<SUBMISSION>
<ACCESSION-NUMBER>0000950134-06-009404
<TYPE>10-Q
<PUBLIC-DOCUMENT-COUNT>5
<PERIOD>20060331
<FILING-DATE>20060510
<DATE-OF-FILING-DATE-CHANGE>20060510
<FILER>
<COMPANY-DATA>
<CONFORMED-NAME>HARMONIC INC
<CIK>0000851310
<ASSIGNED-SIC>3663
<IRS-NUMBER>770201147
<STATE-OF-INCORPORATION>DE
<FISCAL-YEAR-END>1231
</COMPANY-DATA>
<FILING-VALUES>
<FORM-TYPE>10-Q
<ACT>34
<FILE-NUMBER>000-25826
<FILM-NUMBER>06825075
</FILING-VALUES>
<BUSINESS-ADDRESS>
<STREET1>549 BALTIC WAY
<CITY>SUNNYVALE
<STATE>CA
<ZIP>94089
<PHONE>4085422500
</BUSINESS-ADDRESS>
<FORMER-COMPANY>
<FORMER-CONFORMED-NAME>HARMONIC LIGHTWAVES INC
<DATE-CHANGED>19950404
</FORMER-COMPANY>
</FILER>
<DOCUMENT>
<TYPE>10-Q
<SEQUENCE>1
<FILENAME>f20193e10vq.htm
<DESCRIPTION>FORM 10-Q
<TEXT>
<HTML>
<HEAD>
<TITLE>e10vq</TITLE>
</HEAD>
<BODY bgcolor="#FFFFFF">
<!-- PAGEBREAK -->
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>
<DIV style="font-family: 'Times New Roman',Times,serif">




<DIV style="width: 100%; border-bottom: 2pt solid black; font-size: 1pt">&nbsp;</DIV>
<DIV style="width: 100%; border-bottom: 1pt solid black; font-size: 1pt">&nbsp;</DIV>




<DIV align="center" style="font-size: 14pt; margin-top: 12pt"><B>UNITED STATES SECURITIES AND EXCHANGE COMMISSION</B>
</DIV>

<DIV align="center" style="font-size: 12pt"><B>Washington, D.C. 20549</B>
</DIV>

<DIV align="center" style="font-size: 18pt; margin-top: 12pt"><B><DIV align="center"><DIV style="font-size: 3pt; margin-top: 16pt; width: 26%; border-top: 1px solid #000000">&nbsp;</DIV></DIV></B>
</DIV>

<DIV align="center" style="font-size: 18pt; margin-top: 6pt"><B>FORM 10-Q</B>
</DIV>

<DIV align="center" style="font-size: 18pt; margin-top: 12pt"><B><DIV align="center"><DIV style="font-size: 3pt; margin-top: 12pt; width: 26%; border-top: 1px solid #000000">&nbsp;</DIV></DIV></B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>(Mark One)</B>
</DIV>

<DIV align="center">
<TABLE cellspacing="0" border="0" cellpadding="0" width="100%" style="font-size: 12pt">
<TR style="font-size: 6pt">
    <TD width="7%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="88%">&nbsp;</TD>
</TR>
<TR valign="top">
    <TD align="center"><FONT face="Wingdings">&#254;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD><B>QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934</B></TD>
</TR>
</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 12%"><B><B>For the Quarterly Period Ended March&nbsp;31, 2006</B>
</B>
</DIV>

<DIV align="center">
<TABLE cellspacing="0" border="0" cellpadding="0" width="100%" style="font-size: 12pt">
<TR style="font-size: 6pt">
    <TD width="7%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="88%">&nbsp;</TD>
</TR>
<TR valign="top">
    <TD align="center"><FONT face="Wingdings">&#111;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD><B>TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934</B></TD>
</TR>
</TABLE>
</DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 12pt"><B>Commission File No.&nbsp;0-25826</B></DIV>

<DIV align="center" style="font-size: 24pt; margin-top: 12pt"><B>HARMONIC INC.</B>
</DIV>

<DIV align="center" style="font-size: 10pt"><B>(Exact name of Registrant as specified in its charter)</B></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="3%">&nbsp;</TD>
    <TD width="48%">&nbsp;</TD>
</TR>
<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom">
    <TD align="center" valign="top"><B>Delaware</B>
</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top"><B>77-0201147</B></TD>
</TR>
<TR style="font-size: 1px">
    <TD align="center" valign="top" style="border-top: 1px solid #000000">&nbsp;
</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top" style="border-top: 1px solid #000000">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><B>(State or other jurisdiction of incorporation or<BR>
organization)</B>
</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top"><B>(I.R.S. Employer Identification Number)</B></TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 12pt"><B>549 Baltic Way<BR>
Sunnyvale, CA 94089<BR>
(408)&nbsp;542-2500</B></DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 12pt"><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: 10pt; margin-top: 12pt"><B>Securities registered pursuant to section 12(b) of the Act:<BR>
None</B></DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 12pt"><B>Securities registered pursuant to section 12(g) of the Act:<BR>
Common Stock, par value $.001 per share<BR>
Preferred Share Purchase Rights</B></DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Indicate by check mark whether the Registrant (1)&nbsp;has filed all reports required to be filed by Section&nbsp;13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12&nbsp;months (or for shorter period that the Registrant was required to file
such reports), and (2)&nbsp;has been subject to such filing requirements for the past 90&nbsp;days.
</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="30%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="19%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="19%">&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">&nbsp;
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><B>Yes</B> <FONT face="Wingdings">&#254;</FONT>
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><B>No </B><FONT face="Wingdings">&#111;</FONT>
</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">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):
</DIV>


<DIV align="center" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B>Large accelerated filer </B><FONT face="Wingdings">&#111;</FONT> &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; <B>Accelerated filer </B><FONT face="Wingdings">&#254;</FONT> &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; <B>Non-accelerated filer </B><FONT face="Wingdings">&#111;</FONT>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Indicate by check mark whether the Registrant is a shell company (as defined in Rule&nbsp;12b-2 of the Exchange Act).
</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="30%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="15%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="16%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="39%">&nbsp;</TD>
</TR>
<!-- End Table Head -->
<!-- Begin Table Body -->
<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"><B>Yes</B> <FONT face="Wingdings">&#111;</FONT>
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><B>No</B> <FONT face="Wingdings">&#254;</FONT>
</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">The number of shares outstanding of the Registrant&#146;s Common Stock, $.001 par value, was 74,168,674 on April&nbsp;28, 2006.
</DIV>


<DIV style="width: 100%; border-bottom: 1pt solid black; margin-top: 10pt; font-size: 1pt">&nbsp;</DIV>
<DIV style="width: 100%; border-bottom: 2pt solid black; font-size: 1pt">&nbsp;</DIV>












<P align="center" style="font-size: 10pt">&nbsp;
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="left">
<!-- TOC -->
</DIV>
<DIV align="left">
<A name="tocpage"></A>
</DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 18pt"><B>HARMONIC INC.</B>
</DIV>


<DIV align="center" style="font-size: 10pt; margin-top: 6pt"><B>INDEX</B>
</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="8%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="85%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000">Page</TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom">
    <TD colspan="3" align="left"><A href="#101"><B>PART I &#151; FINANCIAL INFORMATION</B></A></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px"><A href="#102">Item&nbsp;1.</A></DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><A href="#102">Condensed Consolidated Financial Statements (unaudited):</A></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><A href="#103">Condensed Consolidated Balance Sheets at March 31, 2006 and December 31, 2005</A></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">2</TD>
    <TD valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><A href="#104">Condensed  Consolidated  Statements  of Operations  for the Three Months Ended  March 31, 2006 and April 1, 2005</A></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="bottom">3</TD>
    <TD valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><A href="#105">Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2006 and April 1, 2005</A></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">4</TD>
    <TD valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><A href="#106">Notes to Condensed Consolidated Financial Statements (unaudited)</A></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">5</TD>
    <TD valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px"><A href="#107">Item&nbsp;2.</A></DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><A href="#107">Management&#146;s Discussion and Analysis of Financial Condition and Results of Operations</A></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">17</TD>
    <TD valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px"><A href="#108">Item&nbsp;3.</A></DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><A href="#108">Quantitative and Qualitative Disclosures About Market Risk</A></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">27</TD>
    <TD valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px"><A href="#109">Item&nbsp;4.</A></DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><A href="#109">Controls and Procedures</A></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">27</TD>
    <TD valign="top">&nbsp;</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="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD colspan="3" align="left"><A href="#110"><B>PART II &#151; OTHER INFORMATION</B></A></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px"><A href="#111">Item&nbsp;1.</A></DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><A href="#111">Legal Proceedings</A></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">28</TD>
    <TD valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px"><A href="#112">Item&nbsp;2.</A></DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><A href="#112">Unregistered Sales of Equity Securities and Use of Proceeds</A></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">46</TD>
    <TD valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px"><A href="#113">Item&nbsp;3.</A></DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><A href="#113">Defaults Upon Senior Securities</A></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">46</TD>
    <TD valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px"><A href="#114">Item&nbsp;4.</A></DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><A href="#114">Submission of Matters to a Vote of Security Holders</A></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">46</TD>
    <TD valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px"><A href="#115">Item&nbsp;5.</A></DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><A href="#115">Other Information</A></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">46</TD>
    <TD valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px"><A href="#116">Item&nbsp;6.</A></DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><A href="#116">Exhibits</A></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">46</TD>
    <TD valign="top">&nbsp;</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="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD colspan="3" align="left"><A href="#117"><B>SIGNATURE</B></A></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">47</TD>
    <TD valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD colspan="3" align="left"><B>INDEX TO EXHIBITS</B></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">48</TD>
    <TD valign="top">&nbsp;</TD>
</TR>
<!-- End Table Body -->
<TR><TD colspan="9"><FONT size="2">&nbsp;<A HREF="f20193exv31w1.htm">EXHIBIT 31.1</A></FONT></TD></TR>
<TR><TD colspan="9"><FONT size="2">&nbsp;<A HREF="f20193exv31w2.htm">EXHIBIT 31.2</A></FONT></TD></TR>
<TR><TD colspan="9"><FONT size="2">&nbsp;<A HREF="f20193exv32w1.htm">EXHIBIT 32.1</A></FONT></TD></TR>
<TR><TD colspan="9"><FONT size="2">&nbsp;<A HREF="f20193exv32w2.htm">EXHIBIT 32.2</A></FONT></TD></TR>
</TABLE>
</DIV>

<DIV align="left">
<!-- /TOC -->
</DIV>

<P align="center" style="font-size: 10pt">1
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>
<DIV style="font-family: 'Times New Roman',Times,serif">




<DIV align="left">
<A name="101"></A>
</DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 18pt"><B>PART I</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>FINANCIAL INFORMATION</B>
</DIV>

<DIV align="left">
<A name="102"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><B>ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)</B>

</DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 18pt"><B>HARMONIC INC.</B>
</DIV>

<DIV align="left">
<A name="103"></A>
</DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 18pt"><B>CONDENSED CONSOLIDATED BALANCE SHEETS<BR>
(UNAUDITED)</B>
</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="76%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD nowrap align="left"><B>(In thousands, except par value amounts)</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>March 31, 2006</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>December 31, 2005</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">ASSETS</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Current assets:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Cash and cash equivalents</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">41,123</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">37,818</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Short-term investments</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">67,435</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">73,010</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Accounts receivable, net of allowances of $3,153 and $3,230</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">43,329</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">43,433</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Inventories</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">31,208</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">38,552</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Prepaid expenses and other current assets</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">8,220</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">8,335</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Total current assets</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">191,315</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">201,148</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Property and equipment, net</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">16,463</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">17,040</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Intangibles and other assets</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">7,384</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">8,109</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Total assets</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">215,162</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">226,297</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">LIABILITIES AND STOCKHOLDERS&#146; EQUITY</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Current liabilities:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Current portion of long-term debt</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">751</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">812</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Accounts payable</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">16,445</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">19,378</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Income taxes payable</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">6,586</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">6,480</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Deferred revenue</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">17,241</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">19,687</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Accrued liabilities</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">34,407</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">37,438</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Total current liabilities</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">75,430</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">83,795</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Long-term debt, less current portion</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">301</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">460</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Accrued excess facilities costs, long-term</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">17,717</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">18,357</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Other non-current liabilities</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">10,064</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">10,703</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Total liabilities</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">103,512</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">113,315</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Commitments and contingencies (Notes 15 and 16)</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Stockholders&#146; equity:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Preferred stock, $0.001 par value, 5,000 shares
authorized; no shares issued or outstanding</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Common stock, $0.001 par value, 150,000 shares authorized;
74,150 and 73,636 shares issued and outstanding</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">74</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">74</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Capital in excess of par value</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,051,834</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,048,090</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Accumulated deficit</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(1,939,863</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(1,934,715</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Accumulated other comprehensive loss</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(395</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(467</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Total stockholders&#146; equity</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">111,650</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">112,982</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Total liabilities and stockholders&#146; equity</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">215,162</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">226,297</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 6pt">The accompanying notes are an integral part of these consolidated financial statements.
</DIV>


<P align="center" style="font-size: 10pt">2
</DIV>

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

<DIV style="font-family: 'Times New Roman',Times,serif">




<DIV align="center" style="font-size: 10pt; margin-top: 18pt"><B>HARMONIC INC.</B>
</DIV>

<DIV align="left">
<A name="104"></A>
</DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 6pt"><B>CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS<BR>
(UNAUDITED)</B>
</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="76%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="6" style="border-bottom: 1px solid #000000"><B>Three Months Ended</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD nowrap align="left" style="border-bottom: 0px solid #000000"><B>(In thousands, except per share data)</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>March 31, 2006</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>April 1, 2005</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Net sales</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">56,221</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">72,915</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Cost of sales</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">36,341</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">45,868</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Gross profit</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">19,880</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">27,047</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Operating expenses:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Research and development</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">9,948</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">9,459</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Selling, general and administrative</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">15,713</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">15,325</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Amortization of intangibles</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">91</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">958</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Total operating expenses</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">25,752</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">25,742</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Income (loss)&nbsp;from operations</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(5,872</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,305</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Interest income, net</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">992</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">522</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Other income (expense), net</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(92</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(49</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Income (loss)&nbsp;before income taxes</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(4,972</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,778</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Provision for income taxes</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">175</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">72</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Net income (loss)</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(5,147</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">1,706</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Net income (loss)&nbsp;per share:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Basic</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(0.07</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">0.02</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Diluted</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(0.07</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">0.02</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Weighted average shares:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Basic</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">74,102</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">72,839</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Diluted</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">74,102</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">74,375</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 6pt">The accompanying notes are an integral part of these consolidated financial statements.
</DIV>


<P align="center" style="font-size: 10pt">3
</DIV>

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

<DIV style="font-family: 'Times New Roman',Times,serif">




<DIV align="center" style="font-size: 10pt; margin-top: 18pt"><B>HARMONIC INC.</B>
</DIV>

<DIV align="left">
<A name="105"></A>
</DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 6pt"><B>CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS<BR>
(UNAUDITED)</B>
</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="76%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="6" style="border-bottom: 1px solid #000000"><B>Three Months Ended</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD nowrap align="left" style="border-bottom: 0px solid #000000"><B>(In thousands)</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>March 31, 2006</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>April 1, 2005</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Cash flows from operating activities:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Net income (loss)</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(5,147</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">1,706</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Adjustments to reconcile net loss to net cash provided by (used
in) operating activities:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Amortization of intangibles</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">250</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,730</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Depreciation</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,170</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,080</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Stock-based compensation</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,627</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">5</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Loss on disposal of fixed assets</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">89</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Changes in assets and liabilities, net of effect of acquisition:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Accounts receivable</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(186</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">9,148</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Inventories</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">7,324</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(171</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Prepaid expenses and other assets</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">183</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,419</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Accounts payable</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(2,933</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,109</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Deferred revenue</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(3,144</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">8,106</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Income taxes payable</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">77</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(566</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Accrued excess facilities costs</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(1,193</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(1,147</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Accrued and other liabilities</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(1,575</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(16,605</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Net cash provided by (used in) operating activities</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(2,547</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">7,903</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Cash flows provided by (used in) investing activities:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Purchases of investments</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(18,609</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(19,787</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Proceeds from sales of investments</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">24,259</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">20,747</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Acquisition of property and equipment</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(1,593</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(1,815</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Acquisition of BTL, net of cash received</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(5,955</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Net cash provided by (used in) investing activities</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4,057</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(6,810</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Cash flows from financing activities:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Proceeds from issuance of common stock, net</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,073</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4,243</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Repayments under bank line and term loan</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(220</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(386</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Repayments of capital lease obligations</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(20</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(32</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Net cash provided by financing activities</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,833</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,825</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Effect of exchange rate changes on cash and cash equivalents</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(38</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">140</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Net increase in cash and cash equivalents</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,305</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">5,058</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Cash and cash equivalents at beginning of period</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">37,818</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">26,603</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Cash and cash equivalents at end of period</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">41,123</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">31,661</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Supplemental disclosure of cash flow information:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Income tax payments, net</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">103</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">51</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Interest paid during the period</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">36</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">127</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Non-cash investing and financing activities:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Issuance of restricted common stock from BTL acquisition</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">1,831</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 6pt">The accompanying notes are an integral part of these consolidated financial statements.
</DIV>


<P align="center" style="font-size: 10pt">4
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">




<DIV align="center" style="font-size: 10pt; margin-top: 18pt"><B>HARMONIC INC.</B>
</DIV>

<DIV align="left">
<A name="106"></A>
</DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 6pt"><B>NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Note 1: Basis of Presentation</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">The accompanying unaudited condensed consolidated financial statements include all adjustments
(consisting only of normal recurring adjustments) which Harmonic Inc. (the &#147;Company&#148;) considers
necessary for a fair statement of the results of operations for the interim periods covered and the
consolidated financial condition of the Company at the date of the balance sheets. This Quarterly
Report on Form 10-Q should be read in conjunction with the Company&#146;s audited consolidated financial
statements contained in the Company&#146;s Annual Report on Form 10-K and Form 10-K/A, which were filed
with the Securities and Exchange Commission on March&nbsp;14, 2006 and April&nbsp;26, 2006, respectively. The
interim results presented herein are not necessarily indicative of the results of operations that
may be expected for the full fiscal year ending December&nbsp;31, 2006, or any other future period. The
Company&#146;s fiscal quarters end on the Friday nearest the calendar quarter end, except for the fourth
quarter which ends on December&nbsp;31.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">The condensed consolidated financial statements include the accounts of the Company and its
subsidiaries. All significant intercompany accounts and transactions have been eliminated in
consolidation.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><I>Use of Estimates</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">The preparation of the consolidated financial statements in conformity with generally accepted
accounting principles in the United States of America requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the reported amounts of revenue
and expenses during the reporting period. Actual results could differ from those estimates.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Note 2: Recent Accounting Pronouncements</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">In November&nbsp;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 No.&nbsp;43, <I>Restatement and Revision of
Accounting Research Bulletins</I>. SFAS 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 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 No.&nbsp;151 are effective for inventory costs incurred during fiscal
years beginning after June&nbsp;15, 2005. The adoption of SFAS No.&nbsp;151 did not have a significant impact
on the Company&#146;s financial condition or results of operations.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">In May&nbsp;2005, FASB issued SFAS 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 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 No.&nbsp;154 is effective for accounting change made in
fiscal years beginning after December&nbsp;15, 2005. The adoption of
this standard did not have an impact on our
results of operations or financial condition.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Note 3: Stock-based Compensation</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">On January&nbsp;1, 2006, the Company adopted Statement of Financial Accounting Standards No.&nbsp;123(R),
&#147;Share-Based Payment,&#148; (&#147;SFAS 123(R)&#148;) which requires the measurement and recognition of
compensation expense for all share-based payment awards made to employees and directors, including
employee stock options and employee
</DIV>

<P align="center" style="font-size: 10pt">5
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">



<DIV align="left" style="font-size: 10pt; margin-top: 6pt">stock purchases related to our Employee Stock Purchase Plan (&#147;ESPP&#148;) based upon the grant-date fair
value of those awards. SFAS 123(R) supersedes the Company&#146;s previous accounting under Accounting
Principles Board Opinion No.&nbsp;25, &#147;Accounting for Stock Issued to Employees&#148; (&#147;APB 25&#148;) and related
interpretations, and provided the required pro forma disclosures prescribed by Statement of
Financial Accounting Standards No.&nbsp;123, &#147;Accounting for Stock-Based Compensation,&#148; (&#147;SFAS 123&#148;) as
amended. In addition, we have applied the provisions of Staff Accounting Bulletin No.&nbsp;107 (&#147;SAB
107&#148;), issued by the Securities and Exchange Commission, in our adoption of SFAS No.&nbsp;123(R).
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">The Company adopted SFAS 123(R) using the modified-prospective transition method, which requires
the application of the accounting standard as of January&nbsp;1, 2006, the first day of the Company&#146;s
fiscal year 2006. The Company&#146;s Condensed Consolidated Financial Statements as of and for the three
months ended March&nbsp;31, 2006 reflect the impact of SFAS 123(R). In accordance with the modified
prospective transition method, the Company&#146;s Condensed Consolidated Financial Statements for prior
periods have not been restated to reflect, and do not include, the impact of SFAS 123(R).
Stock-based compensation expense recognized under SFAS 123(R) for the three months ended March&nbsp;31,
2006 was $1.6&nbsp;million which consisted of stock-based compensation expense related to employee
equity awards and employee stock purchases. There was no stock-based compensation expense related
to employee equity awards and employee stock purchases recognized during the three months ended
April&nbsp;1, 2005.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">SFAS 123(R) requires companies to estimate the fair value of share-based payment awards on the date
of grant using an option-pricing model. The value of the portion of the award that is ultimately
expected to vest is recognized as expense over the requisite service period in the Company&#146;s
Condensed Consolidated Statement of Operations. Prior to the adoption of SFAS 123(R), the Company
accounted for employee equity awards and employee stock purchases using the intrinsic value method
in accordance with APB 25 as allowed under SFAS 123. Under the intrinsic value method, no
stock-based compensation expense had been recognized in the Company&#146;s Condensed Consolidated
Statement of Operations because the exercise price of the Company&#146;s stock options granted to
employees and directors equaled the fair market value of the underlying stock at the date of grant.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Stock-based compensation expense recognized during the period is based on the value of the portion
of share-based payment awards that is ultimately expected to vest during the period. Stock-based
compensation expense recognized in the Company&#146;s Condensed Consolidated Statement of Operations for
the three months ended March&nbsp;31, 2006 included compensation expense for share-based payment awards
granted prior to, but not yet vested as of December&nbsp;31, 2005 based on the grant date fair value
estimated in accordance with the pro forma provisions of SFAS 123 and compensation expense for the
share-based payment awards granted subsequent to December&nbsp;31, 2005 based on the grant date fair
value estimated in accordance with the provisions of SFAS 123(R). In conjunction with the adoption
of SFAS 123(R), the Company changed its method of attributing the value of stock-based compensation
costs to expense from the accelerated multiple-option method to the straight-line single-option
method. Compensation expense for all share-based payment awards granted on or prior to December&nbsp;31,
2005 will continue to be recognized using the accelerated approach while compensation expense for
all share-based payment awards related to stock options and employee stock purchase rights granted
subsequent to December&nbsp;31, 2005 are recognized using the straight-line method.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">As stock-based compensation expense recognized in our results for the first quarter of fiscal year
2006 is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures.
SFAS 123(R) requires forfeitures to be estimated at the time of grant and revised, if necessary, in
subsequent periods if actual forfeitures differ from those estimates. Prior to fiscal year 2006, we
accounted for forfeitures as they occurred for the purposes of pro forma information under SFAS
123, as disclosed in our Notes to Consolidated Financial Statements for the related periods.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">The fair value of share-based payment awards is estimated at grant date using a
Black-Scholes-Merton option pricing model. The Company&#146;s determination of fair value of share-based
payment awards on the date of grant using an option-pricing model is affected by the Company&#146;s
stock price as well as the assumptions regarding a number of highly complex and subjective
variables. These variables include, but are not limited to, the Company&#146;s expected stock price
volatility over the term of the awards, and actual and projected employee stock option exercise
behaviors.
</DIV>

<P align="center" style="font-size: 10pt">6
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Harmonic currently does not expect to receive any tax benefits in fiscal 2006 for any expense
deductions resulting
from expensing of stock options or shares issued under its ESPP plan. Harmonic currently provides a valuation allowance for most
of its deferred tax assets, and a valuation allowance has also been provided for any tax effects of
stock-based compensation expense pursuant to SFAS 123(R).
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Note 4: BTL Acquisition</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">On February&nbsp;25, 2005, Harmonic purchased all of the issued and outstanding shares of Broadcast
Technology Limited, or BTL, a private UK 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 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
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; margin-top: 6pt">The BTL acquisition was accounted for under SFAS No.&nbsp;141 and certain specified provisions of SFAS
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>
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="88%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Cash acquired</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">149</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Other tangible assets acquired</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,508</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Amortizable intangible assets:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Existing technology</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,050</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Customer relationships</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">540</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Tradenames/trademarks</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">320</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Order backlog</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">60</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Goodwill</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,745</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Total assets acquired</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">9,372</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Liabilities assumed</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(568</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Deferred tax liability for acquired intangibles</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(891</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Net assets acquired</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">7,913</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">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; margin-top: 6pt">The residual purchase price of $3.7&nbsp;million has been recorded as goodwill. The goodwill as a result
of this acquisition is not expected to be deductible for tax purposes. In accordance with SFAS No.
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; margin-top: 6pt">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>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Note 5: Cash, Cash Equivalents and Investments</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">At March&nbsp;31, 2006 and December&nbsp;31, 2005, cash, cash equivalents and short-term investments are
summarized as follows (in thousands):
</DIV>

<P align="center" style="font-size: 10pt">7
</DIV>

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

<DIV style="font-family: 'Times New Roman',Times,serif">
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="76%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>March 31, 2006</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>December 31, 2005</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Cash and cash equivalents</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">41,123</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">37,818</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Short-term investments:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Less than one year</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">61,696</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">56,605</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Due in 1-2&nbsp;years</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">5,739</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">16,405</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Total short-term investments</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">67,435</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">73,010</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Total cash, cash equivalents and
short-term investments</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">108,558</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">110,828</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">The following is a summary of available-for-sale securities (in thousands).
</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="52%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>Gross</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>Gross</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>Amortized</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>Unrealized</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>Unrealized</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>Estimated</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>Cost</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>Gains</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>Losses</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>Fair Value</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:45px; text-indent:-15px"><B>March&nbsp;31, 2006</B></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">U.S. government debt securities</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">28,131</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right"><FONT style="font-family: Symbol">&#190;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(152</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">27,979</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Corporate debt securities</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">30,531</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><FONT style="font-family: Symbol">&#190;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(125</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">30,406</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Other debt securities</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">9,050</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><FONT style="font-family: Symbol">&#190;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><FONT style="font-family: Symbol">&#190;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">9,050</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:60px; text-indent:-15px">Total</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">67,712</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right"><FONT style="font-family: Symbol">&#190;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(277</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">67,435</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px"><B>December&nbsp;31, 2005</B></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">U.S. government debt securities</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">20,264</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right"><FONT style="font-family: Symbol">&#190;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(146</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">20,118</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Corporate debt securities</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">46,873</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(209</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">46,667</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Other debt securities</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">6,225</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><FONT style="font-family: Symbol">&#190;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><FONT style="font-family: Symbol">&#190;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">6,225</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:60px; text-indent:-15px">Total</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">73,362</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">3</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(355</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">73,010</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><I>Impairment of Investments</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">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; margin-top: 6pt">In accordance with FASB Staff Position Nos. 115-1 and FAS 124-1, &#147;The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments&#148; (&#147;FSP FAS 115-1&#148;), the
following table summarizes the fair value and gross 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 March&nbsp;31, 2006 (in thousands):
</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="28%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="6" style="border-bottom: 1px solid #000000"><B>Less than 12 months</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="6" style="border-bottom: 1px solid #000000"><B>Greater than 12 months</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="6" style="border-bottom: 1px solid #000000"><B>Total</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>Gross</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>Gross</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>Gross</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>Unrealized</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>Unrealized</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>Unrealized</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>Fair Value</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>Losses</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>Fair Value</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>Losses</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>Fair Value</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>Losses</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">U.S.
Government debt
securities</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">11,399</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(74</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">16,564</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(78</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">27,963</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(152</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Corporate debt
securities</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">13,758</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(74</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">15,969</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(51</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">29,727</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(125</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Total</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">25,157</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(148</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">32,533</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(129</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">57,690</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(277</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<P align="center" style="font-size: 10pt">8
</DIV>

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

<DIV style="font-family: 'Times New Roman',Times,serif">


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">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 align="left" style="font-size: 10pt; margin-top: 12pt"><B>Note 6: Inventories</B>
</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="76%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>March 31,</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>December 31,</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD nowrap align="left"><B>(In thousands)</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>2006</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>2005</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Raw materials</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">12,687</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">14,392</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Work-in-process</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,955</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4,131</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Finished goods</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">16,566</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">20,029</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">31,208</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">38,552</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Note 7: Goodwill and Identified Intangibles</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">The following is a summary of goodwill and intangible assets as of March&nbsp;31, 2006 and December&nbsp;31,
2005 (in thousands):
</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="28%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="10" style="border-bottom: 1px solid #000000"><B>March 31, 2006</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="10" style="border-bottom: 1px solid #000000"><B>December 31, 2005</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>Gross</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>Net</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>Carrying</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>Accumulated</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>Net Carrying</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>Gross Carrying</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>Accumulated</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>Carrying</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>Amount *</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>Amortization</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>Amount</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>Amount</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>Amortization</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>Amount</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Identified intangibles:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Developed core technology</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">29,684</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(28,478</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">1,206</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">29,663</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(28,315</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">1,348</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Customer base</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">31,904</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(31,904</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">31,904</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(31,904</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Trademark and tradename</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4,194</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(4,194</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4,190</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(4,142</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">48</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Supply agreement</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,469</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(3,151</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">318</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,464</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(3,109</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">355</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Subtotal of
identified
intangibles</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">69,251</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(67,727</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,524</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">69,221</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(67,470</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,751</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Goodwill</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4,399</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4,399</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4,896</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4,896</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Total goodwill and other
intangibles</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">73,650</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(67,727</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">5,923</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">74,117</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(67,470</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">6,647</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>



<DIV align="left">
<DIV style="font-size: 3pt; margin-top: 16pt; width: 18%; border-top: 1px solid #000000">&nbsp;</DIV>
</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">
<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96"></TD>
</TR>

<TR valign="top">
    <TD nowrap align="left">*</TD>
    <TD>&nbsp;</TD>
    <TD>Foreign currency translation adjustments, reflecting movement in the currencies of
the underlying entities, totaled approximately $0.2 and $0.3&nbsp;million for intangible assets
and approximately $0.3 and $0.3&nbsp;million for goodwill as of March&nbsp;31, 2006 and December&nbsp;31,
2005, respectively.</TD>
</TR>

</TABLE>



<DIV align="left" style="font-size: 10pt; margin-top: 6pt">The acquisition of BTL resulted in an increase in goodwill and intangible assets of $3.5
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 align="left" style="font-size: 10pt; margin-top: 6pt">The changes in the carrying amount of goodwill for the three months ended March&nbsp;31, 2006 are as
follows (in thousands):
</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="88%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>Goodwill</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Balance as of January&nbsp;1, 2006</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">4,896</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Deferred
taxes related to BTL acquisition</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(531</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Foreign currency translation adjustments</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">34</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Balance as of March&nbsp;31, 2006</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">4,399</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>





<P align="center" style="font-size: 10pt">9
</DIV>

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

<DIV style="font-family: 'Times New Roman',Times,serif">






<DIV align="left" style="font-size: 10pt; margin-top: 6pt">For the three months ended March&nbsp;31, 2006, the Company recorded a total of $0.3&nbsp;million of
amortization expense for identified intangibles, of which $0.2&nbsp;million was included in cost of
sales. For the three months ended April&nbsp;1, 2005, the Company recorded a total of $1.7&nbsp;million of
amortization expense for identified intangibles, of which $0.8&nbsp;million was included in cost of
sales. The estimated future amortization expense of purchased intangible assets with definite lives
for the next three years is as follows (in thousands):
</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="88%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD nowrap align="left" style="border-bottom: 1px solid #000000"><B>Years Ending December 31,</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>Amounts</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">2006 (remaining 9&nbsp;months)</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">607</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">2007</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">786</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">2008</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">131</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Total</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">1,524</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Note 8: Restructuring and Excess Facilities</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">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 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; margin-top: 6pt">As of March&nbsp;31, 2006, accrued excess facilities cost totaled $22.4&nbsp;million of which $4.7&nbsp;million
was included in current accrued liabilities and $17.7&nbsp;million in other non-current liabilities. The
Company incurred cash outlays of $1.2&nbsp;million during the first three months of 2006 principally for
lease payments, property taxes, insurance and other maintenance fees related to vacated facilities.
Harmonic expects to pay approximately $3.6&nbsp;million of excess facility lease costs, net of estimated
sublease income, for the remainder of 2006 and to pay the remaining $18.8&nbsp;million, net of estimated
sublease income, over the remaining lease terms through September&nbsp;2010.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">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; margin-top: 6pt">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 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; margin-top: 6pt">The following table summarizes restructuring activities (in thousands):
</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="64%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>Workforce</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>Reduction</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>Excess Facilities</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>Total</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Balance at December&nbsp;31, 2005</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>$</TD>
    <TD align="right">635</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>$</TD>
    <TD align="right">23,576</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>$</TD>
    <TD align="right">24,211</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Provisions(recoveries)</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Cash payments, net of sublease income</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(577</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(1,194</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(1,771</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Balance at March&nbsp;31, 2006</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">58</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">22,382</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">22,440</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Note 9: Credit Facilities and Long-Term Debt</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">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&nbsp;2005, expires in December&nbsp;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
</DIV>

<P align="center" style="font-size: 10pt">10
</DIV>

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


<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">and payable and disposing of the collateral if obligations
were not repaid. At March&nbsp;31, 2006,
Harmonic was in compliance with the covenants under this line of credit facility. The December&nbsp;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 (7.75% at March&nbsp;31, 2006) 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 March&nbsp;31, 2006, $1.1&nbsp;million was outstanding under the equipment term loan portion of this
facility and there were no borrowings in 2005 or 2006. The term loan is repayable monthly,
including principal and interest at 8.25% per annum on outstanding borrowings as of March&nbsp;31, 2006
and matures at various dates through December&nbsp;2007. Other than standby letters of credit and
guarantees (Note 15), there were no other outstanding borrowings or commitments under the line of
credit facility as of March&nbsp;31, 2006.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Note 10: Benefit Plans</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><I>Stock Option Plans. </I>Harmonic has reserved 12,620,000 shares of Common Stock for issuance under
various employee stock option plans. The options are granted for periods not exceeding ten years
and generally vest 25% at one year from date of grant, and an additional 1/48 per month thereafter.
Stock options are granted at the fair market value of the stock at the date of grant. Beginning on
February&nbsp;27, 2006, option grants had a term of seven years.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><I>Director Option Plans. </I>In May&nbsp;2002, Harmonic&#146;s stockholders approved the 2002 Director Option Plan,
replacing the 1995 Director Option Plan. Harmonic has a total of 428,000 shares of Common Stock
reserved for issuance under the Director Plans. The Director Plans provide for the grant of
non-statutory stock options to certain non-employee directors of Harmonic pursuant to an automatic,
non-discretionary grant mechanism. Options are granted at the fair market value of the stock at the
date of grant for periods not exceeding ten years. Initial grants generally vest monthly over three
years, and subsequent grants generally vest monthly over one year.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">The following table summarizes activities under the Plans:
</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="64%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>Shares Available for</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>Stock Options</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>Weighted Average</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>Grant</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>Outstanding</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>Exercise Price</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="10"><B>(In thousands except exercise price)</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Balance at December&nbsp;31, 2005</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,984</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">9,064</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">13.05</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Options granted</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(1,443</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,443</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">5.86</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Options exercised</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(102</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3.47</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Options forfeited</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">708</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(708</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">12.28</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Options expired</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(44</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">34.50</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 0px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Balance at March&nbsp;31, 2006</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,249</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">9,653</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>$</TD>
    <TD align="right">12.04</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">The weighted-average fair value of options granted for the three months ended March&nbsp;31, 2006 was
$3.76.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">
We received $353,000 from the exercise of stock options during the
three months ended March 31, 2006. No income tax benefits have been
realized from exercised stock options due to the Company&#146;s
current loss position. The Company issues new shares of common stock
upon exercise of stock options.
</div>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">The following table summarizes information regarding stock options outstanding at March&nbsp;31, 2006:
</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="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="6" style="border-bottom: 1px solid #000000"><B>Stock Options Outstanding</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="10" style="border-bottom: 1px solid #000000"><B>Stock Options Exercisable</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>Weighted-Average</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>Number</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>Remaining</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>Number</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD nowrap align="left"><B>Range of Exercise</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>Outstanding</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>Contractual Life</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>Weighted-Average</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>Exercisable at</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>Weighted Average</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD nowrap align="left" style="border-bottom: 1px solid #000000"><B>Prices</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>at March 31, 2006</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>(Years)</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>Exercise Price</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>March 31, 2006</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>Exercise Price</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="17"><B>(In thousands, except exercise price and life)</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">

<TD align="left"><DIV style="margin-left:15px; text-indent:-15px">$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;1.75&nbsp;&nbsp;&nbsp;&nbsp;
&#150;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;5.82</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,219</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">6.8</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">3.80</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">862</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">3.64</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">

<TD align="left"><DIV style="margin-left:48px; text-indent:-15px">5.84&nbsp;&nbsp;&nbsp;
&#150;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;5.87</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,391</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">7.8</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">5.87</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">5.85</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">

<TD align="left"><DIV style="margin-left:48px; text-indent:-15px">5.88&nbsp;&nbsp;&nbsp;
&#150;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;8.93</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,582</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">6.4</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">8.11</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,151</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">7.97</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">

<TD align="left"><DIV style="margin-left:48px; text-indent:-15px">9.00&nbsp;&nbsp;&nbsp;
&#150;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;9.29</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,232</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">5.7</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">9.17</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,071</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">9.15</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">

<TD align="left"><DIV style="margin-left:42px; text-indent:-15px">&nbsp;&nbsp;9.37&nbsp;&nbsp;&nbsp;
&#150;&nbsp;&nbsp;&nbsp;&nbsp;11.50</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,271</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">5.2</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">10.45</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,240</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">10.44</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">

<TD align="left"><DIV style="margin-left:36px; text-indent:-15px">&nbsp;&nbsp;11.53&nbsp;&nbsp;&nbsp;
&#150;&nbsp;&nbsp;&nbsp;&nbsp;23.57</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,170</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4.2</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">21.93</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,161</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">22.01</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">

<TD align="left"><DIV style="margin-left:30px; text-indent:-15px">&nbsp;&nbsp;&nbsp;&nbsp;23.75&nbsp;&nbsp;&nbsp;
&#150;&nbsp;&nbsp;121.68</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">787</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3.4</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">43.86</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">787</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">43.86</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">9,652</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">6.0</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">12.04</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">6,273</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">15.16</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Aggregate
pre-tax intrinsic value of options outstanding and exercisable at
March&nbsp;31, 2006 was $4.4&nbsp;million and $2.4&nbsp;million,
respectively. Aggregate pre-tax intrinsic value represents the
difference between our closing stock price on the last trading day of
the fiscal period, which was $6.37 as of March&nbsp;31, 2006, and the
exercise price multiplied by the number of options outstanding or
exercisable. Total pre-tax intrinsic value of options exercised was
$0.1&nbsp;million for the three month period March&nbsp;31,
2006.</DIV>

<P align="center" style="font-size: 10pt">11
</DIV>

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

<DIV style="font-family: 'Times New Roman',Times,serif">


<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><I>Employee Stock Purchase Plan. </I>In May&nbsp;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&nbsp;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 shares
to 3,500,000 shares. The 2002 Purchase Plan enables employees to purchase shares at 85% of the fair
market value of the Common Stock at the beginning of the offering period or end of the purchase
period, whichever is lower. Each offering period has a maximum duration of two years and consists
of four six-month purchase periods. Offering periods and purchase periods generally begin on the
first trading day on or after January 1 and July 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 the first three months of 2006 and the years 2005 and 2004, the number of shares of stock
issued under the purchase plans were 411,324, 705,171 and 774,683 shares at weighted average prices
of $4.18, $5.05 and $2.32, respectively. The weighted-average fair value of each right to purchase
shares of common stock granted under the purchase plans were $1.70, $1.82 and $2.68 for the first
three months of 2006 and the years 2005 and 2004, respectively. At March&nbsp;31, 2005, 884,017 shares
were reserved for future issuances under the 2002 Purchase Plan.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><I>Retirement/Savings Plan. </I>Harmonic has a retirement/savings plan which qualifies as a thrift plan
under Section 401(k) of the Internal Revenue Code. This plan allows participants to contribute up
to 20% of total compensation, subject to applicable Internal Revenue Service limitations. Harmonic
makes discretionary contributions to the plan of 25% of the first 4% contributed by eligible
participants up to a maximum contribution per participant of $750 per year. This amount has been
increased to $1,000 effective January&nbsp;1, 2006. Such amounts totaled $0.1&nbsp;million in the first three
months of 2006.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><I>Stock-based Compensation</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">The following table summarizes the impact of SFAS 123(R) on stock-based compensation
costs for employees on our Condensed Consolidated Statements of Operations for the three months
ended March&nbsp;31, 2006 :
</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="87%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left" colspan="2" style="border-bottom: 1px solid #000000"><B>Three Months Ended</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD nowrap align="left" style="border-bottom: 0px solid #000000"><B>(In thousands)</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>March 31, 2006</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Employee stock-based compensation in:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Cost of sales</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">274</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Research and development expense</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">522</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Sales, general and administrative expense</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">830</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Total employee stock-based compensation in operating expense</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,352</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Total employee stock-based compensation expense</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,626</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Amount capitalized in inventory</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">42</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Total other
stock-based compensation expense</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Total stock-based compensation</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">1,669</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>



<DIV align="left">
<DIV style="font-size: 3pt; margin-top: 16pt; width: 18%; border-top: 1px solid #000000">&nbsp;</DIV>
</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">
<TR>
    <TD width="100%"></TD>
</TR>

<TR valign="top">
    <TD>Other stock-based compensation represents charges related to non-employee stock
options. No income tax benefit has been recognized relating to
stock-based compensation expense during the three months ended March
31, 2006.</TD>
</TR>

</TABLE>



<DIV align="left" style="font-size: 10pt; margin-top: 6pt">The table below reflects net income (loss)&nbsp;and net income (loss)&nbsp;per share for the three months
ended March&nbsp;31, 2006, compared with pro forma information for the three months ended April&nbsp;1, 2005
(in thousands, except per share amounts):
</DIV>

<P align="center" style="font-size: 10pt">12
</DIV>

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

<DIV style="font-family: 'Times New Roman',Times,serif">
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="76%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="7" style="border-bottom: 1px solid #000000"><B>Three Months Ended</B></TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>March 31, 2006</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>April 1, 2005</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>(pro forma)</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Net income (loss), before stock-based compensation for
employees, prior period</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">N/A</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">1,706</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Less: Stock-based compensation expense previously determined
under fair value based method, net of related tax effects</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(1,626</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(2,182</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Net loss, after effect of stock-based compensation for employees</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(5,147</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(476</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Net income (loss)&nbsp;per share:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Basic &#150; as reported for prior period</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">N/A</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">0.02</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Basic &#150; after effect of stock-based compensation for employees</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(0.07</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(0.01</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Diluted &#150; as reported for prior period</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">N/A</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">0.02</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Diluted &#150; after effect of stock-based compensation for employees</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(0.07</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(0.01</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">
As of March 31, 2006, total unamortized stock-based compensation cost
related to non-vested stock options was $8.0 million which is expected
to be recognized over the remaining vesting period of each grant, up
to the next 48 months.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">The fair
value of each option grant is estimated on the date of grant using
the Black-Scholes-Merton
multiple option pricing model with the following weighted average assumptions:
</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="52%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="7" style="border-bottom: 1px solid #000000"><B>Employee Stock Options</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="7" style="border-bottom: 1px solid #000000"><B>Employee Stock Purchase Plan</B></TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3"><B>2006</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3"><B>2005</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3"><B>2006</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3"><B>2005</B></TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Expected life (years)</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4.7</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3.6</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">0.8</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">0.8</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Volatility</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">77</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">96</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">69</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">69</TD>
    <TD nowrap>%</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Risk-free interest rate</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">4.5</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">3.8</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">3.7</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">3.7</TD>
    <TD nowrap>%</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Dividend yield</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">0.0</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">0.0</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">0.0</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">0.0</TD>
    <TD nowrap>%</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">The expected term for employee stock options and the ESPP represents the weighted-average period
that the stock options are expected to remain outstanding. We derived
the expected term using the simplified method included in SAB 107. As alternative sources of data become available in order to determine
the expected term we will incorporate these data into our assumption.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">We use the historical volatility over the expected term of the options and the ESPP offering period
to estimate the expected volatility. We believe that the historical volatility, at this time,
represents fairly the future volatility of its common stock. We will continue to monitor relevant
information to measure expected volatility for future option grants and ESPP offering periods.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">The risk-free interest rate assumption is based upon observed interest rates appropriate for the
term of our employee stock options. The dividend yield assumption is based on our history and
expectation of dividend payouts.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Note 11: Net Income (Loss) Per Share</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Basic net
income (loss) per share is computed by dividing the net income/(loss) attributable to
common stockholders for the period by the weighted average number of the common shares outstanding
during the period. The diluted net loss per share is the same as basic net loss per share for the
three months ended March&nbsp;31, 2006 because potential common shares, such as common shares issuable
upon the exercise of stock options, are only considered when their effect would be dilutive. During
the three months ended March&nbsp;31, 2006 and April&nbsp;1, 2005,
10.5&nbsp;million and 3.9&nbsp;million,
respectively, of potentially dilutive shares, consisting of options, were excluded from the net
income (loss)&nbsp;per share computations, because their effect was antidilutive.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Following is a reconciliation of the numerators and denominators of the basic and diluted net loss
per share computations (in thousands, except per share data):
</DIV>

<P align="center" style="font-size: 10pt">13
</DIV>

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

<DIV style="font-family: 'Times New Roman',Times,serif">
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="76%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="6" style="border-bottom: 1px solid #000000"><B>Three Months Ended</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>March 31, 2006</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>April 1, 2005</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Net income (loss) (numerator)</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(5,147</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">1,706</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Shares calculation (denominator):</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Weighted average shares outstanding &#151; basic</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">74,102</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">72,839</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Effect of Dilutive Securities:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Potential Common Stock relating to stock
options</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,536</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Average shares outstanding &#151; diluted</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">74,102</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">74,375</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Net income (loss)&nbsp;per share &#151; basic</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(0.07</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">0.02</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Net income (loss)&nbsp;per share &#151; diluted</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(0.07</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">0.02</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Note 12: Comprehensive Income/(Loss)</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">The Company&#146;s total comprehensive income/(loss) was as follows (in thousands):
</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="76%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="6" style="border-bottom: 1px solid #000000"><B>Three Months Ended</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>March 31, 2006</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>April 1, 2005</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Net income/(loss)</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(5,147</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">1,706</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Change in unrealized gain/(loss)
on investments, net</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(46</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(94</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Foreign currency translation</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(25</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">19</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Total comprehensive income/(loss)</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(5,218</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">1,631</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Note 13: Segment Information</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">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. Previously, the Company was organized into two operating segments: BAN, for fiber optic
systems, and CS, for digital headend systems. Each segment had its own management team directing
its product development, marketing strategies and its customer service requirements. A separate
sales force generally supported both segments with appropriate product and market specialization as
required.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">The Company restructured its CS and BAN segments into one consolidated group in the fourth quarter
of 2005 and effective as of January&nbsp;1, 2006 no longer has two operating segments. The restructuring
involved merging the manufacturing operations, research and development, and marketing departments
into one segment.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><I>Geographic Information (in thousands):</I>
</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="76%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="6" style="border-bottom: 1px solid #000000"><B>Three Months Ended</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>March 31, 2006</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>April 1, 2005</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Net sales:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">United States</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">25,653</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">46,374</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">International</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">30,568</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">26,541</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Total</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">56,221</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">72,915</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Note 14: Related Party</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">A director
of Harmonic is also a director of Terayon Communications, from which the Company
purchases products for resale. Product purchases from Terayon were approximately $0.6&nbsp;million and
$8.8&nbsp;million, for the three months ended March&nbsp;31, 2006 and April&nbsp;1, 2005, respectively. As of
March&nbsp;31, 2006 and December&nbsp;31, 2005, Harmonic had liabilities to Terayon of approximately $0.5
million and $0.7&nbsp;million, respectively, for inventory purchases.
</DIV>

<P align="center" style="font-size: 10pt">14
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Note 15: Guarantees</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><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 specified warranty claims. Activity for the
Company&#146;s warranty accrual, which is included in accrued liabilities is summarized below (in
thousands):
</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="76%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="6" style="border-bottom: 1px solid #000000"><B>Three Months Ended</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>March 31, 2006</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>April 1, 2005</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Balance at beginning of the period</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">6,166</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">5,429</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Accrual for warranties</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,042</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,400</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Warranty costs incurred</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(1,150</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(1,242</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">BTL acquisition</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">21</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Balance at end of the period</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">6,058</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">5,608</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><I>Standby Letters of Credit. </I>As of March&nbsp;31, 2006 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 $0.8&nbsp;million.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><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 March&nbsp;31, 2006.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><I>Guarantees. </I>As of March&nbsp;31, 2006, Harmonic had no other guarantees outstanding.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Note 16: Legal Proceedings</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Between June&nbsp;28 and August&nbsp;25, 2000, several actions alleging violations of the federal securities
laws by Harmonic and certain of its officers and directors (some of whom are no longer with
Harmonic) were filed in or removed to the United States District Court (the &#147;District Court&#148;) for
the Northern District of California. The actions subsequently were consolidated.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">A consolidated complaint, filed on December&nbsp;7, 2000, was brought on behalf of a purported class of
persons who purchased Harmonic&#146;s publicly traded securities between January&nbsp;19 and June&nbsp;26, 2000.
The complaint also alleged claims on behalf of a purported subclass of persons who purchased C-Cube
securities between January&nbsp;19 and May&nbsp;3, 2000. In addition to Harmonic and certain of its officers
and directors, the complaint also named C-Cube Microsystems Inc. and several of its officers and
directors as defendants. The complaint alleged that, by making false or misleading statements
regarding Harmonic&#146;s prospects and customers and its acquisition of C-Cube, certain defendants
violated sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the &#147;Exchange Act&#148;). The
complaint also alleged that certain defendants violated section 14(a) of the Exchange Act and
sections 11, 12(a)(2), and 15 of the Securities Act of 1933 (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; margin-top: 6pt">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 59(e) and 15(a) of the Federal Rules of Civil Procedure. On June&nbsp;6,
</DIV>

<P align="center" style="font-size: 10pt">15
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">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; margin-top: 6pt">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; margin-top: 6pt">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. On April&nbsp;19, 2006, the District
Court issued an order setting forth the schedule for filing and
responding to the Third Amended Complaint. Under that schedule,
plaintiffs will file their Third Amended Complaint by May&nbsp;17,
2006, and defendants will respond by June&nbsp;15, 2006.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">A derivative action purporting to be on behalf of Harmonic was filed against its then-current
directors in the Superior Court for the County of Santa Clara on September&nbsp;5, 2000. Harmonic also
was named as a nominal defendant. The complaint is based on allegations similar to those found in
the securities class action and claims that the defendants breached their fiduciary duties by,
among other things, causing Harmonic to violate federal securities laws. The derivative action was
removed to the United States District Court for the Northern District of California on September
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 until fourteen days after (1)&nbsp;defendants provide plaintiff with a copy
of the mandate issued by the Ninth Circuit in the securities action or (2)&nbsp;either party provides
written notice of termination of the tolling period, whichever is
first. Defendants have notified plaintiff of the Ninth
Circuit&#146;s mandate.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">A second derivative action purporting to be on behalf of Harmonic was filed in the Superior Court
for the County of Santa Clara on May&nbsp;15, 2003. It alleges facts similar to those previously alleged
in the securities class action and the federal derivative action. The complaint names as defendants
former and current Harmonic officers and directors, along with former officers and directors of
C-Cube Microsystems, Inc., who were named in the securities class action. The complaint also names
Harmonic as a nominal defendant. The complaint alleges claims for abuse of control, gross
mismanagement, and waste of corporate assets against the Harmonic defendants, and claims for breach
of fiduciary duty, unjust enrichment, and negligent misrepresentation against all defendants. On
July&nbsp;22, 2003, the Court approved the parties&#146; stipulation to stay the case pending resolution of
the appeal in the securities class action. Following the issuance of
the Ninth Circuit&#146;s mandate the Harmonic
and C-Cube defendants filed demurrers to this derivative complaint on
May&nbsp;9, 2006.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">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; margin-top: 6pt">On July&nbsp;3, 2003, Stanford University and Litton Systems filed a complaint in U.S. District Court
for the Central District of California alleging that optical fiber amplifiers incorporated into
certain of Harmonic&#146;s products infringe U.S. Patent No.&nbsp;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
</DIV>

<P align="center" style="font-size: 10pt">16
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">



<DIV align="left" style="font-size: 10pt; margin-top: 6pt">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; margin-top: 6pt">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">
<A name="107"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Item&nbsp;2. </B><B><I>Management&#146; s Discussion and Analysis of Financial Condition and Results of Operations</I></B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of
Section&nbsp;27A of the Securities Act of 1933 and Section&nbsp;21E of the Securities Exchange Act of 1934,
including statements regarding our expectations of continued customer concentration; our
expectations regarding future sales for a major telecommunications operator; our expectations that
sales to cable television, satellite and telecommunications operators will constitute a significant
portion of net sales for the foreseeable future; our expectation that international sales will
continue to account for a significant portion of our net sales for the foreseeable future; our
expectations regarding our capital expenditures during the remainder of 2006; our expectations
regarding the amount of amortization expense we will incur during the remainder of 2006; our
expectation that near-term changes in foreign exchange rates will not have a material impact on our
operating results, financial position and liquidity; our belief that any ultimate liability of
Harmonic with respect to certain litigation arising in the normal course of business will not, in
the aggregate, have a material adverse effect on us or our operating results, financial position or
cash flows; our belief that our existing liquidity sources will satisfy our cash requirement for at
least the next 12&nbsp;months; and our expectation that operating results are likely to fluctuate in the
future. These statements involve risks and uncertainties as well as assumptions that, if they were
to never materialize or prove incorrect, could cause actual results to differ materially from those
projected, expressed or implied in the forward-looking statements. These risks and uncertainties
include those set forth under &#147;Risk Factors&#148; below and elsewhere in this Quarterly Report on Form
10-Q and that are otherwise described from time to time in Harmonic&#146;s filings with the Securities
and Exchange Commission.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Overview</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Harmonic designs, manufactures and sells products for video processing, 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>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">These products and services enable network operators to provide a range of interactive and advanced
digital services that include digital video, video-on-demand (VOD), high-definition television
(HDTV), high-speed Internet access and telephony. They 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; margin-top: 6pt">The sequential increases in net sales in 2005 and 2004 that Harmonic experienced reflected an
improved industry capital spending environment worldwide which favorably impacted us. 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; margin-top: 6pt">In the first quarter of 2006, Harmonic&#146;s net sales decreased 12% on a sequential basis compared to
the fourth quarter of 2005 and by 23% compared to the first quarter of 2005. We believe that the
sequential decrease from the fourth
</DIV>

<P align="center" style="font-size: 10pt">17
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">



<DIV align="left" style="font-size: 10pt; margin-top: 6pt">quarter of 2005 reflects the seasonal nature of the cable business in the U.S. and lower revenue
from Verizon. The Company does not expect to have significant revenue from Verizon after the second
quarter of 2006. The decrease in net sales in the first quarter of 2006 compared to the first
quarter of 2005 was due to the significant amount of third party products sold to our end customers
in the first quarter of 2005. 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; margin-top: 6pt">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; margin-top: 6pt">Historically, a majority of our net sales have been to relatively few customers, and due in part to
the consolidation of ownership of cable television and direct broadcast satellite systems, we
expect this customer concentration to continue for the foreseeable future. In the first quarter of
2006, sales to Comcast accounted for 11% of net sales. In the first quarter of 2005, sales to
Comcast and Charter Communications accounted for 35% and 10% of net sales, respectively.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Sales to customers outside of the U.S. in the first quarter of 2006 and the full year of 2005
represented 54% and 40% of net sales, respectively. A significant portion of international sales
are made to distributors and system integrators, which are generally responsible for importing the
products and providing installation and technical support and service to customers within their
territory. Sales denominated in foreign currencies were approximately 9% and 7% of net sales in the
first quarter of 2006 and the full year of 2005, respectively. We expect international sales to
continue to account for a significant portion of our net sales for the foreseeable future.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">In the fourth quarter of 2005, Harmonic announced a restructuring that combined our product
development, marketing and manufacturing operations and resulted in the BAN and CS operating
segments being combined into a single segment, effective January&nbsp;1, 2006. In connection with this
restructuring, Harmonic reduced its workforce by approximately 40 employees and recorded an expense
of $1.1&nbsp;million for severance costs related to the restructuring.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">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 square feet of space in 2004 and
approximately 30,000 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; margin-top: 6pt">On February&nbsp;25, 2005, Harmonic purchased all of the issued and outstanding shares of Broadcast
Technology Ltd., a private UK 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 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; margin-top: 12pt"><B>Critical Accounting Policies, Judgments and Estimates</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">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.
</DIV>

<P align="center" style="font-size: 10pt">18
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Our significant accounting policies are described in Note 1 to the annual consolidated financial
statements as of and for the year ended December&nbsp;31, 2005, included in our Annual Report on Form
10-K filed with the SEC on March&nbsp;14, 2006 and notes to condensed consolidated financial statements
as of and for the three month period ended March&nbsp;31, 2006, included herein. Our most critical
accounting policies have not changed since December&nbsp;31, 2005 and include the following:
</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="3%" nowrap align="left"><FONT style="font-family: wingdings">&#167;</FONT></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Revenue recognition;</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="3%" nowrap align="left"><FONT style="font-family: wingdings">&#167;</FONT></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Allowances for doubtful accounts, returns and discounts;</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="3%" nowrap align="left"><FONT style="font-family: wingdings">&#167;</FONT></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Valuation of inventories;</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="3%" nowrap align="left"><FONT style="font-family: wingdings">&#167;</FONT></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Impairment of long-lived assets;</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="3%" nowrap align="left"><FONT style="font-family: wingdings">&#167;</FONT></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Restructuring costs and accruals for excess facilities;</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="3%" nowrap align="left"><FONT style="font-family: wingdings">&#167;</FONT></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Assessment of the probability of the outcome of current litigation; 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="3%" nowrap align="left"><FONT style="font-family: wingdings">&#167;</FONT></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Accounting for income taxes.</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="3%" nowrap align="left"><FONT style="font-family: wingdings">&#167;</FONT></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Stock-based compensation</TD>
</TR>

</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Our accounting policy for stock-based compensation for employee stock-based awards was recently
modified due to the adoption of SFAS 123(R) and is described below.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><I>Stock-Based Compensation</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">On January&nbsp;1, 2006, the Company adopted Statement of Financial Accounting Standards No.&nbsp;123(R),
&#147;Share-Based Payment,&#148; (&#147;SFAS 123(R)&#148;) which requires the measurement and recognition of
compensation expense for all share-based payment awards made to employees and directors, including
employee stock options and employee stock purchases related to our Employee Stock Purchase Plan
(&#147;ESPP&#148;) based upon the grant-date fair value of those awards. SFAS 123(R) supersedes the Company&#146;s
previous accounting under Accounting Principles Board Opinion No.&nbsp;25, &#147;Accounting for Stock Issued
to Employees&#148; (&#147;APB 25&#148;) and related interpretations, and provided the required pro forma
disclosures prescribed by Statement of Financial Accounting Standards No.&nbsp;123, &#147;Accounting for
Stock-Based Compensation,&#148; (&#147;SFAS 123&#148;) as amended. In addition, we have applied the provisions of
Staff Accounting Bulletin No.&nbsp;107 (&#147;SAB 107&#148;), issued by the Securities and Exchange Commission, in
our adoption of SFAS No.&nbsp;123(R).
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">The Company adopted SFAS 123(R) using the modified-prospective transition method, which requires
the application of the accounting standard as of January&nbsp;1, 2006, the first day of the Company&#146;s
fiscal year 2006. The Company&#146;s Condensed Consolidated Financial Statements as of and for the three
months ended March&nbsp;31, 2006 reflect the impact of SFAS 123(R). In accordance with the modified
prospective transition method, the Company&#146;s Condensed Consolidated Financial Statements for prior
periods have not been restated to reflect, and do not include, the impact of SFAS 123(R).
Stock-based compensation expense recognized under SFAS 123(R) for the three months ended March&nbsp;31,
2006 was $1.6&nbsp;million which consisted of stock-based compensation expense related to employee
equity awards and employee stock purchases. There was no stock-based compensation expense related
to employee equity awards and employee stock purchases recognized during the three months ended
April&nbsp;1, 2005.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">SFAS 123(R) requires companies to estimate the fair value of share-based payment awards on the date
of grant using an option-pricing model. The value of the portion of the award that is ultimately
expected to vest is recognized as expense over the requisite service period in the Company&#146;s
Condensed Consolidated Statement of Operations. Prior to the adoption of SFAS 123(R), the Company
accounted for employee equity awards and employee stock purchases using the intrinsic value method
in accordance with APB 25 as allowed under SFAS 123. Under the intrinsic value method, no
stock-based compensation expense had been recognized in the Company&#146;s Condensed Consolidated
Statement of Operations because the exercise price of the Company&#146;s stock options granted to
employees and directors equaled the fair market value of the underlying stock at the date of grant.
</DIV>

<P align="center" style="font-size: 10pt">19
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Stock-based compensation expense recognized during the period is based on the value of the portion
of share-based payment awards that is ultimately expected to vest during the period. Stock-based
compensation expense recognized in the Company&#146;s Condensed Consolidated Statement of Operations for
the three months ended March&nbsp;31, 2006 included compensation expense for share-based payment awards
granted prior to, but not yet vested as of December&nbsp;31, 2005 based on the grant date fair value
estimated in accordance with the pro forma provisions of SFAS 123 and compensation expense for the
share-based payment awards granted subsequent to December&nbsp;31, 2005 based on the grant date fair
value estimated in accordance with the provisions of SFAS 123(R). In conjunction with the adoption
of SFAS 123(R), the Company changed its method of attributing the value of stock-based compensation
costs to expense from the accelerated multiple-option method to the straight-line single-option
method. Compensation expense for all share-based payment awards granted on or prior to December&nbsp;31,
2005 will continue to be recognized using the accelerated approach while compensation expense for
all share-based payment awards related to stock options and employee stock purchase rights granted
subsequent to December&nbsp;31, 2005 are recognized using the straight-line method.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">As stock-based compensation expense recognized in our results for the first quarter of fiscal year
2006 is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures.
SFAS 123(R) requires forfeitures to be estimated at the time of grant and revised, if necessary, in
subsequent periods if actual forfeitures differ from those estimates. Prior to fiscal year 2006, we
accounted for forfeitures as they occurred for the purposes of pro forma information under SFAS
123, as disclosed in our Notes to Consolidated Financial Statements for the related periods.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">The fair value of share-based payment awards is estimated at grant date using a
Black-Scholes-Merton option pricing model. The Company&#146;s determination of fair value of share-based
payment awards on the date of grant using an option-pricing model is affected by the Company&#146;s
stock price as well as the assumptions regarding a number of highly complex and subjective
variables. These variables include, but are not limited to, the Company&#146;s expected stock price
volatility over the term of the awards, and actual and projected employee stock option exercise
behaviors.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Harmonic currently does not expect to receive any tax benefits in fiscal 2006 for any expense
deductions resulting from expensing of stock options or shares issued under its ESPP plan. Harmonic currently provides a
valuation allowance for most of its deferred tax assets, and a valuation allowance has also been
provided for any tax effects of stock-based compensation expense pursuant to SFAS 123(R).
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Also see Note 10 to the Condensed Consolidated Financial Statements on Stock-Based Compensation.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Results of Operations</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Harmonic&#146;s historical consolidated statements of operations data for the first quarter of 2006
and 2005 as a percentage of net sales, are as follows:
</DIV>

<P align="center" style="font-size: 10pt">20
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="76%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="7" style="border-bottom: 1px solid #000000"><B>Three Months Ended</B></TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3"><B>March 31,</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 0px solid #000000"><B>April 1, </B></TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>2006</B></TD>
    <TD>&nbsp;</TD>

<TD align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>2005</B></TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Net sales</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">100</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">100</TD>
    <TD nowrap>%</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Cost of sales</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">65</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">63</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Gross profit</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">35</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">37</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Operating expenses:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Research and development</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">18</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">13</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Selling, general and administrative</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">28</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">21</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Amortization of intangibles</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><FONT style="font-family: Symbol">&#190;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Total operating expenses</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">46</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">35</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Income (loss)&nbsp;from operations</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(11</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Interest and other income (expense), net</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><FONT style="font-family: Symbol">&#190;</FONT></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Income (loss)&nbsp;before income taxes</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(9</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Provision for (benefit from) income taxes</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><FONT style="font-family: Symbol">&#190;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><FONT style="font-family: Symbol">&#190;</FONT></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Net income (loss)</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(9</TD>
    <TD nowrap>)%</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">2</TD>
    <TD nowrap>%</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><I>Net Sales &#151; Consolidated</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Harmonic&#146;s consolidated net sales in the first quarter of 2006 compared with the corresponding
period in 2005 is presented in the table below. Also presented is the related dollar and percentage
increase (decrease)&nbsp;in consolidated net sales in the first quarter of 2006 compared with the
corresponding period in 2006 (in thousands, except percentages).
</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="76%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="6" style="border-bottom: 1px solid #000000"><B>Three Months Ended</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD nowrap align="left" style="border-bottom: 1px solid #000000"><B>Product Sales Data:</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>March 31, 2006</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>April 1, 2005</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Video Processing</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">19,685</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">43,731</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Edge and Access</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">28,452</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">21,240</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Software, Support and Other</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">8,084</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">7,944</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Net sales</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">56,221</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">72,915</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Video Processing decrease</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(24,046</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Edge and Access increase</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">7,212</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Software,
Support and Other increase</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">140</TD>
    <TD nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Total decrease</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(16,694</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Video Processing percent change</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(55.0</TD>
    <TD nowrap>)%</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Edge and Access percent change</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">34.0</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Software, Support and Other percent
change</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">1.8</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Total percent change</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(22.9</TD>
    <TD nowrap>)%</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Net sales decreased in the first quarter of 2006 compared to the same period of 2005 principally
due to weaker spending by domestic cable customers for major digital headend projects and the
decrease in the sale of third party products to our end customers. In the video processing product
line, encoder sales were lower by approximately $12.2&nbsp;million in the first quarter of 2006 compared
to the same period in the prior year due to lower spending for major digital headend projects by
domestic cable companies. In addition, sales of third party products to end customers decreased by
approximately $9.8&nbsp;million in the first quarter of 2006 compared to the same period in 2005. The
edge and access products line experienced a significant increase in telco revenue in the first
quarter of 2006 compared to the first quarter of 2005 as telcos continue to introduce and expand
video and other services, primarily in the U.S. and European markets. We also experienced an
increase in sales of VOD products.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><I>Net Sales &#151; Geographic</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Harmonic&#146;s domestic and international net sales in the first quarter of 2006 compared with the
corresponding period
</DIV>

<P align="center" style="font-size: 10pt">21
</DIV>

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

<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">in 2005 are presented in the table below. Also presented is the related dollar and percentage
increase (decrease)&nbsp;in domestic and international net sales in the first quarter of 2006 compared
with the corresponding period in 2005 (in thousands, except percentages).
</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="76%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="6" style="border-bottom: 1px solid #000000"><B>Three Months Ended</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD nowrap align="left" style="border-bottom: 0px solid #000000"><B>Geographic Sales Data:</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>March 31, 2006</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>April 1, 2005</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">U.S.</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">25,653</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">46,374</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">International</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">30,568</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">26,541</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Net sales</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">56,221</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">72,915</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">U.S. decrease</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(20,721</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">International increase</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4,027</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Total decrease</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(16,694</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">U.S. percent change</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(44.7</TD>
    <TD nowrap>)%</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">International percent change</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">15.2</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Total percent change</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(22.9</TD>
    <TD nowrap>)%</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">The decreased U.S. sales in the first quarter of 2006 compared to the corresponding period in 2005
was principally due to fewer sales of third party products to end customers and weaker spending by
domestic cable customers for major digital headend projects. Partially offsetting the decreased
revenue was sales of optical products for fiber-to-the-premises, or FTTP,
projects to a domestic telco in the first quarter of 2006, which was
not a significant customer in the first
quarter of 2005. However, sales to this customer in the first quarter of 2006 were lower than the previous two quarters.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">International sales in the first quarter of 2006 increased significantly compared to the
corresponding period in 2005 primarily due to sales to telcos in the European market. The increased
international sales in the first quarter of 2006 as compared to the same period of 2005, was also
due to increased international capital spending primarily in Europe and Asia. As a result of these
factors, we expect that international sales will continue to account for a significant portion of
our net sales for the foreseeable future.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><I>Gross Profit</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Harmonic&#146;s gross profit and gross profit as a percentage of consolidated net sales in the first
quarter of 2006 as compared with the corresponding prior year period of 2005 are presented in the
tables below. Also presented is the related dollar and percentage increase in gross profit in the
first quarter of 2006 as compared with the corresponding period of 2005 (in thousands, except
percentages).
</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="76%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="7" style="border-bottom: 1px solid #000000"><B>Three Months Ended</B></TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>March 31, 2006</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>April 1, 2005</B></TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Gross profit</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">19,880</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">27,047</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">As a % of net sales</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">35.4</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">37.1</TD>
    <TD nowrap>%</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Decrease</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">$</TD>
    <TD align="right">(7,167</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Percent change</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(26.5</TD>
    <TD nowrap>)%</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">The decrease in gross profit in the first quarter of 2006 as compared to the corresponding period
of 2005 was primarily due to lower sales, increased expense from the write-down of cost for
obsolete and excess inventories of $0.9&nbsp;million, and stock-based compensation expense of $0.3
million. The gross margin percentage of 35.4% in the first quarter of 2006 compared to 37.1% in the
first quarter of 2005 was lower primarily due to low gross margin on certain product sales to
telcos, the expense from the write-down of cost for obsolete and excess inventories, and the
stock-based compensation expense, which was partially offset by lower sales of third party products
to our end customers compared to the first quarter of 2005, sales of which products have
significantly lower gross margins than our average gross margin on sales of our products.
</DIV>

<P align="center" style="font-size: 10pt">22
</DIV>

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

<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">In the first quarter of 2006, $0.2&nbsp;million of amortization of intangibles was included in cost of
sales compared to $0.8&nbsp;million in the first quarter of 2005. The lower amortization in the first
quarter of 2006 was due to the intangibles arising from the DiviCom acquisition becoming fully
amortized during the first quarter of 2005. We expect to record approximately $0.5&nbsp;million in
amortization of intangibles in cost of sales in the remaining nine months of 2006 due to the
acquisition of BTL in February&nbsp;2005.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><I>Research and Development</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Harmonic&#146;s research and development expense and the expense as a percentage of consolidated net
sales in the first quarter of 2006, as compared with the corresponding period of 2005, are
presented in the table below. Also presented is the related dollar and percentage increase in
research and development expense in the first quarter of 2006 as compared with the corresponding
period of 2005 (in thousands, except percentages).
</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="76%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="7" style="border-bottom: 1px solid #000000"><B>Three Months Ended</B></TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>March 31, 2006</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>April 1, 2005</B></TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Research and development expense</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">9,948</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">9,459</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">As a % of net sales</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">17.7</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">13.0</TD>
    <TD nowrap>%</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Increase</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">489</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Percent change</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">5.2</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">The increase in research and development expense in the first quarter of 2006 as compared to the
same period in 2005 was primarily the result of increased use of outside services of $0.3&nbsp;million
associated with the development of new products and stock-based compensation expense of $0.5
million, which was partially offset by lower compensation expense of $0.6&nbsp;million from reductions
in headcount and incentive compensation.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><I>Selling, General and Administrative</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Harmonic&#146;s selling, general and administrative expense and the expense as a percentage of
consolidated net sales in the first quarter of 2006, as compared with the corresponding period of
2005, are presented in the table below. Also presented is the related dollar and percentage
increase in selling, general and administrative expense in the first quarter of 2006 as compared
with the corresponding period of 2005 (in thousands, except percentages).
</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="76%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="7" style="border-bottom: 1px solid #000000"><B>Three Months Ended</B></TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>March 31, 2006</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>April 1, 2005</B></TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Selling, general and administrative
expense</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">15,713</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">15,325</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">As a % of net sales</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">27.9</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">21.0</TD>
    <TD nowrap>%</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Increase</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">388</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Percent change</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">2.5</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">The increase in selling, general and administrative expense in the first quarter of 2006 compared
to the same period in 2005 was primarily a result of stock-based compensation expense of $0.8
million, which was partially offset by lower corporate governance costs of $0.4&nbsp;million.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><I>Amortization of Intangibles</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Harmonic&#146;s amortization of intangible assets and the expense as a percentage of consolidated net
sales in the first quarter of 2006 as compared with the corresponding period of 2005 are presented
in the table below. Also presented is the related dollar and percentage decrease in amortization of
intangible assets in the first quarter of 2006 as compared with the corresponding period of 2005
(in thousands, except percentages).
</DIV>

<P align="center" style="font-size: 10pt">23
</DIV>

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

<DIV style="font-family: 'Times New Roman',Times,serif">
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="76%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="7" style="border-bottom: 1px solid #000000"><B>Three Months Ended</B></TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>March 31, 2006</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>April 1, 2205</B></TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Amortization of intangibles</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">91</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">958</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">As a % of net sales</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">0.2</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">1.3</TD>
    <TD nowrap>%</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Decrease</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">$</TD>
    <TD align="right">(867</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Percent change</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(90.5</TD>
    <TD nowrap>)%</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">The decrease in the amortization of intangibles in the first quarter of 2006 compared to the same
period in 2005 was primarily 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 $0.1&nbsp;million
in amortization of intangibles in operating expenses in the remaining nine months of 2006 due to
the intangible assets resulting from the acquisition of BTL in February&nbsp;2005.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><I>Interest Income, Net</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Harmonic&#146;s interest income, net, and interest income, net, as a percentage of consolidated net
sales in the first quarter of 2006 as compared with the corresponding period of 2005, are presented
in the table below. Also presented is the related dollar and percentage increase in interest
income, net, in the first quarter of 2006 as compared with the corresponding period of 2005 (in
thousands, except percentages).
</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="76%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="7" style="border-bottom: 1px solid #000000"><B>Three Months Ended</B></TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>March 31, 2006</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>April 1, 2005</B></TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Interest income, net</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">992</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">522</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">As a % of net sales</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">1.8</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">0.7</TD>
    <TD nowrap>%</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Increase</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">470</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Percent change</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">90.0</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">The increase in interest income, net, in the first three months of 2006 compared to the
corresponding period of 2005, was due primarily to a larger cash and short-term investment
portfolio during the respective period of 2006 as compared to 2005, higher interest rates on the
portfolio and lower interest expense due to a lower debt balance in the first quarter of 2006.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><I>Other Income (Expense), Net</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Harmonic&#146;s other income (expense), net, and other income (expense), net, as a percentage of
consolidated net sales in the first quarter of 2006 as compared with the corresponding period of
2005, are presented in the table below. Also presented is the related dollar and percentage
decrease in other income (expense), net, in the first quarter of 2006 as compared with the
corresponding periods of 2005 (in thousands, except percentages).
</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="76%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="7" style="border-bottom: 1px solid #000000"><B>Three Months Ended</B></TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>March 31, 2006</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>April 1, 2005</B></TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Other income (expense)</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">$</TD>
    <TD align="right">(92</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">$</TD>
    <TD align="right">(49</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">As a % of net sales</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(0.2</TD>
    <TD nowrap>)%</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(0.1</TD>
    <TD nowrap>)%</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Decrease</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">$</TD>
    <TD align="right">(43</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Percent change</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(87.8</TD>
    <TD nowrap>)%</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">The increase in other expense, net, in the first quarter of 2006 compared to the same period of
2005 was primarily due to foreign exchange losses.
</DIV>

<P align="center" style="font-size: 10pt">24
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><I>Income Taxes</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Harmonic&#146;s provision for income taxes, and provision for income taxes as a percentage of
consolidated net sales in the first quarter of 2006, as compared with the corresponding period of
2005, are presented in the table below. Also presented is the related dollar and percentage
increase in income taxes in the first quarter of 2006 as compared with the corresponding period of
2005 (in thousands, except percentages).
</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="76%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="7" style="border-bottom: 1px solid #000000"><B>Three Months Ended</B></TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>March 31, 2006</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>April 1, 2005</B></TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Provision for income taxes</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">175</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">72</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">As a % of net sales</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">0.3</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">0.1</TD>
    <TD nowrap>%</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Increase</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">103</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Percent change</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">143.1</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">The increase in the provision for income taxes in the first quarter of 2006 compared to the same
period in 2005 was due to higher foreign income taxes.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Liquidity and Capital Resources</B>
</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="76%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="7" style="border-bottom: 1px solid #000000"><B>Three Months Ended</B></TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD nowrap align="left" style="border-bottom: 0px solid #000000"><B>(in thousands)</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>March 31, 2006</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>April 1, 2005</B></TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Cash, cash equivalents and short-term investments</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">108,558</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">104,554</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Net cash provided by (used in) operating activities</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">$</TD>
    <TD align="right">(2,547</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">7,903</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Net cash used in investing activities</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">$</TD>
    <TD align="right">(4,057</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">$</TD>
    <TD align="right">(6,810</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Net cash provided by financing activities</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">1,833</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">3,825</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">As of March&nbsp;31, 2006, cash, cash equivalents and short-term investments totaled $108.6&nbsp;million,
compared to $110.8&nbsp;million as of December&nbsp;31, 2005. Cash used in operations was $2.5&nbsp;million in the
first three months of 2006, compared to cash provided by operations of $7.9&nbsp;million in the first
three months of 2005. The increased use of cash in operating activities in the first three months
of 2006 was primarily due to the net loss of $5.1&nbsp;million for the quarter, lower deferred revenue
of $3.1&nbsp;million, lower accounts payable of $2.9&nbsp;million and lower amortization of intangibles of
$0.3&nbsp;million, which was partially offset by lower inventories of $7.3&nbsp;million. The lower deferred
revenue was primarily due to the timing of revenue based on our revenue recognition policy and the
completion stage of customers&#146; orders. The lower accounts payable and inventory was due to a
decrease in the purchase of production inventory, along with the write-down of cost for obsolete
and excess inventory. The lower amortization is due to the completion of amortization of the
DiviCom intangible assets during the first quarter of 2005.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Additions
to property, plant and equipment were $1.6&nbsp;million during the first three months of 2006
compared to $1.8&nbsp;million in the first three months of 2005. The decrease in the first quarter of
2006 from the comparable period in 2005 was primarily due to a decrease in the acquisition of test
equipment. Harmonic currently expects capital expenditures to be approximately $6&nbsp;million during
2006.
</DIV>



<P align="center" style="font-size: 10pt">25
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">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 March&nbsp;31, 2006 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&nbsp;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; margin-top: 6pt">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&nbsp;2005, expires in December&nbsp;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 March&nbsp;31, 2006, Harmonic was in compliance with the covenants under
this line of credit facility. The December&nbsp;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 (7.75% at March&nbsp;31, 2006) 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 March&nbsp;31, 2006, $1.1&nbsp;million was outstanding
under the equipment term loan portion of this facility and there were no borrowings in 2005 or
2006. The term loan is payable monthly, including principal and
interest at 8.25% per annum on
outstanding borrowings as of March&nbsp;31, 2006 and matures at various dates through December&nbsp;2007.
Other than standby letters of credit and guarantees (Note 15), there were no other outstanding
borrowings or commitments under the line of credit facility as of March&nbsp;31, 2006.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Harmonic&#146;s cash and investment balances at March&nbsp;31, 2006 were $108.6&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&#146;s pre-merger tax liabilities. However, we may need to raise additional funds if our
expectations or estimates change or prove inaccurate, or to take advantage of unanticipated
opportunities or to strengthen our financial position. The completed stock offering in the fourth
quarter of 2003 was part of a registration statement on Form S-3 declared effective by the SEC in
April&nbsp;2002. In April&nbsp;2005, we filed another registration statement on Form S-3 with the SEC.
Pursuant to these registration statements on Form S-3, 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; margin-top: 6pt">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; margin-top: 6pt">Our ability to raise funds may be adversely affected by a number of factors relating to Harmonic,
as well as factors beyond our control, including increased market uncertainty surrounding the
ongoing U.S. war on terrorism, as well as conditions in capital markets and the cable and satellite
industries. There can be no assurance that any financing will be available on terms acceptable to
us, if at all.
</DIV>

<P align="center" style="font-size: 10pt">26
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Off-Balance Sheet Arrangements</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">None as of March&nbsp;31, 2006.
</DIV>
<DIV align="left">
<A name="108"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Item&nbsp;3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Market risk represents the risk of loss that may impact the operating results, financial position,
or liquidity of Harmonic due to adverse changes in market prices and rates. Harmonic is exposed to
market risk because of changes in interest rates and foreign currency exchange rates as measured
against the U.S. Dollar and currencies of Harmonic&#146;s subsidiaries.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Foreign Currency Exchange Risk</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Harmonic has a number of international subsidiaries each of whose sales are generally denominated
in U.S. dollars. Sales denominated in foreign currencies were approximately 9% and 7% of net sales
in the first three months of 2006 and the full year of 2005, respectively. 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, or
forward contracts, to manage exposure related to accounts receivable denominated in foreign
currencies. Harmonic does not enter into derivative financial instruments for trading purposes. At
March&nbsp;31, 2006, we had a forward contract to sell Euros totaling $5.4&nbsp;million that matures during
the second 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 or
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 or liquidity.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><I>Interest Rate Risk</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">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.
</DIV>
<DIV align="left">
<A name="109"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Item&nbsp;4. CONTROLS AND PROCEDURES</B>
</DIV>



<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><I>Evaluation of disclosure controls and procedures.</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Our management, with the participation of our chief executive officer and our chief financial
officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the &#147;Exchange Act&#148;))
as of the end of the period covered by this quarterly report on Form 10-Q.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">A control system, no matter how well conceived and operated, can provide only reasonable assurance
that the objectives of the control system are met. Our management, including our chief executive
officer and chief financial officer, does not expect that our disclosure controls and procedures or
internal control over financial reporting will prevent all errors and fraud. Further, the design of
a control system must reflect the fact that there are resource constraints, and the benefits of
controls must be considered relative to their costs. Because of the inherent limitations in all
control systems, no evaluation of controls can provide absolute assurance that all control issues
within the company have been detected. These inherent limitations include the reality that
judgments in decision-making can be incorrect, and that breakdowns can occur because of simple
errors or mistakes. The design of any control system is also based, in part, upon certain
assumptions about the likelihood of future events, and there can be no assurance that any design
will succeed in achieving its stated goals under all potential future conditions. Over time,
controls may become inadequate because of changes in conditions, or the degree of compliance with
the policies or procedures may deteriorate. Because of the inherent limitations in a control
system, misstatements due to error or
</DIV>

<P align="center" style="font-size: 10pt">27
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">



<DIV align="left" style="font-size: 10pt; margin-top: 6pt">fraud may occur and not be detected.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Based upon their evaluation of the effectiveness of our disclosure controls and procedures as of
the end of the period covered by this quarterly report on Form 10-Q, our chief executive officer
and chief financial officer have concluded that our disclosure controls and procedures are
effective based on their evaluation of these controls and procedures required by paragraph (b)&nbsp;of
Exchange Act Rules&nbsp;13a-15 or 15d-15.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><I>Changes in internal controls.</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">There were no changes in our internal control over financial reporting identified in connection
with the evaluation required by paragraph (d)&nbsp;of Exchange Act Rules&nbsp;13a-15 or 15d-15 that occurred
during our last fiscal quarter that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
</DIV>
<DIV align="left">
<A name="110"></A>
</DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 18pt"><B>PART II</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>OTHER INFORMATION</B>
</DIV>

<DIV align="left">
<A name="111"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Item&nbsp;1. LEGAL PROCEEDINGS</B>
</DIV>



<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><I>Shareholder Litigation</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Between June&nbsp;28 and August&nbsp;25, 2000, several actions alleging violations of the federal securities
laws by Harmonic and certain of its officers and directors (some of whom are no longer with
Harmonic) were filed in or removed to the U.S. District Court for the Northern District of
California. The actions subsequently were consolidated.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">A consolidated complaint, filed on December&nbsp;7, 2000, was brought on behalf of a purported class of
persons who purchased Harmonic&#146;s publicly traded securities between January&nbsp;19 and June&nbsp;26, 2000.
The complaint also alleged claims on behalf of a purported subclass of persons who purchased C-Cube
securities between January&nbsp;19 and May&nbsp;3, 2000. In addition to Harmonic and certain of its officers
and directors, the complaint also named C-Cube Microsystems Inc. and several of its officers and
directors as defendants. The complaint alleged that, by making false or misleading statements
regarding Harmonic&#146;s prospects and customers and its acquisition of C-Cube, certain defendants
violated sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the &#147;Exchange Act&#148;). The
complaint also alleged that certain defendants violated section 14(a) of the Exchange Act and
sections 11, 12(a)(2), and 15 of the Securities Act of 1933 (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; margin-top: 6pt">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 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; margin-top: 6pt">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>

<P align="center" style="font-size: 10pt">28
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">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. On
April&nbsp;19, 2006, the District
Court issued an order setting forth the schedule for filing and
responding to the Third Amended Complaint. Under that schedule,
plaintiffs will file their Third Amended Complaint by May 17, 2006,
and defendants will respond by June 15, 2006.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">A derivative action purporting to be on behalf of Harmonic was filed against its then-current
directors in the Superior Court for the County of Santa Clara on September&nbsp;5, 2000. Harmonic also
was named as a nominal defendant. The complaint is based on allegations similar to those found in
the securities class action and claims that the defendants breached their fiduciary duties by,
among other things, causing Harmonic to violate federal securities laws. The derivative action was
removed to the United States District Court for the Northern District of California on September
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 until fourteen days after (1)&nbsp;defendants provide plaintiff with a copy
of the mandate issued by the Ninth Circuit in the securities action or (2)&nbsp;either party provides
written notice of termination of the tolling period, whichever is
first. Defendants
have notified plaintiff of the Ninth Circuit mandate.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">A second derivative action purporting to be on behalf of Harmonic was filed in the Superior Court
for the County of Santa Clara on May&nbsp;15, 2003. It alleges facts similar to those previously alleged
in the securities class action and the federal derivative action. The complaint names as defendants
former and current Harmonic officers and directors, along with former officers and directors of
C-Cube Microsystems, Inc., who were named in the securities class action. The complaint also names
Harmonic as a nominal defendant. The complaint alleges claims for abuse of control, gross
mismanagement, and waste of corporate assets against the Harmonic defendants, and claims for breach
of fiduciary duty, unjust enrichment, and negligent misrepresentation against all defendants. On
July&nbsp;22, 2003, the Court approved the parties&#146; stipulation to stay the case pending resolution of
the appeal in the securities class action. Following the issuance of the
Ninth Circuit&#146;s mandate the Harmonic and C-Cube
defendants filed demurrers to this derivative complaint on May&nbsp;9, 2006.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">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; margin-top: 12pt"><I>Other Litigation</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">On July&nbsp;3, 2003, Stanford University and Litton Systems filed a complaint in U.S. District Court
for the Central District of California alleging that optical fiber amplifiers incorporated into
certain of Harmonic&#146;s products infringe U.S. Patent No.&nbsp;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; margin-top: 6pt">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">29
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Item&nbsp;1A. RISK FACTORS</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><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; margin-top: 6pt">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; margin-top: 6pt">These capital spending patterns are dependent on a variety of factors, including:
</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="3%" nowrap align="left"><FONT style="font-family: wingdings">&#167;</FONT></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>access to financing;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" nowrap align="left"><FONT style="font-family: wingdings">&#167;</FONT></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>annual budget cycles;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" nowrap align="left"><FONT style="font-family: wingdings">&#167;</FONT></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>the impact of industry consolidation;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" nowrap align="left"><FONT style="font-family: wingdings">&#167;</FONT></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>the status of federal, local and foreign government regulation of telecommunications and television
broadcasting;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" nowrap align="left"><FONT style="font-family: wingdings">&#167;</FONT></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>overall demand for communication services and the acceptance of new video, voice and data services;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" nowrap align="left"><FONT style="font-family: wingdings">&#167;</FONT></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>evolving industry standards and network architectures;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" nowrap align="left"><FONT style="font-family: wingdings">&#167;</FONT></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>competitive pressures, including pricing pressures;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" nowrap align="left"><FONT style="font-family: wingdings">&#167;</FONT></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>discretionary customer spending patterns; 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="3%" nowrap align="left"><FONT style="font-family: wingdings">&#167;</FONT></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>general economic conditions.</TD>
</TR>

</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">In the past, specific factors contributing to reduced capital spending have included:
</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="3%" nowrap align="left"><FONT style="font-family: wingdings">&#167;</FONT></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>uncertainty related to development of digital video industry standards;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" nowrap align="left"><FONT style="font-family: wingdings">&#167;</FONT></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>delays associated with the evaluation of new services, new standards, and system architectures by many
cable and satellite television operators;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" nowrap align="left"><FONT style="font-family: wingdings">&#167;</FONT></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>emphasis on generating revenue from existing customers by operators instead of new construction or
network upgrades;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" nowrap align="left"><FONT style="font-family: wingdings">&#167;</FONT></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>a reduction in the amount of capital available to finance projects of our customers and potential customers;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" nowrap align="left"><FONT style="font-family: wingdings">&#167;</FONT></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>proposed and completed business combinations and divestitures by our customers and regulatory review
thereof;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" nowrap align="left"><FONT style="font-family: wingdings">&#167;</FONT></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>economic and financial conditions in domestic and international markets; 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="3%" nowrap align="left"><FONT style="font-family: wingdings">&#167;</FONT></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>bankruptcies and financial restructuring of major customers.</TD>
</TR>

</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">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, an economic downturn or other factors
could cause additional financial difficulties among our customers,
</DIV>

<P align="center" style="font-size: 10pt">30
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">



<DIV align="left" style="font-size: 10pt; margin-top: 6pt">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; margin-top: 6pt">Major U.S. 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. cable operators, our
revenue may decline and our operating results would be adversely affected.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><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; margin-top: 6pt">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 the first quarter of 2006 and the years 2005 and 2004 accounted for approximately 51%,
54% and 55% 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&#038;T Broadband in November&nbsp;2002, thereby creating the largest U.S. 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 UK have recently completed their
announced merger. In the telco market, AT&#038;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 the first quarter of 2006
and the years 2005 and 2004, sales to Comcast accounted for 11%, 18% and 17%, 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 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 continuing significant shipments for this
telco after the second quarter of 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; margin-top: 6pt">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 align="left" style="font-size: 10pt; margin-top: 6pt"><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>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">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">
<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="3%" nowrap align="left"><FONT style="font-family: wingdings">&#167;</FONT></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>the level and timing of capital spending of our customers, both in the U.S. and in foreign markets;</TD>
</TR>

</TABLE>
</DIV>
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</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">


<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="3%" nowrap align="left"><FONT style="font-family: wingdings">&#167;</FONT></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>changes in market demand;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" nowrap align="left"><FONT style="font-family: wingdings">&#167;</FONT></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>the timing and amount of orders, especially from significant customers;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" nowrap align="left"><FONT style="font-family: wingdings">&#167;</FONT></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>the timing of revenue recognition from solution contracts which may span several quarters;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" nowrap align="left"><FONT style="font-family: wingdings">&#167;</FONT></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>the timing of revenue recognition on sales arrangements, which may include multiple deliverables;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" nowrap align="left"><FONT style="font-family: wingdings">&#167;</FONT></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>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;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" nowrap align="left"><FONT style="font-family: wingdings">&#167;</FONT></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>competitive market conditions, including pricing actions by our competitors;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" nowrap align="left"><FONT style="font-family: wingdings">&#167;</FONT></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>seasonality, with fewer construction and upgrade projects typically occurring in winter months and otherwise being
affected by inclement weather;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" nowrap align="left"><FONT style="font-family: wingdings">&#167;</FONT></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>our unpredictable sales cycles;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" nowrap align="left"><FONT style="font-family: wingdings">&#167;</FONT></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>the amount and timing of sales to telcos, which are particularly difficult to predict;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" nowrap align="left"><FONT style="font-family: wingdings">&#167;</FONT></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>new product introductions by our competitors or by us;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" nowrap align="left"><FONT style="font-family: wingdings">&#167;</FONT></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>changes in domestic and international regulatory environments;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" nowrap align="left"><FONT style="font-family: wingdings">&#167;</FONT></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>market acceptance of new or existing products;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" nowrap align="left"><FONT style="font-family: wingdings">&#167;</FONT></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>the cost and availability of components, subassemblies and modules;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" nowrap align="left"><FONT style="font-family: wingdings">&#167;</FONT></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>the mix of our customer base and sales channels;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" nowrap align="left"><FONT style="font-family: wingdings">&#167;</FONT></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>the mix of our products sold;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" nowrap align="left"><FONT style="font-family: wingdings">&#167;</FONT></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>changes in our operating expenses and extraordinary expenses;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" nowrap align="left"><FONT style="font-family: wingdings">&#167;</FONT></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>the impact of FAS 123(R), a new accounting standard which will require us to expense stock options;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" nowrap align="left"><FONT style="font-family: wingdings">&#167;</FONT></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>our development of custom products and software;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" nowrap align="left"><FONT style="font-family: wingdings">&#167;</FONT></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>the quantity of third-party products we sell, which products carry lower gross margins, compared to our own
products;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" nowrap align="left"><FONT style="font-family: wingdings">&#167;</FONT></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>the quantity of FTTP products we sell, which products carry lower gross margins than our other products;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" nowrap align="left"><FONT style="font-family: wingdings">&#167;</FONT></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>the level of international sales; 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="3%" nowrap align="left"><FONT style="font-family: wingdings">&#167;</FONT></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>economic and financial conditions specific to the cable, satellite and telco industries, and general economic
conditions.</TD>
</TR>

</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">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; margin-top: 6pt">For example, during the first quarter of 2006, our net sales declined sequentially due to a
reduction in sales to Verizon, one of our major customers, and in comparison to the comparable
period in 2005 due to a decrease in the volume of third party products we sold.
</DIV>

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</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">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, a decrease in gross profit percentage in 2005,
and lower than expected sales during the first quarter of 2006, 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 align="left" style="font-size: 10pt; margin-top: 6pt"><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>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">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; margin-top: 6pt">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">
<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="3%" nowrap align="left"><FONT style="font-family: wingdings">&#167;</FONT></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>new video compression standards such as MPEG-4/H.264 and Microsoft&#146;s Windows Media 9 broadcast profile (VC-1);</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" nowrap align="left"><FONT style="font-family: wingdings">&#167;</FONT></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>FTTP and DSL networks designed to facilitate the delivery of video services by telcos;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" nowrap align="left"><FONT style="font-family: wingdings">&#167;</FONT></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>the greater use of protocols such as IP; 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="3%" nowrap align="left"><FONT style="font-family: wingdings">&#167;</FONT></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>the introduction of new consumer devices, such as advanced set-top boxes and personal video recorders (PVRs).</TD>
</TR>

</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">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; margin-top: 6pt">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">
<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="3%" nowrap align="left"><FONT style="font-family: wingdings">&#167;</FONT></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>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;;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" nowrap align="left"><FONT style="font-family: wingdings">&#167;</FONT></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>the use of digital video by businesses, governments and educators;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" nowrap align="left"><FONT style="font-family: wingdings">&#167;</FONT></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>the entry of telcos into the video business to allow them to offer the &#147;triple play&#148;;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" nowrap align="left"><FONT style="font-family: wingdings">&#167;</FONT></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>growth in HDTV, on-demand services and mobile video;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" nowrap align="left"><FONT style="font-family: wingdings">&#167;</FONT></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>efforts by regulators and governments in the U.S. and abroad to encourage the adoption of broadband and digital
technologies; 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="3%" nowrap align="left"><FONT style="font-family: wingdings">&#167;</FONT></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>the extent and nature of regulatory attitudes towards 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.</TD>
</TR>

</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">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>

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</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><I>We Need To Develop And Introduce New And Enhanced Products In A Timely Manner To Remain
Competitive.</I>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">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">
<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="3%" nowrap align="left"><FONT style="font-family: wingdings">&#167;</FONT></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>are not cost effective;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" nowrap align="left"><FONT style="font-family: wingdings">&#167;</FONT></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>are not brought to market in a timely manner;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" nowrap align="left"><FONT style="font-family: wingdings">&#167;</FONT></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>are not in accordance with evolving industry standards and architectures;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" nowrap align="left"><FONT style="font-family: wingdings">&#167;</FONT></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>fail to achieve market acceptance; or</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" nowrap align="left"><FONT style="font-family: wingdings">&#167;</FONT></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>are ahead of the market.</TD>
</TR>

</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">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; margin-top: 6pt">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 after the second quarter of 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; margin-top: 6pt">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>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><I>Broadband Communications Markets Are Characterized By Rapid Technological Change.</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">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>

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</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><I>The Markets In Which We Operate Are Intensely Competitive And Many Of Our Competitors Are Larger
And More Established.</I>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">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 most 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; margin-top: 6pt">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; margin-top: 6pt">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 align="left" style="font-size: 10pt; margin-top: 6pt"><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>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">The sales cycles of many of our products, particularly our newer products and products sold
internationally, are typically unpredictable and usually involve:
</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="3%" nowrap align="left"><FONT style="font-family: wingdings">&#167;</FONT></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>a significant technical evaluation;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" nowrap align="left"><FONT style="font-family: wingdings">&#167;</FONT></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>a commitment of capital and other resources by cable, satellite, and other network operators;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" nowrap align="left"><FONT style="font-family: wingdings">&#167;</FONT></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>time required to engineer the deployment of new technologies or new broadband services;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" nowrap align="left"><FONT style="font-family: wingdings">&#167;</FONT></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>testing and acceptance of new technologies that affect key operations; 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="3%" nowrap align="left"><FONT style="font-family: wingdings">&#167;</FONT></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>test marketing of new services with subscribers.</TD>
</TR>

</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">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.
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>

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<DIV align="left" style="font-size: 10pt; margin-top: 6pt">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 align="left" style="font-size: 10pt; margin-top: 6pt"><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>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Sales to customers outside of the U.S. in the first quarter of 2006 and the years 2005 and 2004
represented 54%, 40% and 42% 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>

<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="3%" nowrap align="left"><FONT style="font-family: wingdings">&#167;</FONT></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>changes in foreign government regulations and telecommunications standards;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" nowrap align="left"><FONT style="font-family: wingdings">&#167;</FONT></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>import and export license requirements, tariffs, taxes and other trade barriers;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" nowrap align="left"><FONT style="font-family: wingdings">&#167;</FONT></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>fluctuations in currency exchange rates;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" nowrap align="left"><FONT style="font-family: wingdings">&#167;</FONT></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>difficulty in collecting accounts receivable;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" nowrap align="left"><FONT style="font-family: wingdings">&#167;</FONT></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>the burden of complying with a wide variety of foreign laws, treaties and technical standards;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" nowrap align="left"><FONT style="font-family: wingdings">&#167;</FONT></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>difficulty in staffing and managing foreign operations;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" nowrap align="left"><FONT style="font-family: wingdings">&#167;</FONT></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>political and economic instability; 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="3%" nowrap align="left"><FONT style="font-family: wingdings">&#167;</FONT></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>changes in economic policies by foreign governments.</TD>
</TR>

</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Certain of our international customers have accumulated significant levels of debt and have
announced during the past three years reorganizations and financial restructurings, including
bankruptcy filings. Even if these restructurings are completed, we cannot assure you that these
customers will be in a position to purchase new equipment at levels we have seen in the past.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">While our international sales and operating expenses have typically been denominated in U.S.
dollars, fluctuations in currency exchange rates could cause our products to become relatively more
expensive to customers in a particular country, leading to a reduction in sales or profitability in
that country.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Following implementation of the Euro in January&nbsp;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. 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. 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 align="left" style="font-size: 10pt; margin-top: 6pt"><I>Pending Business Combinations And Other Financial And Regulatory Issues Among Our Customers Could
Adversely Affect Our Business.</I>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">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&nbsp;2002. The stock prices of
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">



<DIV align="left" style="font-size: 10pt; margin-top: 6pt">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; margin-top: 6pt">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&#038;T Broadband
transaction in 2002 and the acquisition by The News Corporation Ltd. in December&nbsp;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 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 UK
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 align="left" style="font-size: 10pt; margin-top: 6pt"><I>Changes in Telecommunications Legislation and Regulations Could Harm Our Prospects And Future
Sales.</I>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">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
video 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>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><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>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">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. For example, on May&nbsp;4, 2006 we announced that our Chairman, President and Chief
Executive Officer, Anthony J. Ley, was retiring from his position as President and Chief Executive
Officer effective immediately, and that he was being succeeded by our current Executive Vice
President, Patrick Harshman. We cannot assure you that this transition of management personnel will
not cause disruption to our operations or customer relationships, or a decline in our financial
results.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">In addition, 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>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><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>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">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 123(R) that requires
us to record a charge to earnings for employee stock option grants and employee stock
</DIV>

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</DIV>

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<DIV align="left" style="font-size: 10pt; margin-top: 6pt">purchase
plan rights for all future periods beginning on January&nbsp;1, 2006.
The adoption of this standard has
negatively impacted and will continue to negatively impact our earnings and may affect our ability
to raise capital on acceptable terms. For the three months ended March&nbsp;31, 2006, stock-based
compensation expense recognized under SFAS 123(R) was $1.6&nbsp;million, which consisted of stock-based
compensation expense related to employee equity awards and employee stock purchases.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">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 align="left" style="font-size: 10pt; margin-top: 6pt"><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>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">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 10-K
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>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><I>We May Need Additional Capital In The Future And May Not Be Able To Secure Adequate Funds On Terms
Acceptable To Us.</I>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">We have generated substantial operating losses since we began operations in June&nbsp;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 March&nbsp;31, 2006 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; margin-top: 6pt">We believe that the proceeds of the stock offering we completed in November&nbsp;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&nbsp;2003 related to a registration statement on Form S-3
declared effective by the SEC in April&nbsp;2002. In April&nbsp;2005, we filed another registration statement
on Form S-3 with the SEC. Pursuant to these registration statements on Form S-3, 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; margin-top: 6pt">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
</DIV>

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</DIV>

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<DIV align="left" style="font-size: 10pt; margin-top: 6pt">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; margin-top: 6pt">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 align="left" style="font-size: 10pt; margin-top: 6pt"><I>If Demand For Our Products Increases More Quickly Than We Expect, We May Be Unable To Meet Our
Customers&#146; Requirements.</I>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Our net sales increased approximately 4% in 2005 compared to 2004, and approximately 36% in 2004
from 2003. If demand for our products increases, 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 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>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><I>We Must Be Able To Manage Expenses And Inventory Risks Associated With Meeting The Demand Of Our
Customers.</I>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">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; margin-top: 6pt">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>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><I>We Face Risks Associated With Having Important Facilities And Resources Located In Israel.</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Harmonic maintains a facility in Caesarea in the State of Israel with a total of 68 employees as of
March&nbsp;31, 2006, 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&nbsp;2001 terrorist attacks, the situation in Iraq, the ongoing U.S. 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>

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</DIV>

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<DIV align="left" style="font-size: 10pt; margin-top: 6pt">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>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><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>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">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 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; margin-top: 6pt">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>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><I>We Need To Effectively Manage Our Operations And The Cyclical Nature Of Our Business.</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">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 employees. In the first quarter of 2005, we added 42
employees in connection with our acquisition of BTL, and in connection with the consolidation of
our two operating divisions in December&nbsp;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>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><I>We May Be Materially Affected By The WEEE And RoHS Directives.</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">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&nbsp;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&nbsp;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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</DIV>

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<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><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>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">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 March&nbsp;31, 2006, 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&nbsp;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&nbsp;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&nbsp;2005 payments, LSI Logic is obligated to reimburse Harmonic.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">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>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><I>We May Be Subject To Risks Associated With Acquisitions.</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">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 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>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><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>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">The DiviCom business and C-Cube semiconductor business (acquired by LSI Logic in June&nbsp;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&nbsp;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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</DIV>

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<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><I>Our Failure To Adequately Protect Our Proprietary Rights May Adversely Affect Us.</I>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">We currently hold 38 issued U.S. 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; margin-top: 6pt">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; margin-top: 6pt">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>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><I>We Or Our Customers May Face Intellectual Property Infringement Claims From Third Parties.</I>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">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; margin-top: 6pt">On July&nbsp;3, 2003, Stanford University and Litton Systems filed a complaint in U.S. District Court
for the Central District of California alleging that optical fiber amplifiers incorporated into
certain of Harmonic&#146;s products infringe U.S. Patent No.&nbsp;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; margin-top: 6pt">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>

<P align="center" style="font-size: 10pt">42
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><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>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Between June&nbsp;28 and August&nbsp;25, 2000, several actions alleging violations of the federal securities
laws by Harmonic and certain of its officers and directors (some of whom are no longer with
Harmonic) were filed in or removed to the United States District Court (the &#147;District Court&#148;) for
the Northern District of California. The actions subsequently were consolidated.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">A consolidated complaint, filed on December&nbsp;7, 2000, was brought on behalf of a purported class of
persons who purchased Harmonic&#146;s publicly traded securities between January&nbsp;19 and June&nbsp;26, 2000.
The complaint also alleged claims on behalf of a purported subclass of persons who purchased C-Cube
securities between January&nbsp;19 and May&nbsp;3, 2000. In addition to Harmonic and certain of its officers
and directors, the complaint also named C-Cube Microsystems Inc. and several of its officers and
directors as defendants. The complaint alleged that, by making false or misleading statements
regarding Harmonic&#146;s prospects and customers and its acquisition of C-Cube, certain defendants
violated sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the &#147;Exchange Act&#148;). The
complaint also alleged that certain defendants violated section 14(a) of the Exchange Act and
sections 11, 12(a)(2), and 15 of the Securities Act of 1933 (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; margin-top: 6pt">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 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; margin-top: 6pt">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; margin-top: 6pt">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. On
April&nbsp;19, 2006, the District
Court issued an order setting forth the schedule for filing and
responding to the Third Amended Complaint. Under that schedule,
plaintiffs will file their Third Amended Complaint by May&nbsp;17, 2006,
and defendants will respond by June&nbsp;15, 2006.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">A derivative action purporting to be on behalf of Harmonic was filed against its then-current
directors in the Superior Court for the County of Santa Clara on September&nbsp;5, 2000. Harmonic also
was named as a nominal defendant. The complaint is based on allegations similar to those found in
the securities class action and claims that the defendants breached their fiduciary duties by,
among other things, causing Harmonic to violate federal securities laws. The derivative action was
removed to the United States District Court for the Northern District of California on September
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 until fourteen days after (1)&nbsp;defendants provide plaintiff with a copy
of the mandate issued by the Ninth Circuit in the securities action or (2)&nbsp;either party provides
written notice of termination of the tolling period, whichever is
first. Defendants have notified plaintiff of the Ninth
Circuit&#146;s mandate.
</DIV>

<P align="center" style="font-size: 10pt">43
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">A second derivative action purporting to be on behalf of Harmonic was filed in the Superior Court
for the County of
Santa Clara on May&nbsp;15, 2003. It alleges facts similar to those previously alleged in the securities
class action and the federal derivative action. The complaint names as defendants former and
current Harmonic officers and directors, along with former officers and directors of C-Cube
Microsystems, Inc., who were named in the securities class action. The complaint also names
Harmonic as a nominal defendant. The complaint alleges claims for abuse of control, gross
mismanagement, and waste of corporate assets against the Harmonic defendants, and claims for breach
of fiduciary duty, unjust enrichment, and negligent misrepresentation against all defendants. On
July&nbsp;22, 2003, the Court approved the parties&#146; stipulation to stay the case pending resolution of
the appeal in the securities class action. Following the issuance of the
Ninth Circuit&#146;s mandate the Harmonic and C-Cube
defendants filed demurrers to this derivative complaint on
May&nbsp;9, 2006.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">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; margin-top: 6pt">On July&nbsp;3, 2003, Stanford University and Litton Systems filed a complaint in U.S. District Court
for the Central District of California alleging that optical fiber amplifiers incorporated into
certain of Harmonic&#146;s products infringe U.S. Patent No.&nbsp;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; margin-top: 6pt"><I>The Terrorist Attacks Of 2001 And The Ongoing Threat Of Terrorism Have Created Great Uncertainty
And May Continue To Harm Our Business.</I>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">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>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><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>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">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 align="left" style="font-size: 10pt; margin-top: 6pt"><I>The Markets In Which We, Our Customers And Suppliers Operate Are Subject To The Risk Of Earthquakes
And Other Natural Disasters.</I>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">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
</DIV>

<P align="center" style="font-size: 10pt">44
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">



<DIV align="left" style="font-size: 10pt; margin-top: 6pt">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 align="left" style="font-size: 10pt; margin-top: 12pt"><I>Our Stock Price May Be Volatile.</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">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 align="left" style="font-size: 10pt; margin-top: 6pt"><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>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">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">
<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="3%" nowrap align="left"><FONT style="font-family: wingdings">&#167;</FONT></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>authorizing blank check preferred stock, which could be issued with voting, liquidation, dividend and other rights
superior to Harmonic common stock;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" nowrap align="left"><FONT style="font-family: wingdings">&#167;</FONT></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>limiting the liability of, and providing indemnification to, directors and officers;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" nowrap align="left"><FONT style="font-family: wingdings">&#167;</FONT></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>limiting the ability of Harmonic stockholders to call and bring business before special meetings;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" nowrap align="left"><FONT style="font-family: wingdings">&#167;</FONT></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>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;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" nowrap align="left"><FONT style="font-family: wingdings">&#167;</FONT></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>controlling the procedures for conduct and scheduling of Board and stockholder meetings; 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="3%" nowrap align="left"><FONT style="font-family: wingdings">&#167;</FONT></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>providing the board of directors with the express power to postpone previously scheduled annual meetings and to
cancel previously scheduled special meetings.</TD>
</TR>

</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">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; margin-top: 6pt">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; margin-top: 6pt">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; margin-top: 6pt">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
</DIV>

<P align="center" style="font-size: 10pt">45
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">



<DIV align="left" style="font-size: 10pt; margin-top: 6pt">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">
<A name="112"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Item&nbsp;2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">None.
</DIV>
<DIV align="left">
<A name="113"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Item&nbsp;3. DEFAULTS UPON SENIOR SECURITIES</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">None.
</DIV>
<DIV align="left">
<A name="114"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Item&nbsp;4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">None.
</DIV>
<DIV align="left">
<A name="115"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Item&nbsp;5. OTHER INFORMATION</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">None.
</DIV>
<DIV align="left">
<A name="116"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><B>Item&nbsp;6. EXHIBITS</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><I>Exhibits</I>
</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="6%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="89%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD nowrap align="left"><B>Exhibit Number</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom">
    <TD align="center" valign="bottom"><DIV style="margin-left:0px; text-indent:-0px">31.1
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Section&nbsp;302 Certification of Principal Executive Officer</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD align="center" valign="bottom"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="bottom"><DIV style="margin-left:0px; text-indent:-0px">31.2
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Section&nbsp;302 Certification of Principal Financial Officer</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD align="center" valign="bottom"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="bottom"><DIV style="margin-left:0px; text-indent:-0px">32.1
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Section&nbsp;906 Certification of Principal Executive Officer</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD align="center" valign="bottom"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="bottom"><DIV style="margin-left:0px; text-indent:-0px">32.2
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Section&nbsp;906 Certification of Principal Financial Officer</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<P align="center" style="font-size: 10pt">46
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="left">
<A name="117"></A>
</DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 18pt"><B>SIGNATURES</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">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 Quarterly Report on Form 10-Q to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City of Sunnyvale, State
of California, on May&nbsp;10, 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">HARMONIC INC.<BR>
&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR><TR>
    <TD align="left">&nbsp;</TD>
    <TD valign="top">By:&nbsp;&nbsp;</TD>
    <TD colspan="2" 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>&nbsp;</TD>
    <TD colspan="2" align="left">Robin N. Dickson&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR><TR>
    <TD align="left">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left">Chief Financial Officer<BR>
(Principal Financial and Accounting Officer)&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

</TABLE>

<P align="center" style="font-size: 10pt">47
</DIV>

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<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="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="6%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="89%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD nowrap align="left" style="border-bottom: 1px solid #000000"><B>Exhibit Number</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" style="border-bottom: 1px solid #000000"><B>Exhibit Index</B></TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom">
    <TD align="center" valign="bottom"><DIV style="margin-left:0px; text-indent:-0px">31.1
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Section&nbsp;302 Certification of Principal Executive Officer</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="bottom"><DIV style="margin-left:0px; text-indent:-0px">31.2
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Section&nbsp;302 Certification of Principal Financial Officer</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="bottom"><DIV style="margin-left:0px; text-indent:-0px">32.1
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Section&nbsp;906 Certification of Principal Executive Officer</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="bottom"><DIV style="margin-left:0px; text-indent:-0px">32.2
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Section&nbsp;906 Certification of Principal Financial Officer</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<P align="center" style="font-size: 10pt">&nbsp;
</DIV>

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<FILENAME>f20193exv31w1.htm
<DESCRIPTION>EXHIBIT 31.1
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<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">Harmonic Inc.<BR>
Certification of Principal Executive Officer<BR>
Pursuant to Section&nbsp;302 of<BR>
The Sarbanes-Oxley Act of 2002
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">I, Patrick Harshman, 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 quarterly report on Form 10-Q of Harmonic Inc.:</TD>
</TR>

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

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

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

<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">Date: May 10, 2006&nbsp;</TD>
    <TD valign="top">By:&nbsp;&nbsp;</TD>

<TD colspan="2" style="border-bottom: 1px solid #000000" align="left">/s/ Patrick Harshman
&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR><TR>
    <TD align="left">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left">Patrick Harshman&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR><TR>
    <TD align="left">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left">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>

</BODY>
</HTML>
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-31.2
<SEQUENCE>3
<FILENAME>f20193exv31w2.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">


<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;31.2
</DIV>


<DIV align="center" style="font-size: 10pt; margin-top: 18pt">Harmonic Inc.<BR>
Certification of Principal Financial Officer<BR>
Pursuant to Section&nbsp;302 of<BR>
The Sarbanes-Oxley Act of 2002
</DIV>



<DIV align="left" style="font-size: 10pt; margin-top: 6pt">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 quarterly report on Form 10-Q of Harmonic Inc.:</TD>
</TR>

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

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

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

<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">Date: May 10, 2006&nbsp;</TD>
    <TD valign="top">By:&nbsp;&nbsp;</TD>

<TD colspan="2" 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>&nbsp;</TD>
    <TD colspan="2" align="left">Robin N. Dickson&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR><TR>
    <TD align="left">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left">Chief Financial Officer<br>
(Principal Financial Officer)&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

</TABLE>

<P align="center" style="font-size: 10pt">&nbsp;
</DIV>

</BODY>
</HTML>
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-32.1
<SEQUENCE>4
<FILENAME>f20193exv32w1.htm
<DESCRIPTION>EXHIBIT 32.1
<TEXT>
<HTML>
<HEAD>
<TITLE>exv32w1</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">


<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;32.1
</DIV>


<DIV align="center" style="font-size: 10pt; margin-top: 18pt">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
</DIV>



<DIV align="left" style="font-size: 10pt; margin-top: 6pt">As of the date hereof, I, Patrick Harshman, 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 quarterly report of the Company on Form 10-Q for the
quarter year ended March&nbsp;31, 2006, 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:
May&nbsp;10, 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/ Patrick Harshman
&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR><TR>
    <TD align="left">&nbsp;</TD>
    <TD colspan="3" align="left">Patrick Harshman&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR><TR>
    <TD align="left">&nbsp;</TD>
    <TD colspan="3" align="left">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>

</BODY>
</HTML>
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-32.2
<SEQUENCE>5
<FILENAME>f20193exv32w2.htm
<DESCRIPTION>EXHIBIT 32.2
<TEXT>
<HTML>
<HEAD>
<TITLE>exv32w2</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">


<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">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
</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 quarterly report of the Company on Form 10-Q for the quarter
ended March&nbsp;31, 2006, 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:
May&nbsp;10, 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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</HTML>
</TEXT>
</DOCUMENT>
</SUBMISSION>
