31.1
<SEQUENCE>4
<FILENAME>f18224exv31w1.htm
<DESCRIPTION>EXHIBIT 31.1
<TEXT>
<HTML>
<HEAD>
<TITLE>exv31w1</TITLE>
</HEAD>
<BODY bgcolor="#FFFFFF">
<!-- PAGEBREAK -->
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="right" style="font-size: 10pt; margin-top: 12pt">Exhibit&nbsp;31.1
</DIV>


<DIV align="center" style="font-size: 10pt; margin-top: 18pt"><B>Harmonic Inc.<BR>
Certification of Principal Executive Officer<BR>
Pursuant to Section&nbsp;302 of<BR>
The Sarbanes-Oxley Act of 2002</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 12pt">I, Anthony J. Ley, Chairman, President and Chief Executive Officer of Harmonic Inc., certify that:
</DIV>


<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left">1.</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>I have reviewed this annual report on Form 10-K of Harmonic Inc.:</TD>
</TR>

</TABLE>
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left">2.</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>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;</TD>
</TR>

</TABLE>
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left">3.</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>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;</TD>
</TR>

</TABLE>
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left">4.</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>The registrant&#146;s other certifying officer(s) and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules&nbsp;13a-15(e) and
15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and have:</TD>
</TR>

</TABLE>
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="1%" nowrap align="left">a)</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>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;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="1%" nowrap align="left">b)</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Designed such internal control over financial reporting, or caused such internal
control over financial reporting to be designed under our supervision, to provide
reasonable assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with generally accepted
accounting principles;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="1%" nowrap align="left">c)</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Evaluated the effectiveness of the registrant&#146;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</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="1%" nowrap align="left">d)</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Disclosed in this report any change in the registrant&#146;s internal control over financial
reporting that occurred during the registrant&#146;s most recent fiscal quarter (the
registrant&#146;s fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the registrant&#146;s internal control
over financial reporting; and</TD>
</TR>

</TABLE>
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left">5.</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>The registrant&#146;s other certifying officer(s) and I have disclosed, based on our most recent
evaluation of internal control over financial reporting, to the registrant&#146;s auditors and the
audit committee of the registrant&#146;s board of directors (or persons performing the equivalent
functions):</TD>
</TR>

</TABLE>
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="1%" nowrap align="left">a)</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>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&#146;s ability to record, process, summarize and report financial information;
and</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="1%" nowrap align="left">b)</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Any fraud, whether or not material, that involves management or other employees who
have a significant role in the registrant&#146;s internal control over financial reporting.</TD>
</TR>

</TABLE>
</DIV>
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="20%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="46%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="30%">&nbsp;</TD>
</TR>
<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom">

<TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">Date: March&nbsp;13, 2006
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">By:
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">/s/ Anthony J. Ley
<DIV style="font-size: 1pt; border-top: 1px solid #000000">&nbsp;</DIV>
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Anthony J. Ley</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Chairman, President and Chief Executive Officer</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">(Principal Executive Officer)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<P align="center" style="font-size: 10pt">&nbsp;
</DIV>

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</DOCUMENT>
<DOCUMENT>
<TYPE>EX-31.2
<SEQUENCE>5
<FILENAME>f18224exv31w2.htm
<DESCRIPTION>EXHIBIT 31.2
<TEXT>
<HTML>
<HEAD>
<TITLE>exv31w2</TITLE>
</HEAD>
<BODY bgcolor="#FFFFFF">
<!-- PAGEBREAK -->
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">


<DIV align="right" style="font-size: 10pt; margin-top: 12pt">Exhibit&nbsp;31.2
</DIV>


<DIV align="center" style="font-size: 10pt; margin-top: 18pt"><B>Harmonic Inc.<BR>
Certification of Principal Financial Officer<BR>
Pursuant to Section&nbsp;302 of<BR>
The Sarbanes-Oxley Act of 2002</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 12pt">I, Robin N. Dickson, Principal Financial Officer of Harmonic Inc., certify that:
</DIV>


<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left">1.</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>I have reviewed this annual report on Form 10-K of Harmonic Inc.:</TD>
</TR>

</TABLE>
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left">2.</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>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;</TD>
</TR>

</TABLE>
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left">3.</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>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;</TD>
</TR>

</TABLE>
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left">4.</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>The registrant&#146;s other certifying officer(s) and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules&nbsp;13a-15(e) and
15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and have:</TD>
</TR>

</TABLE>
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="1%" nowrap align="left">a)</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>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;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="1%" nowrap align="left">b)</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Designed such internal control over financial reporting, or caused such internal
control over financial reporting to be designed under our supervision, to provide
reasonable assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with generally accepted
accounting principles;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="1%" nowrap align="left">c)</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Evaluated the effectiveness of the registrant&#146;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</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="1%" nowrap align="left">d)</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Disclosed in this report any change in the registrant&#146;s internal control over financial
reporting that occurred during the registrant&#146;s most recent fiscal quarter (the
registrant&#146;s fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the registrant&#146;s internal control
over financial reporting; and</TD>
</TR>

</TABLE>
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left">5.</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>The registrant&#146;s other certifying officer(s) and I have disclosed, based on our most recent
evaluation of internal control over financial reporting, to the registrant&#146;s auditors and the
audit committee of the registrant&#146;s board of directors (or persons performing the equivalent
functions):</TD>
</TR>

</TABLE>
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="1%" nowrap align="left">a)</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>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&#146;s ability to record, process, summarize and report financial information;
and</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="1%" nowrap align="left">b)</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Any fraud, whether or not material, that involves management or other employees who
have a significant role in the registrant&#146;s internal control over financial reporting.</TD>
</TR>

</TABLE>
</DIV>
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="20%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="36%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="40%">&nbsp;</TD>
</TR>
<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom">

<TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">Date: March&nbsp;13, 2006
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">By:
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">/s/ Robin N. Dickson
<DIV style="font-size: 1pt; border-top: 1px solid #000000">&nbsp;</DIV>
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Robin N. Dickson</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Chief Financial Officer</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">(Principal Financial Officer)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<P align="center" style="font-size: 10pt">&nbsp;
</DIV>

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</DOCUMENT>
<DOCUMENT>
<TYPE>EX-32.1
<SEQUENCE>6
<FILENAME>f18224exv32w1.htm
<DESCRIPTION>EXHIBIT 32.1
<TEXT>
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<TITLE>exv32w1</TITLE>
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<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">


<DIV align="right" style="font-size: 10pt; margin-top: 12pt">Exhibit&nbsp;32.1
</DIV>


<DIV align="center" style="font-size: 10pt; margin-top: 18pt"><B>Harmonic Inc.<BR>
Certification of Principal Executive Officer<BR>
Pursuant to 18 U.S.C. Section&nbsp;1350 as Adopted Pursuant to<BR>
Section&nbsp;906 of the Sarbanes-Oxley Act of 2002</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">As of the date hereof, I, Anthony J. Ley, Chairman, President and Chief Executive Officer of
Harmonic Inc. (the &#147;Company&#148;), certify, pursuant to 18 U.S.C. Section&nbsp;1350, as adopted pursuant to
Section&nbsp;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&nbsp;31, 2005, as filed with the Securities and Exchange Commission
(the &#147;Report&#148;), 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, as amended.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 12pt">Date:
March&nbsp;13, 2006
</DIV>


<TABLE width="100%" border="0" cellspacing="0" cellpadding="0" style="font-size: 10pt">
<TR>
    <TD width="48%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="35%">&nbsp;</TD>
    <TD width="15%">&nbsp;</TD>
</TR>
<TR>
    <TD valign="top" align="left">&nbsp;</TD>
    <TD colspan="3" align="left">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR><TR>
    <TD align="left">&nbsp;</TD>
    <TD colspan="3" style="border-bottom: 1px solid #000000" align="left">                                                  /s/ Anthony J. Ley
&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR><TR>
    <TD align="left">&nbsp;</TD>
    <TD colspan="3" align="left">Anthony J. Ley&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR><TR>
    <TD align="left">&nbsp;</TD>
    <TD colspan="3" align="left">Chairman, President and Chief Executive Officer<BR>
(Principal Executive Officer)&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

</TABLE>

<P align="center" style="font-size: 10pt">&nbsp;
</DIV>

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</DOCUMENT>
<DOCUMENT>
<TYPE>EX-32.2
<SEQUENCE>7
<FILENAME>f18224exv32w2.htm
<DESCRIPTION>EXHIBIT 32.2
<TEXT>
<HTML>
<HEAD>
<TITLE>exv32w2</TITLE>
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<BODY bgcolor="#FFFFFF">
<!-- PAGEBREAK -->
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">


<TABLE width="100%" border="0" cellspacing="0" cellpadding="0" style="font-size: 10pt">
<TR>
    <TD width="48%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="35%">&nbsp;</TD>
    <TD width="15%">&nbsp;</TD>
</TR>

</TABLE>

<DIV align="right" style="font-size: 10pt; margin-top: 12pt">Exhibit&nbsp;32.2
</DIV>


<DIV align="center" style="font-size: 10pt; margin-top: 18pt"><B>Harmonic Inc.<BR>
Certification of Principal Financial Officer<BR>
Pursuant to 18 U.S.C. Section&nbsp;1350 as Adopted Pursuant to<BR>
Section&nbsp;906 of the Sarbanes-Oxley Act of 2002</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">As of the date hereof, I, Robin N. Dickson, Chief Financial Officer of Harmonic Inc. (the
&#147;Company&#148;), certify, pursuant to 18 U.S.C. Section&nbsp;1350, as adopted pursuant to Section&nbsp;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&nbsp;31, 2005, as filed with the Securities and Exchange Commission (the &#147;Report&#148;), 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, as amended.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 12pt">Date:
March&nbsp;13, 2006
</DIV>


<TABLE width="100%" border="0" cellspacing="0" cellpadding="0" style="font-size: 10pt">
<TR>
    <TD width="48%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="35%">&nbsp;</TD>
    <TD width="15%">&nbsp;</TD>
</TR>
<TR>
    <TD valign="top" align="left">&nbsp;</TD>
    <TD colspan="3" align="left">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR><TR>
    <TD align="left">&nbsp;</TD>
    <TD colspan="3" style="border-bottom: 1px solid #000000" align="left">                                                  /s/ Robin N. Dickson
&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR><TR>
    <TD align="left">&nbsp;</TD>
    <TD colspan="3" align="left">Robin N. Dickson&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR><TR>
    <TD align="left">&nbsp;</TD>
    <TD colspan="3" align="left">Chief Financial Officer<BR>
(Principal Financial Officer)&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR>
    <TD colspan="5">&nbsp;</TD>
</TR>
</TABLE>


<P align="center" style="font-size: 10pt">&nbsp;
</DIV>


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