UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number: 001-33355

 

BigBand Networks, Inc.

(Exact name of registrant as specified in its charter)

Delaware		04-3444278
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)

475 Broadway Street
Redwood City, California 94063
(Address of principal executive offices and zip code)

(650) 995-5000
(Registrant’s telephone number, including area code)

 

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ  No o

     Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o  No o

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o  No þ

     As of August 1, 2010, 68,713,570 shares of the registrant’s common stock, par value $0.001 per share, were outstanding.

 

 

BigBand Networks, Inc.

FORM 10-Q
FOR THE QUARTER ENDED
June 30, 2010
INDEX

				Page
PART I.		Financial Information			3
Item 1.		Financial Statements (Unaudited)			3
		Condensed Consolidated Balance Sheets as of June 30, 2010 and December 31, 2009			3
		Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2010 and 2009			4
		Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2010 and 2009			5
		Notes to Condensed Consolidated Financial Statements			6
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			20
Item 3.		Quantitative and Qualitative Disclosures About Market Risk			26
Item 4.		Controls and Procedures			27
PART II.		Other Information			28
Item 1.		Legal Proceedings			28
Item 1A.		Risk Factors			28
Item 6.		Exhibits			38
		Signature			39
EX-31.1
EX-31.2
EX-32.1

PART 1. FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

BigBand Networks, Inc.
Condensed Consolidated Balance Sheets
(Unaudited in thousands, except per share data)

		As of				As of
		June 30,				December 31,
		2010				2009
ASSETS
Current assets:
Cash and cash equivalents		$	33,058			$	24,894
Marketable securities			130,035				147,014
Accounts receivable, net of allowance for doubtful accounts of $23 and $56 as of June 30, 2010 and December 31, 2009, respectively			6,644				18,495
Inventories, net			7,703				4,933
Prepaid expenses and other current assets			4,759				6,177
Total current assets			182,199				201,513
Property and equipment, net			9,911				11,417
Goodwill			1,656				1,656
Other non-current assets			8,923				9,002
Total assets		$	202,689			$	223,588
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	4,187			$	9,483
Accrued compensation and related benefits			5,459				5,023
Current portion of deferred revenues, net			30,582				32,428
Current portion of other liabilities			5,119				7,083
Total current liabilities			45,347				54,017
Deferred revenues, net, less current portion			10,434				12,438
Other liabilities, less current portion			1,978				2,642
Accrued long-term Israeli severance pay			4,663				4,215
Commitments and contingencies
Stockholders’ equity:
Common stock, $0.001 par value, 250,000 shares authorized as of June 30, 2010 and December 31, 2009; 68,596 and 67,138 shares issued and outstanding as of June 30, 2010 and December 31, 2009, respectively			69				67
Additional paid-in-capital			292,429				283,704
Accumulated other comprehensive (loss) income			(202	)			124
Accumulated deficit			(152,029	)			(133,619	)
Total stockholders’ equity			140,267				150,276
Total liabilities and stockholders’ equity		$	202,689			$	223,588

See accompanying notes.

BigBand Networks, Inc.
Condensed Consolidated Statements of Operations
(Unaudited in thousands, except per share amounts)

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2010				2009				2010				2009
Net revenues:
Products		$	16,605			$	22,221			$	41,486			$	56,148
Services			9,788				16,805				17,142				26,766
Total net revenues			26,393				39,026				58,628				82,914
Cost of net revenues:
Products			9,402				10,918				23,326				25,982
Services			3,032				3,113				6,309				6,284
Total cost of net revenues			12,434				14,031				29,635				32,266
Gross profit			13,959				24,995				28,993				50,648
Operating expenses:
Research and development			13,110				11,127				26,602				22,610
Sales and marketing			5,998				5,855				12,048				12,304
General and administrative			4,010				4,962				8,536				9,497
Restructuring charges			1,039				—				1,039				1,356
Class action litigation charges			—				477				—				477
Total operating expenses			24,157				22,421				48,225				46,244
Operating (loss) income			(10,198	)			2,574				(19,232	)			4,404
Interest income			337				690				852				1,593
Other (expense) income, net			(95	)			130				(183	)			(93	)
(Loss) income before (benefit from) provision for income taxes			(9,956	)			3,394				(18,563	)			5,904
(Benefit from) provision for income taxes			(315	)			319				(153	)			547
Net (loss) income		$	(9,641	)		$	3,075			$	(18,410	)		$	5,357
Basic net (loss) income per common share		$	(0.14	)		$	0.05			$	(0.27	)		$	0.08
Diluted net (loss) income per common share		$	(0.14	)		$	0.04			$	(0.27	)		$	0.08
Shares used in basic net (loss) income per common share			68,018				65,753				67,667				65,309
Shares used in diluted net (loss) income per common share			68,018				68,771				67,667				68,519

See accompanying notes.

BigBand Networks, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited in thousands)

		Six Months ended June 30,
		2010				2009
Cash Flows from Operating activities
Net (loss) income		$	(18,410	)		$	5,357
Adjustments to reconcile net (loss) income to net cash used in operating activities:
Depreciation of property and equipment			3,601				4,299
Amortization of software license			416				—
Loss on disposal of property and equipment			220				103
Stock-based compensation			7,383				6,493
Net settled unrealized (losses) gains on cash flow hedges			(28	)			223
Change in operating assets and liabilities:
Decrease in accounts receivable			11,851				13,214
(Increase) decrease in inventories, net			(2,770	)			478
Decrease (increase) in prepaid expenses and other current assets			1,417				(634	)
Increase in other non-current assets			(337	)			(1,336	)
Decrease in accounts payable			(5,296	)			(1,931	)
Increase in long-term Israeli severance pay			448				23
Decrease in accrued and other liabilities			(2,248	)			(6,721	)
Decrease in deferred revenues			(3,850	)			(20,740	)
Net cash used in operating activities			(7,603	)			(1,172	)
Cash Flows from Investing activities
Purchase of marketable securities			(92,850	)			(87,026	)
Proceeds from maturities of marketable securities			88,818				70,061
Proceeds from sale of marketable securities			20,770				3,500
Purchase of property and equipment			(2,362	)			(2,081	)
Purchase of software license			—				(1,250	)
Proceeds from sale of property and equipment			47				—
Decrease in restricted cash			—				130
Net cash provided by (used in) investing activities			14,423				(16,666	)
Cash Flows from Financing activities
Proceeds from issuance of common stock			1,344				3,185
Net cash provided by financing activities			1,344				3,185
Net increase (decrease) in cash and cash equivalents			8,164				(14,653	)
Cash and cash equivalents as of beginning of period			24,894				50,981
Cash and cash equivalents as of end of period		$	33,058			$	36,328

See accompanying notes.

BigBand Networks, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1. Description of Business

     BigBand Networks, Inc. (BigBand or the Company), headquartered in Redwood City, California, was incorporated on December 3, 1998, under the laws of the state of Delaware and commenced operations in January 1999. BigBand develops, markets and sells network-based platforms that enable cable multiple system operators and telecommunications companies to offer video services across coaxial, fiber and copper networks.

2. Summary of Significant Accounting Policies

     Basis of Presentation

     The condensed consolidated financial statements include accounts of the Company and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated. The accompanying condensed consolidated balance sheet as of June 30, 2010, and the condensed consolidated statements of operations for the three and six months ended June 30, 2010 and 2009, and the condensed consolidated statements of cash flows for the six months ended June 30, 2010 and 2009 are unaudited. The condensed consolidated balance sheet as of December 31, 2009 was derived from the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009 filed with the U.S. Securities and Exchange Commission (SEC) on March 5, 2010 (Form 10-K). The accompanying condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes contained in the Company’s Form 10-K.

     The accompanying condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) and pursuant to the rules and regulations of the SEC as permitted by such rules. Not all of the financial information and footnotes required for complete financial statements have been presented. Management believes the unaudited condensed consolidated financial statements have been prepared on a basis consistent with the audited consolidated financial statements and include all adjustments necessary of a normal and recurring nature for a fair presentation of the Company’s condensed consolidated balance sheet as of June 30, 2010, the condensed consolidated statements of operations for the three and six months ended June 30, 2010 and 2009, and the condensed consolidated statements of cash flows for the six months ended June 30, 2010 and 2009. The results for the three and six months ended June 30, 2010 are not necessarily indicative of the results to be expected for the year ending December 31, 2010 or for any other interim period or for any future period.

     There have been no significant changes in the Company’s accounting policies during the six months ended June 30, 2010 compared to the significant accounting policies described in the Company’s Form 10-K.

     Use of Estimates

     The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Management uses estimates and judgments in determining recognition of revenues, valuation of inventories, valuation of stock-based awards, provision for warranty claims, the allowance for doubtful accounts, restructuring costs, valuation of goodwill and long-lived assets, and income tax amounts. Management bases its estimates and assumptions on methodologies it believes to be reasonable. Actual results could differ from those estimates, and such differences could affect the results of operations reported in future periods.

     Revenue Recognition

     The Company’s software and hardware product applications are sold as solutions and its software is a significant component of these solutions. The Company provides unspecified software updates and enhancements related to products through support contracts. As a result, the Company accounts for revenues in accordance with Accounting Standards Codification (ASC) 985 Software, for each transaction, all of which involve the sale of products with a significant software component. Revenue is recognized when all of the following have occurred: (1) the Company has entered into an arrangement with a customer; (2) delivery has occurred; (3) customer payment is fixed or determinable and free of contingencies and significant uncertainties; and (4) collection is probable.

     Product revenues consist of sales of the Company’s software and hardware products. Software product sales include a perpetual license to the Company’s software. The Company recognizes product revenues upon shipment to its customers, including channel partners, on non-cancellable contracts and purchase orders when all revenue recognition criteria are met, or, if specified in an agreement, upon receipt of final acceptance of the product, provided all other criteria are met. End users and channel partners generally have no rights of return, stock rotation rights, or price protection. Shipping charges billed to customers are included in product revenues and the related shipping costs are included in cost of product revenues.

     Substantially all of the Company’s product sales have been made in combination with support services, which consist of software updates and customer support. The Company’s customer service agreements allow customers to select from plans offering various levels of technical support, unspecified software upgrades and enhancements on an if-and-when-available basis. Revenues for support services are recognized on a straight-line basis over the service contract term, which is typically one year but can extend to five years for the Company’s telecommunications customers. Revenues from other services, such as installation, program management and training, are recognized when the services are performed.

     The Company uses the residual method to recognize revenues when a customer agreement includes one or more elements to be delivered at a future date and vendor specific objective evidence (VSOE) of the fair value of all undelivered elements exists. Under the residual method, the fair value of the undelivered elements is deferred and the remaining portion of the contract fee is recognized as product revenues. If evidence of the fair value of one or more undelivered elements does not exist, all revenues are deferred and recognized when delivery of those elements occurs or when fair value can be established. When the undelivered element is customer support and there is no evidence of fair value for this support, revenue for the entire arrangement is bundled and revenue is recognized ratably over the service period. VSOE of fair value for elements of an arrangement is based on the normal pricing and discounting practices for those services when sold separately.

     Fees are typically considered to be fixed or determinable at the inception of an arrangement based on specific products and quantities to be delivered. In the event payment terms are greater than 180 days, the fees are deemed not to be fixed or determinable and revenues are recognized when the payments become due, provided the remaining criteria for revenue recognition have been met.

     Deferred revenues consist primarily of deferred service fees (including customer support and professional services such as installation, program management and training) and product revenues, net of the associated costs. Deferred product revenue generally relates to acceptance provisions that have not been met or partial shipment or when the Company does not have VSOE of fair value on the undelivered items. When deferred revenues are recognized as revenues, the associated deferred costs are also recognized as cost of net revenues.

     The Company assesses the ability to collect from its customers based on a number of factors, including the credit worthiness of the customer and the past transaction history of the customer. If the customer is not deemed credit worthy, all revenues are deferred from the arrangement until payment is received and all other revenue recognition criteria have been met.

     Cash, Cash Equivalents and Marketable Securities

     The Company holds its cash and cash equivalents in checking, money market and investment accounts with high credit quality financial institutions. The Company considers all highly liquid investments with original maturities of three months or less when purchased to be cash equivalents.

     Marketable securities consist principally of corporate debt securities, commercial paper, securities of U.S. agencies and certificates of deposit, with remaining time to maturity of two years or less. If applicable, the Company considers marketable securities with remaining time to maturity greater than one year and that have been in a consistent loss position for at least nine months to be classified as long-term, as it expects to hold them to maturity. As of June 30, 2010, the Company did not have any such securities. The Company considers all other marketable securities with remaining time to maturity of less than two years to be short-term marketable securities. The short-term marketable securities are classified as current assets because they can be readily converted into securities with a shorter remaining time to maturity or into cash. The Company determines the appropriate classification of its marketable securities at the time of purchase and re-evaluates such designations as of each balance sheet date. All marketable securities and cash equivalents in the portfolio are classified as available-for-sale and are stated at fair value, with all the associated unrealized gains and losses reported as a component of accumulated other comprehensive income (loss). Fair value is based on quoted market rates or direct and indirect observable markets for these investments. The amortized cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization and accretion are included in interest income. The cost of securities sold and any gains and losses on sales are based on the specific identification method.

     The Company reviews its investment portfolio periodically to assess for other-than-temporary impairment in order to determine the classification of the impairment as temporary or other-than-temporary, which involves considerable judgment regarding factors such as the length of the time and the extent to which the market value has been less than amortized cost, the nature of underlying assets, and the financial condition, credit rating, market liquidity conditions and near-term prospects of the issuer. In April 2009, the Financial Accounting Standards Board (FASB) issued new guidance which was incorporated into FASB Accounting Standards Codification 320 Investments — Debt and Equity Securities, which established a new method of recognizing and reporting other-than-temporary impairments of debt securities. If the fair value of a debt security is less than its amortized cost basis at the balance sheet date, an assessment would have to be made as to whether the impairment is other-than-temporary. If the Company considers it more likely than not that it will sell the security before it will recover its amortized cost basis, an other-than-temporary impairment will be considered to have occurred. An other-than temporary impairment will also be considered to have occurred if the Company does not expect to recover the entire amortized cost basis of the security, even if it does not intend to sell the security. The Company has recognized no other-than-temporary impairments for its marketable securities.

     Fair Value of Financial Instruments

     The carrying values of cash and cash equivalents, restricted cash, accounts receivable, marketable securities, derivatives used in the Company’s hedging program, accounts payable and other accrued liabilities approximate their fair value. The carrying values of the Company’s other long-term liabilities and the Israeli severance pay fund assets approximate their fair value.

     Credit Risk and Concentrations of Significant Customers

     Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash equivalents, marketable securities, accounts receivable and restricted cash. Cash equivalents, restricted cash and marketable securities are invested through major banks and financial institutions in the U.S. and Israel. Such deposits in the U.S. may be in excess of insured limits and are not insured in Israel. Management believes that the financial institutions that hold the Company’s investments are financially sound and, accordingly, minimal credit risk exists with respect to these investments.

     The Company’s customers are impacted by several factors, including an industry downturn and tightening of access to capital. The market that the Company serves is characterized by a limited number of large customers creating a concentration of risk. To date, the Company has not incurred any significant charges related to uncollectible accounts related to large customers. The Company had three customers which individually had an accounts receivable balance of greater than 10% of the Company’s total accounts receivable balance as of both June 30, 2010 and December 31, 2009.

     The Company recognized revenues from two and three customers that were 10% or greater of the Company’s total net revenues for the three months ended June 30, 2010 and 2009, respectively. The Company recognized revenues from two and three customers that were 10% or greater of the Company’s total net revenues for the six months ended June 30, 2010 and 2009, respectively.

     Inventories, Net

     Inventories, net consist primarily of finished goods and are stated at the lower of standard cost or market. Standard cost approximates actual cost on the first-in, first-out method. The Company regularly monitors inventory quantities on-hand and records write-downs for excess and obsolete inventories based on the Company’s estimate of demand for its products, potential obsolescence of technology, product life cycles and whether pricing trends or forecasts indicate that the carrying value of inventory exceeds its estimated selling price. These factors are impacted by market and economic conditions, technology changes, and new product introductions and require estimates that may include factors that are uncertain. If inventory is written down, a new cost basis is established that cannot be increased in future periods.

     Impairment of Long-Lived Assets

     The Company periodically evaluates whether changes have occurred that require revision of the remaining useful life of long-lived assets or would render them not recoverable. If such circumstances arise, the Company compares the carrying amount of the long-lived assets to the estimated future undiscounted cash flows expected to be generated by the long-lived assets. If the estimated aggregate undiscounted cash flows are less than the carrying amount of the long-lived assets, an impairment charge, calculated as the amount by which the carrying amount of the assets exceeds the fair value of the assets, is recorded. Through June 30, 2010, no impairment losses have been recognized.

     Warranty Liabilities

     The Company provides a warranty for its software and hardware products. In most cases, the Company warrants that its hardware will be free of defects in workmanship for one year, and that its software media will be free of defects for 90 days. In master purchase agreements with large customers, however, the Company often warrants that its products (hardware and software) will function in material conformance to specifications for a period ranging from one to five years from the date of shipment. In general, the Company accrues for warranty claims based on the Company’s historical claims experience. In addition, the Company accrues for warranty claims based on specific events and other factors when the Company believes an exposure is probable and can be reasonably estimated. The adequacy of the accrual is reviewed on a periodic basis and adjusted, if necessary, based on additional information as it becomes available.

     Income Taxes

     The Company follows ASC 740 Income Taxes, which requires the use of the liability method of accounting for income taxes. The liability method computes income taxes based on a projected effective tax rate for the full calendar year. For example, the effective tax rate for the six months ended June 30, 2010 will be based on the projected effective tax rate for the year ending December 31, 2010. The liability method includes the effects of deferred tax assets or liabilities. Deferred tax assets or liabilities are recognized for the expected tax consequences of temporary differences between the financial statement and tax basis of assets and liabilities using the enacted tax rates that will be in effect when these differences reverse. The Company provides a valuation allowance to reduce deferred tax assets to the amount that is expected, based on whether such assets are more likely than not to be realized.

     Foreign Currency Derivatives

     The Company has revenues, expenses, assets and liabilities denominated in currencies other than the U.S. dollar that are subject to foreign currency risks, primarily related to expenses and liabilities denominated in the Israeli New Shekel. A foreign currency risk management program was established by the Company to help protect against the impact of foreign currency exchange rate movements on the Company’s operating results. The Company does not enter into derivatives for speculative or trading purposes. All derivatives, whether designated in hedging relationships or not, are required to be recorded on the consolidated balance sheet at fair value. The accounting for changes in the fair value of a derivative depends on the intended use of the derivative and the resulting designation.

     The Company selectively hedges future expenses denominated in Israeli New Shekels by purchasing foreign currency forward contracts or combinations of purchased and sold foreign currency option contracts. When the U.S. dollar strengthens against the Israeli New Shekel, the decrease in the value of future foreign currency expenses is offset by losses in the fair value of the contracts designated as hedges. Conversely, when the U.S. dollar weakens significantly against the Israeli New Shekel, the increase in the value of future foreign currency expenses is offset by gains in the fair value of the contracts designated as hedges. The exposures are hedged using derivatives designated as cash flow hedges under ASC 815 Derivatives and Hedging. The effective portion of the derivative’s gain or loss is initially reported as a component of accumulated other comprehensive income (loss) and, on occurrence of the forecasted transaction, is subsequently reclassified to the consolidated statement of operations, primarily in research and development expenses. The ineffective portion of the gain or loss is recognized immediately in other income (expense), net. For the three and six months ended June 30, 2010 and 2009, this amount was not material. These derivative instruments generally have maturities of 180 days or less, and hence all unrealized amounts as of June 30, 2010 will have settled as of December 31, 2010.

     Prior to June 30, 2010, the Company entered into foreign currency forward contracts to reduce the impact of foreign currency fluctuations on assets and liabilities denominated in currencies other than its functional currency, which is the U.S. dollar. The Company did not have any such transactions outstanding as of June 30, 2010. The Company recognized these derivative instruments as either assets or liabilities on the consolidated balance sheet at fair value. These forward exchange contracts were not accounted for as hedges; therefore, changes in the fair value of these instruments were recorded as other income (expense), net in the consolidated statement of operations. These derivative instruments generally had maturities of 90 days. Gains and losses on these contracts were intended to offset the impact of foreign exchange rate changes on the underlying foreign currency denominated assets and liabilities, primarily liabilities denominated in Israeli New Shekels, and therefore, did not subject the Company to material balance sheet risk.

     All of the derivative instruments are with high quality financial institutions and the Company monitors the creditworthiness of these parties. Amounts relating to these derivative instruments were as follows (in thousands):

		As of June 30,				As of December 31,
		2010				2009
Derivatives designated as hedging instruments:
Notional amount of currency option contracts: Israeli New Shekels		ILS	27,000			ILS	27,000
Notional amount of currency option contracts: U.S. dollars		$	7,370			$	7,454
Unrealized losses included in other comprehensive income on condensed consolidated balance sheets:
Unsettled — primarily included as other current liabilities		$	(204	)		$	(147	)
Settled — underlying derivative was settled but forecasted transaction has not occurred			(32	)			(4	)
Total unrealized losses included in other comprehensive (loss) income		$	(236	)		$	(151	)
Derivatives not designated as hedging instruments:
Notional amount of foreign currency forward contracts: Israeli New Shekels		ILS	—			ILS	5,000
Notional amount of foreign currency forward contracts: U.S. dollars		$	—			$	1,323

     The change in accumulated other comprehensive income (loss) from cash flow hedges included on the Company’s condensed consolidated balance sheets was as follows (in thousands):

		Six Months Ended June 30,
		2010				2009
Accumulated other comprehensive loss related to cash flow hedges as of beginning of period		$	(151	)		$	(621	)
Changes in settled and unsettled portion of cash flow hedges			(239	)			(464	)
			(390	)			(1,085	)
Less:
Changes in cash flow hedges: Loss reflected in condensed consolidated statement of operations			(154	)			(1,038	)
Accumulated other comprehensive loss related to cash flow hedges as of end of period		$	(236	)		$	(47	)

     Stock-based Compensation

     The Company applies the fair value recognition and measurement provisions of ASC 718 Compensation — Stock Compensation (ASC 718). Stock-based compensation is recorded at fair value as of the grant date and recognized as an expense over the employee’s requisite service period (generally the vesting period), which the Company has elected to amortize on a straight-line basis.

     Recently Issued Accounting Standards

     In October 2009, the FASB issued ASU 2009-13 Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements — a consensus of the FASB Emerging Issues Task Force (ASU 2009-13) and ASU 2009-14 Software (Topic 985): Certain Revenue Arrangements That Include Software Elements — a consensus of the FASB Emerging Issues Task Force (ASU 2009-14). ASU 2009-13 requires entities to allocate revenue in an arrangement using estimated selling prices of the delivered goods and services based on a selling price hierarchy. The amendments eliminate the residual method of revenue allocation and require revenue to be allocated using the relative selling price method. ASU 2009-14 removes tangible products from the scope of software revenue guidance and provides guidance on determining whether software deliverables in an arrangement that includes a tangible product are covered by the scope of the software revenue guidance. ASU 2009-13 and ASU 2009-14 are effective on a prospective basis for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, with early adoption permitted. The Company is currently evaluating the potential impact of the adoption of ASU 2009-13 and ASU 2009-14 on its consolidated financial position, results of operations or cash flows.

3. Basic and Diluted Net (Loss) Income per Common Share

     The computation of basic and diluted net (loss) income per common share was as follows (in thousands, except per share data):

		Three Months Ended June 30,								Six Months Ended June 30,
		2010				2009				2010				2009
Numerator:
Net (loss) income		$	(9,641	)		$	3,075			$	(18,410	)		$	5,357
Denominator:
Weighted average shares used in basic net (loss) income per common share			68,018				65,753				67,667				65,309
Stock options			—				2,637				—				2,837
Warrants			—				182				—				182
Restricted stock units			—				199				—				153
Employee stock purchase plan shares			—				—				—				38
Weighted average shares used in diluted net (loss) income per common share			68,018				68,771				67,667				68,519
Basic net (loss) income per common share		$	(0.14	)		$	0.05			$	(0.27	)		$	0.08
Diluted net (loss) income per common share		$	(0.14	)		$	0.04			$	(0.27	)		$	0.08

     As of June 30, 2010 and 2009, the Company had securities outstanding that could potentially dilute basic net income (loss) per common share in the future, but were excluded from the computation of net (loss) income per common share for the periods presented as their effect would have been anti-dilutive as follows (shares in thousands):

		As of June 30,
		2010				2009
Stock options outstanding			12,973				7,820
Restricted stock units			3,785				13
Employee stock purchase plan shares			267				211

4. Fair Value

     The fair value of the Company’s cash equivalents and marketable securities is determined in accordance with ASC 820 Fair Value Measurements and Disclosures (ASC 820). ASC 820 clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, ASC 820 establishes a three-tier value hierarchy, which prioritizes the inputs used in measuring fair value as follows: observable inputs such as quoted prices in active markets (Level 1), inputs other than the quoted prices in active markets that are observable either directly or indirectly (Level 2) and unobservable inputs in which there is little or no market data, which requires the Company to develop its own assumptions (Level 3). This hierarchy requires the Company to use observable market data, when available, and to minimize the use of unobservable inputs when determining fair value. For the Company’s Level 2 investments, fair value was derived from non-binding market consensus prices that were corroborated by observable market data, quoted market prices for similar instruments, or pricing models, such as discounted cash flow techniques, with all significant inputs derived from or corroborated by observable market data. The Company’s discounted cash flow techniques use observable market inputs, such as LIBOR-based yield curves.

     The Company’s fair value measurements of its financial assets (cash, cash equivalents and marketable securities) as of June 30, 2010 were as follows (in thousands):

		Level 1				Level 2				Level 3				Total
Marketable securities:
Corporate debt securities		$	—			$	64,562			$	—			$	64,562
U.S. Agency debt securities			3,018				51,563				—				54,581
Commercial paper			—				10,692				—				10,692
Certificates of deposit			200				—				—				200
			3,218				126,817				—				130,035
Cash equivalents:
Money market funds			12,505				—				—				12,505
Corporate debt securities			—				1,000				—				1,000
Commercial paper			—				7,599				—				7,599
			12,505				8,599				—				21,104
Total cash equivalents and marketable securities		$	15,723			$	135,416			$	—			$	151,139
Cash balances															11,954
Total cash, cash equivalents and marketable securities														$	163,093

     The Company’s fair value measurements of its financial assets (cash, cash equivalents and marketable securities) as of December 31, 2009 were as follows (in thousands):

		Level 1				Level 2				Level 3				Total
Marketable securities:
Corporate debt securities		$	—			$	70,819			$	—			$	70,819
U.S. Agency debt securities			1,265				63,014				—				64,279
Commercial paper			—				7,393				—				7,393
Certificates of deposit			4,523				—				—				4,523
			5,788				141,226				—				147,014
Cash equivalents:
Money market funds			12,527				—				—				12,527
Corporate debt securities			—				181				—				181
Commercial paper			—				1,000				—				1,000
			12,527				1,181				—				13,708
Total fair value		$	18,315			$	142,407			$	—			$	160,722
Cash balances															11,186
Total cash, cash equivalents and marketable securities														$	171,908

     In addition to the amounts disclosed in the above table, the fair value of the Company’s Israeli severance pay assets, which were almost fully comprised of Level 2 assets, was $4.1 million and $3.6 million as of June 30, 2010 and December 31, 2009, respectively.

5. Balance Sheet Data

     Marketable Securities

     Marketable securities included available-for-sale securities as follows (in thousands):

		As of June 30, 2010
		Amortized				Unrealized				Unrealized				Estimated
		Cost				Gain				Loss				Fair Value
Corporate debt securities		$	64,542			$	99			$	(79	)		$	64,562
U.S. Agency debt securities			54,567				22				(8	)			54,581
Commercial paper			10,692				—				—				10,692
Certificates of deposit			200				—				—				200
Total marketable securities		$	130,001			$	121			$	(87	)		$	130,035

		As of December 31, 2009
		Amortized				Unrealized				Unrealized				Estimated
		Cost				Gain				Loss				Fair Value
Corporate debt securities		$	70,569			$	288			$	(38	)		$	70,819
U.S. Agency debt securities			64,256				70				(47	)			64,279
Commercial paper			7,394				—				(1	)			7,393
Certificates of deposit			4,520				4				(1	)			4,523
Total marketable securities		$	146,739			$	362			$	(87	)		$	147,014

     The fair value of investments showing unrealized loss (none of which had been in a continuous loss position for more than nine months) was $46.7 million and $54.0 million as of June 30, 2010 and December 31, 2009, respectively. The contractual maturity date of the available-for-sale securities was as follows (in thousands):

		As of June 30,				As of December 31,
		2010				2009
Due within one year		$	90,425			$	107,449
Due within one to two years			39,610				39,565
Total marketable securities		$	130,035			$	147,014

     Inventories, Net

     Inventories, net were comprised entirely of finished goods as of June 30, 2010 and December 31, 2009.

     Prepaid Expenses and Other Current Assets

     Prepaid expenses and other current assets were comprised as follows (in thousands):

		As of June 30,				As of December 31,
		2010				2009
Taxes receivable		$	1,286			$	2,969
Prepaid maintenance			1,024				981
Interest receivable			991				1,070
Other			1,458				1,157
Total prepaid expenses and other current assets		$	4,759			$	6,177

     Property and Equipment, Net

     Property and equipment, net is stated at cost, less accumulated depreciation. Depreciation is calculated using the straight-line method and recorded over the assets’ estimated useful lives of 18 months to seven years. Property and equipment, net was comprised as follows (in thousands):

		As of June 30,				As of December 31,
		2010				2009
Engineering and other equipment		$	28,641			$	30,129
Computers, software and related equipment			19,340				19,942
Leasehold improvements			5,898				5,897
Office furniture and fixtures			1,112				1,132
			54,991				57,100
Less: accumulated depreciation			(45,080	)			(45,683	)
Total property and equipment, net		$	9,911			$	11,417

     Goodwill

     Goodwill is carried at cost and is not amortized. The carrying value of goodwill was approximately $1.7 million as of June 30, 2010 and December 31, 2009. Goodwill is tested for impairment on an annual basis and between annual tests in certain circumstances, and written down when impaired. The Company considered several factors including management structure and the nature of operations and concluded that it has only one reporting unit. Consistent with this determination, it reviewed the carrying amount of this unit compared to its fair value based on quoted market prices of the Company’s common stock. Following this approach, through June 30, 2010, no impairment losses have been recognized.

     Other Non-current Assets

     Other non-current assets were comprised as follows (in thousands):

		As of June 30,				As of December 31,
		2010				2009
Israeli severance pay		$	4,061			$	3,648
Security deposit			1,923				1,962
Software license			1,667				2,083
Restricted cash			583				583
Deferred tax assets			460				449
Other			229				277
Total other non-current assets		$	8,923			$	9,002

     Deferred Revenues, Net

     Deferred revenues, net were as follows (in thousands):

		As of June 30,				As of December 31,
		2010				2009
Deferred service revenues, net		$	29,065			$	27,252
Deferred product revenues, net			11,951				17,614
Total deferred revenues, net			41,016				44,866
Less current portion of deferred revenues, net			(30,582	)			(32,428	)
Deferred revenues, net, less current portion		$	10,434			$	12,438

     Other Liabilities

     Other liabilities were comprised as follows (in thousands):

		As of June 30,				As of December 31,
		2010				2009
Rent and restructuring liabilities		$	1,725			$	1,581
Foreign, franchise and other income tax liabilities			1,613				2,198
Accrued warranty			1,571				2,068
Sales and use tax payable			509				1,310
Accrued professional fees			408				462
Customer prepayments			31				816
Other			1,240				1,290
Total other liabilities			7,097				9,725
Less current portion of other liabilities			(5,119	)			(7,083	)
Other liabilities, less current portion		$	1,978			$	2,642

     Accrued Warranty

     Activity related to product warranty was as follows (in thousands):

		Six Months Ended June 30,
		2010				2009
Balance as of beginning of period		$	2,068			$	3,381
Warranty charged to cost of sales			142				176
Utilization of warranty			(353	)			(691	)
Other adjustments			(286	)			(569	)
Balance as of end of period			1,571				2,297
Less current portion of accrued warranty			(818	)			(1,060	)
Accrued warranty, less current portion		$	753			$	1,237

6. Restructuring Charges

     On May 4, 2010, the Audit Committee under designation of the Board of Directors authorized a restructuring plan pursuant to which 31 employees and 11 contractors were terminated. On February 9, 2009, the Audit Committee under designation of the Board of Directors authorized a restructuring plan pursuant to which employees were terminated. These plans were made in response to market and economic conditions. On October 29, 2007, the Audit Committee under designation of the Board of Directors authorized a restructuring plan in connection with the retirement of the Company’s CMTS product line pursuant to which employees were terminated and facilities were vacated. The Company incurred additional charges related to this October 29, 2007 plan for the six months ended June, 30, 2010 and 2009 to adjust its restructuring liability for changes in estimated sublease rentals associated with the facility. All of the restructuring plans were essentially complete as of June 30, 2010. Charges incurred with these restructuring plans were as follows (in thousands):

		May 2010				February 2009				October 2007
		Plan				Plan				Plan				Total
Charges incurred in six months ended June 30, 2010
Vacated facilities		$	—			$	—			$	347			$	347
Severance			692				—				—				692
		$	692			$	—			$	347			$	1,039
Charges incurred in six months ended June 30, 2009
Vacated facilities		$	—			$	—			$	699			$	699
Severance			—				657				—				657
		$	—			$	657			$	699			$	1,356
Total cumulative charges through June 30, 2010
Severance		$	692			$	657			$	2,463			$	3,812
Vacated facilities			—				—				2,111				2,111
Other			—				—				159				159
		$	692			$	657			$	4,733			$	6,082
Date through which Company will pay facilities costs		Not applicable				Not applicable				March 2012				March 2012

     Restructuring activity for the six months ended June 30, 2010 was as follows (in thousands):

										Total
		Vacated				Severance and				restructuring
		facilities costs				related expenses				liabilities
Balance as of December 31, 2009		$	894			$	—			$	894
Charges			347				692				1,039
Cash payments			(269	)			(491	)			(760	)
Balance as of June 30, 2010		$	972			$	201			$	1,173
Less restructuring liability, current portion			(546	)			(201	)			(747	)
Restructuring liability, less current portion		$	426			$	—			$	426

7. Legal Proceedings

     BigBand Networks, Inc. v. Imagine Communications, Inc., Case No. 07-351

     On June 5, 2007, the Company filed suit against Imagine Communications, Inc. in the U.S. District Court, District of Delaware, alleging infringement of certain U.S. Patents covering advanced video processing and bandwidth management techniques. The lawsuit seeks injunctive relief, along with monetary damages for willful infringement. The Company is subject to certain counterclaims by which Imagine Communications, Inc. has challenged the validity and enforceability of the Company’s asserted patents. The Company intends to defend itself vigorously against such counterclaims. No trial date has been set. At this stage of the proceeding, it is not possible for the Company to quantify the extent of potential liabilities, if any, resulting from the alleged counterclaims.

     Securities Litigation

     In connection with the settlement of the Company’s federal securities litigation (In re BigBand Networks, Inc. Securities Litigation, Case No. C07-5101-SBA) as ordered by the U.S. District Court for the Northern District of California on September 22, 2009, the related shareholder derivative lawsuit (Ifrah v. Bassan-Eskenazi, et. al., Case No. 468401) was dismissed by the Superior Court for the County of San Mateo, California on September 23, 2009, and the state securities litigation (Wiltjer v. Bassan-Eskenazi, et. al., Case No. CGC-07-469661) was dismissed by the Superior Court for the City and County of San Francisco on October 27, 2009. As of June 30, 2010 and December 31, 2009, the Company had no further significant obligations under these lawsuits.

8. Stockholders’ Equity

     The Company allocated stock-based compensation expense as follows (in thousands):

		Three Months Ended June 30,								Six Months Ended June 30,
		2010				2009				2010				2009
Cost of net revenues		$	610			$	520			$	1,176			$	959
Research and development			1,365				1,191				2,687				2,220
Sales and marketing			642				580				1,311				1,064
General and administrative			1,008				1,188				2,209				2,250
Total stock-based compensation		$	3,625			$	3,479			$	7,383			$	6,493

     Equity Incentive Plans

     Since March 15, 2007, the Company has granted all options and restricted stock units (RSUs) under its 2007 Equity Incentive Plan (2007 Plan). The 2007 Plan allows the Company to award incentive and non-qualified stock options, restricted stock, RSUs and stock appreciation rights to employees, officers, directors and consultants of the Company. Options under the 2007 Plan are granted at an exercise price that equals the closing value of the Company’s common stock on the date of grant, generally are exercisable in installments vesting over a four-year period and generally have a maximum term of ten years from the date of grant. The Company creates newly issued shares for all share transactions with employees.

     The Company has options outstanding under its 1999, 2001 and 2003 share option and incentive plans (collectively the Prior Plans). Cancelled or forfeited stock option grants under the Prior Plans are added to the total amount of shares available for grant under the 2007 Plan.

     The 2007 Plan contains an “evergreen” provision, pursuant to which the number of shares available for issuance under the 2007 Plan shall be increased on the first day of the fiscal year, in an amount equal to the least of (a) 6,000,000 shares, (b) 5% of the outstanding Shares on the last day of the immediately preceding fiscal year or (c) such number of shares determined by the Board of Directors. Shares available for future issuance under the 2007 Plan were as follows (in thousands):

		Shares
Available as of December 31, 2009			7,495
Authorized shares added			3,357
Options and RSU cancelled			1,815
Options and RSU granted			(5,032	)
Available as of June 30, 2010			7,635

     Stock Options

     Data pertaining to stock option activity under all the plans was as follows (in thousands, except per share and period data):

						Weighted				Weighted Average
		Number				Average				Remaining				Aggregate
		of				Exercise				Contractual Life				Intrinsic
		Options				Price				(Years)				Value
Outstanding as of December 31, 2009			12,115			$	4.33				6.99			$	7,621
Granted			2,739				2.96
Exercised			(615	)			1.12							$	1,230
Cancelled			(1,266	)			4.77
Outstanding as of June 30, 2010			12,973			$	4.15				6.60			$	5,299
Vested and expected to vest, net of forfeitures			12,615			$	4.16				6.52			$	5,278

     The intrinsic value of an outstanding option is calculated based on the difference between its exercise price and the closing price of the Company’s common stock on the last trading date in the year, or in the case of an exercised option, it is based on the difference between its exercise price and the actual fair market value of the Company’s common stock on the date of exercise. Stock options with exercise prices greater than the closing price of the Company’s common stock on the last trading day of the year have an intrinsic value of zero. The aggregate intrinsic values for options outstanding in the preceding table are based on the Company’s closing stock prices of $3.02 and $3.44 per share as of June 30, 2010 and December 31, 2009, respectively. As of June 30, 2010, total unrecognized stock compensation expense relating to unvested stock options, adjusted for estimated forfeitures, was $15.8 million. This amount is expected to be recognized over a weighted-average period of 2.9 years.

     Restricted Stock Units

     RSU grants under the 2007 Plan generally vest in increments over two to four years from the date of grant. The RSUs are classified as equity awards because the RSUs are paid only in shares upon vesting. RSU awards are measured at the fair value at the date of grant, which corresponds to the closing stock price of the Company’s common stock on the date of grant. The Company’s RSU activity was as follows (in thousands, except per share data):

						Weighted				Weighted Average
						Average				Remaining				Aggregate
		Restricted				Grant-Date				Contractual Life				Intrinsic
		Stock Units				Fair Value				(Years)				Value
Unvested as of December 31, 2009			2,497			$	5.58				1.77			$	8,590
Granted			2,293				2.70
Vested			(456	)			6.13							$	1,300
Cancelled			(549	)			4.61
Unvested as of June 30, 2010			3,785			$	4.01				1.48			$	11,431
Vested and expected to vest, net of forfeitures			3,519			$	4.01				1.43			$	10,627

     As of June 30, 2010, total unrecognized stock compensation expense relating to unvested RSUs, adjusted for estimated forfeitures, was $12.2 million. This amount is expected to be recognized over a weighted-average period of 2.5 years.

     On June 11, 2010, the Company granted 388,000 RSUs to certain employees, some or all of which may vest based on achievement of 2010 incentive compensation plan targets, or be cancelled and returned to shares available for future issuance. The Company also granted 91,000 RSUs which vest in five years; however, vesting will accelerate if certain stock performance criteria are attained. The stock compensation expense for these RSUs will be expensed over their estimated vesting period and was immaterial for the three months ended June 30, 2010.

     Employee Stock Purchase Plan

     Under the Company’s 2007 Employee Stock Purchase Plan (ESPP), employees may purchase shares of common stock at a price per share that is 85% of the fair market value of the Company’s common stock as of the beginning or the end of each six month offering period, whichever is lower. The ESPP contains an evergreen provision, pursuant to which an annual increase may be added on the first day of each fiscal year, equal to the least of (i) 3,000,000 shares of the Company’s common stock, (ii) 2% of the outstanding shares of the Company’s common stock on the first day of the fiscal year or (iii) an amount determined by the Board of Directors. The ESPP is compensatory in nature, and therefore results in compensation expense. The Company recorded stock-based compensation expense associated with its ESPP of $74,000 and $0.2 million for the three and six months ended June 30, 2010, respectively. The Company recorded stock-based compensation expense associated with its ESPP of $0.2 million and $0.4 million for the three and six months ended June 30, 2009, respectively. Shares available for future issuance under the ESPP were as follows (in thousands):

		Shares
Available as of December 31, 2009			2,477
Authorized shares added			1,343
Common shares issued			(265	)
Available as of June 30, 2010			3,555

     Stock-Based Compensation Assumptions

     The Company uses the Black-Scholes option-pricing model to determine the fair value of stock-based awards, including ESPP awards, under ASC 718. This model incorporates various subjective assumptions including expected volatility, expected term and interest rates. The fair value of each new option awarded was estimated on the grant date using the assumptions noted as follows:

		Three Months Ended June 30,								Six Months Ended June 30,
		2010				2009				2010				2009
Stock Options
Expected volatility			67	%			75	%			67-73	%			73-75	%
Expected term		6 years				6 years				6 years				6 years
Risk-free interest			2.60	%			2.57	%			2.60-2.80	%			2.00-2.57	%
Expected dividends			0.0	%			0.0	%			0.0	%			0.0	%

     The computation of expected volatility is derived primarily from the weighted historical volatilities of several comparable companies within the cable and telecommunications equipment industry and to a lesser extent, the Company’s weighted historical volatility following its IPO in March 2007. The risk-free interest factor is based on the U.S. Treasury yield curve in effect at the time of grant for zero coupon U.S. Treasury notes with maturities approximately equal to each grant’s expected term. For all periods presented, the Company has elected to use the simplified method of determining the expected term as permitted by SEC Staff Accounting Bulletin (SAB) 107 as revised by SAB 110. The Company estimates its forfeiture rate based on an analysis of its actual forfeitures and will continue to evaluate the adequacy of the forfeiture rate based on actual forfeiture experience, analysis of employee turnover behavior, and other factors. Estimates, including achievement of incentive compensation plan targets, are evaluated each reporting period and adjusted, if necessary, by recognizing the cumulative effect of the change in estimate on compensation costs recognized in prior year periods.

9. Segment Reporting

     The Company has a single reporting segment. Enterprise-wide disclosures related to revenues and long-lived assets are described below. Net revenues by geographical region were allocated based on the shipping destination of customer orders, and were as follows (in thousands):

		Three Months Ended June 30,								Six Months Ended June 30,
		2010				2009				2010				2009
United States		$	23,618			$	34,505			$	52,304			$	70,668
Asia			2,171				1,396				4,561				7,638
Europe			364				2,163				1,143				3,253
Americas excluding United States			240				962				620				1,355
Total net revenues		$	26,393			$	39,026			$	58,628			$	82,914

     Long-lived assets, net of depreciation were as follows (in thousands):

		As of June 30,				As of December 31,
		2010				2009
United States		$	5,242			$	6,286
Israel			4,231				4,728
Rest of World			438				403
Total long-lived assets, net		$	9,911			$	11,417

10. Income Taxes

     As part of the process of preparing its unaudited condensed consolidated financial statements, the Company is required to estimate its income taxes in each of the jurisdictions in which it operates. This process involves estimating the current tax liability under the most recent tax laws and assessing temporary differences resulting from the differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included on the unaudited condensed consolidated balance sheets.

     Income tax benefit was $0.3 million and $0.2 million for the three and six months ended June 30, 2010, respectively. Income tax expense was $0.3 million and $0.5 million for the three and six months ended June 30, 2009, respectively. The benefit for the three months ended June 30, 2010 was primarily related to the release of reserves pertaining to the Israeli tax provisions upon finalization of the tax audit for fiscal years from 2004 through 2007. The effective tax rates for these periods differed from the U.S. federal statutory rate primarily due to the differential in foreign tax rates on cost-plus foreign jurisdictions, non deductible stock compensation expense, other currently non-deductible items, movement in the Company’s valuation allowance and various discrete items.

11. Comprehensive (Loss) Income

     The components of comprehensive (loss) income were as follows (in thousands):

		Three Months Ended June 30,								Six Months Ended June 30,
		2010				2009				2010				2009
Net (loss) income		$	(9,641	)		$	3,075			$	(18,410	)		$	5,357
Change in cash flow hedges			(161	)			695				(85	)			574
Change in unrealized gains (losses) on marketable securities			(113	)			411				(241	)			(107	)
Comprehensive (loss) income		$	(9,915	)		$	4,181			$	(18,736	)		$	5,824

     Other comprehensive (loss) income was as follows (in thousands):

		As of June 30,				As of December 31,
		2010				2009
Net unrealized losses on cash flow hedges		$	(236	)		$	(151	)
Net unrealized gains on marketable securities			34				275
Total accumulated other comprehensive (loss) income		$	(202	)		$	124

     Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     This quarterly report on Form 10-Q contains “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements include statements as to industry trends and our future expectations and other matters that do not relate strictly to historical facts. These statements are often identified by the use of words such as “may,” “will,” “expect,” “believe,” “anticipate,” “project”, “intend,” “could,” “estimate,” or “continue,” and similar expressions or variations. These statements are based on the beliefs and assumptions of our management based on information currently available to management. Such forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results and the timing of certain events to differ materially from the future results expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the section titled “Risk Factors” and those included elsewhere in this Form 10-Q. Furthermore, such forward-looking statements speak only as of the date of this report. We undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements.

Overview

     We develop, market and sell network-based platforms that enable cable multiple system operators (MSOs) and telecommunications companies (collectively, service providers) to offer video services across coaxial, fiber and copper networks. We were incorporated in Delaware in December 1998. Since that time, we have developed significant expertise in rich media processing, communications networking and bandwidth management. Our customers are using our platforms to expand high-definition television (HDTV) services, and enable high-quality video advertising programming to subscribers. Our Broadcast Video, TelcoTV, Switched Digital Video and IPTV (Personalized Video) solutions are comprised of a combination of software and programmable hardware platforms. We have sold our solutions to more than 200 customers globally. We sell our products and services to customers in the U.S. and Canada through our direct sales force. Domestically, our customers include Bright House, Cablevision, Charter, Comcast, Cox, Time Warner Cable and Verizon, which are seven of the ten largest service providers in the U.S. We sell to customers internationally through a combination of direct sales and resellers. Our largest international resellers include Beijing Bupt-Guoan, Ssangyong, and Sugys, who sell to end users such as Jiangsu Cable and LG Telecom.

     Net Revenues. We derive our net revenues principally from our video products, which are comprised of a combination of software licenses and programmable hardware platforms, and our service offerings. Our sales cycle typically ranges from six to eighteen months, but can be longer if the sale relates to new product introductions. Our sales process generally involves several stages before we can recognize revenues on the sale of our products. As a provider of advanced technologies, we seek to actively participate with our existing and potential customers in the evaluation of their technology needs and network architectures, including the development of initial designs and prototypes. Following these activities, we typically respond to a service provider’s request for proposal, configure our products to work within our customer’s network architecture, and test our products first in laboratory testing and then in field environments to ensure interoperability with existing products in the service provider’s network. Following testing, our revenue recognition generally depends on satisfying the acceptance criteria specified in our contract with the customer and our customer’s schedule for roll-out of the product. Completion of several of these stages is substantially outside of our control, which causes our revenue patterns from a given customer to vary widely from period to period. After initial deployment of our products, subsequent purchases of our products typically have a more compressed sales cycle.

     Due to the concentrated nature of the cable and telecommunications industries, we sell our products to a limited number of large customers. Within a given quarter, our revenues from our large customers can vary significantly based upon their budgetary cycles and implementation schedules. For the three months ended June 30, 2010 and 2009, we derived approximately 79% and 78%, respectively, of our net revenues from our top five customers. For the six months ended June 30, 2010 and 2009, we derived approximately 73% and 78%, respectively, of our net revenues from our top five customers. We believe that for the foreseeable future our net revenues will continue to be highly concentrated in a limited number of large customers. The loss of one or more of our large customers, or the cancellation or deferral of purchases by one or more of these customers, would have a material adverse impact on our revenues and operating results. We often recognize a substantial portion of our revenues in the last month of a quarter, which limits our visibility to estimated future revenues, product mix and gross margins.

     Our service revenues include ongoing customer support and maintenance, product installation and training. Our customer support and maintenance is available in a tiered offering at either a standard or an enhanced level. The majority of our customers have purchased our enhanced level of customer support and maintenance. Our accounting for revenues is complex, and we account for revenues in accordance with applicable U.S. generally accepted accounting principles (GAAP).

     Cost of Net Revenues. Our cost of product revenues consists primarily of payments for components and product assembly, costs of product testing, provisions recorded for excess and obsolete inventory, provisions recorded for warranty obligations, manufacturing overhead and allocated facilities and information technology expense. Cost of service revenues is primarily comprised of personnel

costs in providing technical support, costs incurred to support deployment and installation within our customers’ networks, training costs and allocated facilities and information technology expense.

     Gross Margin. Our gross profit as a percentage of net revenues, or gross margin, has been and will continue to be affected by a variety of factors, including the mix of software, hardware and services sold, and the average selling prices of our products. We achieve a higher gross margin on the software content of our products compared to the hardware content. In general, we expect the average selling prices of our products to decline over time due to competitive pricing pressures, but we seek to minimize the impact to our gross margins by introducing new products with higher margins, selling software enhancements to existing products, achieving price reductions for components and improving product design to reduce costs. Our gross margins for products are also influenced by the specific terms of our contracts, which may vary significantly from customer to customer based on the type of products sold, the overall size of the customer’s order, and the architecture of the customer’s network, which can influence the amount and complexity of design, integration and installation services.

     Operating Expenses. Our operating expenses consist of research and development, sales and marketing, general and administrative, restructuring and other charges. Personnel-related costs are the most significant component of our operating expenses. We currently expect our headcount to remain relatively flat in the near term. We expect our operating expenses to decline in absolute dollars for the three months ending September 30, 2010 compared to the three months ended June 30, 2010 as we remain cautious about our spending in the near term.

     Research and development expense is the largest functional component of our operating expenses and consists primarily of personnel costs, independent contractor costs, prototype expenses, and other allocated facilities and information technology expense. All research and development costs are expensed as incurred. Our development teams are located in Tel Aviv, Israel; Shenzhen, China; Westborough, Massachusetts and Redwood City, California. We expect our research and development expense to decrease in absolute dollars for the three months ending September 30, 2010 compared to the three months ended June 30, 2010, primarily due to a reduction in both personnel and independent contractor costs following our May 2010 restructuring plan.

     Sales and marketing expense relates primarily to compensation and associated costs for marketing and sales personnel, sales commissions, promotional and other marketing expenses, travel, trade-show expenses and allocated facilities and information technology expense. Marketing programs are intended to generate revenues from new and existing customers and are expensed as incurred. We expect sales and marketing expense to decrease modestly in absolute dollars for the three months ending September 30, 2010 compared to the three months ended June 30, 2010.

     General and administrative expense consists primarily of compensation and associated costs for general and administrative personnel, professional services and allocated facilities and information technology expenses. Professional services consist of outside legal, accounting and other consulting costs. We expect general and administrative expense to increase modestly in absolute dollars for the three months ending September 30, 2010 compared to the three months ended June 30, 2010, primarily due to legal fees related to a lawsuit filed by us against Imagine Communications, Inc. alleging patent infringement, and other overhead expenses.

Critical Accounting Policies and Estimates

     Our condensed consolidated financial statements have been prepared in accordance with U.S. GAAP, and pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). The preparation of our condensed consolidated financial statements requires our management to make estimates, assumptions, and judgments 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 revenues and expenses during the applicable periods. Management bases its estimates, assumptions, and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances. Different assumptions and judgments would change the estimates used in the preparation of our condensed consolidated financial statements, which, in turn, could change the results from those reported. Our management evaluates its estimates, assumptions and judgments on an ongoing basis.

     Critical accounting policies that affect our more significant judgments and estimates used in the preparation of our condensed consolidated financial statements include accounting for revenue recognition, the valuation of inventories, warranty liabilities, stock- based compensation, the allowance for doubtful accounts, the impairment of long-lived assets, and income taxes, the policies of which are discussed under the caption “Critical Accounting Policies and Estimates” in our 2009 Form 10-K filed with the SEC on March 5, 2010. For additional information on the recent accounting pronouncements impacting our business, see Note 2 of the Notes to Condensed Consolidated Financial Statements.

Results of Operations

     The percentage relationships of the listed items from our condensed consolidated statements of operations as a percentage of total net revenues were as follows:

		Three Months Ended June 30,								Six Months Ended June 30,
		2010				2009				2010				2009
Total net revenues			100.0	%			100.0	%			100.0	%			100.0	%
Total cost of net revenues			47.1				36.0				50.5				38.9
Total gross profit			52.9				64.0				49.5				61.1
Operating expenses:
Research and development			49.7				28.5				45.4				27.3
Sales and marketing			22.7				15.0				20.5				14.8
General and administrative			15.2				12.8				14.6				11.5
Restructuring charges			3.9				—				1.8				1.6
Class action litigation charges			—				1.2				—				0.6
Total operating expenses			91.5				57.5				82.3				55.8
Operating (loss) income			(38.6	)			6.5				(32.8	)			5.3
Interest income			1.3				1.8				1.5				1.9
Other (expense) income, net			(0.4	)			0.4				(0.4	)			(0.1	)
(Loss) income before (benefit from) provision for income taxes			(37.7	)			8.7				(31.7	)			7.1
(Benefit from) provision for income taxes			(1.2	)			0.8				(0.3	)			0.7
Net (loss) income			(36.5	)%			7.9	%			(31.4	)%			6.4	%