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EX-31.1 - EXHIBIT 31.1 - BigBand Networks, Inc.ex31_1.htm
EX-31.2 - EXHIBIT 31.2 - BigBand Networks, Inc.ex31_2.htm
EX-32.1 - EXHIBIT 32.1 - BigBand Networks, Inc.ex32_1.htm
EX-10.30 - EXHIBIT 10.30 - BigBand Networks, Inc.ex10_30.htm
EX-10.31 - EXHIBIT 10.31 - BigBand Networks, Inc.ex10_31.htm



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
 
For the quarterly period ended March 31, 2011
 
Or
 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from                      to                     
 
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.
 
 Large Accelerated filer  o
 Accelerated filer  þ
Non-Accelerated filer o
Smaller reporting company  o
 
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 May 1, 2011, 70,070,273 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
 
 
 March 31, 2011
 
 
INDEX
 
   
Page
     
PART I.
3
     
Item 1.
3
     
 
3
     
 
4
     
 
5
     
 
6
     
Item 2.
19
     
Item 3.
27
     
Item 4.
27
     
PART II.
28
     
Item 1.
28
     
Item 1A.
28
     
Item 6.
38
     
 
39
     

 
2

 
PART 1.         FINANCIAL INFORMATION
Item 1.            FINANCIAL STATEMENTS
 
BigBand Networks, Inc.
Condensed Consolidated Balance Sheets
(Unaudited in thousands, except per share data)
             
   
As of
March 31,
2011
   
As of
December 31,
2010
 
ASSETS
           
Current assets:
           
Cash and cash equivalents
  $ 15,671     $ 21,537  
Marketable securities
    120,649       122,012  
Accounts receivable, net of allowance for doubtful accounts of $17 as of both March 31, 2011 and December 31, 2010
    8,729       5,001  
Inventories, net
    12,474       11,117  
Prepaid expenses and other current assets
    3,710       4,190  
Total current assets
    161,233       163,857  
Property and equipment, net
    6,872       8,088  
Goodwill
    1,656       1,656  
Other non-current assets
    6,779       7,170  
Total assets
  $ 176,540     $ 180,771  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
Current liabilities:
               
Accounts payable
  $ 7,935     $ 4,656  
Accrued compensation and related benefits
    6,605       5,178  
Current portion of deferred revenues, net
    19,894       18,143  
Current portion of other liabilities
    4,333       4,266  
Total current liabilities
    38,767       32,243  
Deferred revenues, net, less current portion
    7,545       8,327  
Other liabilities, less current portion
    1,582       1,692  
Accrued long-term Israeli severance pay
    4,842       4,376  
Commitments and contingencies
               
Stockholders’ equity:
               
Common stock, $0.001 par value, 250,000 shares authorized as of March 31, 2011 and December 31, 2010; 70,057 and 69,687 shares issued and outstanding as of March 31, 2011 and December 31, 2010, respectively
    70       70  
Additional paid-in capital
    301,740       299,003  
Accumulated other comprehensive (loss) income
    (11 )     253  
Accumulated deficit
    (177,995 )     (165,193 )
Total stockholders’ equity
    123,804       134,133  
Total liabilities and stockholders’ equity
  $ 176,540     $ 180,771  

See accompanying notes
 
 
3

 
BigBand Networks, Inc.
Condensed Consolidated Statements of Operations
(Unaudited in thousands)
 
   
Three Months Ended March 31,
 
   
2011
   
2010
 
Net revenues:
           
Products
  $ 9,529     $ 24,881  
Services
    8,836       7,354  
Total net revenues
    18,365       32,235  
                 
Cost of net revenues:
               
Products
    5,766       13,924  
Services
    3,043       3,277  
Total cost of net revenues
    8,809       17,201  
                 
Gross profit
    9,556       15,034  
                 
Operating expenses:
               
Research and development
    11,383       13,492  
Sales and marketing
    5,112       6,050  
General and administrative
    3,814       4,526  
Restructuring charges
    2,007       -  
Total operating expenses
    22,316       24,068  
                 
Operating loss
    (12,760 )     (9,034 )
Interest income
    206       515  
Other expense, net
    (30 )     (88 )
Loss before provision for income taxes
    (12,584 )     (8,607 )
Provision for income taxes
    218       162  
Net loss
  $ (12,802 )   $ (8,769 )
                 
Basic net loss per common share
  $ (0.18 )   $ (0.13 )
Diluted net loss per common share
  $ (0.18 )   $ (0.13 )
                 
Shares used in basic net loss per common share
    69,842       67,313  
Shares used in diluted net loss per common share
    69,842       67,313  
 
See accompanying notes
 
 
4

 
BigBand Networks, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited in thousands)
   
Three Months ended March 31,
 
   
2011
   
2010
 
Cash Flows from Operating activities
 
Net loss
  $ (12,802 )   $ (8,769 )
Adjustments to reconcile net loss to net cash (used in) operating activities:
         
Stock-based compensation
    2,688       3,758  
Depreciation of property and equipment
    1,344       1,846  
Fixed assets written off related to restructuring
    551       -  
Amortization of software license
    -       208  
Gain on disposal of property and equipment
    -       (11 )
Net settled unrealized losses on cash flow hedges
    (51 )     (23 )
Change in operating assets and liabilities:
               
(Increase) decrease in accounts receivable
    (3,728 )     10,648  
(Increase) in inventories, net
    (1,357 )     (3,766 )
Decrease in prepaid expenses and other current assets
    368       906  
Decrease (increase) in other non-current assets
    391       (353 )
Increase (decrease) in accounts payable
    3,279       (1,268 )
Increase in long-term Israeli severance pay
    466       360  
Increase (decrease) in accrued and other liabilities
    1,317       (1,669 )
Increase (decrease) in deferred revenues
    969       (7,469 )
Net cash (used in) operating activities
    (6,565 )     (5,602 )
Cash Flows from Investing activities
               
Purchase of marketable securities
    (44,900 )     (51,397 )
Proceeds from maturities of marketable securities
    38,951       44,897  
Proceeds from sale of marketable securities
    7,278       8,500  
Purchase of property and equipment
    (679 )     (1,105 )
Proceeds from sale of property and equipment
    -       47  
Net cash provided by investing activities
    650       942  
Cash Flows from Financing activities
               
Proceeds from exercise of stock options
    49       423  
Net cash provided by financing activities
    49       423  
                 
Net (decrease) in cash and cash equivalents
    (5,866 )     (4,237 )
Cash and cash equivalents as of beginning of period
    21,537       24,894  
Cash and cash equivalents as of end of period
  $ 15,671     $ 20,657  
 
See accompanying notes.
 
 
5

 
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 March 31, 2011, and the condensed consolidated statements of operations for the three months ended March 31, 2011 and 2010, and the condensed consolidated statements of cash flows for the three months ended March 31, 2011 and 2010 are unaudited. The condensed consolidated balance sheet as of December 31, 2010 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, 2010 filed with the U.S. Securities and Exchange Commission (SEC) on March 9, 2011 (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 March 31, 2011, the condensed consolidated statements of operations for the three months ended March 31, 2011 and 2010, and the condensed consolidated statements of cash flows for the three months ended March 31, 2011 and 2010. The results for the three months ended March 31, 2011 are not necessarily indicative of the results to be expected for the year ending December 31, 2011 or for any other interim period or for any future period.
 
       With the exception of the adoption of guidance related to revenue recognition, discussed below, there have been no significant changes in the Company’s accounting policies during the three months ended March 31, 2011 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 and noncancellable and unconditional purchase commitments, 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
 
        In October 2009, the Financial Accounting Standards Board (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 and 14 amended the accounting standards for revenue recognition to remove tangible products containing software components and nonsoftware components that function together to deliver the product’s essential functionality from the scope of industry-specific software revenue recognition guidance, and also:
 
provide updated guidance on whether multiple deliverables exist, how the deliverables in an arrangement should be separated, and how the consideration should be allocated;
   
require an entity to allocate revenue in an arrangement using estimated selling prices (ESP) of deliverables if the Company does not have vendor-specific objective evidence of selling price (VSOE) or third-party evidence of selling price (TPE); and
   
eliminate the use of the residual method and require an entity to allocate revenue using the relative selling price method.
 
 
6

 
       The Company adopted the provisions of ASU 2009-13 and 14, prospectively, for all transactions originating or materially modified after December 31, 2010. This guidance does not generally change the units of accounting for the Company’s revenue transactions. Most products and services qualify as separate units of accounting. The adoption of ASU 2009-13 and 14 did not have a material impact on the Company’s consolidated financial condition, operating revenues, results of operations or cash flows, and the Company does not expect a material impact in the future.
 
       The Company’s software and hardware product applications are sold as solutions and its software is a significant component to the functionality of these solutions. The Company provides unspecified software updates and enhancements related to products through support contracts. 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 resellers, 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 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.
 
       The Company sells its products and services to customers in North America through its direct sales force, and sells to customers internationally through a combination of direct sales and resellers. Sales to the Company’s resellers are final and the resellers do not have any rights of return, product rotation rights, or price protection.
 
        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 generally extends 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 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.
 
        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 revenues and related costs generally relate to acceptance provisions that have not been met, partial shipment or for transactions entered into before December 31, 2010, when the Company did 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.
 
        For all transactions entered into after December 31, 2010, the Company recognizes revenues using estimated selling prices of the delivered goods and services based on a hierarchy of methods contained in ASU 2009-13. The Company uses VSOE for determination of estimated selling price of elements in each arrangement if available, and since third party evidence is not available for those elements where vendor specific objective evidence of selling price cannot be determined, the Company evaluates factors to determine its ESP for all other elements. In multiple element arrangements where hardware and software are sold as part of the solution, revenue is allocated to the hardware and software as a group using the relative selling prices of each of the deliverables in the arrangement based upon the aforementioned selling price hierarchy.
 
        VSOE of fair value for elements of an arrangement is based upon the normal pricing and discounting practices for those services when sold separately, and VSOE for support services is measured by the renewal rate offered to the customer. In determining VSOE, the Company requires that a substantial majority of the selling prices for a service fall within a reasonably narrow pricing range, generally evidenced by approximately 80% of such historical stand-alone transactions falling within plus or minus 15% of the mean rates. In addition, the Company may consider major service groups, geographies, customer classifications, and other variables in determining VSOE.
 
       The Company is typically not able to determine TPE for its products or services. TPE is determined based on competitor prices for similar deliverables when sold separately. Generally, the Company’s go-to-market strategy differs from that of its peers and its offerings contain a significant level of differentiation such that the comparable pricing of products with similar functionality cannot be obtained. Furthermore, the Company is unable to reliably determine what similar competitor products’ selling prices are on a stand-alone basis.
 
        When the Company is unable to establish selling price of its non-software deliverables using VSOE or TPE, it uses ESP in its allocation of arrangement consideration. The objective of ESP is to determine the price at which the Company would transact a sale if the product or service were sold on a stand-alone basis. The Company determines ESP for a product or service by considering multiple factors including, but not limited to, pricing practices, geographies, customer classes and distribution channels.
 
 
7

 
        The Company regularly reviews VSOE and ESP and maintains internal controls over the establishment and updates of these estimates. There was no material impact during the three months ended March 31, 2011, nor does the Company currently expect a material impact in the near term from changes in VSOE or ESP.
 
       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, 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 March 31, 2011, 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. 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, other accrued 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 difficult industry conditions and 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 receivable. The Company had three and four customers that each had an accounts receivable balance of greater than 10% of the Company’s total accounts receivable balance as of March 31, 2011 and December 31, 2010, respectively. The Company recognized revenues from four and three customers that were 10% or greater of the Company’s total net revenues for the three months ended March 31, 2011 and 2010, respectively.
 
        Inventories, Net
 
       Inventories, net consist of finished goods and raw materials, and are stated at the lower of standard cost or market. Standard cost approximates actual cost on the first-in, first-out method, and is comprised of material, labor, and overhead. The Company’s net inventory balance was $12.5 million and $11.1 million as of March 31, 2011 and December 31, 2010, respectively. The Company’s inventory requires lead time to manufacture, and therefore it is required to order certain inventory in advance of anticipated sales. The Company regularly monitors inventory quantities on-hand and records write-downs for excess and obsolete inventories determined primarily by future demand forecasts. Inventory write-downs are measured as the difference between the cost of the inventory and market value, and are charged to the provision for inventory which is a component of its cost of net product revenues. At the point of the write-down a new lower cost basis for that inventory is established and subsequent changes in facts and circumstances do not result in the restoration or increase in that newly established cost basis.
 
 
8

 
        The Company records a liability for firm noncancellable and unconditional purchase commitments for quantities in excess of its future demand forecasts consistent with the valuation of its excess and obsolete inventory. As of March 31, 2011 and December 31, 2010, the liability for these purchase commitments in excess of its future demand forecasts was $0.5 million and $0.8 million, respectively, and was included in other current liabilities on the Company’s consolidated balance sheets, and cost of net product revenues in its consolidated statements of operations.
 
        The inventory provisions included in inventories, net on the Company’s consolidated balance sheets were $1.7 million and $2.8 million as of March 31, 2011 and December 31, 2010, respectively. The Company’s write-downs for inventory charged to cost of net product revenues were $0.3 million and $0.2 million for the three months ended March 31, 2011 and 2010, respectively. The Company could be required to increase its inventory provisions if there were to be sudden and significant decreases in demand for its products or if there were a higher incidence of inventory obsolescence because of rapidly changing technology and customer requirements. The Company continues to regularly evaluate the exposure for inventory write-downs and the adequacy of its liability for purchase commitments.
 
        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.
 
        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 three months ended March 31, 2011 is based on the projected effective tax rate for the year ending December 31, 2011. 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 months ended March 31, 2011 and 2010, this amount was not material. The Company’s derivative instruments generally have maturities of 180 days or less, and hence all unrealized amounts as of March 31, 2011 will have settled as of September 30, 2011.
 
 
9

 
        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 March 31,
2011
   
As of December 31,
2010
 
             
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
  $ 7,720     $ 7,548  
                 
Unrealized (losses) gains included in other comprehensive income on condensed consolidated balance sheets:
               
Settled - underlying derivative was settled but forecasted transaction has not occurred
  $ (1 )   $ 50  
Unsettled - primarily included as other current (liabilities) assets
    (75 )     104  
Total unrealized (losses) gains included in other comprehensive income
  $ (76 )   $ 154  
 
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):
 
   
Three Months Ended March 31,
 
   
2011
   
2010
 
             
Accumulated other comprehensive income (loss) related to cash flow hedges as of beginning of period
  $ 154     $ (151 )
Changes in settled and unsettled portion of cash flow hedges
    (128 )     17  
      26       (134 )
Less:
               
Less changes in cash flow hedges: income (loss) reflected in condensed consolidated statement of operations
    102       (59 )
Accumulated other comprehensive loss related to cash flow hedges as of end of period
  $ (76 )   $ (75 )
 
Stock-based Compensation
 
        The Company applies the fair value recognition and measurement provisions of ASC 718 Compensation — Stock Compensation. 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 Adopted Accounting Standards
 
As described above under Revenue Recognition, the Company adopted the provisions of ASU 2009-13 and ASU 2009-14 on a prospective basis for all transactions entered into or materially amended after December 31, 2010.
 
       In December 2010, the FASB issued ASU 2010-28, Intangibles - Goodwill and Other (Topic 350) - When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts (ASU 2010-28)ASU 2010-28 modifies Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In determining whether it is more likely than not that a goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating that an impairment may exist such as if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. The Company adopted ASU 2010-28 effective January 1, 2011, and this adoption did not have a material impact on its consolidated financial condition, results of operations or cash flows.
 
 
10

 
3. Basic and Diluted Net Loss per Common Share
 
        The computation of basic and diluted net loss per common share was as follows (in thousands, except per share data):
 
   
Three Months Ended March 31,
 
   
2011
   
2010
 
Numerator:
           
Net loss
  $ (12,802 )   $ (8,769 )
                 
Denominator:
               
Weighted average shares used in basic and diluted net loss per common share
    69,842       67,313  
                 
Basic and diluted net loss per common share
  $ (0.18 )   $ (0.13 )
                 
 
As of March 31, 2011 and 2010, 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 per common share for the periods presented as their effect would have been anti-dilutive as follows (shares in thousands):
 
   
As of March 31,
 
   
2011
   
2010
 
             
Stock options outstanding
    6,520       11,893  
Restricted stock units
    6,010       3,582  
Employee stock purchase plan shares
    257       295  
                 
 
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) were as follows as of March 31, 2011 (in thousands):
 
 
 
Level 1
   
Level 2
   
Level 3
   
Total
 
                         
Marketable securities:
                       
Corporate debt securities
  $ -     $ 72,352     $ -     $ 72,352  
U.S. Agency debt securities
    -       37,305       -       37,305  
Commercial paper
    -       10,992       -       10,992  
      -       120,649       -       120,649  
Cash equivalents:
                               
Money market funds
    6,596       -       -       6,596  
Corporate debt securities
    -       2,011       -       2,011  
Commercial paper
    -       1,650       -       1,650  
      6,596       3,661       -       10,257  
Total cash equivalents and marketable securities
  $ 6,596     $ 124,310     $ -     $ 130,906  
Cash balances
                            5,414  
Total cash, cash equivalents and marketable securities
                    $ 136,320  
 
 
11

 
                    The Company’s fair value measurements of its financial assets (cash, cash equivalents and marketable securities) were as follows as of December 31, 2010 (in thousands):

                         
 
 
Level 1
   
Level 2
   
Level 3
   
Total
 
Marketable securities:
                       
Corporate debt securities
  $ -     $ 69,728     $ -     $ 69,728  
U.S. Agency debt securities
    -       43,791       -       43,791  
Commercial paper
    -       8,493       -       8,493  
      -       122,012       -       122,012  
Cash equivalents:
                               
Money market funds
    7,111       -       -       7,111  
Commercial paper
    -       1,499       -       1,499  
      7,111       1,499       -       8,610  
Total cash equivalents and marketable securities
  $ 7,111     $ 123,511     $ -     $ 130,622  
Cash balances
                            12,927  
Total cash, cash equivalents and marketable securities
                    $ 143,549  
 
       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 $4.3 million and $3.9 million as of March 31, 2011 and December 31, 2010, respectively. There were no movements between level 1 and level 2 financial assets for the three months ended March 31, 2011.
 
5. Balance Sheet Data
 
Marketable Securities
 
Marketable securities included available-for-sale securities as follows (in thousands):

   
As of March 31, 2011
 
   
Amortized
Cost
   
Unrealized
Gain
   
Unrealized
 Loss
   
Estimated
Fair Value
 
                         
Corporate debt securities
  $ 72,283     $ 108     $ (39 )   $ 72,352  
U.S. Agency debt securities
    37,311       10       (16 )     37,305  
Commercial paper
    10,988       4       -       10,992  
 Total marketable securities
  $ 120,582     $ 122     $ (55 )   $ 120,649  
                                 
 
   
As of December 31, 2010
 
   
Amortized Cost
   
Unrealized Gain
   
Unrealized Loss
   
Estimated Fair Value
 
                                 
Corporate debt securities
  $ 69,627     $ 131     $ (30 )   $ 69,728  
U.S. Agency debt securities
    43,795       8       (12 )     43,791  
Commercial paper
    8,491       2       -       8,493  
 Total marketable securities
  $ 121,913     $ 141     $ (42 )   $ 122,012  
 
The contractual maturity date of the available-for-sale securities was as follows (in thousands):
 
   
As of March 31,
   
As of December 31,
 
   
2011
   
2010
 
             
Due within one year
  $ 89,349     $ 97,179  
Due within one to two years
    31,300       24,833  
Total marketable securities
  $ 120,649     $ 122,012  
 
 
12

 
Inventories, Net
 
Inventories, net were comprised as follows (in thousands):
 
   
As of March 31,
   
As of December 31,
 
   
2011
   
2010
 
             
Finished products
  $ 10,442     $ 9,110  
Raw materials
    2,032       2,007  
Total inventories, net
  $ 12,474     $ 11,117  
 
Prepaid Expenses and Other Current Assets
 
Prepaid expenses and other current assets were comprised as follows (in thousands):
 
   
As of March 31,
   
As of December 31,
 
   
2011
   
2010
 
             
Interest receivable
  $ 1,046     $ 1,156  
Prepaid maintenance
    797       813  
Taxes receivable
    494       543  
Other
    1,373       1,678  
Total prepaid expenses and other current assets
  $ 3,710     $ 4,190  
 
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 March 31,
   
As of December 31,
 
   
2011
   
2010
 
             
Engineering and other equipment
  $ 22,469     $ 22,238  
Computers, software and related equipment
    17,384       17,215  
Leasehold improvements
    3,439       5,115  
Office furniture and fixtures
    955       1,110  
      44,247       45,678  
Less: accumulated depreciation
    (37,375 )     (37,590 )
Total property and equipment, net
  $ 6,872     $ 8,088  
 
Goodwill
 
Goodwill is carried at cost and is not amortized. The carrying value of goodwill was approximately $1.7 million as of March 31, 2011 and December 31, 2010.
 
Other Non-current Assets
 
Other non-current assets were comprised as follows (in thousands):
 
   
As of March 31,
   
As of December 31,
 
   
2011
   
2010
 
             
Israeli severance pay
  $ 4,297     $ 3,933  
Security deposit
    1,830       2,083  
Deferred tax assets
    530       530  
Other
    122       624  
Total other non-current assets
  $ 6,779     $ 7,170  
 
 
13

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

   
As of March 31,
   
As of December 31,
 
   
2011
   
2010
 
             
Deferred service revenues, net
  $ 23,416     $ 22,091  
Deferred product revenues, net
    4,023       4,379  
Total deferred revenues, net
    27,439       26,470  
Less current portion of deferred revenues, net
    (19,894 )     (18,143 )
Deferred revenues, net, less current portion
  $ 7,545     $ 8,327  
 
Other Liabilities
 
Other liabilities were comprised as follows (in thousands):

   
As of March 31,
   
As of December 31,
 
   
2011
   
2010
 
             
Foreign, franchise and other income tax liabilities
  $ 1,431     $ 1,230  
Rent and restructuring liabilities
    1,236       1,015  
Accrued warranty
    1,038       1,147  
Accrued professional fees
    401       480  
Customer prepayments
    350       -  
Sales and use tax payable
    116       245  
Other
    1,343       1,841  
Total other liabilities
    5,915       5,958  
Less current portion of other liabilities
    (4,333 )     (4,266 )
Other liabilities, less current portion
  $ 1,582     $ 1,692  
 
Accrued Warranty
 
Activity related to product warranty was as follows (in thousands):
 
   
Three Months Ended March 31,
 
   
2011
   
2010
 
             
Balance as of beginning of period
  $ 1,147     $ 2,068  
Warranty charged to cost of sales
    101       58  
Utilization of warranty
    (256 )     (118 )
Other adjustments
    46       (286 )
Balance as of end of period
    1,038       1,722  
Less current portion of accrued warranty
    (593 )     (880 )
Accrued warranty, less current portion
  $ 445     $ 842  
 
6. Restructuring Charges
 
       On January 7, 2011, the Audit Committee under designation of the Board of Directors authorized a restructuring plan to respond to market and business conditions, pursuant to which the Company reduced headcount by approximately 9%, and vacated a portion of its Tel Aviv and Westborough, Massachusetts facilities. Approximately $1.0 million of severance and $1.0 million of vacated facility charges were incurred in the three months ended March 31, 2011. Subsequent to vacating the Tel Aviv facility, the Company entered into a sublease for the vacated portion of its Tel Aviv facility.
 
 
14

 
Since its initial public offering in March 2007, the Company has authorized restructuring plans. All of the restructuring plans were substantially complete as of March 31, 2011. Total restructuring activity for the three months ended March 31, 2011 was as follows (in thousands):
 
   
Balance as of
December 31,
 2010
   
Charges
   
Cash
Payments
   
Other Non-
Cash
Adjustments
 (1)
   
Balance as of
March 31, 2011
 
                               
Vacated facilities
  $ 563     $ 1,025     $ (99 )   $ (565 )   $ 924  
Severance
    38       982       (559 )     -       461  
Total restructuring liability
  $ 601     $ 2,007     $ (658 )   $ (565 )   $ 1,385  
Less restructuring liability, current portion                                     (1,360 
Restructuring liability, less current portion                                   $ 25  
(1) Other non-cash adjustments primarily related to fixed assets written off as part of the Company's restrucuring plan.
 
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.
 
8. Stockholders’ Equity
 
The Company allocated stock-based compensation expense as follows (in thousands):
 
   
Three Months Ended March 31,
 
   
2011
   
2010
 
             
Cost of net revenues
  $ 416     $ 566  
Research and development
    1,105       1,322  
Sales and marketing
    368       669  
General and administrative
    799       1,201  
Total stock-based compensation
  $ 2,688     $ 3,758  
 
Equity Incentive Plans
 
        Since March 15, 2007, the Company has granted options and restricted stock units (RSUs) pursuant to 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 issues new shares for all awards under the 2007 Plan.
 
        On October 18, 2010, the Company’s stockholders approved a one-time voluntary stock option exchange program (Exchange Program) that permitted eligible employees to exchange certain outstanding stock options that had exercise prices substantially in excess of the fair market value of the Company’s common stock for a lesser number of RSUs to be granted under the Company’s 2007 Plan and the Israeli Sub-plan thereunder. The Exchange Program commenced on October 21, 2010 and ended on November 18, 2010. Following the exchange, options to purchase approximately 5.2 million shares were exchanged for 1.8 million RSUs. The incremental stock compensation charge related to the Exchange Program was not material.
 
 
15

 
       The Company has options outstanding under its 1999, 2001 and 2003 share option and incentive plans. Cancelled or forfeited stock option grants under these 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. On February 16, 2011, the Board of Directors determined there would be no evergreen increase under the 2007 Plan for 2011. Shares available for future issuance under the 2007 Plan were as follows (in thousands):
 
 
 Shares
   
 Available as of December 31, 2010
                12,219
Options and RSUs granted
                (2,380)
Options and RSUs cancelled
                     803
 Available as of March 31, 2011
                10,642
 
       Data pertaining to stock option activity under the plans was as follows (in thousands, except per share and period data):
 
   
Number
of
Options
   
Weighted
Average
Exercise
Price
   
Weighted Average
Remaining
Contractual Life
 (Years)
   
Aggregate
Intrinsic
Value
 
                         
Outstanding as of December 31, 2010
    6,376     $ 2.71       6.48     $ 3,993  
Granted
    551       2.62                  
Exercised
    (51 )     1.18             $ 74  
Cancelled
    (356 )     3.96                  
Outstanding as of March 31, 2011
    6,520     $ 2.65       6.47     $ 3,326  
Vested and expected to vest, net of forfeitures
    6,338     $ 2.64       6.38     $ 3,326  
 
       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 period, 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 period 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 $2.55 and $2.80 per share as of March 31, 2011 and December 31, 2010, respectively. As of March 31, 2011, total unrecognized stock compensation expense relating to unvested stock options, adjusted for estimated forfeitures expected to be recognized over a weighted-average period of 3.2 years, was insignificant.
 
Restricted Stock Units
 
       Except for performance based awards (which track performance against the Company’s incentive compensation plan targets), RSU grants under the 2007 Plan generally vest in increments over three 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. RSUs expected to vest reflect an estimated forfeiture rate. The Company’s RSU activity was as follows (in thousands, except per share data):
 
   
Restricted
Stock Units
   
Weighted
Average
Grant-Date
Fair Value
   
Weighted Average
Remaining
Contractual Life
(Years)
   
Aggregate
Intrinsic
Value
 
                         
Unvested as of December 31, 2010
    4,946     $ 3.57       1.28     $ 13,893  
Granted
    1,829       2.61                  
Vested
    (318 )     2.92             $ 838  
Cancelled
    (447 )     3.59                  
 Unvested as of March 31, 2011
    6,010     $ 3.31       1.15     $ 15,327  
 Vested and expected to vest, net of forfeitures
    5,715     $ 3.31       1.14     $ 14,572  
 
 
16

 
As of March 31, 2011, total unrecognized stock compensation expense relating to unvested RSUs, adjusted for estimated forfeitures, was $16.6 million. This amount is expected to be recognized over a weighted-average period of 1.9 years.
 
        In June 2010, the Company granted 91,000 RSUs to the Company’s chief executive officer which vest in five years; however, vesting will accelerate if certain stock performance criteria are attained. The stock compensation expense for these RSUs is being recorded over their estimated vesting period using the Monte Carlo method and such expense was $11,000 for the three months ended March 31, 2011.
 
       During 2010, the Company granted approximately 450,000 performance-based vesting RSUs to its employees, including the Company’s named executive officers, as part of its incentive compensation plan (ICP) program for the second half of 2010. Compensation under the 2010 ICP program was based on cash and performance-based vesting RSUs. Since no ICP payout for this period was earned, none of these performance-based vesting RSUs vested, and  the Company recorded no expense. Instead, approximately 350,000 of these performance-based vesting RSUs were modified and reused as part of its ICP program for the first half of 2011, with the remainder being cancelled and made available for future issuance. In addition, during the three months ended March 31, 2011, the Company granted approximately 0.8 million RSUs as a result of its decision to compensate all participants in the first half of 2011 ICP through RSUs. As a result, as of March 31, 2011, the Company had approximately 1.1 million RSUs outstanding for which vesting is subject to the achievement of performance targets, including one or both of individual and Company financial performance targets. Stock compensation recognized for these RSUs was $0.7 million for the three months ended March 31, 2011.
 
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. On February 16, 2011, the Board of Directors determined there would be no evergreen increase under the ESPP for 2011. The ESPP is compensatory in nature, and therefore results in compensation expense. The Company recorded stock-based compensation expense associated with its ESPP of $77,000 and $0.2 million for the three months ended March 31, 2011 and 2010, respectively. Shares available for future issuance under the ESPP were approximately 3.3 million as of both March 31, 2011 and December 31, 2010.
 
Stock-Based Compensation
 
        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 March 31,
 
   
2011
   
2010
 
Stock Options
           
Expected volatility
    66 %     73 %
Expected term
 
6 years
   
6 years
 
Risk-free interest
    2.47 %     2.80 %
Expected dividends
    0.0 %     0.0 %

       The computation of expected volatility is derived primarily from the Company’s weighted historical volatility following its IPO in March 2007 and to a lesser extent the weighted historical volatilities of several comparable companies within the cable and telecommunications equipment industry. 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 periods. 
 
 
17

 
 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 March 31,
 
   
2011
   
2010
 
             
United States
  $ 17,636     $ 28,686  
Asia
    375       2,390  
Europes
    180       779  
Americas excluding United States
    174       380  
Total net revenues
  $ 18,365     $ 32,235  
                 
 
Long-lived assets, net of depreciation were as follows (in thousands):
 
   
As of March 31,
   
As of December 31,
 
   
2011
   
2010
 
             
Israel
  $ 3,212     $ 3,829  
United States
    3,023       3,584  
Rest of World
    637       675  
Total long-lived assets, net
  $ 6,872     $ 8,088  
                 
 
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 expense was $0.2 million for both the three months ended March 31, 2011 and 2010. 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, and movement in the Company’s valuation allowance.
 
11. Comprehensive Loss
 
       The components of comprehensive loss were as follows (in thousands):

   
Three Months Ended March 31,
 
   
2011
   
2010
 
             
Net loss
  $ (12,802 )   $ (8,769 )
Change in cash flow hedges
    (230 )     76  
Change in unrealized gains (losses) on marketable securities
    (34 )     (128 )
Comprehensive loss
  $ (13,066 )   $ (8,821 )
 
Accumulated other comprehensive (loss) income was as follows (in thousands): 
 
   
As of March 31,
2011
   
As of December 31,
2010
 
             
Net unrealized (loss) gain on cash flow hedges
  $ (76 )   $ 154  
Net unrealized gain on marketable securities
    65       99  
Total accumulated other comprehensive (loss) income
  $ (11 )   $ 253  

 
18

 
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.
 
       Net Revenues. We derive our net revenues principally from our video products and related 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 March 31, 2011 and 2010, we derived approximately 81% and 77%, 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 estimate 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 be adversely impacted by competitive pricing pressures, but we seek to control 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. Our overhead costs for our services are relatively fixed, and fluctuations of our service revenues impact our service gross margin, which historically has been, and we expect will continue to be, higher than our product gross margin.
 
 
19

 
       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 expect our operating expenses to decrease in absolute dollars for the three months ending June 30, 2011 compared to the three months ended March 31, 2011.
 
       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 modestly in absolute dollars for the three months ending June 30, 2011 compared to the three months ended March 31, 2011.
 
        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 remain flat in absolute dollars for the three months ending June 30, 2011 compared to the three months ended March 31, 2011.
 
       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 remain flat in absolute dollars for the three months ending June 30, 2011 compared to the three months ended March 31, 2011.
 
Critical Accounting Policies and Estimates
 
       Our 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 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 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 2010 Form 10-K filed with the SEC on March 9, 2011. For additional information on the recent accounting pronouncements impacting our business, see Note 2 of the Notes to Condensed Consolidated Financial Statements. With the exception of the adoption of guidance related to revenue recognition, discussed below, there have been no significant changes in our accounting policies during the three months ended March 31, 2011 compared to the significant accounting policies described in our Form 10-K.
 
Revenue Recognition
 
       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 and 14 amended the accounting standards for revenue recognition to remove tangible products containing software components and nonsoftware components that function together to deliver the product’s essential functionality from the scope of industry-specific software revenue recognition guidance, and also:
 
provide updated guidance on whether multiple deliverables exist, how the deliverables in an arrangement should be separated, and how the consideration should be allocated;
   
require an entity to allocate revenue in an arrangement using estimated selling prices (ESP) of deliverables if we do not have vendor-specific objective evidence of selling price (VSOE) or third-party evidence of selling price (TPE); and
   
eliminate the use of the residual method and require an entity to allocate revenue using the relative selling price method.
 
 
20

 
        We adopted the provisions of ASU 2009-13 and 14, prospectively, for all transactions originating or materially modified after December 31, 2010. This guidance does not generally change the units of accounting for our revenue transactions. Most products and services qualify as separate units of accounting. The adoption of ASU 2009-13 and 14 did not have a material impact on our consolidated financial condition, operating revenues, results of operations or cash flows, and we do not expect a material impact in the future.
 
       Our software and hardware product applications are sold as solutions and our software is a significant component to the functionality of these solutions. We provide unspecified software updates and enhancements related to products through support contracts. Revenue is recognized when all of the following have occurred: (1) we have 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 our software and hardware products. Software product sales include a perpetual license to our software. We recognize product revenues upon shipment to our customers, including resellers, 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 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.
 
       We sell our products and services to customers in North America through our direct sales force, and sells to customers internationally through a combination of direct sales and resellers. Sales to our resellers are final and the resellers do not have any rights of return, product rotation rights, or price protection.
 
       Substantially all of our product sales have been made in combination with support services, which consist of software updates and customer support. Our 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 generally extends to five years for our telecommunications customers. Revenues from other services, such as installation, program management and training, are recognized when the services are performed.
 
       We assess the ability to collect from our 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.
 
       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 revenues and related costs generally relate to acceptance provisions that have not been met, partial shipment or for transactions entered into before December 31, 2010, when we did 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.
 
       For all transactions entered into after December 31, 2010, we recognize revenues using estimated selling prices of the delivered goods and services based on a hierarchy of methods contained in ASU 2009-13. We use VSOE for determination of estimated selling price of elements in each arrangement if available, and since third party evidence is not available for those elements where vendor specific objective evidence of selling price cannot be determined, we evaluate factors to determine our ESP for all other elements. In multiple element arrangements where hardware and software are sold as part of the solution, revenue is allocated to the hardware and software as a group using the relative selling prices of each of the deliverables in the arrangement based upon the aforementioned selling price hierarchy.
 
       VSOE of fair value for elements of an arrangement is based upon the normal pricing and discounting practices for those services when sold separately, and VSOE for support services is measured by the renewal rate offered to the customer. In determining VSOE, we require that a substantial majority of the selling prices for a service fall within a reasonably narrow pricing range, generally evidenced by approximately 80% of such historical stand-alone transactions falling within plus or minus 15% of the mean rates. In addition, we may consider major service groups, geographies, customer classifications, and other variables in determining VSOE.
 
       We typically are not able to determine TPE for our products or services. TPE is determined based on competitor prices for similar deliverables when sold separately. Generally, our go-to-market strategy differs from that of our peers and our offerings contain a significant level of differentiation such that the comparable pricing of products with similar functionality cannot be obtained. Furthermore, we are unable to reliably determine what similar competitor products’ selling prices are on a stand-alone basis.
 
       When we are unable to establish selling price of our non-software deliverables using VSOE or TPE, we use ESP in our allocation of arrangement consideration. The objective of ESP is to determine the price at which we would transact a sale if the product or service were sold on a stand-alone basis. We determine ESP for a product or service by considering multiple factors including, but not limited to, pricing practices, geographies, customer classes and distribution channels.
 
 
21

 
        We regularly review VSOE and ESP and maintain internal controls over the establishment and updates of these estimates. There were no material impacts during the three months ended March 31, 2011, nor do we currently expect a material impact in the near term from changes in VSOE or ESP.
 
 Results of Operations
 
       Our results of operations were as follows:
 
   
Three Months Ended
March 31, 2011
   
Three Months Ended
March 31, 2010
 
   
Amount
($ thousands)
   
% of
 Revenues
   
Amount
($ thousands)
   
% of
Revenues
 
                         
Total net revenues
  $ 18,365       100.0 %   $ 32,235       100.0 %
Total cost of net revenues
    8,809       48.0       17,201       53.4  
Total gross profit
    9,556       52.0       15,034       46.6  
                                 
Operating expenses:
                               
Research and development
    11,383       62.0       13,492       41.9  
Sales and marketing
    5,112       27.8       6,050       18.8  
General and administrative
    3,814       20.8       4,526       14.0  
Restructuring charges
    2,007       10.9       -       -  
Total operating expenses
    22,316       121.5       24,068       74.7  
                                 
Operating loss
    (12,760 )     (69.5 )     (9,034 )     (28.1 )
Interest income
    206       1.1       515       1.6  
Other expense, net
    (30 )     (0.1 )     (88 )     (0.2 )
Loss before provision for income taxes
    (12,584 )     (68.5 )     (8,607 )     (26.7 )
Provision for income taxes
    218       1.2       162       0.5  
Net loss
  $ (12,802 )     (69.7 ) %   $ (8,769 )     (27.2 ) %
 
Net Revenues
 
       Total net revenues decreased 43.0% to $18.4 million for the three months ended March 31, 2011 from $32.2 million for the three months ended March 31, 2010. The decrease was due to a $15.4 million decrease in product revenues, partially offset by a $1.5  million increase in service revenues.
 
        Revenues from our top five customers comprised approximately 81% and 77% of net revenues for the three months ended March 31, 2011 and 2010, respectively. Cox Communications, Charter, Time Warner Cable and Verizon each represented 10% or more of our net revenues for the three months ended March 31, 2011. Cox Communications, Time Warner Cable and Verizon each represented 10% or more of our net revenues for the three months ended March 31, 2010.
 
       Time Warner Cable represented less than 20% of our net revenues for the three months ended March 31, 2011 compared to more than 40% of our net revenues for the three months ended March 31, 2010. The decrease as a percentage of total revenues and in absolute dollars was attributable to the minimal expansion of our Switched Digital Video solutions during the three months ended March 31, 2011, compared to a large multi-site roll out of both our Broadcast Video and Switched Digital Video solutions by Time Warner during the three months ended March 31, 2010.
 
       Verizon represented slightly less than 30% of our net revenues for the three months ended March 31, 2011 compared to slightly more than 10% of our net revenues for the three months ended March 31, 2010. The increase was due to some expansion and upgrade orders from Verizon to support their FiOS deployment.
 
 
22

 
       Net revenues by geographical region based on the shipping destination of customer orders was as follows:

   
Three Months Ended
March 31, 2011
   
Three Months Ended
March 31, 2010
 
   
Amount
($ thousands)
   
% of
 Revenues
   
Amount
($ thousands)
   
% of
Revenues
 
                         
United States
  $ 17,636       96.1 %   $ 28,686       89.0 %
Asia
    375       2.0       2,390       7.4  
Europe
    180       1.0       779       2.4  
Americas excluding United States
    174       0.9       380       1.2  
    $ 18,365       100.0 %   $ 32,235       100.0 %
 
                   Product Revenues. Product revenues decreased 61.7% to $9.5 million for the three months ended March 31, 2011 from $24.9 million for the three months ended March 31, 2010. This decrease was primarily due to a $13.4 million decrease in Switched Digital Video (SDV) revenues, as early SDV adopters had substantially completed their initial deployments in 2010 and potential new customers did not commence SDV deployments in the three months ended March 31, 2011. Broadcast Video revenues decreased to a lesser extent primarily due to a modest decline in order volume from our customers. These decreases were slightly offset by a modest increase in TelcoTV revenues due to expansion and upgrade orders for the FiOS solution utilized by Verizon.
 
       Service Revenues. Service revenues increased 20.2% to $8.8 million for the three months ended March 31, 2011 from $7.4 million for the three months ended March 31, 2010. This increase was primarily due to the timing of the Video customer support and maintenance renewal orders compared to the three months ended March 31, 2010. Installation and training revenues decreased modestly due to a decline in order volume, primarily related to SDV deployments from both new and existing customers.
 
        Gross Profit and Gross Margin
 
       Gross Profit. Gross profit for the three months ended March 31, 2011 was $9.6 million compared to $15.0 million for the three months ended March 31, 2010, a decrease of 36.4%. Gross margin increased to 52.0% for the three months ended March 31, 2011 compared to 46.6% for the three months ended March 31, 2010, primarily due to higher service revenues, which typically have higher gross margins, and also due to and a more favorable product mix.
 
       Product Gross Margin. Product gross margin for the three months ended March 31, 2011 was 39.5% compared to 44.0% for the three months ended March 31, 2010. This decrease was primarily due to decreased product revenues that resulted in a lower absorption of fixed manufacturing costs. Manufacturing overhead expenses for the three months ended March 31, 2011 was $1.3 million compared to $2.2 million for the three months ended March 31, 2010, a decrease of 40.8%, which was primarily due to a $0.4 million decrease in wages and benefits related to decreased headcount, and a $0.3 million decrease in discretionary spending. Product gross margin for the three months ended March 31, 2011 and 2010 included stock-based compensation expense of $0.2 million and $0.3 million, respectively.
 
       Services Gross Margin. Services gross margin for the three months ended March 31, 2011 was 65.6% compared to 55.4% for the three months ended March 31, 2010. This increase was primarily due to a $1.5 million increase in service revenues, primarily related to an increase in Video customer support and maintenance revenues. Cost of service revenues for the three months ended March 31, 2011 was $3.0 million compared to $3.3 million for the three months ended March 31, 2010, a decrease of 7.1%, which was primarily due to a decrease in wages and benefits related to decreased headcount. Services gross margin for both the three months ended March 31, 2011 and 2010 included stock-based compensation expense of $0.2 million.
 
Operating Expenses
 
       Research and Development. Research and development expense was $11.4 million for the three months ended March 31, 2011, or 62.0% of net revenues, compared to $13.5 million for the three months ended March 31, 2010, or 41.9% of net revenues. The decrease was primarily due to a $0.9 million decrease in wages and benefits related to an 18% decrease in headcount, a $0.6 million decrease in independent contractor costs and a $0.2 million decrease in depreciation expense. Research and development expense for the three months ended March 31, 2011 and 2010 included stock-based compensation expense of $1.1 million and $1.3 million, respectively.
 
       Sales and Marketing. Sales and marketing expense was $5.1 million for the three months ended March 31, 2011, or 27.8% of net revenues, compared to $6.1 million for the three months ended March 31, 2010, or 18.8% of net revenues. The decrease was primarily due to a $0.6 million decrease in wages and benefits related to an 18% decrease in headcount and $0.3 million reduction in marketing programs due to cost containment efforts. Sales and marketing expense for the three months ended March 31, 2011 and 2010 included stock-based compensation expense of $0.4 million and $0.7 million, respectively.
 
       General and Administrative. General and administrative expense was $3.8 million for the three months ended March 31, 2011, or 20.8% of net revenues, compared to $4.5 million for the three months ended March 31, 2010, or 14.0% of net revenues. The decrease was primarily due to a $0.4 million decrease in wages and benefits related to a 16% decrease in headcount. General and administrative expense for the three months ended March 31, 2011 and 2010 included stock-based compensation expense of $0.8 million and $1.2 million, respectively.
 
 
23

 
       Restructuring Charges. Restructuring charges were $2.0 million for the three months ended March 31, 2011 and zero for the three months ended March 30, 2010. On January 7, 2011, the Audit Committee under designation of the Board of Directors authorized a restructuring plan pursuant to which we reduced headcount by approximately 9% and vacated a portion of two leased facilities. Approximately $1.0 million of severance and related benefits and approximately $1.0 million for vacated facility charges and related fixed asset write offs were recorded in the three months ended March 31, 2011.
 
 Interest Income
 
        Interest income was $0.2 million for the three months ended March 31, 2011 compared to $0.5 million for the three months ended March 31, 2010. The decrease in interest income was primarily attributable to lower interest rates, and to a lesser extent lower cash and investment balances.
 
Other expense, net
 
        Other expense, net, which consists primarily of foreign exchange gains (losses), was an expense of $30,000 for the three months ended March 31, 2011 compared to an expense of $88,000 for the three months ended March 31, 2010.
 
Provision for income taxes
 
        Provision for income taxes for the three months ended March 31, 2011 was $0.2 million, or negative 1.7%, on a pre-tax loss of $12.6 million, compared to tax expense of $0.2 million, or negative 1.9%, on a pre-tax loss of $8.6 million for the three months ended March 31, 2010. The difference between our effective tax rates and the federal statutory rate of 35% is primarily attributable to the differential in foreign tax rates, non deductible stock compensation expense, other currently non-deductible items, and movement in our valuation allowance.
 
        We maintained a valuation allowance as of March 31, 2011 against certain of our deferred tax assets because, based on the available evidence, we believe it is more likely than not that we would not be able to utilize these deferred tax assets in the future. We intend to maintain this valuation allowance until sufficient evidence exists to support its reduction. We make estimates and judgments about our future taxable income that are based on assumptions that are consistent with our plans and estimates. Should the actual amounts differ from our estimates, the amount of our valuation allowance could be materially impacted.
 
       We had unrecognized tax benefits of approximately $3.2 million and $3.1 million as of March 31, 2011 and December 31, 2010, respectively. We expect the unrecognized tax benefits to remain unchanged for the next 12 months.
 
Our policy includes interest and penalties related to unrecognized tax benefits within our provision for income taxes. The company’s material jurisdictions are the United States and Israel, which remain open to examination by the appropriate governmental agencies for tax years 2006 to 2010 and 2008 to 2010, respectively. The federal and state taxing authorities may choose to audit tax returns for tax years beyond the statute of limitation period due to significant tax attribute carryforwards from prior years, making adjustments only to carryforward attributes.
 
Non-GAAP Financial Measures
 
       We report all financial information required in accordance with U.S. generally accepted accounting principles (GAAP), but we believe that evaluating our ongoing operating results may be difficult to understand if limited to reviewing only GAAP financial measures. Many of our investors have requested that we disclose non-GAAP information because it is useful in understanding our performance as it excludes amounts that many investors feel may obscure our true operating results. Likewise, management uses non-GAAP measures to manage and assess the profitability of our business going forward and does not consider stock-based compensation expense or restructuring charges and related taxes in managing our operations. Specifically, management does not consider these expenses/benefits when developing and monitoring our budgets and spending. As a result, we use calculations of non-GAAP net loss and net loss per share, which exclude these expenses when evaluating our ongoing operations and allocating resources within the organization.
 
 
24

 
Reconciliations of GAAP and non-GAAP financial measures for the three months ended March 31, 2011 were as follows (in thousands except per share):
 
   
Three Months Ended March 31,
 
   
2011
   
2010
 
             
GAAP net loss
  $ (12,802 )   $ (8,769 )
Stock-based compensation
    2,688       3,758  
Restructuring charges
    2,007       -  
Tax benefits (adjustments)
    92       (21 )
Non-GAAP net loss
  $ (8,015 )   $ (5,032 )
                 
Basic and diluted GAAP net loss per common share
  $ (0.18 )   $ (0.13 )
Basic and diluted Non-GAAP net loss per common share
  $ (0.11 )   $ (0.07 )
 
Liquidity and Capital Resources
 
Since inception, we have financed our operations primarily through private and public sales of equity securities and from cash provided by operations. As of March 31, 2011, we had no long-term debt outstanding.

Cash Flow
 
       Cash, cash equivalents and marketable securities. As of March 31, 2011, our cash, cash equivalents and marketable securities of $136.3 million were invested primarily in corporate debt securities, commercial paper, and securities of U.S. agencies. We do not enter into investments for trading or speculative purposes. Although our cash, cash equivalents and marketable securities decreased by $7.2 million during the three months ended March 31, 2011, we believe that our existing sources of liquidity will be sufficient to meet our currently anticipated cash requirements for at least the next 12 months. In order to remain competitive, we must constantly evaluate the need to make significant investments in products and in research and development. We may seek additional equity or debt financing to maintain or expand our product lines or research and development efforts, or for other strategic purposes such as acquisitions. The timing and amount of any such financing requirements will depend on a number of factors, including demand for our products, changes in industry conditions, product mix, competitive factors and the timing of any strategic acquisitions. There can be no assurance that such financing will be available on acceptable terms, and any additional equity financing would result in incremental ownership dilution to our existing stockholders. There are no significant limits or restrictions that affect our ability to access our cash, cash equivalents and marketable securities.
 
Operating activities
 
The key line items affecting cash from operating activities were as follows (in thousands):
 
   
Three Months Ended March 31,
 
   
2011
   
2010
 
             
Net loss
  $ (12,802 )   $ (8,769 )
Add back non-cash charges (1)
    4,532       5,778  
Net loss before non-cash charges
    (8,270 )     (2,991 )
(Increase) decrease in accounts receivable
    (3,728 )     10,648  
(Increase) in inventories, net
    (1,357 )     (3,766 )
Increase (decrease) in deferred revenues
    969       (7,469 )
Increase (decrease) in accounts payable and accrued and other liabilities
    4,596       (2,937 )
Other, net
    1,225       913  
Net cash (used in) operating activities
  $ (6,565 )   $ (5,602 )
(1) Non-cash charges primarily related to stock-based compensation of $2.7 million and $3.8 million, and depreciation of property and equipment of $1.3 million and $1.8 million for the three months ended March 31, 2011 and 2010, respectively.  
 
 
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Our net loss of $12.8 million for the three months ended March 31, 2011 included non-cash charges of $4.5 million primarily related to $2.7 million of stock-based compensation and $1.3 million of depreciation expense. Operating cash activities for the three months ended March 31, 2011 included:
 
Accounts payable and accrued and other liabilities increased by $4.6 million during the three months ended March 31, 2011. This was primarily due to timing of payments to suppliers combined with higher accrued compensation and related benefits.
 
Accounts receivable increased by $3.7 million during the three months ended March 31, 2011 due to the timing of sales and shipments to our customers. Days sales outstanding increased to 43 for the three months ended March 31, 2011 compared to 22 for the three months ended March 31, 2010.
 
Our net loss of $8.8 million for the three months ended March 31, 2010 included non-cash charges of $5.8 million primarily related to $3.8 million of stock-based compensation and $1.8 million of depreciation expense. Operating cash activities for the three months ended March 31, 2010 included:
 
Accounts receivable decreased by $10.6 million during the three months ended March 31, 2010 due to the timing of sales and shipments to our customers, and strong collection activity.
 
Deferred revenues decreased by $7.5 million during the three months ended March 31, 2010, primarily due to a decrease in deferred product revenues, which was primarily due to lower volume of orders and also due to the timing of sales and shipments to our customers.
 
Investing Activities
 
Our investing activities provided cash of $0.7 million for the three months ended March 31, 2011, primarily from maturities and sales, net of purchases of marketable securities of $1.3 million, partially offset by the purchase of property and equipment, primarily computer and engineering equipment of $0.7 million.
 
Our investing activities provided cash of $0.9 million for the three months ended March 31, 2010, primarily from maturities and sales, net of purchases of marketable securities of $2.0 million, partially offset by the purchase of property and equipment, primarily computer and engineering equipment of $1.1 million.
 
Financing Activities
 
Our financing activities provided cash of $49,000 and $0.4 million for the three months ended March 31, 2011 and 2010, respectively, from the issuance of common stock through the exercise of stock options under our equity incentive plans.
 
Contractual Obligations and Commitments
 
Our contractual obligations as of March 31, 2011 were as follows (in thousands):
 
   
Payments due by December 31:
 
   
Total
   
2011
   
2012
   
2013
   
Thereafter
 
                               
Purchase obligations (1)
  $ 5,497     $ 5,497     $ -     $ -     $ -  
Operating lease obligations (2)
    5,015       2,888       1,847       280       -  
Total obligations
  $ 10,512     $ 8,385     $ 1,847     $ 280     $ -  
 
(1) Purchase obligations comprise firm non-cancellable agreements to purchase inventory.
(2) Operating lease obligations are net of $1.7 million of sublease rentals from a portion of our Tel Aviv and Westborough, Massachusetts facilities.
 
Off-Balance Sheet Arrangements
 
As of March 31, 2011, we had no off-balance sheet arrangements as defined in Item 303(a)(4) of Regulation S-K.
 
Effects of Inflation
 
       Our monetary assets, consisting primarily of cash, marketable securities and accounts receivable, are not materially affected by inflation because they are short-term in duration. Our non-monetary assets, consisting primarily of inventory, goodwill and prepaid expenses and other assets, are not affected significantly by inflation. We believe that the impact of inflation on the replacement costs of our equipment, furniture and leasehold improvements will not materially affect our operations. However, the rate of inflation affects our cost of goods sold and operating expenses, such as those for employee compensation, which may not be readily recoverable in the price of the products and services offered by us.
 
 
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Item 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
Interest Rate Sensitivity
 
       The primary objectives of our investment activities are to preserve principal, provide liquidity and maximize income without exposing us to significant risk of loss. The securities we invest in are subject to market risk and a change in prevailing interest rates may cause the principal amount of our investment to fluctuate. We maintain our portfolio of cash equivalents and short-term investments in a variety of securities, including commercial paper, corporate debt securities, government and non-government debt securities, and money market funds. As of March 31, 2011, our investments were primarily in commercial paper, corporate notes and bonds, money market funds and U.S. government and agency securities. If overall interest rates fell 10% for the three months ended March 31, 2011, our interest income would have decreased by an immaterial amount, assuming consistent investment levels.
 
Foreign Currency Risk
 
        Our sales contracts are primarily denominated in U.S. dollars, and therefore the majority of our revenues are not subject to foreign currency risk. However, if we extend credit to international customers and the U.S. dollar appreciates against our customers’ local currency, there is an increased collection risk as it will require more local currency to settle our U.S. dollar invoice.
 
       Our operating expenses and cash flows are subject to fluctuations due to changes in foreign currency exchange rates, particularly changes in the Israeli New Shekel, and to a lesser extent the Chinese Yuan and Euro. To help protect against significant fluctuations in value and the volatility of future cash flows caused by changes in currency exchange rates, we have foreign currency risk management programs to hedge future forecasted expenses denominated in Israeli New Shekels. An adverse change in exchange rates of 10% for the Israeli New Shekel, Chinese Yuan and Euro, without any hedging would have resulted in an increase in our loss before taxes of approximately $0.8 million for the three months ended March 31, 2011.
 
       We continue to hedge a portion of our projected exposure to exchange rate fluctuations between the U.S. dollar and the Israeli New Shekel. Currency forward contracts and currency options are generally utilized in these hedging programs. Our hedging programs are intended to reduce, but not eliminate, the impact of currency exchange rate movements. As our hedging program is relatively short-term in nature, a long-term material change in the value of the U.S. dollar versus the Israeli New Shekel could adversely impact our operating expenses in the future.
 
Item 4.
CONTROLS AND PROCEDURES
 
Evaluation of Disclosure Controls and Procedures
 
       As of the end of the period covered by this Quarterly Report on Form 10-Q, as required by paragraph (b) of Rule 13a-15 or Rule 15d-15 under the Securities Exchange Act of 1934, as amended, we evaluated under the supervision of our Chief Executive Officer and our Chief Financial Officer, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) of the Securities Exchange Act of 1934, as amended). Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and procedures are effective to ensure that information we are required to disclose in reports that we file or submit under the Securities Exchange Act of 1934 (i) is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms, and (ii) is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Our disclosure controls and procedures are designed to provide reasonable assurance that such information is accumulated and communicated to our management. Our disclosure controls and procedures include components of our internal control over financial reporting. Management’s assessment of the effectiveness of our internal control over financial reporting is expressed at the level of reasonable assurance because a control system, no matter how well designed and operated, can provide only reasonable, but not absolute, assurance that the control system’s objectives will be met.
 
Changes in Internal Control over Financial Reporting
 
       During the three months ended March 31, 2011, there was no change in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Rule 13a-15 or Rule 15d-15 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 
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PART II. OTHER INFORMATION
 
Item 1.
 
A discussion of our current litigation is disclosed in the notes to our condensed consolidated financial statements. See “Notes to Condensed Consolidated Financial Statements, Note 7 — Legal Proceedings” in Part I, Item 1 of this quarterly report on Form 10-Q.
 
Item 1A.
 
       An investment in our equity securities involves significant risks. Any of these risks, as well as other risks not currently known to us or that we currently consider immaterial, could have a material adverse effect on our business, prospects, financial condition or operating results. The trading price of our common stock could decline due to any of these risks, and you may lose all or part of your investment. In assessing the risks described below, you should also refer to the other information contained in this Form 10-Q, including our consolidated financial statements and the related notes, before deciding to purchase any shares of our common stock.
 
We depend on cable multiple system operators (MSOs) and telecommunications companies adopting advanced technologies for substantially all of our net revenues, and any decrease or delay in capital spending for these advanced technologies would harm our operating results, financial condition and cash flows.
 
       Almost all of our sales depend on cable MSOs and telecommunications companies adopting advanced video technologies, and we expect these sales to continue to constitute a significant majority of our revenues for the foreseeable future. Demand for our products will depend on the magnitude and timing of capital spending by service providers on advanced technologies for constructing and upgrading their network infrastructure, and a reduction or delay in this spending could have a material adverse effect on our business.
 
       The capital spending patterns of our existing and potential customers depend on a variety of factors, including:
 
annual budget cycles;

technology adoption cycles and network architectures of service providers, and evolving industry standards that may impact them;

competitive pressures, including pricing pressures;

changes in general economic conditions;

the impact of industry consolidation;

the strategic focus of our customers and potential customers;

the status of federal, local and foreign government regulation of telecommunications and television broadcasting, and regulatory approvals that our customers need to obtain;

discretionary customer spending patterns;

bankruptcies and financial restructurings within the industry; and

work stoppages or other labor- or labor market-related issues that may impact the timing of orders and revenues from our customers.
 
       Since 2009, we have seen reduced capital spending by our customers for our key products. Any continued slowdown or delay in the capital spending by service providers for our products as a result of any of the above factors would likely have a significant adverse impact on our quarterly revenues and net losses.
 
 
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Our operating results are likely to fluctuate significantly and may fail to meet or exceed the expectations of securities analysts or investors or our guidance, causing our stock price to decline.
 
       Our operating results have fluctuated in the past and are likely to continue to fluctuate, on an annual and a quarterly basis, as a result of a number of factors, many of which are outside our control. These factors include:
 
market acceptance of new or existing products offered by us or our customers;

the level and timing of capital spending by our customers;

the timing, mix and amount of orders, especially from significant customers;

the level of our deferred revenue balances;

changes in market demand for our products;

the mix of software, hardware products sold and service revenues;

our unpredictable and lengthy sales cycles, which typically range from six to 18 months;

the timing of revenue recognition on sales arrangements, which may include multiple deliverables and result in delays in recognizing revenue;

our ability to design, install and receive customer acceptance of our products;

materially different acceptance criteria in key customers’ agreements, which can result in large amounts of revenue being recognized, or deferred, as the different acceptance criteria are applied to large orders;

new product introductions by our competitors;

market acceptance of new or existing products offered by us or our customers;

competitive market conditions, including pricing actions by our competitors;

our ability to complete complex development of our software and hardware on a timely basis;

unexpected changes in our operating expenses;

the impact of new accounting, income tax and disclosure rules;

the cost and availability of components used in our products;

the potential loss of key manufacturer and supplier relationships; and

changes in domestic and international regulatory environments.
 
       We expect that our 2011 financial performance will be significantly affected by our ability to deliver our next-generation QAM in a timely fashion with acceptable quality, and achieving market acceptance of this new platform. We establish our expenditure levels for product development and other operating expenses based on projected sales levels, and our expenses are relatively fixed in the short term. Accordingly, variations in the timing of our sales can cause significant fluctuations in our operating results. In addition, as a result of the factors described above, our operating results in one or more future periods may fail to meet or exceed the expectations of securities analysts or investors or our guidance, which would likely cause the trading price of our common stock to decline substantially.
 
Our customer base is highly concentrated, and there are a limited number of potential customers for our products. The loss of any of our key customers would likely reduce our revenues significantly.
 
        Historically, a large portion of our sales have been to a limited number of large customers. Our five largest customers accounted for approximately 81% of our net revenues for the three months ended March 31, 2011, compared to 77% for the three months ended March 31, 2010. Cox Communications, Charter, Time Warner Cable and Verizon each represented 10% or more of our net revenues for the three months ended March 31, 2011. Cox Communications, Time Warner Cable and Verizon each represented 10% or more of our net revenues for the three months ended March 31, 2010.
 
       We believe that for the foreseeable future our net revenues will be concentrated in a limited number of large customers, and we do not have contracts or other agreements that guarantee continued sales to these or any other customers. Consequently, reduced capital expenditures by any one of our larger customers (whether caused by adverse financial conditions, more cautious spending patterns due to economic uncertainty or other factors) is likely to have a material negative impact on our operating results. For example, Verizon slowed the rollout of its FiOS system in 2009, which has had continuing negative impact on our business. In addition, as the consolidation of ownership of cable MSOs and telecommunications companies continues, we may lose existing customers and have access to a shrinking pool of potential customers. We expect to see continuing industry consolidation due to the significant capital costs of constructing video, voice and data networks and for other reasons. This will likely result in our customers gaining increased purchasing leverage over us. This may reduce the selling prices of our products and services and as a result may harm our business and financial results. Many of our customers desire to have two sources for the products we sell to them. As a result, our future revenue opportunities could be limited, and our profitability could be adversely impacted. The loss of, or reduction in orders from, any of our key customers would significantly reduce our revenues and have a material adverse impact on our business, operating results and financial condition.
 
If revenues forecasted for a particular period are not realized in such period due to the lengthy, complex and unpredictable sales cycles of our products, our operating results for that or subsequent periods will be harmed.
 
        The sales cycles of our products are typically lengthy, complex and unpredictable and usually involve:
 
a significant technical evaluation period;

a significant commitment of capital and other resources by service providers;

substantial time required to engineer the deployment of new technologies for new video services;

substantial testing and acceptance of new technologies that affect key operations; and

substantial test marketing of new services with subscribers.
 
 
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       For these and other reasons, our sales cycles are generally between six and eighteen months, but can last longer. If orders forecasted for a specific customer for a particular quarter do not occur in that quarter, our operating results for that quarter or subsequent quarters could be substantially lower than anticipated. Our quarterly and annual results may fluctuate significantly due to revenue recognition rules and the timing of the receipt of customer orders.
 
       Additionally, we derive a large portion of our net revenues from sales that include the network design, installation and integration of equipment, including equipment acquired from third parties to be integrated with our products to the specifications of our customers. We base our revenue forecasts on the estimated timing to complete the network design, installation and integration of our customer projects and customer acceptance of those products. The systems of our customers are both diverse and complex, and our ability to configure, test and integrate our systems with other elements of our customers’ networks depends on technologies provided to our customers by third parties. As a result, the timing of our revenue related to the implementation of our solutions in these complex networks is difficult to predict and could result in lower than expected revenue in any particular quarter. Similarly, our ability to deploy our equipment in a timely fashion can be subject to a number of other risks, including the availability of skilled engineering and technical personnel, the availability of equipment produced by third parties and our customers’ need to obtain regulatory approvals.
 
Lower deferred revenue balances will make future period results less predictable.
 
        Historically, we have had relatively high deferred revenue balances at quarter end, which has provided us with some measure of predictability for future periods. However, our deferred revenue balance as of March 31, 2011 was approximately $10.0 million lower than it was as of March 31, 2010. This lower deferred revenue balance makes our quarterly revenue more dependent on orders both received and shipped within the same quarter, and therefore less predictable. This lack of deferred revenues could cause additional revenue volatility, which could in turn harm our stock price.
 
The markets in which we operate are intensely competitive, many of our competitors are larger, more established and better capitalized than we are, and some of our competitors have integrated products performing functions similar to our products into their existing network infrastructure offerings, and consequently our existing and potential customers may decide against using our products in their networks, which would harm our business.
 
        The markets for selling network-based hardware and software products to service providers are extremely competitive and have been characterized by rapid technological change. We compete broadly with system suppliers including ARRIS Group, Cisco Systems, Harmonic, Motorola and a number of smaller companies. Many of our competitors are substantially larger and have greater financial, technical, marketing and other resources than we have. Given their capital resources, long-standing relationships with service providers worldwide, and broader product lines, many of these large organizations are in a better position to withstand any significant reduction in capital spending by customers in these markets. If we are unable to overcome these resource advantages, our competitive position would suffer.
 
        In addition, other providers of network-based hardware and software products offer functionality aimed at solving similar problems addressed by our products. For example, several vendors have announced products designed to compete with our Switched Digital Video solution. The inclusion of functionality perceived to be similar to our product offerings in our competitors’ products that already have been accepted as necessary components of network architecture may have an adverse effect on our ability to market and sell our products. In addition, our customers’ other vendors that can provide a broader product offering may be able to offer pricing or other concessions that we are not able to match because we currently offer a more modest suite of products and have fewer resources. If our existing or potential customers are reluctant to add network infrastructure from new vendors or otherwise decide to work with their other existing vendors, our business, operating results and financial condition will be adversely affected.
 
       Over the years, we have seen consolidation among our competitors. We expect this trend to continue as companies attempt to strengthen or maintain their market positions in the evolving industry for video by increasing the amount of commercial and technical integration of their video products. Due to our comparatively small size and comparatively narrow product offerings, our ability to compete will depend on our ability to partner with companies to offer a more complete overall solution. If we fail to do so, our competitive position will be harmed and our sales will likely suffer. These combined companies may offer more compelling product offerings and may be able to offer greater pricing flexibility, making it more difficult for us to compete while sustaining acceptable gross margins. Finally, continued industry consolidation may impact customers’ perceptions of the viability of smaller companies, which may affect their willingness to purchase products from us. These competitive pressures could harm our business, operating results and financial condition.
 
 
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We have been unable to achieve sustained profitability, which could harm the price of our stock.
 
       Historically, we have experienced significant operating losses, and we were not profitable in either the three months ended March 31, 2011 and 2010. If we fail to achieve or sustain profitability in the future, it will harm our long-term business, and we may not meet the expectations of the investment community, which would have a material adverse impact on our stock price.
 
We may not accurately anticipate the timing of the market needs for our products and develop such products at the appropriate times at significant research and development expense, or we may not gain market acceptance of our emerging video solutions and/or adoption of new network architectures and technologies, any of which could harm our operating results and financial condition.
 
       Accurately forecasting and meeting our customers’ requirements is critical to the success of our business. Forecasting to meet customers’ needs is particularly difficult for newer products and products under development. Our ability to meet customer demand depends on our ability to configure our solutions to the complex architectures that our customers have developed, the availability of components and other materials and the ability of our contract manufacturers to scale their production of our products. Our ability to meet customer requirements depends on our ability to obtain sufficient volumes of required components and materials in a timely fashion. If we fail to meet customers’ supply expectations, our net revenues will be adversely affected, and we will likely lose business. In addition, our priorities for future product development are based on how we expect the market for video services to develop in the U.S. and in international markets.
 
       Future demand for our products will depend significantly on the growing market acceptance of several emerging video services including HDTV, addressable advertising, video delivered over telecommunications company networks and video delivered over Internet Protocol by cable MSOs. The effective delivery of these services will depend on service providers developing and building new network architectures to deliver them. If the introduction or adoption of these services or the deployment of these networks is not as widespread or as rapid as we or our customers expect, our revenue opportunities will be limited.
 
       Our product development efforts require substantial research and development expense, as we develop new technology, including next generation MSP and technology primarily related to the delivery of video over IP networks. In addition, as many of our products are new solutions, there is a risk of delays in delivery of these solutions. Our research and development expense was $11.4 million for the three months ended March 31, 2011, and there can be no assurance that we will achieve an acceptable return on our research and development efforts, and no assurance that we will be able to deliver our solutions in time to achieve market acceptance.
 
Our ability to grow will depend significantly on our delivery of products that help enable telecommunications companies to provide video services. If the demand for video services from telecommunications companies does not materialize or if these service providers find alternative methods of delivering video services, future sales of our video products will suffer.
 
        We have generated significant revenues from a single telecommunications company. Our ability to grow will depend on our selling video products to additional telecommunications companies. Although a number of our existing products are being deployed in telecom networks, we will need to devote considerable resources to obtain orders, qualify our products and hire knowledgeable personnel to address telecommunications company customers, each of which will require significant time and financial commitment. To date, our efforts to sell to additional telecommunication companies have not been successful. There can be no assurance that our efforts to sell to additional telecommunication companies will be successful in the near future, or at all. If technological advancements allow telecommunications companies to provide video services without upgrading their current system infrastructure or provide them a more cost-effective method of delivering video services than our products, projected sales of our video products will suffer. Even if these providers choose our video solutions, they may not be successful in marketing video services to their customers, in which case additional sales of our products would likely be limited.
 
       Selling successfully to additional telecommunication companies has been and will be a significant challenge for us. Several of our largest competitors have mature customer relationships with many of the largest telecommunications companies, while we have limited experience with sales and marketing efforts designed to reach these potential customers. In addition, telecommunications companies face specific network architecture and legacy technology issues that we have only limited expertise in addressing. If we fail to penetrate the telecommunications market successfully, our growth in revenues and our operating results would likely be adversely impacted.
 
We anticipate that our gross margins will fluctuate with changes in our product mix and our fixed cost absorption. We expect decreases in the average selling prices of our hardware and software products to further adversely impact our operating results.
 
        Our product gross margins decreased to 39.5% for the three months ended March 31, 2011 compared to 44.0% for the three months ended March 31, 2010. Our industry has historically experienced a decrease in average selling prices. We anticipate that the average selling prices of our products will continue to decrease in the future in response to competitive pricing pressures, increased sales discounts and new product introductions by our competitors. We may experience substantial decreases in future operating results due to a decrease of our average selling prices. Additionally, our failure to develop and introduce new products on a timely basis or to effectively absorb our fixed costs would likely contribute to a decline in our gross margins, which could have a material adverse effect on our operating results and cause the price of our common stock to decline. We also anticipate that our gross margins will fluctuate from period to period as a result of the mix of products we sell in any given period. If our sales of lower margin products significantly expand in future quarterly periods, our overall gross margin levels and operating results would be adversely impacted.
 
 
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If we do not accurately anticipate the correct mix of our products that will be sold, we may be required to record charges related to excess inventories.
 
       Due to the unpredictable nature of the demand for our products, we are required to place non-cancellable orders with our suppliers for components, finished products and services in advance of actual customer commitments to purchase these products. Significant unanticipated fluctuations in demand could result in costly excess production or inventories. Our inventory balance was approximately $3.8 million higher as of March 31, 2011 compared to March 31, 2010. In order to reduce the negative financial impact of excess production, we may be required to significantly reduce the sales prices of our products in an attempt to increase demand, which in turn could result in a reduction in the value of the original inventory. If we were to determine that we could not utilize or sell this inventory, we may be required to write down its value. Writing down inventory or reducing product prices could adversely impact our gross margins and financial condition.
 
Any further economic downturn will likely adversely affect our financial condition and results of operations and make our future business more difficult to forecast and manage.
 
       Our business is sensitive to changes in general economic conditions, both in the U.S. and globally. Due to the continued tight credit markets and concerns regarding the availability of credit, our current or potential customers may delay or reduce purchases of our products, which would adversely affect our revenues and therefore harm our business and results of operations.
 
       We expect our business to be adversely impacted by any future downturn in the U.S. or global economies as our customers’ capital spending is expected to be reduced during in response to such conditions. Any uncertainty in the U.S. and global economies would likely make it more difficult for us to forecast and manage our business.
 
 Our efforts to develop additional channels to market and sell our products internationally may take longer to be successful than we anticipate, if they succeed at all.
 
       Our video solutions traditionally have been sold directly to large cable MSOs, and a limited number of telecommunications companies. To date, we have not focused on smaller service providers and have had only limited access to service providers in certain international markets, including Asia and Europe. Although we intend to establish strategic relationships with leading distributors worldwide in an attempt to reach new customers, we have not been successful in establishing these relationships and may not succeed in doing so in the near-term. Even if we do establish these relationships, the distributors may not succeed in marketing our products to their customers. Some of our competitors have established long-standing relationships with cable MSOs and telecommunications companies that may limit our and our distributors’ ability to sell our products to those customers. Even if we were to sell our products to those customers, it would likely not be based on long-term commitments, and those customers would be able to terminate their relationships with us at any time without significant penalties.
 
        International sales represented 3.9% of our net revenues for the three months ended March 31, 2011 compared to 11.0% for three months ended March 31, 2010. Our international sales depend on our development of indirect sales channels in Europe and Asia through distributor and reseller arrangements with third parties. However, our recent efforts at international expansion have not resulted in increased revenues from these markets, and there can be no assurance that our current efforts will substantially diversify our product revenue. We may not be able to successfully enter into additional reseller and/or distribution agreements and/or may not be able to successfully manage our product sales channels. In addition, many of our resellers also sell products from other vendors that compete with our products and may choose to focus on products of those vendors. Additionally, our ability to utilize an indirect sales model in these international markets will depend on our ability to qualify and train those resellers to perform product installations and to provide customer support. If we fail to develop and cultivate relationships with significant resellers, or if these resellers do not succeed in their sales efforts (whether because they are unable to provide support or otherwise), we may be unable to grow or sustain our revenue in international markets.
 
Our expansion of international development operations may take longer to be successful than we anticipate, if they succeed at all.
 
       As of March 31, 2011, approximately 84% of our research and development headcount was located outside the U.S., primarily in Israel and increasingly in China. Managing research and development operations in numerous locations requires substantial management oversight. If we are unable to expand our international operations successfully and in a timely manner, our business, operating results and financial condition may be harmed. Such expansion may be more difficult or could take longer than we anticipate.
 
       Our international operations, and the international operations of our contract manufacturers and our outsourced development contractors, are subject to a number of risks, any or all of which could reduce our future revenues or increase our costs from our international operations.
 
 
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 We are exposed to fluctuations in currency exchange rates, which could negatively affect our financial results and cash flows.
 
       Because a substantial portion of our employee base is located in Israel, we are exposed to fluctuations in currency exchange rates between the U.S. dollar and the Israeli New Shekel. These fluctuations could have a material adverse impact on our financial results and cash flows. A decrease in the value of the U.S. dollar relative to foreign currencies could increase our operating expenses and the cost of raw materials to the extent that we must purchase components or pay employees in foreign currencies.
 
       Currently, we hedge a portion of our anticipated future expenses and certain assets and liabilities denominated in the Israeli New Shekel. The hedging activities we undertake are intended to partially offset the impact of currency fluctuations. As our hedging program is relatively short-term in nature, a material long-term change in the value of the U.S. dollar versus the Israeli New Shekel could increase our operating expenses in the future.
 
 Our products must interoperate with many software applications and hardware found in our customers’ networks. If we are unable to ensure that our products interoperate properly, our business would be harmed.
 
       Our products must interoperate with our customers’ existing networks, which often have varied and complex specifications, utilize multiple protocol standards, software applications and products from multiple vendors, and contain multiple generations of products that have been added over time. As a result, we must continually ensure that our products interoperate properly with these existing networks. To meet these requirements, we must undertake development efforts that require substantial capital investment and employee resources. We may not accomplish these development efforts quickly or cost-effectively, if at all. For example, our products currently interoperate with equipment from several vendors such as ARRIS Group, Cisco Systems, Microsoft and Motorola. If we fail to maintain compatibility with these vendors (some of whom are our competitors), we may face substantially reduced demand for, or delay in the implementation of, our products, either or both of which would adversely affect our business, operating results and financial condition.
 
       We have entered into interoperability arrangements with a number of equipment and software vendors for the use or integration of their technology with our products. In these cases, the arrangements give us access to and enable interoperability with various products in the digital video market that we do not otherwise offer. If these relationships fail, we will have to devote substantially more resources to the development of alternative products and the support of our products, and our efforts may not be as effective as the combined solutions with our current partners. In many cases, these parties are either companies with which we compete directly in other areas, such as Motorola, or companies that have extensive relationships with our existing and potential customers and may have influence over the purchasing decisions of these customers. A number of our competitors have stronger relationships with some of our existing and potential partners and, as a result, our ability to successfully partner with these companies may be harmed. Our failure to establish or maintain key relationships with third party equipment and software vendors may harm our ability to successfully sell and market our products. We are currently investing significant resources to develop these relationships. Our operating results could be adversely affected if these efforts do not generate the revenues necessary to offset this investment.
 
        In addition, if we find errors in the existing software or defects in the hardware used in our customers’ networks or problematic network configurations or settings, as we have in the past, we may have to modify our software or hardware so that our products will interoperate with our customers’ networks. This could cause longer installation times for our products and could cause order cancellations, either of which would adversely affect our business, operating results and financial condition.
 
 Our ability to sell our products is highly dependent on the quality of our support and services offerings, and our failure to offer high-quality support and services would have a material adverse effect on our sales and results of operations.
 
       Once our products are deployed within our customers’ networks, our customers depend on our support organization to resolve any issues relating to our products. If we or our channel partners do not effectively assist our customers in deploying our products, or succeed in helping our customers quickly resolve post-deployment issues and provide effective ongoing support, our ability to sell our products to existing customers would be adversely affected and our reputation with potential customers could be harmed. In addition, to the extent we expand our operations internationally, our support organization will face additional challenges including those associated with delivering support, training and documentation in languages other than English. Our failure to maintain high-quality support and services would have a material adverse effect on our business, operating results and financial condition.
 
If we fail to comply with new laws and regulations, or changing interpretations of existing laws or regulations, our future revenues could be adversely affected.
 
       Our products are subject to various legal and regulatory requirements and changes. For example, effective June 12, 2009, federal law required that television broadcast stations stop broadcasting in analog format and broadcast only in digital format. We believe that this change accelerated the timing of sales of our digital products, and consequently the revenue associated with our broadcast solutions decreased after June 30, 2009. These and other implementations of laws and interpretations of existing regulations could cause our customers to forgo or change the timing of spending on new technology rollouts, such as switched digital video, which could make our results more difficult to predict, or harm our revenues.
 
       Additionally, governments in the U.S. and other countries have adopted laws and regulations regarding privacy and advertising that could impact important aspects of our business. In particular, governments are considering new limits or requirements with respect to our customers’ collection, use, storage and disclosure of personal information for marketing purposes. Any legislation enacted or regulation issued could dampen the growth and acceptance of addressable advertising which is enabled by our products. If the use of our products to increase advertising revenue is limited or becomes unlawful, our business, results of operations and financial condition would be harmed.
 
 
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We must manage our business effectively even if our infrastructure, management and resources might be strained due to our continued expense reduction efforts.
 
        In the past several years, including this year, we have undertaken a number of reductions in force, experienced a number of changes in our executive management and implemented other cost reduction measures. Effectively managing our business with reduced headcount and expenses in some areas, will likely place increased strain on our existing resources.
 
        In addition, we may need to expand and otherwise improve our internal systems, including our management information systems, customer relationship and support systems, and operating, administrative and financial systems and controls. These efforts may require us to make significant capital expenditures or incur significant expenses, and divert the attention of management, sales, support and finance personnel from our core business operations, which may adversely affect our financial performance in future periods. Moreover, to the extent we grow in the future, such growth will result in increased responsibilities for our management personnel. Managing any future growth will require substantial resources that we may not have or otherwise be able to obtain.
 
Our business is subject to the risks of warranty returns, product liability and product defects.
 
       Products like ours are very complex and can frequently contain undetected errors or failures, especially when first introduced or when new versions are released. Despite testing, errors may occur. Product errors could affect the performance of our products, delay the development or release of new products or new versions of products, adversely affect our reputation and our customers’ willingness to buy products from us and adversely affect market acceptance or perception of our products. Any such errors or delays in releasing new products or new versions of products or allegations of unsatisfactory performance could cause us to lose revenue or market share, increase our service costs, cause us to incur substantial costs in redesigning the products, subject us to liability for damages and divert our resources from other tasks, any one of which could materially adversely affect our business, results of operations and financial condition.
 
       Although we have limitation of liability provisions in our standard terms and conditions of sale, they may not fully or effectively protect us from claims as a result of federal, state or local laws or ordinances or unfavorable judicial decisions in the U.S. or other countries. The sale and support of our products also entails the risk of product liability claims. We maintain insurance to protect against certain claims associated with the use of our products, but our insurance coverage may not adequately cover any claim asserted against us. In addition, even claims that ultimately are unsuccessful could result in our expenditure of funds in litigation and divert management’s time and other resources.
 
Regional instability in Israel may adversely affect business conditions, including the operations of our contract manufacturers, and may disrupt our operations and negatively affect our operating results.
 
       A substantial portion of our research and development operations and our contract manufacturing occurs in Israel. As of March 31, 2011, we had 150  full-time employees located in Israel. We also have customer service, marketing and general and administrative employees at this facility. 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. In addition, in the past, Israel and companies doing business with Israel have been the subject of an economic boycott. Israel has also been and is subject to civil unrest and terrorist activity, with varying levels of severity, for the last decade. Security and political conditions may have an adverse impact on our business in the future. Hostilities involving Israel or the interruption or curtailment of trade between Israel and its trading partners could adversely affect our operations and make it more difficult for us to retain or recruit qualified personnel in Israel.
 
        In addition, most of our employees in Israel are obligated to perform annual reserve duty in the Israeli Defense Forces and several have been called for active military duty in connection with intermittent hostilities over the years. Should hostilities in the region escalate again, some of our employees would likely be called to active military duty, possibly resulting in interruptions in our sales and development efforts and other impacts on our business and operations, which we cannot currently assess.
 
 We depend on a limited number of third parties to provide key components of, and to provide manufacturing and assembly services with respect to, our products.
 
       We and our contract manufacturers obtain many components necessary for the manufacture or integration of our products from a sole supplier or a limited group of suppliers. We or our contract manufacturers do not typically have long-term agreements in place with such suppliers. As an example, we do not have a long-term purchase agreement in place with PowerOne, the sole supplier of power supplies for our products. Our direct and indirect reliance on sole or limited suppliers involves several risks, including the inability to obtain an adequate supply of required components, and reduced control over pricing, quality and timely delivery of components. Our ability to deliver our products on a timely basis to our customers would be materially adversely impacted if we or our contract manufacturers needed to find alternative replacements for (as examples) the chassis, chipsets, central processing units or power supplies that we use in our products. Significant time and effort would be required to locate new vendors for these alternative components, if alternatives are even available. Moreover, the lead times required by the suppliers of some components are lengthy and preclude rapid changes in quantity requirements and delivery schedules. Even as we increase our use of standardized components, we may experience supply chain issues, particularly as a result of market volatility. Such volatility could lead suppliers to decrease inventory, which in turn would lead to increased manufacturing lead times for us. In addition, increased demand by third parties for the components we use in our products (for example, field programmable gate arrays or other semiconductor technology) may lead to decreased availability and higher prices for those components from our suppliers, since we generally carry little inventory of our product components. As a result, we may not be able to secure enough components at reasonable prices or of acceptable quality to build products in a timely manner, which would impact our ability to deliver products to our customers, and our business, operating results and financial condition would be adversely affected.
 
 
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        For manufacturing and assembly, we currently rely exclusively on Flextronics or Benchmark, depending on the product, to assemble our products, manage our supply chain and negotiate component costs for our solutions. Our reliance on these contract manufacturers reduces our control over the assembly process, exposing us to risks, including reduced control over quality assurance, production costs and product supply. If we fail to manage our relationships with these contract manufacturers effectively, or if these contract manufacturers experience delays (including delays in their ability to purchase components, as noted above), disruptions, capacity constraints or quality control problems in their operations, our ability to ship products to our customers could be impaired and our competitive position and reputation could be harmed. If these contract manufacturers are unable to negotiate with their suppliers for reduced component costs, our operating results would be harmed. Qualifying a new contract manufacturer and commencing volume production is expensive and time-consuming. If we are required to change contract manufacturers, we may lose net revenues, incur increased costs and damage our customer relationships.
 
Our failure to adequately protect our intellectual property and proprietary rights, or to secure such rights on reasonable terms, may adversely affect us.
 
       We hold numerous issued U.S. patents and have a number of patent applications pending in the U.S. and foreign jurisdictions. Although we attempt to protect our intellectual property rights through patents, copyrights, trademarks, licensing arrangements, maintaining certain technology as trade secrets and other measures, we cannot be sure 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. Despite our efforts, other competitors may be able to develop technologies that are similar or superior to our technology, duplicate our technology to the extent it is not protected, or design around the patents that we own. In addition, effective patent, copyright, trademark 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.
 
        The steps that we have taken may not prevent misappropriation of our technology. In addition, to prevent misappropriation we may need to take legal action to enforce our patents and other intellectual property rights, protect our trade secrets, determine the validity and scope of the proprietary rights of others, or to defend against claims of infringement or invalidity. For example, on June 5, 2007, we filed a lawsuit in federal court against Imagine Communications, Inc., alleging patent infringement. This and other potential intellectual property litigation could result in substantial costs and diversion of resources and could negatively affect our business, operating results and financial condition.
 
        In order to successfully develop and market certain of our planned products, we may be required to enter into technology development or licensing agreements with third parties whether to avoid infringement or because we believe a specific functionality is necessary for a successful product launch. These third parties may be willing to enter into technology development or licensing agreements only on a costly royalty basis or on terms unacceptable to us, or not at all. Our failure to enter into technology development or licensing agreements on reasonable terms, when necessary, could limit our ability to develop and market new products and could cause our business to suffer. For example, we could face delays in product releases until alternative technology can be identified, licensed or developed, and integrated into our current products. These delays, if they occur, could adversely affect our business, operating results and financial condition.
 
We may face intellectual property infringement claims from third parties.
 
       Our industry is characterized by the existence of an extensive number of patents and frequent claims and related litigation regarding patent and other intellectual property rights. From time to time, third parties have asserted and may assert patent, copyright, trademark and other intellectual property rights against us or our customers. Our suppliers and customers may have similar claims asserted against them. 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 attorneys’ fees. Any future litigation, regardless of its outcome, could result in substantial expense and significant diversion of the efforts of our management and technical personnel. An adverse determination in any such proceeding could subject us to significant liabilities, temporary or permanent injunctions or require us to seek licenses from third parties or pay royalties that may be substantial. Furthermore, necessary licenses may not be available on satisfactory terms, or at all.
 
 
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Our use of open source and third-party software could impose limitations on our ability to commercialize our products.
 
       We incorporate open source software into our products, including certain open source code which is governed by the GNU General Public License, Lesser GNU General Public License and Common Development and Distribution License. The terms of many open source licenses have not been interpreted by U.S. courts, and there is a risk that these licenses could be construed in a manner that could impose unanticipated conditions or restrictions on our ability to commercialize our products. In such event, we could be required to seek licenses from third parties in order to continue offering our products, make generally available, in source code form, proprietary code that links to certain open source modules, re-engineer our products, discontinue the sale of our products if re-engineering could not be accomplished on a cost-effective and timely basis, or become subject to other consequences, any of which could adversely affect our business, operating results and financial condition.
 
We may engage in future acquisitions that dilute the ownership interests of our stockholders, cause us to use a significant portion of our cash, incur debt or assume contingent liabilities.
 
       As part of our business strategy, from time to time, we review potential acquisitions of other businesses, and we may acquire businesses, products, or technologies in the future. In the event of any future acquisitions, we could:
 
issue equity securities which would dilute our current stockholders’ percentage ownership;

incur substantial debt;

assume contingent liabilities; or

spend significant cash.
 
These actions could harm our business, operating results and financial condition, or the price of our common stock. Moreover, even if we do obtain benefits from acquisitions in the form of increased sales and earnings, there may be a delay between the time when the expenses associated with an acquisition are incurred and the time when we recognize such benefits. This is particularly relevant in cases where it is necessary to integrate new types of technology into our existing portfolio and where new types of products may be targeted for potential customers with which we do not have pre-existing relationships. Acquisitions and investment activities also entail numerous risks, including:
 
difficulties in the assimilation of acquired operations, technologies and/or products;

unanticipated acquisition transaction costs;

the diversion of management’s attention from other business;

adverse effects on existing business relationships with suppliers and customers;

risks associated with entering markets in which we have no or limited prior experience;

the potential loss of key employees of acquired businesses;

difficulties in the assimilation of different corporate cultures and practices; and

substantial charges for the amortization of certain purchased intangible assets, deferred stock compensation or similar items.
     
        We may not be able to successfully integrate any businesses, products, technologies or personnel that we might acquire in the future, and our failure to do so could have a material adverse effect on our business, operating results and financial condition.
 
Negative conditions in the global credit markets may impair the value or reduce the liquidity of a portion of our investment portfolio.
 
       As of March 31, 2011, we had $136.3 million in cash, cash equivalents and investments in marketable securities. Historically, we have invested these amounts primarily in government agency debt securities, corporate debt securities, commercial paper, auction rate securities, money market funds and taxable municipal debt securities meeting certain criteria. We currently hold no mortgaged-backed or auction rate securities. However, our investments are subject to general credit, liquidity, market and interest rate risks, which may be exacerbated by any uncertainty in the U.S. and global credit markets such as the conditions in late 2008 and 2009 that affected various sectors of the financial markets and caused global credit and liquidity issues. In the future, market risks associated with our investment portfolio may harm the results of our operations, liquidity and financial condition.
 
        Although we believe we have chosen a lower risk portfolio designed to preserve our existing cash position, it may not adequately protect the value of our investments. Furthermore, this lower risk portfolio is unlikely to provide us with any significant interest income in the near term.
 
 
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While we believe that we currently have proper and effective internal control over financial reporting, we must continue to comply with laws requiring us to evaluate those internal controls.
 
       We are required to comply with Section 404 of the Sarbanes-Oxley Act of 2002. The provisions of the act require, among other things, that we evaluate the effectiveness of our internal control over financial reporting and disclosure controls and procedures. Ensuring that we have adequate internal financial and accounting controls and procedures in place to help produce accurate financial statements on a timely basis is a costly and time-consuming effort. For example, our accounting for income taxes requires considerable, specific knowledge of various tax acts, both foreign and domestic, and also involves several subjective judgments that could lead to fluctuations in our results of operations should some or all events not occur as anticipated. We incur significant costs and demands upon management as a result of complying with these laws and regulations affecting us as a public company. If we fail to maintain proper and effective internal controls in future periods, it could adversely affect our ability to run our business effectively and could cause investors to lose confidence in our financial reporting.
 
We are subject to import/export controls that could subject us to liability or impair our ability to compete in international markets.
 
       Our products are subject to U.S. export controls and may be exported outside the U.S. only with the required level of export license or through an export license exception, in most cases because we incorporate encryption technology into our products. In addition, various countries regulate the import of certain encryption technology and have enacted laws that could limit our ability to distribute our products or could limit our customers’ ability to implement our products in those countries. Changes in our products or changes in export and import regulations may create delays in the introduction of our products in international markets, prevent our customers with international operations from deploying our products throughout their global systems or, in some cases, prevent the export or import of our products to certain countries altogether. Any change in export or import regulations or related legislation, shift in approach to the enforcement or scope of existing regulations, or change in the countries, persons or technologies targeted by such regulations, could result in decreased use of our products by, or in our decreased ability to export or sell our products to, existing or potential customers internationally.
 
        In addition, we may be subject to customs duties and export quotas, which could have a significant impact on our revenue and profitability. While we have not yet encountered significant regulatory difficulties in connection with the sales of our products in international markets, the future imposition of significant customs duties or export quotas could have a material adverse effect on our business.
 
Our business is subject to the risks of earthquakes, fire, floods and other natural catastrophic events, and to interruption by manmade problems such as computer viruses or terrorism.
 
       Our corporate headquarters is located in the San Francisco Bay area, a region known for seismic activity. A significant natural disaster, such as an earthquake, fire or a flood, could have a material adverse impact on our business, operating results and financial condition. In addition, our computer servers are vulnerable to computer viruses, break-ins and similar disruptions from unauthorized tampering with our computer systems. In addition, acts of terrorism or war or public health outbreaks could cause disruptions in our or our customers’ business or the economy as a whole. To the extent that such disruptions result in delays or cancellations of customer orders, or the deployment of our products, our business, operating results and financial condition would be adversely affected.

 
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Item 6.
EXHIBITS
 
3.1B
Form of Amended and Restated Certificate of Incorporation of the Registrant(1)
   
3.2B
Form of Amended and Restated Bylaws of the Registrant(1)
   
10.30
Offer Letter dated March 14, 2011 - Erez Rosen
   
10.31
Offer Letter dated March 25, 2011 - Richard C. Smith
   
31.1
Rule 13a-14(a)/15d-14(a) Certification of Principal Executive Officer
   
31.2
Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer
   
32.1*
Section 1350 Certification of Principal Executive Officer and Principal Financial Officer
 
(1) Incorporated by reference to exhibit of same number filed with the registrant’s Registration Statement on Form S-1 (No. 333-139652) on December 22, 2006, as amended.
*   This exhibit shall not be deemed “filed” for the purposes of Section 18 of the Exchange Act or otherwise subject to the liability of that Section, nor shall it be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act, whether made before or after the date hereof, except to the extent this exhibit is specifically incorporated by reference.
 
 
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SIGNATURE
 
        Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
Date: May 6, 2011
   
     
    BigBand Networks, Inc.
     
 
By:
/s/Ravi Narula
    Ravi Narula, Chief Financial Officer
    (Principal Financial and Accounting Officer)
 
EXHIBIT INDEX

3.1B
Form of Amended and Restated Certificate of Incorporation of the Registrant(1)
   
3.2B
Form of Amended and Restated Bylaws of the Registrant(1)
   
10.30
Offer Letter dated March 14, 2011 - Erez Rosen
   
10.31
Offer Letter dated March 25, 2011 - Richard C. Smith
   
31.1
Rule 13a-14(a)/15d-14(a) Certification of Principal Executive Officer
   
31.2
Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer
   
32.1*
Section 1350 Certification of Principal Executive Officer and Principal Financial Officer
 
(1) Incorporated by reference to exhibit of same number filed with the registrant’s Registration Statement on Form S-1 (No. 333-139652) on December 22, 2006, as amended.
*   This exhibit shall not be deemed “filed” for the purposes of Section 18 of the Exchange Act or otherwise subject to the liability of that Section, nor shall it be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act, whether made before or after the date hereof, except to the extent this exhibit is specifically incorporated by reference.
 

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Index