BigBand Networks 10-Q 2008 Q2 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2008

Or

¨ 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  x    No  ¨

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 definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large Accelerated filer  ¨        Accelerated filer  ¨        Non-Accelerated filer  x        Smaller reporting company  ¨

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

As of August 1, 2008, 64,020,306 shares of the registrant’s common stock, par value $0.001 per share, were outstanding.

BigBand Networks, Inc.

FORM 10-Q

FOR THE QUARTER ENDED

June 30, 2008

INDEX

		Page
PART I.	Financial Information	3
Item 1.	Financial Statements (Unaudited)	3
	Condensed Consolidated Balance Sheets as of June 30, 2008 and December 31, 2007	3
	Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2008 and 2007	4
	Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2008 and 2007	5
	Notes to Condensed Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	27
Item 4.	Controls and Procedures	28
PART II.	Other Information	29
Item 1.	Legal Proceedings	29
Item 1A.	Risk Factors	29
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	41
Item 4.	Submission of Matters to a Vote of Security Holders	41
Item 5.	Other Information	42
Item 6.	Exhibits	45
	Signature	46

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PART 1: FINANCIAL INFORMATION

Item 1. Financial Statements

BigBand Networks, Inc.

Condensed Consolidated Balance Sheets

(In thousands, except per share data)

(Unaudited)

	As of June 30, 2008			As of December 31, 2007
ASSETS
Current assets:
Cash and cash equivalents	$	50,854		$	55,162
Marketable securities		107,915			99,358
Trade receivables, net of allowance for doubtful accounts of $148 and $142 at June 30, 2008 and December 31, 2007, respectively		25,195			27,855
Inventories, net		8,242			6,832
Prepaid expenses and other current assets		5,414			4,012
Total current assets		197,620			193,219
Property and equipment, net		17,193			17,432
Goodwill and other intangible assets, net		2,104			2,390
Other non-current assets		6,230			5,545
Total assets	$	223,147		$	218,586
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	9,532		$	13,811
Accrued compensation and related benefits		9,450			6,475
Current portion of deferred revenues, net		49,395			48,256
Accrued warranty		2,944			3,502
Other current liabilities		6,597			11,879
Total current liabilities		77,918			83,923
Deferred revenues, net, less current portion		19,804			19,032
Accrued warranty, less current portion		1,085			857
Other non-current liabilities		409			—
Accrued long-term severance pay fund		4,005			3,188
Commitments and contingencies
Stockholders’ equity:
Common stock, $0.001 par value, 250,000 shares designated at June 30, 2008 and December 31, 2007; 63,977 and 61,907 shares issued and outstanding at June 30, 2008 and December 31, 2007, respectively		64			62
Additional paid-in capital		257,518			248,139
Deferred stock-based compensation		(65	)		(203	)
Accumulated other comprehensive (loss) income		(258	)		248
Accumulated deficit		(137,333	)		(136,660	)
Total stockholders’ equity		119,926			111,586
Total liabilities and stockholders’ equity	$	223,147		$	218,586

See accompanying notes.

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BigBand Networks, Inc.

Condensed Consolidated Statements of Operations

(In thousands, except per share amounts)

(Unaudited)

	Three Months Ended June 30,						Six Months Ended June 30,
	2008			2007			2008			2007
Net revenues:
Products	$	33,888		$	46,261		$	65,851		$	91,917
Services		9,123			8,202			17,066			15,380
Total net revenues		43,011			54,463			82,917			107,297
Cost of net revenues:
Products		14,353			21,761			26,678			40,829
Services		3,285			3,611			6,499			6,981
Total cost of net revenues		17,638			25,372			33,177			47,810
Gross profit		25,373			29,091			49,740			59,487
Operating expenses:
Research and development		12,809			13,678			27,212			26,750
Sales and marketing		7,002			11,113			14,866			21,427
General and administrative		5,360			4,115			10,188			7,637
Restructuring charges		1,158			—			1,493			—
Amortization of intangible assets		143			143			286			286
Total operating expenses		26,472			29,049			54,045			56,100
Operating (loss) income		(1,099	)		42			(4,305	)		3,387
Interest income		1,202			2,157			2,871			3,038
Interest expense		—			(271	)		—			(609	)
Other income (expense), net		1,365			105			1,447			(4,997	)
Income before provision for income taxes		1,468			2,033			13			819
Provision for income taxes		221			378			686			141
Net income (loss)	$	1,247		$	1,655		$	(673	)	$	678
Basic net income (loss) per common share	$	0.02		$	0.03		$	(0.01	)	$	0.02
Diluted net income (loss) per common share	$	0.02		$	0.02		$	(0.01	)	$	0.01
Shares used in computing basic net income (loss) per common share		63,400			58,140			62,898			38,373
Shares used in computing diluted net income (loss) per common share		67,548			70,764			62,898			66,725

See accompanying notes.

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BigBand Networks, Inc.

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

	Six Months Ended June 30,
	2008			2007
Cash Flows from Operating activities:
Net (loss) income	$	(673	)	$	678
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Depreciation of property and equipment		4,947			4,028
Amortization of intangible assets		286			286
Increase in accrued imputed interest on loan		—			21
Loss on disposal of property and equipment		244			187
Revaluation of preferred stock warrant liabilities		—			4,974
Stock-based compensation		5,663			5,360
Change in operating assets and liabilities:
Decrease in trade receivables		2,660			8,576
Increase in inventories, net		(1,410	)		(3,384	)
Increase in prepaid expenses and other current assets		(1,992	)		(155	)
(Increase) decrease in other non-current assets		(350	)		1,111
Decrease in accounts payable		(1,978	)		(5,267	)
Increase in long-term severance pay fund		817			404
Decrease in accrued and other liabilities		(2,243	)		(1,137	)
Increase (decrease) in deferred revenues		1,911			(2,125	)
Net cash provided by operating activities		7,882			13,557
Cash Flows from Investing activities:
Purchases of marketable securities		(106,804	)		(77,195	)
Proceeds from maturities or sale of marketable securities		98,015			32,415
Purchases of property and equipment		(7,252	)		(6,739	)
Increase in restricted cash		(3	)		(770	)
Net cash used in investing activities		(16,044	)		(52,289	)
Cash Flows from Financing activities:
Proceeds from the issuance of common stock		3,854			3,020
Principal payments on loans		—			(14,000	)
Principal payments on capital lease obligations		—			(56	)
Proceeds from initial public offering, net of expenses		—			88,010
Net cash provided by financing activities		3,854			76,974
Net (decrease) increase in cash and cash equivalents		(4,308	)		38,242
Cash and cash equivalents at beginning of the period		55,162			38,570
Cash and cash equivalents at end of the period	$	50,854		$	76,812

See accompanying notes.

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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 hardware and software platforms that enable cable operators and telecommunications providers to deploy advanced video services and more effective video advertising.

2. Summary of Significant Accounting Policies

Basis of Presentation

The condensed consolidated financial statements include accounts of the Company and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated. The accompanying condensed consolidated balance sheet as of June 30, 2008, and the condensed consolidated statements of operations for the three and six months ended June 30, 2008 and 2007, and the condensed consolidated statements of cash flows for the six months ended June 30, 2008 and 2007 are unaudited. The condensed consolidated balance sheet as of December 31, 2007 was derived from the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K (Form 10-K) for the year ended December 31, 2007. The accompanying condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes contained in such Form 10-K dated March 12, 2008.

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. Not all 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 fair presentation of the Company’s condensed consolidated balance sheet as of June 30, 2008, the condensed consolidated statements of operations for the three and six months ended June 30, 2008 and 2007, and the condensed consolidated statements of cash flows for the six months ended June 30, 2008 and 2007.

There have been no significant changes in the Company’s accounting policies during the six months ended June 30, 2008 compared to the significant accounting policies described in the Company’s Form 10-K for the year ended December 31, 2007.

Use of Estimates

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

Revenue Recognition

The Company’s software and hardware are sold as solutions with software as a significant component of the product. The Company provides unspecified software updates and enhancements related to products through support contracts. As a result, the Company accounts for revenues in accordance with Statement of Position (SOP) 97-2, “Software Revenue Recognition,” as amended by SOP 98-9, “Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions,” for all transactions involving the sale of products with a significant software component. Revenue is recognized when all of the following have occurred: (1) the Company has entered into an arrangement with a customer; (2) delivery has occurred; (3) customer payment is fixed or determinable and free of contingencies and significant uncertainties; and (4) collection is probable.

Product revenues consist of revenues from sales of the Company’s software and hardware. Product sales include a perpetual license to the Company’s software. The Company recognizes product revenues upon shipment to its customers, including channel partner distributors, on non-cancelable 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, channel partners, and distributors 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.

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The Company provides allowances for customer credits that are estimated based on the terms of the arrangement and past history and adjusted periodically based on actual experience or future expectations. Allowances for customer credits are recorded as a liability or reductions of trade receivables.

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

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

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

Deferred revenues consist primarily of deferred product revenues, net of the associated costs, and deferred service fees. Deferred product revenue generally relates to acceptance provisions that have not been met or partial shipment or when the Company does not have VSOE of fair value on the undelivered items. When deferred revenues are recognized as revenues, the associated deferred costs are also recognized as cost of sales. The Company assesses the ability to collect from its customers based on a number of factors, including the credit worthiness of the customer and the past transaction history of the customer. If the customer is not deemed credit worthy, all revenues are deferred from the arrangement until payment is received and all other revenue recognition criteria have been met.

Cash and Cash Equivalents

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

Marketable Securities

At June 30, 2008, marketable securities consisted principally of corporate debt securities, commercial paper, and debt of U.S. agencies with remaining time to maturity of two years or less. Auction rate securities, which were disposed of in January 2008, were considered short-term marketable securities due to their reset feature which was seven, twenty eight or thirty five days. The Company considers marketable securities with remaining time to maturity greater than one year and in a consistent loss position for at least nine months to be classified as long-term as it expects to hold them to maturity. The Company considers all other marketable securities with remaining time to maturity less than two years to be short-term marketable securities. The short-term marketable securities are classified in the balance sheet as current assets because they can be readily converted into cash or into securities with a shorter remaining time to maturity and because the Company is not committed to holding the marketable securities until maturity. The Company determines the appropriate classification of its marketable securities at the time of purchase and reevaluates 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 market value, with all the associated unrealized gains and losses, net of taxes, 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 and other expenses, net. Additionally, the Company assesses whether an other-than-temporary impairment loss on its investments has occurred due to declines in fair value or other market conditions. The Company did not consider any declines in fair value of securities held as of June 30, 2008 and December 31, 2007 to be other-than-temporary. Realized gains and losses and declines in value judged to be other-than-temporary on available-for-sale securities are included in interest income, net of taxes. The cost of securities sold and any gains and losses on sales are based on the specific identification method.

7

Fair Value of Financial Instruments

The carrying values of cash and cash equivalents, restricted cash, trade receivables, marketable securities, derivatives used in the Company’s hedging program, accounts payable, and other accrued liabilities approximate their fair value. The carrying values of the Company’s capital lease obligations, loans payable, preferred stock warrant liability, and other long-term liabilities approximate their fair value.

Concentration of Credit Risk and Significant Customers

The Company had two customers with a trade receivable balance of greater than 10% of the Company’s total trade receivables balances as of June 30, 2008, and three customers with individual trade receivable balances of greater than 10% of the Company’s total trade receivable balances as of December 31, 2007.

The Company recognized net revenues from three customers that were 10% or greater of the Company’s total net revenues for each of the three and six months ended June 30, 2008, and two customers that were 10% or greater of the Company’s total net revenues for each of the three and six months ended June 30, 2007.

Inventories, Net

Inventories, net consist of raw materials, work-in-process, and finished goods and are stated at the lower of standard cost or market. Standard costs approximate the first-in, first-out method. The Company regularly monitors inventory quantities on-hand and records write-downs for excess and obsolete inventories based on the Company’s estimate of demand for its products, potential obsolescence of technology, product life cycles, and whether pricing trends or forecasts indicate that the carrying value of inventory exceeds its estimated selling price. These factors are impacted by market and economic conditions, technology changes, and new product introductions and require estimates that may include elements that are uncertain. Actual demand may differ from forecasted demand and may have a material effect on gross margins. If inventory is written down, a new cost basis will be established that can not be increased in future periods.

Impairment of Long-Lived Assets

The Company periodically evaluates whether events or changes in circumstances indicate that the carrying amount of long-lived assets may not be 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. The fair value of the long-lived assets is determined based on the estimated discounted cash flows expected to be generated from the long-lived assets. Through June 30, 2008, no impairment charges have been 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 specification 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

Income taxes are calculated under the provisions of Statement of Financial Accounting Standards No. 109,Accounting for Income Taxes (SFAS 109). Under SFAS 109, the liability method is used in accounting for income taxes, which 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 bases 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.

Hedging Instruments

The Company has revenues, expenses, assets and liabilities denominated in currencies other than the U.S. dollar, and that are subject to foreign currency risks, primarily related to expenses and liabilities denominated in the Israeli New Shekel. Beginning in 2007, the Company established a foreign currency risk management program to help offset some of 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. The Company’s practice is to use foreign currency forward contracts or combinations of purchased and sold foreign currency option contracts to reduce its exposure to foreign currency exchange rate fluctuations. All derivatives, whether designated in hedging relationships or not, are required to be recorded on the 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.

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The Company also enters into foreign currency forward contracts to reduce the impact of foreign currency fluctuations on assets and liabilities denominated in currencies other than the functional currency of the reporting entity. In accordance with SFAS No. 133,Accounting for Derivative Instruments and Hedging Activities (SFAS 133), the Company recognizes these derivative instruments as either assets or liabilities on the balance sheet at fair value. These forward exchange contracts are not accounted for as hedges and, therefore, changes in the fair value of these instruments are recorded as other income (expense), net on the statement of operations. These derivative instruments generally have maturities of 90 days or less. Gains and losses on these contracts are intended to offset the impact of foreign exchange rate changes on the underlying foreign currency denominated assets and liabilities, primarily liabilities denominated in Israeli New Shekels, and therefore, do not subject the Company to material balance sheet risk. Any gain or loss from these forward contracts is recognized in other income (expense), net in the period of change, including any unrealized gains or losses at period end. The unrealized gain on forward contracts that were outstanding as of June 30, 2008 was $35,000, and the notional amount (contractual amount of the derivative instrument) was $3.6 million.

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. The exposures are hedged using derivatives designated as cash flow hedges under SFAS 133. The effective portion of the derivative’s gain or loss is initially reported as a component of accumulated other comprehensive income (loss) and, upon occurrence of the forecasted transaction, is subsequently reclassified into the consolidated statement of operations line item to which the hedged transaction relates. The ineffective portion of the gain or loss is recognized in other income (expense), net immediately. These derivative instruments generally have maturities of 180 days or less. As of June 30, 2008, the amount of net unrealized and realized losses on derivatives designated as cash flow hedges and recorded in accumulated other comprehensive income (loss) was $0.2 million. The notional amount of the purchased currency option contracts, which are combined with sold currency option contracts, was $16.7 million as of June 30, 2008. During the three months ended June 30, 2008, the Company reduced its forecasted cash flows in Israeli New Shekels and therefore reduced the notional value of its outstanding derivatives with maturity dates from June through December 2008. As a result of this change in forecasted cash flow, the derivative instruments were no longer deemed to be highly effective resulting in the ineffective portion of the gain on these derivatives of $0.8 million to be recognized in other income (expense), net. In addition, the Company realized a gain of $0.2 million associated with reducing the notional value of its outstanding derivative instruments.

Comprehensive Income (Loss)

Comprehensive income (loss) consists of net income (loss) and other comprehensive income (loss). Other comprehensive income (loss) includes certain changes in equity that are excluded from results of operations. As of June 30, 2008, accumulated other comprehensive income (loss) was composed of net unrealized losses on marketable securities, and net unrealized and realized losses on derivatives designated as cash flow hedges. As of December 31, 2007, accumulated comprehensive income was composed of net unrealized gains on marketable securities, net unrealized and realized gains on cash flow hedges. The components of comprehensive income (loss) were as follows (in thousands):

	Three Months Ended June 30,						Six Months Ended June 30,
	2008			2007			2008			2007
Net income (loss)	$	1,247		$	1,655		$	(673	)	$	678
Other comprehensive income items:
Change in cash flow hedges		(641	)		—			(275	)		—
Change in marketable securities		(461	)		(18	)		(231	)		(17	)
Comprehensive income (loss)	$	145		$	1,637		$	(1,179	)	$	661

Accumulated other comprehensive income (loss) was comprised as follows (in thousands):

	As of June 30, 2008			As of December 31, 2007
Net unrealized (loss) gain on cash flow hedges	$	(230	)	$	45
Net unrealized (loss) gain on marketable securities		(28	)		203
Total	$	(258	)	$	248

Other Income (Expense), Net

Other income (expense), net consists of foreign currency translation gains and losses, and expenses resulting from fair value adjustments of redeemable convertible preferred stock warrants. During the three months ended June 30, 2008, the Company recognized foreign currency gains of $1.4 million, inclusive of the gains described above under “Hedging Instruments”. During the six months ended June 30, 2007, a non-cash charge of $5.0 million was recorded as a result of a remeasurement of redeemable convertible preferred stock warrant liabilities to the then current fair market value immediately prior to their conversion to common stock warrants.

Stock-based Compensation

The Company applies the fair value recognition and measurement provisions of SFAS No. 123(R),Share-Based Payment(SFAS 123R). Under SFAS 123R, stock-based awards, including stock options, are 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. The Company adopted the provisions of SFAS 123R using the prospective transition method. Under this transition method, non-vested stock-based awards outstanding as of January 1, 2006 continued to be accounted for under the intrinsic value method.

Recently Issued Accounting Standards

In February 2008, the FASB issued Financial Staff Positions (FSP) FAS 157-2,Effective Date of FASB Statement No. 157 (FSP 157-2), which delays the effective date of SFAS No. 157,Fair Value Measurement (SFAS 157), for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial

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statements on a recurring basis (at least annually). SFAS 157 establishes a framework for measuring fair value and expands disclosures about fair value measurements. FSP 157-2 partially defers the effective date of SFAS 157 to fiscal years beginning after November 15, 2008, and interim periods within those fiscal years for items within the scope of this FSP. FSP 157-2 is effective for the Company beginning January 1, 2009. The Company is currently evaluating the potential impact of the adoption of those provisions of SFAS 157, for which effectiveness was delayed by FSP 157-2, on its consolidated financial position and results of operations.

In March 2008, the FASB issued Statement No. 161,Disclosures about Derivative Instruments and Hedging Activities – an amendment of FASB Statement No. 133 (SFAS 161). This statement requires enhanced disclosures about an entity’s derivative and hedging activities and is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with earlier application encouraged. The Company will adopt SFAS 161 in the first fiscal quarter of 2009. Since SFAS 161 requires only additional disclosures concerning derivatives and hedging activities, adoption of SFAS 161 will not have an impact on the Company’s consolidated financial condition, results of operations and cash flows.

In December 2007, the FASB issued SFAS No. 141 (revised 2007),Business Combinations (SFAS 141R). SFAS 141R establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any noncontrolling interest in the acquiree and the goodwill acquired. SFAS 141R also establishes disclosure requirements to enable the evaluation of the nature and financial effects of the business combination. This statement is effective for periods beginning after December 15, 2008. The Company is currently evaluating the potential impact of the adoption of SFAS 141R on its consolidated financial position, results of operations and cash flows.

In May 2008, the FASB issued SFAS No. 162,The Hierarchy of Generally Accepted Accounting Principles(SFAS 162). SFAS 162 is intended to improve financial reporting by identifying a consistent framework, or hierarchy, for selecting accounting principles to be used in preparing financial statements that are presented in conformity with GAAP for nongovernmental entities. SFAS 162 is effective 60 days following SEC approval of the Public Company Accounting Oversight Board Auditing amendments to AU Section 411, The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles. The Company is currently evaluating the potential impact, if any, of the adoption of SFAS 162 on its consolidated financial position, results of operations and cash flows.

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

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

	Three Months Ended June 30,				Six Months Ended June 30,
	2008		2007		2008			2007
Numerator:
Net income (loss)	$	1,247	$	1,655	$	(673	)	$	678
Denominator:
Weighted average shares used in computing basic net income (loss) per common share		63,400		58,140		62,898			38,373
Convertible preferred stock converted during the period		—		—		—			16,273
Employee stock options		3,901		12,222		—			11,574
Employee stock purchase plan shares		39		41		—			33
Warrants to purchase common stock		208		361		—			472
Weighted average shares used in computing diluted net income (loss) per common share		67,548		70,764		62,898			66,725
Basic net income (loss) per common share	$	0.02	$	0.03	$	(0.01	)	$	0.02
Diluted net income (loss) per common share	$	0.02	$	0.02	$	(0.01	)	$	0.01

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As of June 30, 2008 and 2007, the Company had securities outstanding that could potentially dilute basic net income (loss) per common share in the future, but that were excluded from the computation of diluted net income (loss) per share in the periods presented as their effect would have been anti-dilutive. Potentially dilutive outstanding securities were as follows (shares in thousands):

	As of June 30,
	2008	2007
Restricted stock units	189	—
Stock options outstanding	6,934	4,679
Warrants to purchase common stock	—	83

4. Fair Value

SFAS 157 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, SFAS 157 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 require 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. The Company measures certain financial assets, mainly comprised of marketable securities, at fair value.

As of June 30, 2008, the Company’s fair value measurements of its financial assets (cash equivalents and marketable securities) was as follows (in thousands):

	Level 1		Level 2		Level 3		Total
Money market funds	$	26,585	$	—	$	—	$	26,585
U.S. Agency debt securities		—		42,116		—		42,116
Corporate debt securities		—		32,332		—		32,332
Commercial paper		—		49,576		—		49,576
Municipal debt securities (taxable)		—		990		—		990
Total	$	26,585	$	125,014	$	—	$	151,599

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5. Balance Sheet Data

Marketable Securities

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

	As of June 30, 2008
	Amortized costs		Unrealized gains		Unrealized losses			Estimated fair value
U.S. Agency debt securities	$	45,112	$	39	$	(74	)	$	45,077
Corporate debt securities		27,375		84		(80	)		27,379
Commercial paper		34,447		37		(15	)		34,469
Municipal debt securities (taxable)		1,000		—		(10	)		990
Total	$	107,934	$	160	$	(179	)	$	107,915
	As of December 31, 2007
	Amortized costs		Unrealized gains		Unrealized losses			Estimated fair value
U.S. Agency debt securities	$	14,494	$	15	$	(2	)	$	14,507
Corporate debt securities		35,048		104		(10	)		35,142
Commercial paper		36,763		93		(4	)		36,852
Auction rate securities		11,650		—		—			11,650
Municipal debt securities (taxable)		1,200		7		—			1,207
Total	$	99,155	$	219	$	(16	)	$	99,358

Inventories, Net

Inventories, net were comprised as follows (in thousands):

	As of June 30, 2008		As of December 31, 2007
Raw materials, parts, supplies	$	—	$	49
Work-in-progress		159		172
Finished products		8,083		6,611
Total inventory, net	$	8,242	$	6,832

Property and Equipment, Net

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

	As of June 30, 2008			As of December 31, 2007
Computers, software and related equipment	$	17,926		$	15,489
Office furniture and fixtures		1,209			1,372
Engineering and other equipment		26,965			24,984
Leasehold improvements		6,296			5,991
		52,396			47,836
Less: accumulated depreciation		(35,203	)		(30,404	)
Total property and equipment, net	$	17,193		$	17,432

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Goodwill and Other Intangible Assets, Net

Goodwill is carried at cost and is not amortized. The carrying value of goodwill was approximately $1.7 million as of June 30, 2008 and December 31, 2007. Other intangible assets are carried at cost less accumulated amortization. Amortization is computed using the straight-line method and recorded over the intangible assets’ estimated useful lives of four to five years. Other intangible assets, net were comprised as follows (in thousands):

	Cost		Accumulated Amortization			Net Book Value
As of June 30, 2008
Patented products	$	1,564	$	(1,250	)	$	314
Customer relationships		670		(536	)		134
Trade names		503		(503	)		—
Total intangible assets	$	2,737	$	(2,289	)	$	448
	Cost		Accumulated Amortization			Net Book Value
As of December 31, 2007
Patented products	$	1,564	$	(1,095	)	$	469
Customer relationships		670		(468	)		202
Trade names		503		(440	)		63
Total intangible assets	$	2,737	$	(2,003	)	$	734

The estimated future amortization expense of intangible assets as of June 30, 2008 is as follows (in thousands):

Six months ending December 31, 2008	$	224
The year ending December 31, 2009		224
	$	448

Other Non-current Assets

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

	As of June 30, 2008		As of December 31, 2007
Severance pay fund	$	2,660	$	2,178
Deferred tax assets		551		551
Restricted cash		753		751
Security deposits		2,093		1,692
Other		173		373
Total	$	6,230	$	5,545

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Accrued Warranty

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

	Six Months Ended June 30, 2008			Year Ended December 31, 2007
Balance at beginning of period	$	4,359		$	4,136
Warranty charged to cost of sales		1,072			2,933
Utilization of warranty		(893	)		(1,848	)
Other adjustments		(509	)		(862	)
Total accrued warranty		4,029			4,359
Less accrued warranty, current portion		(2,944	)		(3,502	)
Accrued warranty, less current portion	$	1,085		$	857

Other Current Liabilities

Other current liabilities were comprised as follows (in thousands):

	As of June 30, 2008		As of December 31, 2007
Foreign, franchise, and other income tax liabilities	$	1,462	$	1,886
Sales and use tax payable		321		1,367
Customer prepayments		513		3,274
Accrued professional fees		1,511		976
Rent liabilities		1,881		1,530
Other		909		2,846
Total	$	6,597	$	11,879

6. Restructuring Charges

On October 29, 2007, the Audit Committee of the Board of Directors initiated a restructuring plan in connection with the retirement of the Company’s cable modem termination system platform under a plan of termination described in Financial Accounting Standards No. 146Accounting for Costs Associated with Exit or Disposal Activities (SFAS 146). This resulted in aggregate net charges of approximately $3.3 million through March 31, 2008. Severance payments and related charges of approximately $2.5 million through March 31, 2008 consisted primarily of salary and expected payroll taxes and medical benefits. The Company’s plans also involved vacating several leased facilities throughout the world, with lease terms expiring through fiscal 2012 with estimated lease payments of $0.7 million, net of sublease income. Severance payments associated with the restructuring plan were completed as of June 30, 2008. The payment of costs associated with facility lease obligations are expected to be paid over the remaining term of the related obligations which extend to March 2012.

On April 29, 2008, the Audit Committee of the Board of Directors authorized a restructuring plan pursuant to which employees were terminated under a plan of termination described in SFAS 146. A total of $1.2 million in charges was incurred in connection with this plan during the three months ended June 30, 2008, including charges of $0.3 million for severance costs and $0.9 million for lease termination costs. Restructuring activity for the six months ended June 30, 2008 was as follows (in thousands):

	Balance, December 31, 2007		Charges		Cash Payments			Balance, June 30, 2008
Severance and related expenses	$	731	$	537	$	(1,174	)	$	94
Vacated facilities costs		626		934		(334	)		1,226
Other costs		106		22		(125	)		3
Total	$	1,463	$	1,493	$	(1,633	)	$	1,323

The restructuring charges above have been reflected separately as restructuring charges on the consolidated statement of operations. The balance of restructuring charges as of June 30, 2008 is included in other current and other non-current liabilities.

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7. Legal Proceedings

In re BigBand Networks, Inc. Securities Litigation, Case No. C 07-5101-SBA

Since October 3, 2007, a series of purported shareholder class action lawsuits were filed in the United States District Court for the Northern District of California against the Company, certain of its officers and directors, and the underwriters of the Company’s initial public offering (IPO). One such suit was subsequently dismissed. In February 2008, the lawsuits were consolidated and a lead plaintiff was appointed by the Court. In May 2008, the lead plaintiff filed a consolidated complaint against the Company, the directors and officers who signed the Company’s IPO registration statement, and the underwriters of the Company’s initial public offering. The consolidated complaint alleges that the Company’s IPO prospectus contained false and misleading statements regarding the Company’s business strategy and prospects, and the prospects of the Company’s CMTS division in particular. The lead plaintiff purports to represent anyone who purchased the Company’s common stock in the initial public offering. The consolidated complaint asserts causes of action for violations of Sections 11, 12(a)(2) and 15 of the Securities Act of 1933. Defendants filed a motion to dismiss in August 2008. The lawsuit seeks unspecified monetary damages.

Wiltjer v. BigBand Networks, Inc., et. Al., Cast No. CGC-07-469661

In December 2007, a similar purported shareholder class action complaint alleging violations of Sections 11, 12(a)(2) and 15 of the Securities Act of 1933 was filed in the Superior Court for the City and County of San Francisco. The complaint names as defendants the Company, certain of its officers and directors, and the underwriters of the Company’s IPO. The complaint alleges that the Company’s IPO prospectus contained false and misleading statements regarding the Company’s business prospects, product operability and CMTS platform. The plaintiff purports to represent anyone who purchased the Company’s common stock in the IPO. The complaint seeks unspecified monetary damages. The case was removed to the United States District Court, but subsequently returned to the Superior Court for the City and County of San Francisco. On August 11, 2008, the Court stayed the case in deference to the federal class action.

These lawsuits are still in the preliminary stages, and it is not possible for the Company to quantify the extent of potential liability, if any. As a component of these lawsuits, the Company has the obligation to indemnify the underwriters for expenses related to the suit, including the cost of one counsel for the underwriters.

Ifrah v. Bassan-Eskenazi, et. Al., Case No. 468401

In December 2007, a shareholder derivative lawsuit was filed against certain of the Company’s officers and directors in the Superior Court for the County of San Mateo, California. The Company is named as a nominal defendant. The complaint alleges that the defendants violated their fiduciary duties in connection with the Company’s disclosures in connection with the Company’s initial public offering and thereafter, in particular by allegedly issuing false and misleading statements in the Company’s registration statement and prospectus regarding the Company’s business prospects. The lawsuit seeks unspecified monetary damages and injunctive relief on behalf of the Company, including unspecified corporate governance reforms. To date defendants have not responded to the complaint. At the parties’ request, the Court has stayed all proceedings in the case until January 29, 2009. The lawsuit is in its earliest stages, and it is not possible for the Company to quantify the extent of potential liabilities, if any.

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. These patents cover 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 and legal proceedings related to its lawsuit against Imagine Communications, Inc. No trial date has been set. The Company intends to defend itself vigorously against such counterclaims. Currently, the Company is unable to estimate the possible loss or range of loss associated with these actions, if any.

8. Stockholders’ Equity

Initial Public Offering

On March 20, 2007, the Company completed an initial public offering of its common stock in which the Company sold and issued 7,500,000 shares of its common stock and selling stockholders sold 4,805,000 shares of the Company’s common stock, in each case at a public offering price of $13.00 per share. The Company raised a total of $97.5 million in gross proceeds from the IPO, or approximately $87.8 million in net proceeds after deducting underwriting discounts and commissions of $6.8 million and other offering costs of approximately $2.9 million.

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Common Stock Warrants

As of June 30, 2008, a warrant holder had unexercised warrants outstanding to purchase 267,858 shares of the Company’s common stock for an exercise price of $1.79 per share that expire on February 20, 2010. During the three months ended June 30, 2008, a warrant holder exercised its common stock warrants for 160,300 shares, and under the cashless exercise provisions of the warrant agreement received 67,663 shares in full settlement of the warrant.

Equity Incentive Plans

On January 31, 2007, the Board of Directors approved the 2007 Equity Incentive Plan (2007 Plan). A total of 6,000,000 shares of common stock were reserved for future issuance under the 2007 Plan, which became effective on March 15, 2007. The Company no longer grants stock options under its 1999, 2001, and 2003 share option and incentive plans. Cancelled or forfeited stock option grants under those plans will be added to the total amount of shares available for grants under the 2007 Plan. In addition, shares authorized but unissued as of March 15, 2007 under the Company’s 1999, 2001 and 2003 share option and incentive plans were added to shares available for grants under the 2007 Plan up to a maximum of 20,005,559 shares. The 2007 Plan contains an “evergreen” provision, pursuant to which an automatic annual increase of authorized shares is added on the first day of each fiscal year equal to the lesser of (a) 6,000,000 shares, (b) 5% of the outstanding shares on December 31 of the previous year or (c) a lesser amount determined by the Board of Directors. The Board of Directors increased the amount of shares reserved under the 2007 Plan by 3,095,341 shares on February 14, 2008, which was equal to 5% of the outstanding shares as of December 31, 2007.

The 2007 Plan allows the Company to award stock options (incentive and non-qualified),restricted stock, restricted stock units, and stock appreciation rights to employees, officers, directors and consultants of the Company. The exercise price of incentive stock options granted under the 2007 Plan to participants with less than 10% voting power of all classes of stock of the Company or any parent or subsidiary company may not be less than 100% of the fair market value of the Company’s common stock on the date of the grant. The exercise price of incentive stock options granted under the 2007 Plan to participants with 10% or more voting power of all classes of stock of the Company or any parent or subsidiary company may not be less than 110% of the fair market value of the Company’s common stock on the date of the grant. Options granted under the 2007 Plan are generally exercisable in installments vesting over a four-year period and have a maximum term of ten years from the date of grant. Incentive stock options granted to participants with 10% or more of the voting power of all classes of the Company’s common stock on the date of grant have a maximum term of five years from the date of grant.

Data pertaining to stock option activity under the plans during the six months ended June 30, 2008 was as follows (in thousands, except per share and period data):

	Number of Options		Weighted Average Exercise Price		Weighted Average Remaining Contractual Life	Aggregate Intrinsic Value
Outstanding at December 31, 2007	13,851		$	3.85	7.33	$	26,651
Granted	976		$	5.83
Exercised	(1,856	)	$	1.69
Canceled	(942	)	$	6.12
Outstanding at June 30, 2008	12,029		$	4.17	7.45	$	17,681
Vested and expected to vest	11,681				7.41	$	17,614

The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying stock option awards and $4.73, the closing price per share of the Company’s common stock at June 30, 2008 (the last trading day of the quarter), multiplied by the shares outstanding, vested and expected to vest.

Restricted Stock Units

The 2007 Plan provides for grants of restricted stock units (RSUs) that generally vest over 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 and expensed over the vesting period, net of estimated forfeitures. In the three months ended June 30, 2008, the Company recorded a cumulative adjustment for the effect of changes in its estimated forfeitures, based on a review of actual forfeiture activity and expected future employee turnover. The adjustment resulted in a reduction to stock-based compensation expense of $0.4 million for the three and six months ended June 30, 2008. The effect of forfeiture adjustments for fiscal 2007 was insignificant.

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The Company’s restricted stock unit activity was as follows (in thousands, except per share data):

	Restricted Stock Units		Weighted Average Grant-Date Fair Value		Aggregate Intrinsic Value
Outstanding, December 31, 2007	356		$	14.61	$	1,832
Granted	279		$	5.46
Exercised	(4	)	$	5.98
Cancelled	(66	)	$	18.95
Outstanding, June 30, 2008	565		$	9.65	$	2,671
Vested and expected to vest	524				$	2,479

Employee Stock Purchase Plan

On January 31, 2007, the Board of Directors approved the 2007 Employee Stock Purchase Plan (ESPP). A total of 1,000,000 shares of common stock were reserved for future issuance under the ESPP, which became effective on March 15, 2007. Under the 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 offering period, whichever is lower. The ESPP is compensatory and results in compensation cost accounted for under SFAS 123R. For the three and six months ended June 30, 2008, the Company recorded stock-based compensation expense associated with its ESPP of $0.3 million and $0.5 million, respectively. For the three and six months ended June 30, 2007, the Company recorded stock-based compensation expense associated with its ESPP of $0.4 million and $0.4 million, respectively . The ESPP contains an “evergreen” provision, pursuant to which an automatic annual increase is added on the first day of each fiscal year equal to the lesser of (a) 3,000,000 shares, (b) 2% of the outstanding shares on December 31 of the previous year or (c) a lesser amount determined by the Board of Directors. The Board of Directors increased the amount of shares reserved under the ESPP by 1,238,136 on February 14, 2008, which was equal to 2% of the outstanding shares as of December 31, 2007.

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 SFAS 123R. The Black-Scholes option-pricing model incorporates various subjective assumptions including expected volatility, expected term and interest rates. The computation of expected volatility is derived from historical volatilities of several comparable companies within the communications equipment industry. For the three and six months ended June 30, 2008 and 2007, the Company has elected to use the simplified method of determining the expected term as permitted by SEC Staff Accounting Bulletins 107 and 110.

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The fair value of stock-based awards was estimated on the date of grant using assumptions as follows:

	Three months ended June 30,						Six months ended June 30,
	2008			2007			2008			2007
Stock Options
Expected volatility		66	%		84	%		66-71	%		84-91	%
Expected term		6 years			6 years			6 years			6 years
Risk-free interest rate		3.31	%		4.75	%		2.95 - 3.31	%		4.62-4.75	%
Expected dividends	$	—		$	—		$	—		$	—
Stock Purchase Plan
Expected volatility		59	%		55	%		59-91	%		55	%
Expected term		0.5 years			0.6 years			0.5 years			0.6 years
Risk-free interest rate		1.87	%		5.12	%		1.87-3.71	%		5.12	%
Expected dividends	$	—		$	—		$	—		$	—

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

	Three months ended June 30,				Six months ended June 30,
	2008		2007		2008		2007
Cost of net revenues	$	435	$	426	$	889	$	699
Research and development		636		1,058		1,894		1,731
Sales and marketing		529		1,037		1,249		2,189
General and administrative		837		427		1,631		741
	$	2,437	$	2,948	$	5,663	$	5,360

As of June 30, 2008, total unrecognized stock compensation expense relating to unvested stock options and restricted stock units, adjusted for estimated forfeitures, was $30.2 million and $3.9 million, respectively. These amounts are expected to be recognized over a weighted-average period of 2.71 years.

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 are allocated to the geographical region based on the shipping destination of customer orders. Net revenues by geographical region were as follows (in thousands):

	Three months ended June 30,				Six months ended June 30,
	2008		2007		2008		2007
United States	$	38,547	$	43,321	$	73,260	$	90,663
Americas, excluding United States		957		335		3,047		726
Asia		2,102		6,425		3,638		9,397
Europe		1,405		4,382		2,972		6,511
	$	43,011	$	54,463	$	82,917	$	107,297

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Product line net revenues were as follows (in thousands):

	Three months ended June 30,				Six months ended June 30,
	2008		2007		2008		2007
Video	$	33,339	$	38,642	$	64,327	$	78,727
Data		549		7,619		1,524		13,190
	$	33,888	$	46,261	$	65,851	$	91,917

Long-lived assets were as follows (in thousands):

	As of June 30, 2008		As of December 31, 2007
United States	$	9,188	$	9,358
Israel		7,743		7,752
Other		262		322
	$	17,193	$	17,432

10. Income Taxes

As part of the process of preparing the 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 differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included in the unaudited condensed consolidated balance sheets.

Income tax expense for the three months ended June 30, 2008 was $0.2 million as compared to $0.4 million of income tax expense for the three months ended June 30, 2007. The decrease in tax expense related primarily to the reduction in quarterly pre-tax income. The effective tax rate for both the three months ended June 30, 2008 and June 30, 2007 differs from the U.S. federal statutory rate primarily due to the utilization of U.S. net operating loss carryforwards and foreign income taxes.

Income tax expense for the six months ended June 30, 2008 was $0.7 million as compared to $0.1 million of tax expense for the six months ended June 30, 2007. The increase in income tax expense relates primarily to higher pre-tax earnings in foreign jurisdictions, which do not have operating loss carryforwards. The effective tax rate for both the six months ended June 30, 2008 and June 30, 2007 differs from the U.S. federal statutory rate primarily due to the utilization of U.S. net operating loss carryforwards and foreign income taxes.

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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,” “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 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 identified below, and those discussed in the section titled “Risk Factors” 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

BigBand Networks, Inc. develops, markets and sells network-based platforms that enable cable operators and telephone companies to offer video services across coaxial, fiber and copper networks. We have significant expertise in rich media processing, communications networking and bandwidth management. Leading service providers use our product applications to offer video services to tens of millions of subscribers, 24 hours a day, seven days a week. We have sold our product applications to more than 200 customers globally, including six of the ten largest service providers in the United States.

Our net revenues are influenced by a variety of factors, including the level and timing of capital spending of our customers, and the annual budgetary cycles of, and the timing and amount of orders from, significant customers. The selling prices of our products vary based upon the particular customer implementation, which impacts the relative mix of software, hardware and services associated with the sale. Due to the nature of the cable and telecommunications industries, we sell our products to a limited number of large customers. We believe that for the foreseeable future our net revenues will be highly concentrated in a relatively small 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.

Our sales cycle for an initial customer purchase typically ranges from nine to twelve months, but can be longer. This process generally involves several stages before we can recognize revenues on the sale of our products—the customer’s evaluation of its technology needs and architecture; our response to a request for proposal; the configuration of our products to work within our customer’s network architecture; and the testing of 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 depends on satisfying complex customer acceptance criteria specified in our contract with the customer and our customer’s schedule for roll-out of the product. Several of these stages are substantially outside of our control, and as a result, can cause 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.

Net Revenues. We derive our net revenues from sales of, and services for Video and, to a lesser extent, Data products. Our product revenues are comprised of a combination of software licenses and hardware. Our primary Video products include Digital Simulcast, TelcoTV and Switched Digital Video. Our Data products are High-Speed Data, IP Video and Voice-over-IP on our cable modem termination system (CMTS) platform, which we retired in October 2007. Going forward, we expect revenues from our Data products to remain immaterial.

Our services 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 enhanced level. The substantial majority of our customers have purchased our enhanced level of customer support and maintenance.

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, and manufacturing overhead and allocated facilities and information technology expense. Cost of services 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 and hardware sold, the average selling prices of our products, and the mix of revenue between products and services. We achieve a higher gross margin on the software content of our products compared to the hardware content. In general, we expect the average selling prices of our products to decline over

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time due to competitive pricing pressures, but we seek to minimize the impact to our gross margins by introducing new products with higher margins, selling software enhancements to existing products, achieving price reductions for components and improving product design to reduce costs. Our gross margins for products are also influenced by the specific terms of our contracts, which may vary significantly from customer to customer based on the type of products sold, the overall size of the customer’s order, and the architecture of the customer network, which can influence the complexity of design, integration and installation services. We expect gross margins to decrease in the three months ending September 30, 2008 compared to the three months ended June 30, 2008 primarily due to projected product mix, which varies quarterly, and no anticipated releases of warranty reserves in the three months ending September 30, 2008.

Operating Expenses. Our operating expenses consist of research and development, sales and marketing, general and administrative, amortization of intangible assets and restructuring charges. Personnel related costs are the most significant component of total operating expense.

Research and development expense is the largest functional component of our operating expense and consists primarily of personnel costs, independent contractor costs, prototype expenses, and other allocated facilities and information technology expense. The majority of our research and development staff is focused on software development. All research and development costs are expensed as incurred. Our development teams are located in Tel Aviv, Israel; Westborough, Massachusetts; Redwood City, California and Shenzhen, Peoples’ Republic of China. We expect our research and development expenses to increase in the three months ending September 30, 2008 compared to the three months ended June 30, 2008 due to higher projected compensation expense for both new and existing employees as well as a projected increase in contractor expenditures.

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, depreciation expenses for demonstration equipment used for trade-shows, and allocated facilities and information technology expense. Marketing programs are intended to generate net revenues from new and existing customers and are expensed as incurred. We expect sales and marketing expense to increase in the three months ending September 30, 2008 compared to the three months ended June 30, 2008 due to a modest projected increase in headcount and related compensation expense.

General and administrative expense consists primarily of compensation and associated costs for general and administrative personnel, professional fees, and allocated facilities and information technology expenses. Professional services consist of outside legal, accounting and information technology and other consulting costs. We expect general and administrative expense to increase for the remainder of 2008 as we continue to incur costs related to ongoing patent infringement litigation and Sarbanes-Oxley 404 compliance work.

Restructuring charges consist primarily of severance costs, lease termination costs and other associated costs under plans approved by the Audit Committee of our Board of Directors on October 29, 2007 and April 29, 2008. The three months ended June 30, 2008 included restructuring charges of $1.2 million, of which $0.9 million was for lease termination charges and $0.3 million was for severance costs related to a reduction in headcount.

Interest income.Interest income is expected to decline each quarter for the remainder of fiscal 2008 due to lower projected yield on cash, cash equivalents and investments.

Critical Accounting Policies and Estimates

Our interim condensed consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles, or GAAP, and pursuant to the rules and regulations of the Securities and Exchange Commission, or the 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, accounting for the valuation of inventories, accounting for warranty liabilities, accounting for stock-based compensation, accounting for the allowance for doubtful accounts, accounting for the impairment of intangible assets and other long-lived assets, and accounting for income taxes, which policies are discussed in more detail under the caption “Critical Accounting Policies and Estimates” in our 2007 Annual Report on Form 10-K filed with the SEC on March 12, 2008. We adopted SFAS 157,Fair Value Measurements, in the three months ended March 31, 2008 without material impact to our financial statements. For additional information on the recent accounting pronouncements impacting our business, see Note 2 of the Notes to Condensed Consolidated Financial Statements.

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Results of Operations

The following table shows the percentage relationships of the listed items from our condensed consolidated statements of operations, as a percentage of total net revenues:

	Three months ended June 30,				Six months ended June 30,
	2008		2007		2008		2007
Net revenues:
Products	78.8	%	84.9	%	79.4	%	85.7	%
Services	21.2	%	15.1	%	20.6	%	14.3	%
Total net revenues	100.0	%	100.0	%	100.0	%	100.0	%
Cost of net revenues:
Products	33.4	%	40.0	%	32.2	%	38.1	%
Services	7.6	%	6.6	%	7.8	%	6.5	%
Total cost of net revenues	41.0	%	46.6	%	40.0	%	44.6	%
Gross profit:
Products	45.4	%	44.9	%	47.2	%	47.6	%
Services	13.6	%	8.5	%	12.8	%	7.8	%
Total gross profit	59.0	%	53.4	%	60.0	%	55.4	%
Operating expenses:
Research and development	29.8	%	25.1	%	32.8	%	24.9	%
Sales and marketing	16.3	%	20.4	%	17.9	%	20.0	%
General and administrative	12.4	%	7.5	%	12.4	%	7.1	%
Restructuring charges	2.7	%	—	%	1.8	%	—	%
Amortization of intangible assets	0.3	%	0.3	%	0.3	%	0.3	%
Total operating expenses	61.5	%	53.3	%	65.2	%	52.3	%
Operating (loss) income	(2.5	)%	0.1	%	(5.2	)%	3.1	%
Interest income	2.8	%	3.9	%	3.5	%	2.8	%
Interest expense	—	%	(0.5	)%	—	%	(0.6	)%
Other income (expense), net	3.1	%	0.2	%	1.7	%	(4.6	)%
Income before provision for income taxes	3.4	%	3.7	%	—	%	0.7	%
Provision for income taxes	0.5	%	0.7	%	0.8	%	0.1	%
Net income (loss)	2.9	%	3.0	%	(0.8	)%	0.6	%

Net Revenues

Total net revenues decreased 21.0% to $43.0 million for the three months ended June 30, 2008 from $54.5 million in the three months ended June 30, 2007. Total net revenues decreased 22.7% to $82.9 million for the six months ended June 30, 2008 from $107.3 million in the six months ended June 30, 2007. The decrease for both the three and six months ended June 30, 2008 was due to the retirement of our CMTS platform products in October 2007 and a decrease in video revenues in both TelcoTV and Digital Simulcast.

In the three months ended June 30, 2008, 89.6% of our net revenues were from customers in the United States compared to 79.5% of net revenues in the three months ended June 30, 2007. In the six months ended June 30, 2008, 88.4% of our net revenues were from customers in the United States compared to 84.5% in the six months ended June 30, 2007.

Due to the nature of the cable and telecommunications industries, we sell our products to a limited number of large customers, which have varied over time. Cox Communications, Time Warner Cable and Verizon each represented 10% or more of our net revenues in the three and six months ended June 30, 2008. In the three months ended June 30, 2008, our top five customers accounted for 82.5% of our net revenues compared to 73.3% in the three months ended June 30, 2007. In the six months ended June 30, 2008, our top five customers accounted for 80.6% of our net revenues compared to 77.4% in the six months ended June 30, 2007. We believe that for the foreseeable future our net revenues will continue to be concentrated in a relatively small number of large customers.

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Product Revenues.Product revenues decreased 26.7% to $33.9 million for the three months ended June 30, 2008 from $46.3 million in the three months ended June 30, 2007. Video revenues decreased $5.3 million for the three months ended June 30, 2008 from the comparable prior period, due to a decline in our TelcoTV and Digital Simulcast revenues. The decline in Video revenues was primarily a result of a $7.1 million decrease in revenues from our largest TelcoTV customer, which was partially offset by an increase in revenues from our newer Switched Digital Video products. Data revenues decreased $7.1 million for the three months ended June 30, 2008 from the comparable prior period primarily due to the retirement of our CMTS platform products.

Product revenues decreased 28.4% to $65.9 million for the six months ended June 30, 2008 from $91.9 million in the six months ended June 30, 2007. Video revenues decreased $14.4 million for the six months ended June 30, 2008 from the comparable prior period, due to a decline in our TelcoTV and Digital Simulcast revenues, primarily as a result of a $25.2 million decrease in revenues from our largest TelcoTV customer. Data revenues decreased $11.7 million for the six months ended June 30, 2008 from the comparable prior period due to the retirement of our CMTS platform products. These decreases were partially offset by an increase in revenues from our newer Switched Digital Video products.

Services Revenues.Services revenues for the three months ended June 30, 2008 were $9.1 million compared to $8.2 million in the three months ended June 30, 2007, an increase of $0.9 million or 11.2%. The increase was primarily due to a $1.0 million increase in Video installation and training and a $0.4 million increase in Video customer support and maintenance from our installed based of customers. This was partially offset by a $0.5 million decrease in customer support and maintenance revenue for CMTS platform products that were retired in October 2007.

Services revenues for the six months ended June 30, 2008 were $17.1 million compared to $15.4 million in the six months ended June 30, 2007, an increase of $1.7 million or 11.0%. The increase was primarily due to a $1.9 million increase in Video customer support and maintenance and a $0.8 million increase in Video installation and training. This was partially offset by a $1.0 million decrease of customer support and maintenance revenue for CMTS platform products that were retired in October 2007.

Gross Profit and Gross Margin

Gross profit for the three months ended June 30, 2008 was $25.4 million compared to $29.1 million in the three months ended June 30, 2007, a decrease of $3.7 million or 12.8%. Gross margin increased to 59.0% in the three months ended June 30, 2008 compared to 53.4% in the three months ended June 30, 2007.

Gross profit for the six months ended June 30, 2008 was $49.7 million compared to $59.5 million in the six months ended June 30, 2007, a decrease of $9.8 million or 16.4%. Gross margin increased to 60.0% in the six months ended June 30, 2008 compared to 55.4% in the six months ended June 30, 2007.

Product Gross Margin. Product gross margin for the three months ended June 30, 2008 was 57.6% compared to 53.0% in the three months ended June 30, 2007. This increase was due to favorable product mix as well as a $0.8 million decrease in warranty expense. The warranty expense decrease was attributable to the reversal of a warranty reserve related to our retired CMTS platform products for $0.6 million and lower warranty expense on our Video products for $0.2 million. To a lesser extent, product gross margins benefited by $0.3 million from the sale of previously reserved inventories of our retired CMTS platform products. Product gross margin for the three months ended June 30, 2008 and 2007 included stock-based compensation of $0.3 million for each period.

Product gross margin for the six months ended June 30, 2008 was 59.5% compared to 55.6% in the six months ended June 30, 2007. This increase was primarily due to an unusually high concentration of higher margin software revenues, primarily in the first quarter of 2008, as well as a $1.0 million decrease in warranty expense. The warranty expense decrease was attributable to the reversal of a warranty reserve primarily related to our retired CMTS platform products for $0.6 million and lower warranty expense on our video products for $0.4 million. Additionally, the increase was due to the sales related to the expansion of existing deployments, which generally have higher margins due to lower material costs. Product gross margins also benefited by $0.8 million from the sale of previously reserved inventories of our retired CMTS platform products. Product gross margin for the six months ended June 30, 2008 and 2007 included stock-based compensation of $0.6 million and $0.4 million, respectively.

Services Gross Margin. Services gross margin for the three months ended June 30, 2008 was 64.0% compared to 56.0% in the three months ended June 30, 2007. This increase was due to a $0.9 million increase in revenues and a $0.3 million reduction in the cost of services, primarily attributable to lower compensation expense and travel due to a reduction in headcount. Services gross margin for the three months ended June 30, 2008 and 2007 included stock-based compensation of $0.2 million for each period.

Services gross margin for the six months ended June 30, 2008 was 61.9% compared to 54.6% in the six months ended June 30, 2007. This increase was due to a $1.7 million increase in revenues and a $0.5 million reduction in cost of services, primarily attributable to lower compensation expense and travel due to a reduction in headcount. Services gross margin for both the six months ended June 30, 2008 and 2007 included stock-based compensation of $0.3 million.

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Operating Expenses

Research and Development. Research and development expense was $12.8 million for the three months ended June 30, 2008, or 29.8% of net revenues, compared to $13.7 million in the three months ended June 30, 2007, or 25.1% of net revenues. The decrease of $0.9 million was primarily due to lower compensation expense and travel related to a reduction in headcount, which was slightly offset by an increase in contractor expense. Also, facility costs were lower for the three months ended June 30, 2008 as a result of our restructuring actions. Research and development expense includes stock-based compensation of $0.6 million and $1.1 million for the three months ended June 30, 2008 and 2007, respectively. The decline in stock-based compensation of $0.5 million was primarily due to a reversal of a portion of previously recorded stock-based compensation expense related to an adjustment of our estimated forfeitures for restricted stock units (RSUs) granted in May 2007.

Research and development expense was $27.2 million for the six months ended June 30, 2008, or 32.8% of net revenues, compared to $26.8 million in the six months ended June 30, 2007, or 24.9% of net revenues. The increase of $0.4 million was related to an increase in bonus expense, increased depreciation expense and higher allocated facility expenses. These were slightly offset by lower base salary compensation expense, lower travel as a result of the reduction in headcount and reduced lab and prototype expenditures. Research and development expense included stock-based compensation of $1.9 million and $1.7 million for the six months ended June 30, 2008 and 2007, respectively.

Sales and Marketing.Sales and marketing expense was $7.0 million for the three months ended June 30, 2008, or 16.3% of net revenues, compared to $11.1 million in the three months ended June 30, 2007, or 20.4% of net revenues. The decrease of $4.1 million was primarily due to a $2.0 million decrease in compensation expense related to the reduction in headcount, a $0.7 million decrease in travel expenses, a $0.5 million decrease in overhead expenses and a $0.4 million decrease in marketing related activities, such as trade shows and public relations. Additionally, stock-based compensation decreased $0.5 million primarily due to a reduction in headcount. Sales and marketing expense included stock-based compensation of $0.5 million and $1.0 million for the three months ended June 30, 2008 and 2007, respectively.

Sales and marketing expense was $14.9 million for the six months ended June 30, 2008, or 17.9% of net revenues, compared to $21.4 million in the six months ended June 30, 2007, or 20.0% of net revenues. The decrease of $6.5 million was primarily due to a $3.2 million decrease in compensation expense related to the reduction in headcount, a $1.0 million decrease in travel expenses, a $0.7 million decrease in marketing related activities, such as trade shows and public relations and a $0.6 million decrease in overhead expenses. Additionally, stock-based compensation decreased $1.0 million primarily due to a reduction in headcount. Sales and marketing expense included stock-based compensation of $1.2 million and $2.2 million for the six months ended June 30, 2008 and 2007, respectively.

General and Administrative. General and administrative expense was $5.4 million for the three months ended June 30, 2008, or 12.4% of net revenues, compared to $4.1 million in the three months ended June 30, 2007, or 7.5% of net revenues. This increase of $1.3 million was due to $0.6 million increase in legal fees attributable to a lawsuit we filed against Imagine Communications, Inc. alleging patent infringement and legal expenses associated with the securities class action litigation. Additionally, there was a $0.4 million increase in audit and Sarbanes-Oxley 404 compliance work and a $0.4 million increase in stock-based compensation, which was partially offset by a net decrease in salary, travel, facilities and subcontractors of $0.1 million primarily related to a reduction in headcount. General and administrative expense included stock-based compensation of $0.8 million and $0.4 million for the three months ended June 30, 2008 and 2007, respectively.

General and administrative expense was $10.2 million for the six months ended June 30, 2008, or 12.4% of net revenues, compared to $7.6 million in the six months ended June 30, 2007, or 7.1% of net revenues. This increase of $2.6 million was primarily due to a $1.2 million increase in legal fees attributable to a lawsuit filed against Imagine Communications, Inc. alleging patent infringement and legal expenses associated with the securities class action litigation. Additionally, there was a $0.9 million increase in stock-based compensation and a $0.6 million increase in audit and Sarbanes-Oxley 404 compliance work, which was partially offset by a net decrease in salary, travel, facilities and subcontractors of $0.1 million primarily related to a reduction in headcount. General and administrative expense included stock-based compensation of $1.6 million and $0.7 million for the six months ended June 30, 2008 and 2007, respectively.

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Restructuring charges. Restructuring charges were $1.2 million for the three months ended June 30, 2008, or 2.7% of net revenues, and were $1.5 million for the six months ended June 30, 2008, or 1.8% of net revenues, compared to none for the same periods in 2007. The $1.5 million restructuring charges were for lease termination charges of $0.9 million and severance and related expenses of $0.6 million due to a reduction in headcount.

Interest Income

Interest income was $1.2 million for the three months ended June 30, 2008 compared to $2.2 million for the three months ended June 30, 2007. Interest income was $2.9 million for the six months ended June 30, 2008 compared to $3.0 million in the six months ended June 30, 2007. The decrease in interest income in the three and six month periods ended June 30, 2008 from the comparable prior periods in 2007 was the result of lower interest rates.

Interest expense

Interest expense was $0.3 million and $0.6 million for the three and six months ended June 30, 2007, respectively. A portion of proceeds from our initial public offering was used to repay outstanding borrowings, which resulted in the elimination of interest expense in the three and six months ended June 30, 2008.

Other income (expense), net

Other income (expense), net for the three months ended June 30, 2008 was $1.4 million compared to $0.1 million for the three months ended June 30, 2007. During the three months ended June 30, 2008, we reduced our forecasted cash flows in Israeli New Shekels and reduced the notional value of our outstanding derivatives with maturity dates of June through December 2008. As a result, our derivative instruments were no longer deemed effective from an accounting perspective, resulting in a $1.0 million gain in the three months period ended June 30, 2008, which was not recognized in the comparable prior period. Additionally, we recognized foreign exchange gains of $0.4 million and $0.1 million for the three months ended June 30, 2008 and 2007, respectively.

Other income (expense), net for the six months ended June 30, 2008 was $1.4 million income compared to $5.0 million expense for the six months ended June 30, 2007. The six months ended June 30, 2008 included the $1.0 million derivative gain previously described, which was not realized in the comparable prior period and $0.5 million of exchange gains. The six months ended June 30, 2007 included a $5.0 million charge from fair value adjustments of preferred stock warrants. Upon the completion of our initial public offering on March 27, 2007, the warrants to purchase redeemable convertible preferred stock became warrants to purchase our common stock and accordingly we ceased adjusting these warrants for changes in fair value and reclassified their respective liabilities to stockholders’ equity.

Provision for Income Taxes

We estimate actual current tax exposure together with assessing temporary differences resulting from differing treatment of items, such as accruals and allowances not currently deductible for tax purposes. These differences result in deferred tax assets and liabilities, which are included in our condensed consolidated balance sheets. We assess the likelihood that our deferred tax assets will be recovered from future taxable income and to the extent we believe that recovery is not more likely than not, we must establish a valuation allowance. Management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities and any valuation allowance recorded against our net deferred tax assets.

We recorded a valuation allowance as of June 30, 2008 against certain 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 these valuation allowances until sufficient evidence exists to support the reversal of the valuation allowances. 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.

Income tax expense for the three months ended June 30, 2008 decreased to $0.2 million on pre-tax income of $1.5 million, compared to $0.4 million of tax expense on pre-tax income of $2.0 million for the three months ended June 30, 2007. The decrease in income tax expense related primarily to the reduction in pre-tax income. The effective tax rate for the three months ended June 30, 2008 and June 30, 2007 differed from the U.S. federal statutory rate primarily due to the utilization of U.S. net operating loss carryforwards and foreign income taxes.

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Income tax expense for the six months ended June 30, 2008 was $0.7 million on pre-tax income of $13,000, compared to $0.1 million of tax expense on pre-tax income of $0.8 million for the six months ended June 30, 2007. The increase in income tax expense related primarily to higher pre-tax earnings in foreign jurisdictions, which do not have operating loss carryforwards. The effective tax rate for the six months ended June 30, 2008 and June 30, 2007 differed from the U.S. federal statutory rate primarily due to the utilization of U.S. net operating loss carryforwards and foreign income taxes.

Liquidity and Capital Resources

The following sections discuss the effects of changes in our balance sheet and cash flows, contractual obligations and other commitments on our liquidity and capital resources.

Cash and Cash Equivalents and Marketable Securities

Cash and cash equivalents and marketable securities were comprised as follows (in thousands):

	As of June 30, 2008		As of December 31, 2007		Increase (decrease)
Cash and cash equivalents	$	50,854	$	55,162	$	(4,308	)
Marketable securities		107,915		99,358		8,557
Total	$	158,769	$	154,520	$	4,249

The increase in cash and cash equivalents and investments was primarily a result of cash provided by operating activities of $7.9 million, and the issuance of common stock of $3.9 million related to employee stock option exercises and employee stock purchases, which were partially offset by our capital expenditures of $7.3 million. We believe that our cash and cash equivalents and marketable securities position allows us to use our cash resources for strategic investments to gain access to new technologies and working capital.

We expect that cash provided by operating activities may fluctuate in future periods as a result of a number of factors, including fluctuations in our operating results, the rate at which products are shipped during the quarter, accounts receivable collections, inventory and supply chain management and the timing and amount of taxes and other payments.

Operating Activities

Our operating activities provided cash of $7.9 million for the six months ended June 30, 2008, primarily due to profitability after excluding non-cash charges of $11.1 million for the period. These non-cash charges were primarily comprised of $5.7 million in stock-based compensation and $4.9 million in depreciation of property and equipment. The decrease in trade receivables was $2.7 million primarily due to increased collections, partially offset by decreases in accounts payable and accrued and other liabilities of $4.3 million.

Trade Receivables, Net

Trade receivables, net was as follows (in thousands):

	As of June 30, 2008		As of December 31, 2007		Increase (decrease)
Trade receivables, net	$	25,195	$	27,855	$	(2,660	)

Our trade receivables balance varies from period to period based upon the timing of shipments and customer collections.

Inventories, Net

Inventories, net were as follows (in thousands):

	As of June 30, 2008		As of December 31, 2007		Increase (decrease)
Inventories, net	$	8,242	$	6,832	$	1,410

Finished goods consist primarily of build-to-order and build-to-stock products, and include spares of reusable equipment related to our technical support and warranty activities. All inventories are accounted for at the lower of standard cost or market. Inventory is written down based on 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, based upon assumptions about future demand, and are charged to the provision for inventory, which is a component of our cost of net revenues.

Deferred Revenues, Net

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

	As of June 30, 2008		As of December 31, 2007		Increase (decrease)
Deferred revenues, net	$	69,199	$	67,288	$	1,911
Reported as:
Current	$	49,395	$	48,256	$	1,139
Non-current		19,804		19,032		772
Total	$	69,199	$	67,288	$	1,911

The increase in deferred revenues reflects shipments that did not meet revenue recognition criteria and volume of services revenues, partially offset by the ongoing amortization of deferred services revenues.

Investing Activities

Our investing activities used cash of $16.0 million in the six months ended June 30, 2008, primarily from net purchases of marketable securities of $8.8 million and the purchase of property and equipment of $7.3 million to support our business, which consisted primarily of computer and engineering equipment purchases. Our investing activities used cash of $52.3 million in the six months ended June 30, 2007, primarily from net purchases of marketable securities of $44.8 million and the purchase of property and equipment of $6.7 million, which consisted primarily of computer and test equipment and software purchases.

Financing Activities

Our financing activities provided cash of $3.9 million in the six months ended June 30, 2008 as compared to $77.0 million in the six months ended June 30, 2007. The cash provided in the current period of $3.9 million resulted from the issuance of common stock upon the exercise of stock options and employee stock purchases. During the six months ended June 30, 2007, our initial public offering generated net proceeds of $88.0 million from the sale of 7.5 million shares of common stock, a portion of which funds were utilized to repay our $14.0 million loan.

Liquidity and Capital Resource Requirements

Based on past performance and current expectations, we believe our cash and cash equivalents, investments, and cash generated from operations, and our ability to access capital markets, including committed credit lines, will satisfy our working capital needs, capital expenditures, investment requirements, contractual obligations, commitments, future customer financings and other liquidity requirements associated with our operations through at least the next 12 months. There are no other transactions, arrangements, or other relationships with unconsolidated entities or other persons that are reasonably likely to materially affect liquidity, the availability, and our requirements for capital resources.

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Off-Balance Sheet Arrangements

As of June 30, 2008, we had no off-balance sheet arrangements as defined in Item 303(a)(4) of the Securities and Exchange Commission’s Regulation S-K.

Effects of Inflation

Our monetary assets, consisting primarily of cash, marketable securities and receivables, are not affected by inflation because they are short-term in duration. Our non-monetary assets, consisting primarily of inventory, intangible assets, goodwill and prepaid expenses and other assets, are not affected significantly by inflation. We believe that the impact of inflation on replacement costs of equipment, furniture and leasehold improvements will not materially affect our operations. However, the rate of inflation affects our cost of goods sold and expenses, such as those for employee compensation, which may not be readily recoverable in the price of the products and services offered by us.

Recent Accounting Pronouncements

See Note 2 of the Notes to the Condensed Consolidated Financial Statements in this Form 10-Q for recent accounting pronouncements that could affect us.

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Sensitivity

The primary objectives of our investment activity are to preserve principal, provide liquidity and maximize income without significantly increasing risk. Some of the securities we invest in are subject to market risk. This means that a change in prevailing interest rates may cause the principal amount of the investment to fluctuate. To control this risk, we maintain our portfolio of cash equivalents and short-term investments in a variety of securities, including commercial paper, money market funds, government and non-government debt securities and certificates of deposit. The risk associated with fluctuating interest rates is limited to our investment portfolio. While we held $11.7 million of auction rate securities as of December 31, 2007, we currently hold no mortgage-backed or auction rate securities. As of June 30, 2008, our investments were in commercial paper, corporate notes and bonds, money market funds and U.S. government and agency securities. If overall interest rates fell 10% in the three months ended June 30, 2008, our interest income would have declined by approximately $0.1 million, assuming consistent investment levels.

Foreign Currency Risk

Our sales contracts are primarily denominated in United States dollars and therefore the majority of our net revenues are not subject to foreign currency risk. Our operating expense and cash flows are subject to fluctuations due to changes in foreign currency exchange rates, particularly changes in the Euro and New Israeli Shekel. In the three months ended June 30, 2008, the exchange rate fluctuation between the United States dollar and the Israeli New Shekel increased our operating expenses by approximately $0.4 million without hedging and reduced our operating expenses by $0.1 million with hedging. An adverse change in exchange rates of 10% for all foreign currencies, without any hedging, would have resulted in a decline of income before taxes of approximately $1.1 million for the three months ended June 30, 2008. We expect that a similar adverse movement in the three months ended September 30, 2008, without any hedging, would cause a comparable decrease in income.

To protect against reductions in value and the volatility of future cash flows caused by changes in currency exchange rates, during 2007 we established foreign currency risk management programs to hedge both balance sheet items and future forecasted expenses. Currency forward contracts and currency options are generally utilized in these hedging programs. Our hedging programs are intended to reduce, but will not always entirely eliminate, the impact of currency exchange rate movements. As our hedging program is relatively short term in nature, continued depreciation of the United States dollar versus the Israeli New Shekel is likely to adversely impact our operating expenses in the future. During the three months ended June 30, 2008, we reduced our forecasted cash flows in Israeli New Shekels and therefore reduced the notional value of our outstanding derivatives with maturity dates of June through December 2008. As a result of this change in forecasted cash flow the derivative instruments were no longer deemed effective from an accounting perspective, resulting in a $1.0 million gain in the three months ended June 30, 2008, which was not recognized in the comparable prior period. Additionally, we recognized foreign exchange gains of $0.4 million and $1.0 million for the three months ended June 30, 2008 and 2007, respectively.

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Item 4. CONTROLS AND PROCEDURES

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures

We maintain disclosure controls and procedures, as such term is defined in SEC Rule 13a-15(e), that are designed to ensure that information required to be disclosed in our reports under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

As required by SEC Rule 13a-15(b), we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of June 30, 2008. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level.

Changes in Internal Control over Financial Reporting

There have been no changes in our internal control over financial reporting that occurred during the period covered by this Form 10-Q that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

A review 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.”

Item 1A. Risk Factors

Investments in the equity securities of publicly traded companies involve significant risks. Our business, prospects, financial condition or operating results could be materially adversely affected by any of these risks, as well as other risks not currently known to us or that we currently consider immaterial. 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 report on 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 the adoption of advanced technologies by cable operators and telephone companies 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.

Substantially all of our sales are dependent upon the adoption of advanced technologies by cable operators and telephone companies, and we expect these sales to continue to constitute a significant majority of our sales 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 are dependent on a variety of factors, including:

• available capital and access to financing;

• annual budget cycles;

• overall consumer demand for video services and the acceptance of newly introduced services;

• competitive pressures, including pricing pressures;

• the impact of industry consolidation;

• the strategic focus of our customers and potential customers;

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

• work stoppages or other labor-related issues that may impact the timing of orders and revenues from our 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

• general economic conditions.

Any slowdown or delay in the capital spending by service providers as a result of any of the above factors would likely have a significant impact on our quarterly revenue and profitability levels.

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 of our control. These factors include:

• the level and timing of capital spending of our customers, both in the United States and in international markets;

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

• changes in market demand for our products;

• our ability to secure significant orders from telephone companies;

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• our mix of products sold;

• the mix of software and hardware products sold;

• our unpredictable and lengthy sales cycles, which typically range from nine to eighteen months;

• the timing of revenue recognition on sales arrangements, which may include multiple deliverables;

• materially different acceptance criteria in master purchase agreements with key customers, 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;

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

• unexpected changes in our operating expense;

• the potential loss of key manufacturer and supplier relationships;

• the cost and availability of components used in our products;

• changes in domestic and international regulatory environments; and

• the impact of new accounting rules.

We establish our expenditure levels for product development and other operating expense 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 operating results. As a result of all these factors, our operating results in one or more future periods may fail to meet or exceed the expectations of securities analysts or investors or our guidance, which would likely cause the trading price of our common stock to decline substantially.

The markets in which we operate are intensely competitive, and many of our competitors are larger, more established and better capitalized than we are.

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, SeaChange International, Tandberg Television (a division of Ericsson), and a number of smaller companies. We may not be able to compete successfully in the future, which may harm our business.

Many of our competitors are substantially larger and have greater financial, technical, marketing and other resources than we have. Given their capital resources, many of these large organizations are in a better position to withstand any significant reduction in capital spending by customers in these markets. They often have broader product lines and market focus and are not as susceptible to downturns in a particular market. In addition, many of our competitors have been in operation much longer than we have and therefore have more long-standing and established relationships with domestic and foreign service providers. If any of our competitors’ products or technologies were to become the industry standard, our business would also be seriously harmed. If our competitors are successful in bringing their products to market earlier, or if their products are more technologically capable than ours, then our sales could be materially adversely affected.

In recent years, we have seen consolidation among our competitors, such as Cisco’s acquisition of Scientific Atlanta, Motorola’s acquisition of Terayon, and purchases of VOD solutions by each of Arris, Cisco, Harmonic and Motorola. In addition, some of our competitors have entered into strategic relationships with one another to offer a more comprehensive solution than would be available individually. We expect this trend to continue as companies attempt to strengthen or maintain their market positions in the evolving industry for video. Many of the companies driving this consolidation trend have significantly greater financial, technical and other resources than we do, and are much better positioned than we are to offer complementary products and technologies. These combined companies may offer more compelling product offerings and 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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Certain 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.

Other providers of network-based hardware and software products are offering functionality aimed at solving similar problems addressed by our products. For example, several vendors have recently announced products designed to be competitive with our Switched Digital Video product application. The inclusion of functionality perceived to be similar to our product offerings in our competitors’ products that have been accepted as necessary components of network architecture may have an adverse effect on our ability to market and sell our products. Furthermore, even if the functionality offered by other network infrastructure providers is more limited than our products, a significant number of customers may elect to accept such limited functionality in lieu of adding components from a different vendor. Many of our existing and potential customers have invested substantial personnel and financial resources to design and operate their networks and have mature relationships with other providers of network infrastructure products, which may make them reluctant to add new components to their networks, particularly from new vendors. In addition, our customers’ other vendors with 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 existing vendors, our business, operating results and financial condition will be adversely affected.

We anticipate that our gross margins will fluctuate with changes in our product mix and expected decreases in the average selling prices of our products and software content, which may adversely impact our operating results.

Our industry has historically experienced a decrease in average selling prices. We anticipate that the average selling prices of our products will 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 the decrease of our average selling prices. Our failure to develop and introduce new products on a timely basis would likely contribute to a decline in 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 these lower margin products significantly expand in future quarterly periods, our overall gross margin levels and operating results would be adversely impacted.

Our anticipated growth will depend significantly on our ability to deliver products that help enable telephone companies to provide video services. If the projected growth in demand for video services from telephone companies does not materialize or if these service providers find alternative methods of delivering video services, future sales of our Video products will suffer.

Prior to 2006, our sales were principally to cable operators. Since 2006, we have generated significant revenues from telephone companies. Our future growth, if any, is dependent on our ability to sell Video products to telephone companies that are increasingly reliant on the delivery of video services to their customers. Although a number of our existing products are being deployed in these networks, we will need to devote considerable resources to obtain orders, qualify our products and hire knowledgeable personnel to address telephone company customers, each of which will require significant time and financial commitment. These efforts may not be successful in the near future, or at all. If technological advancements allow these telephone companies to provide video services without upgrading their current system infrastructure or that allow 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 products, 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 the telephone company market will be a significant challenge for us. Several of our largest competitors have mature customer relationships with many of the largest telephone companies, while we have limited recent experience with sales and marketing efforts designed to reach these potential customers. In addition, telephone companies face specific network architecture and legacy technology issues that we have only limited expertise in addressing. If we fail to penetrate the telephone company market successfully, our growth in revenues and operating results would be correspondingly limited.

Our customer base has become increasingly 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 customers. Sales to our five largest customers accounted for approximately 82.5% of our net revenues in the three months ended June 30, 2008 compared to 73.3% in the three months ended June 30, 2007. In the six months ended June 30, 2008, our top five customers accounted for 80.6% of our net revenues compared to 77.4% in the six months ended June 30, 2007. Cox Communications, Time Warner Cable and Verizon each represented 10% or more of our net revenues in the three and six months ended June 30, 2008. We believe that for the foreseeable future our net revenues will be concentrated in a relatively small number of large customers.

We anticipate that a large portion of our revenues will continue to depend on sales to a limited number of customers, and we do not have contracts or other agreements that guarantee continued sales to these or any other customers. In addition, as the consolidation of ownership of cable operators and telephone companies continues, we may lose existing customers and

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have access to a shrinking pool of potential customers. We expect to see continuing industry consolidation and customer concentration due to the significant capital costs of constructing video, voice and data networks and for other reasons. For example, Adelphia, formerly the fifth largest cable company in the United States, was sold in 2006 to Comcast and Time Warner Cable, the two largest U.S. cable operators. Further business combinations may occur in our customer base which will result in increased purchasing leverage by these customers 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.

The timing of a significant portion of our net revenues is dependent on complex systems integration.

We derive a significant 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 is dependent upon technologies provided to our customers by third parties. As a result, the timing of our revenue related to the implementation of our product applications 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.

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 and voice services;

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

• substantial test marketing of new services with subscribers.

For these and other reasons, our sales cycles generally have been between nine 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 could be substantially lower than anticipated. Our quarterly and annual results may fluctuate significantly due to revenue recognition policies and the timing of the receipt of orders.

We have been unable to achieve sustained profitability, which could adversely affect the price of our stock.

To date, we have experienced significant operating losses. Although we were profitable in the three months ended June 30, 2008, we have not achieved sustained profitability. For example, we were unprofitable for the three months ended March 31, 2008. If we fail to achieve sustained profitability in the future, it would adversely impact our long-term business and we may not meet the expectations of the investment community in the future, which could have a material adverse impact on our stock price.

We need to develop and introduce new and enhanced products in a timely manner to remain competitive, and our product development efforts require substantial research and development expense.

The markets in which we compete are characterized by continuing technological advancement, changes in customer requirements and evolving industry standards. To compete successfully, we must design, develop, manufacture and sell new or enhanced products that provide increasingly higher levels of performance and reliability and meet the cost expectations of our customers. Our product development efforts require substantial research and development expense. For example, as we develop new technology primarily related to the delivery of video over IP networks, our research and development expense has increased as a percentage of revenues from 24.9% in the six months ended June 30, 2007 to 32.8% in the six months ended June 30, 2008. We expect research and development expense as a percentage of revenues to continue to be relatively high. Research and development expense in the three months ended June 30, 2008 was $12.8 million and in the three months ended June 30, 2007 was $13.7 million. There can be no assurance that we will achieve an acceptable return on our research and development efforts.

Likewise, new technologies, standards and formats are being adopted by our customers. While we are in the process of developing products based on many of these new formats in order to remain competitive, we do not have such products at this time and cannot be certain when, if at all, we will have products in support of such new formats.

We may not accurately anticipate the timing of the market needs for our products and develop such products at the appropriate times, 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 in connection with newer products and products under development. Our ability to meet customer demand depends on our ability to configure our product applications 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 these 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 our expectations of how the market for video, voice and data services will continue to develop in the United States and in international markets. If the market for such services develops more rapidly than we anticipate, then our product development efforts may be behind, which may result in our being unable to recoup our capital spent on product development as a result of a missed market opportunity. Conversely, if the market develops more slowly than we anticipate, we may find that we have expended significant capital on product development prior to our being able to generate any revenues for those products. If we are unable to accurately time our product introductions to meet market demand, it could have a material adverse impact on our operating results and financial condition.

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In addition, if actual orders are materially lower than the indications we receive from our customers, our ability to manage our inventory and expenses will also be harmed. If we enter into purchase commitments to acquire components and materials, or expend resources to manufacture products, and those products are not purchased by our customers when expected, our business and operating results could suffer.

Our future growth depends on market acceptance of several emerging video services, on the adoption of new network architectures and technologies and on several other industry trends.

Future demand for our products will depend significantly on the growing market acceptance of several emerging video services; HDTV; addressable advertising; and video delivered over telephone company networks.

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 growth will be limited.

Furthermore, we expect the extent and nature of regulatory attitudes towards issues such as competition among service providers, access by third parties to networks of other service providers and new services to impact our customers’ purchasing decisions. If service providers do not pursue the opportunity to offer integrated video services as aggressively as we expect, our revenue growth would be limited.

We need to develop additional distribution channels to market and sell our products.

Our Video products have been traditionally sold directly to large cable operators with recent sales directly to telephone 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 may not succeed in establishing these relationships. 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 operators and telephone 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.

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 always have long-term agreements in place with such suppliers. As examples, we do not have long-term purchase agreements in place with Schroff, the sole supplier of our product chassis; or 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 certain of these components are lengthy and preclude rapid changes in quantity requirements and delivery schedules. In addition, increased demand by third parties for the components we use in our products (for example, Field Programmable Gate Array and other semiconductor technology) may lead to decreased availability and higher prices for those components from our suppliers, since we carry

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little inventory of our products and product components. As a result, we may not be able to secure sufficient 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.

With respect to manufacture 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 video products. 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 are 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.

We must manage any growth in our business effectively even if our infrastructure, management and resources might be strained.

We experienced rapid growth in our business until 2007. In 2007, we experienced a significant revenue decline in the latter half of the year. A return to growth, if any, will likely place a significant strain on our resources. For example, we may need to hire additional development and customer support personnel. 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 it will result in increased responsibilities of management personnel. Managing this growth will require substantial resources that we may not have or otherwise be able to obtain.

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 the devotion of substantial employee resources. We may not accomplish these development efforts quickly or cost-effectively, if at all. For example, our products currently interoperate with set-top boxes marketed by vendors such as Cisco Systems and Motorola and with VOD servers marketed by SeaChange and Arris. If we fail to maintain compatibility with these set-top boxes, VOD servers or other software or equipment found in our customers’ existing networks, we may face substantially reduced demand for our products, 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 have successful partnering arrangements 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, and plan to continue to invest, 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.

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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 United States and foreign jurisdictions. Although we attempt to protect our intellectual property rights through patents, trademarks, copyrights, licensing arrangements, maintaining certain technology as trade secrets and other measures, we cannot assure you that any patent, trademark, copyright or other intellectual property rights owned by us will not be invalidated, circumvented or challenged, that such intellectual property rights will provide competitive advantages to us or that any of our pending or future patent applications will be issued with the scope of the claims sought by us, if at all. 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 formally protected, or design around the patents that we own. In addition, effective patent, copyright and trade secret protection may be unavailable or limited in certain foreign countries in which we do business or may do business in the future.

The steps that we have taken may not be able to 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 a specific functionality is necessary for 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 materially adversely affect our business, operating results and financial condition.

Regional instability in Israel may adversely affect business conditions 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 June 30, 2008, we had 186 full-time employees located in Israel. In addition, we have additional capabilities at this facility consisting of customer service, marketing and general and administrative employees. Accordingly, we are directly influenced by the political, economic and military conditions affecting Israel, and any major hostilities, such as the hostilities in Lebanon in 2006, involving Israel or the interruption or curtailment of trade between Israel and its trading partners could significantly harm our business. The September 2001 terrorist attacks, the ongoing U.S. war on terrorism and the terrorist attacks and hostilities within Israel have heightened the risks of conducting business in Israel. In addition, Israel and companies doing business with Israel have, in the past, 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, since September 2000. 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 recruit qualified personnel in Israel.

In addition, most of our employees in Israel are obligated to perform annual reserve duty in the Israel Defense Forces and several were called for active military duty in connection with the hostilities in Lebanon in mid-2006. 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 are subject to securities class action lawsuits.

Since October 3, 2007, a series of purported shareholder class action lawsuits were filed in the United States District Court for the Northern District of California against us, certain of our officers and directors, and the underwriters of our initial public offering, or IPO. One such suit was subsequently dismissed. In February 2008, the lawsuits were consolidated and a lead plaintiff was appointed by the Court. In May 2008, the lead plaintiff filed a consolidated complain against us, the directors and officers who signed the IPO prospectus, and the underwriters of our IPO. The consolidated complaint alleges that our IPO prospectus contained false and misleading statements regarding our business strategy and prospects, and the prospects of our CMTS platform in particular. The lead plaintiff purports to represent anyone who purchased our common stock in the initial public offering. The consolidated complaint asserts causes of action for violations of Sections 11, 12(a)(2) and 15 of the Securities Act of 1933. Defendants filed a motion to dismiss in August 2008. As a component of these lawsuits, we have the obligation to indemnify the underwriters for expenses related to the suit, including the cost of one counsel for the underwriters.

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In December 2007, a similar purported shareholder class action complaint alleging violations of Sections 11, 12(a)(2) and 15 of the Securities Act of 1933 was filed in the Superior Court for the City and County of San Francisco. The complaint names as defendants the company, certain of our officers and directors, and the underwriters of our IPO. The complaint alleges that our IPO prospectus contained false and misleading statements regarding our business prospects, product operability and CMTS platform. The plaintiff purports to represent anyone who purchased our common stock in the IPO. The complaint seeks unspecified monetary damages. The case was removed to the United States District Court, but subsequently returned to the Superior Court for the City and County of San Francisco. On August 11, 2008, the Court stayed the case in deference to the federal class action.

On December 11, 2007, a shareholder derivative lawsuit was filed against certain of our officers and directors in the Superior Court for the County of San Mateo, California. The company is named as a nominal defendant. The complaint alleges that the defendants violated their fiduciary duties in connection with our disclosures in connection with our initial public offering and thereafter, in particular by allegedly issuing false and misleading statements in our registration statement and prospectus regarding our business prospects. The lawsuit is in its earliest stages, and to date defendants have not responded to the complaint. At the parties’ request, the Court has stayed all proceedings in the case until January 23, 2009.

While we have directors and officers liability insurance that should defray the costs associated with defending these lawsuits, this litigation, regardless of its outcome, will result in substantial expense and significant diversion of the time and efforts of our management. In addition, it may damage our reputation with customers and investors. An adverse determination in any such proceeding could subject us to significant liabilities, as well as damage our reputation.

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 and one of our contract manufacturers are 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 the Israeli New Shekel could increase our level of operating expenses and the cost of procurement of raw materials to the extent we must purchase components denominated in the Israeli New Shekel. For example, from December 31, 2007 to June 30, 2008, the U.S. dollar declined 12% relative to the Israeli New Shekel. A weakened dollar could also increase the real cost to us of our expenses in countries outside the United States.

Currently, we hedge a portion of our anticipated future expenses and certain assets and liabilities denominated in the Israeli New Shekel. The hedging activities undertaken by us are intended to partially offset the impact of currency fluctuations. If our attempts to hedge against these risks are not successful, our net income could be adversely impacted. In addition, as our hedging program is relatively short term in nature, continued depreciation of the U.S. dollar versus the Israeli New Shekel is likely to adversely impact our operating expenses in the future.

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.

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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.

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. Our products must successfully interoperate with products from other vendors. As a result, when problems occur in a network, it may be difficult to identify the sources of these problems. The occurrence of hardware and software errors, whether or not caused by our products, could result in the delay or loss of market acceptance of our products, and therefore delay our ability to recognize revenue from sales, and any necessary revisions may cause us to incur significant expenses. The occurrence of any such problems could harm our business, operating results 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 United States 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.

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, 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, as 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.

Competition for qualified personnel, particularly management and research and development personnel, is intense. In order to manage our expected growth, we must be successful in attracting and retaining qualified personnel.

Our future success will depend on the ability of our management to operate effectively, both individually and as a group. We are dependent on our ability to retain and motivate high caliber personnel, in addition to attracting new personnel. In addition, we have experienced an increase in voluntary attrition since our initial public offering. The loss of any of our senior management or other key product development or sales and marketing personnel, or our inability to timely and adequately fill vacant positions could adversely affect our future business, operating results and financial condition. In addition, a large number of our research and product development personnel have broad expertise in video algorithms, radio frequency and digital video standards that is vitally important in our product development efforts. If we were to lose a significant number of these research and development employees, our ability to develop successful new products would be harmed, and our revenues and operating results would likely suffer as a result. Competition for qualified management, technical and other personnel can be intense, and we may not be successful in attracting and retaining such personnel. While our employees are required to sign standard agreements concerning confidentiality and ownership of inventions, we generally do not have employment contracts or non-competition agreements with our personnel. The loss of the services of any of our key personnel, the inability to attract or retain qualified personnel in the future or delays in hiring required personnel, particularly senior management and engineers and other technical personnel, could negatively affect our business, operating results and financial condition.

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Our expansion into international markets may not succeed.

International sales represented $4.5 million of our net revenues for the three months ended June 30, 2008, and $11.1 million of our net revenues for the three months ended June 30, 2007. As part of our restructuring efforts announced in October 2007, we substantially reduced the number of personnel dedicated to sales outside the United States. Our international sales will depend upon developing indirect sales channels in Europe and Asia through distributor and reseller arrangements with third parties. However, 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 are not successful in their sales efforts whether because they are unable to provide support or otherwise, we maybe unable to grow or sustain our revenue in international markets.

Our future growth will require further expansion of our international operations in Europe, Asia and other markets. We recently established a small research and development presence in China and an outsourced research and development presence in the Ukraine. 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 take longer than we anticipate, and we may not be able to successfully market, sell, deliver and support our products internationally.

Our international operations, the international operations of our contract manufacturers and our outsourced development contractors, and our efforts to increase sales in international markets, are subject to a number of risks, including:

• inflation and fluctuations in currency exchange rates, especially the Israeli New Shekel;

• political and economic instability;

• unpredictable changes in foreign government regulations and telecommunications standards;

• legal and cultural differences in the conduct of business;

• import and export license requirements, tariffs, taxes and other trade barriers;

• difficulty in collecting accounts receivable;

• potentially adverse tax consequences;

• the burden of complying with a wide variety of foreign laws, treaties and technical standards;

• difficulty in protecting our intellectual property;

• acts of war or terrorism and insurrections;

• difficulty in staffing and managing foreign operations; and

• changes in economic policies by foreign governments.

The effects of any of the risks described above could reduce our future revenues or increase our costs from our international operations.

We may engage in future acquisitions that dilute the ownership interests of our stockholders, cause us to 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 expect to acquire businesses, products, or technologies in the future. In the event of any future acquisitions, we could:

• issue equity securities which would dilute current stockholders’ percentage ownership;

• incur substantial debt;

• assume contingent liabilities; or

• expend 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;

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• unanticipated costs associated with the acquisition transaction;

• 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.

Economic downturns may impact our customers, and the resulting revenue shortfall may harm our operating results.

Many economists are predicting an economic downturn in 2008. An economic downturn could adversely impact the demand for our products. Economic weakness or recession could also result in our customers experiencing financial difficulties and/or electing to constrain spending on network expansion, which in turn could result in decreased revenues and earnings for us. Such a downturn also could have a negative impact on our ability to forecast and manage the amount of components purchased from our suppliers. Economic uncertainty generally would make it difficult to forecast operating results, and future investment decisions that depend on those results. In the event of economic downturn, the foregoing negative impact on our customers, and on our ability to manage our business, could have a material adverse effect on our results of operations and stock price.

Negative conditions in the global credit markets may impair the value or reduce the liquidity of a portion of our investment portfolio.

As of June 30, 2008, we had $50.9 million in cash and cash equivalents and $107.9 million in investments in marketable debt securities. We have historically invested these amounts in government agency debt securities, corporate debt securities, commercial paper, auction rate securities, money market funds and taxable municipal debt securities meeting certain criteria. While we held $11.7 million of auction rate securities as of December 31, 2007, we currently hold no mortgaged-backed or auction rate securities. However, certain of our investments are subject to general credit, liquidity, market and interest rate risks, which may be exacerbated by U.S. sub-prime mortgage defaults that have affected various sectors of the financial markets and caused global credit and liquidity issues. In the future, these market risks associated with our investment portfolio may harm our results of operations, liquidity and financial condition.

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 United States 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 encountered significant regulatory difficulties in connection with the sales of our products in international markets, the future imposition of significant increases in the level of customs duties or export quotas could have a material adverse effect on our business.

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If we fail to comply with environmental regulatory requirements, our future revenues could be adversely affected.

We face increasing complexity in our product design and procurement operations as we adjust to new and upcoming requirements relating to the materials composition of many of our products. The European Union, or EU, has adopted certain directives to facilitate the recycling of electrical and electronic equipment sold in the EU, including the Restriction on the Use of Certain Hazardous Substances in Electrical and Electronic Equipment directive that restricts the use of lead, mercury and certain other substances in electrical and electronic products placed on the market in the EU after July 1, 2006. In connection with our compliance with these environmental laws and regulations, we have incurred substantial costs, including research and development costs, and costs associated with assuring the supply of compliant components from our suppliers. Similar laws and regulations have been proposed or may be enacted in other regions, including in the United States, China and Japan. Other environmental regulations may require us to reengineer our products to utilize components that are compatible with these regulations, and this reengineering and component substitution may result in additional costs to us or disrupt our operations or logistics.

New privacy laws and regulations or changing interpretations of existing laws and regulations could harm our business.

Governments in the United States 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 limitations 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.

If we do not adequately manage and evolve our financial reporting and managerial systems and processes, our operating results and financial condition may be harmed.

Our ability to successfully implement our business plan and comply with regulations applicable to being a public reporting company requires an effective planning and management process. We expect that we will need to continue to improve existing, and implement new, operational and financial systems, procedures and controls to manage our business effectively in the future. Any delay in the implementation of, or disruption in the transition to, new or enhanced systems, procedures or controls, could harm our ability to accurately forecast sales demand, manage our supply chain and record and report financial and management information on a timely and accurate basis. In addition, the successful enhancement of our operational and financial systems, procedures and controls will result in higher general and administrative costs in future periods, and may adversely impact our operating results and financial condition.

While we believe that we currently have proper and effective internal control over financial reporting, we are exposed to risks from legislation requiring companies to evaluate those internal controls.

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 that needs to be evaluated frequently. We have incurred increased costs and demands upon management as a result of complying with the laws and regulations affecting public companies, which costs adversely affect our operating results.

As a newly public company, we are required to comply with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002 as of December 31, 2008 and subsequent fiscal years. If we fail to maintain proper and effective internal controls in future periods, it could adversely affect our operating results, financial condition and our ability to run our business effectively and could cause investors to lose confidence in our financial reporting.

Accounting regulations related to equity compensation could adversely affect our earnings and our ability to attract and retain key personnel.

Since our inception, we have used stock options as a fundamental component of our employee compensation packages. We believe that our stock option plans are an essential tool to link the long-term interests of our stockholders and employees and serve to motivate management to make decisions that will, in the long run, give the best returns to stockholders. The Financial Accounting Standards Board has instituted changes to GAAP that require us to record a charge to earnings for employee stock option grants and employee stock purchase plan rights. In addition, NASDAQ Global Market, or NASDAQ, regulations requiring stockholder approval for all stock option plans could make it more difficult for us to grant options to employees in the future. To the extent that these or other new regulations make it more difficult or expensive to grant options to employees, we may incur increased compensation costs, change our equity compensation strategy or find it difficult to attract, retain and motivate employees, each of which could materially and adversely affect our business, operating results and financial condition.

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The retirement of our CMTS platform and related reduction in force could disrupt the operation of our business, distract management attention from revenue-generating efforts, increase our expenses, harm our reputation and result in a decline in employee morale.

Our organization has changed rapidly and further organizational changes may be required to address our strategic objectives. Our organization has changed through the retirement of our CMTS platform and a related reduction in headcount. The retirement may make our revenues from this product difficult to predict, as well as subject us to customer relationship risks, which could harm our business.

We also have eliminated approximately 135 positions globally since October 2007. On October 30, 2007, we announced the re-focusing of our business on our core Video product line and the retirement of our CMTS platform. These changes have placed a significant strain on our management, personnel, systems and resources. If we are unable to manage these organizational changes effectively, including effectively implementing cost cutting measures, we may not be able to take advantage of market opportunities, develop new products, enhance our technological capabilities, satisfy customer requirements, execute on our business plan or respond to competitive pressures. We cannot assure you that we will be able to achieve planned cost cutting measures in a timely manner or at all, or that our cost cutting measures, as planned, will be effective. If cost cutting measures are not effectively implemented, we may experience unanticipated effects from these measures causing harm to our business and customer relationships.

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 are 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 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 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.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

In May 2008, we issued and sold an aggregate of 67,663 shares of our common stock to an accredited investor upon the exercise of a previously granted warrant. This warrant was exercised on a cashless net exercise basis.

The foregoing transaction did not involve any underwriters, underwriting discounts or commissions, or any public offering. We believe the offer, sale and issuance of the securities described above was exempt from registration under the Securities Act by virtue of Regulation D promulgated thereunder and/or Section 4(2) of the Securities Act because the issuance of securities to the recipient did not involve a public offering. Appropriate legends were affixed to the securities issued in such transaction. We believe that the recipient of securities in this transaction had adequate access, through its business relationships, to information about us.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

The annual meeting of stockholders of BigBand Networks, Inc. was held on June 9, 2008 at the offices of Wilson Sonsini Goodrich & Rosati, P.C. located at 650 Page Mill Road, Palo Alto, California at 9:00 a.m. local time. There were 62,837,041 shares of BigBand Networks, Inc. common stock outstanding and entitled to vote at such meeting, and there were present in person or by proxy 54,016,176 common shares, representing 85.96% of the outstanding shares.

The results of the voting on the matters submitted to the stockholders were as follows:

1. To elect the following directors as Class II directors of the Company to hold office for a three-year term and until their successors are elected and qualified:

	Votes For	Withheld
Gal Israely	53,848,700	167,476
Bruce I. Sachs	53,134,049	882,127
There were no abstentions or broker non-votes.

2. To ratify the appointment of Ernst & Young LLP as our independent auditors for the fiscal year ending December 31, 2008:

Votes for:	53,977,512
Votes against:	25,353
Abstain:	13,311
There were no broker non-votes.

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ITEM  5. OTHER INFORMATION

2008 Incentive Compensation Program

Amir Bassan-Eskenazi, President and Chief Executive Officer

Base Salary (annual):	$	325,000
Bonus Potential
First Half:		97,500
Second Half:		97,500
Annual:		130,000
Total:	$	325,000

2008 Officer Bonus Goal	First Half % Actual Achievement		Second Half % Goal Weighting		Annual % Goal Weighting
1) Achieve revenues goal	40	%	30	%	30	%
2) Achieve earnings goal	25	%	20	%	20	%
3) Achieve bookings goal	NA		15	%	15	%
4) Achieve product release schedule goal	5	%	5	%	5	%
5) Achieve specified product plan goal	5	%	5	%	5	%
6) Achieve specified new product sales goal	5	%	5	%	5	%
7) Achieve specified customer satisfaction goal	11	%	10	%	10	%
8) Achieve employee satisfaction and retention goal	0	%	10	%	10	%
Total	91	%	100	%	100	%

2008 Incentive Compensation Program

Maurice Castonguay, Senior Vice President and Chief Financial Officer

Base Salary (annual):	$	280,000
Bonus Potential
First Half:		21,000
Second Half:		42,000
Annual:		56,000
Total:	$	119,000

2008 Officer Bonus Goal	First Half % Actual Achievement		Second Half % Goal Weighting		Annual % Goal Weighting
1) Achieve earnings goal	22	%	10	%	10	%
2) Achieve departmental budgeting goal	NA		10	%	10	%
3) Achieve cash and investments goal	3.5	%	7	%	7	%
4) Achieve expense hedging goal	7	%	7	%	7	%
5) Achieve investor relations, financial analyst relations, and operating results goals	21	%	21	%	21	%
6) Achieve financial controls goal	25	%	20	%	20	%
7) Achieve corporate governance goal	5	%	5	%	5	%
8) Achieve internal communication goal	4	%	10	%	10	%
9) Achieve employee satisfaction and retention goal	0	%	10	%	10	%
Total	87.5	%	100	%	100	%

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2008 Incentive Compensation Program

David Heard, Chief Operating Officer

Base Salary (annual):	$	325,000
Bonus Potential:
First Half:		68,250
Second Half:		68,250
Annual:		91,000
Total:	$	227,500

2008 Officer Bonus Goal	First Half % Actual Achievement		Second Half % Goal Weighting		Annual % Goal Weighting
1) Achieve specified bookings goal	6	%	10	%	10	%
2) Achieve specified margins goal	7	%	5	%	5	%
3) Achieve specified revenues goal	NA		5	%	5	%
4) Achieve specified earnings goal	NA		5	%	5	%
5) Achieve cost reduction and operating cost of goods goal	7	%	NA		NA
6) Achieve product footprint goal	4	%	5	%	5	%
7) Achieve SDV market share goal	7	%	5	%	5	%
8) Achieve product delivery goals	6	%	9	%	9	%
9) Achieve product support goal	5	%	4	%	4	%
10) Achieve development process goal	5	%	4	%	4	%
11) Maintain low product returns	5	%	4	%	4	%
12) Maintain TL9000 certification	4	%	4	%	4	%
13) Achieve product release schedule goal	5	%	5	%	5	%
14) Achieve specified product plan goal	4	%	5	%	5	%
15) Achieve new product sales goal	10	%	5	%	5	%
16) Achieve customer satisfaction goal	11	%	5	%	5	%
17) Achieve customer response time goal	5	%	5	%	5	%
18) Achieve business operations goal	NA		5	%	5	%
19) Achieve employee satisfaction and retention goal	0	%	10	%	10	%
Total	91	%	100	%	100	%

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2008 Incentive Compensation Program

Jeffrey Lindholm, Former Senior Vice President of Sales and Marketing

Base Salary (annual):	$	250,000
Bonus Potential:
First Half:		63,000
Second Half:		—
Annual:		—
Total:	$	63,000

2008 Officer Bonus Goal	First Half % Actual Achievement		Second Half % Goal Weighting	Annual % Goal Weighting
1) Achieve sales contracting goal	0	%	NA	NA
2) Achieve specified product goal	20	%	NA	NA
3) Achieve partnership and distribution goal with respect to new product	0	%	NA	NA
4) Achieve specified marketing goal with respect to new product	7.5	%	NA	NA
5) Achieve direct marketing roll-out goal	12.5	%	NA	NA
6) Achieve employee satisfaction and retention goal	6	%	NA	NA
Total	46	%	NA	NA

2008 Incentive Compensation Program

Ran Oz, Executive Vice President and Chief Technology Officer

Base Salary (annual):	$	225,000
Bonus Potential:
First Half:		33,750
Second Half:		33,750
Annual:		45,000
Total:	$	112,500

2008 Officer Bonus Goal	First Half % Actual Achievement		Second Half % Goal Weighting		Annual % Goal Weighting
1) Achieve specified product demonstration and trials goals	18	%	23	%	23	%
2) Achieve specified SDV development goal	18	%	22	%	22	%
3) Achieve specified product demonstration and development goal	13	%	12	%	12	%
4) Achieve QAM development strategy goal	11	%	6	%	6	%
5) Achieve specified on-demand product strategy goal	8	%	5	%	5	%
6) Achieve customer relations and positioning goal	5	%	12	%	12	%
7) Achieve specified innovation-related sales goal	NA		10	%	10	%
8) Achieve employee satisfaction and retention goal	0	%	10	%	10	%
Total	73	%	100	%	100	%

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ITEM 6. EXHIBITS

(a) 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)
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

The certification attached as Exhibit 32.1 that accompanies this Quarterly Report on Form 10-Q is not deemed filed with the Securities and Exchange Commission and is not to be incorporated by reference.

(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.

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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: August 14, 2008

BigBand Networks, Inc.
By:	/s/ Maurice L. Castonguay
	Maurice L. Castonguay, Chief Financial Officer (Principal Financial Officer)

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