UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

(Mark One)

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

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

Commission file number: 001-33355

 

BigBand Networks, Inc.

(Exact name of registrant as specified in its charter)

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

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

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

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

Large accelerated filer o		Accelerated filer þ		Non-accelerated filer   o (Do not check if a smaller reporting company)		Smaller reporting company o

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

          As of November 1, 2009, 66,425,618 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
September 30, 2009
INDEX

				Page
PART I.		Financial Information			3
Item 1.		Financial Statements (Unaudited)			3
		Condensed Consolidated Balance Sheets as of September 30, 2009 and December 31, 2008			3
		Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2009 and 2008			4
		Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2009 and 2008			5
		Notes to Condensed Consolidated Financial Statements			6
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			22
Item 3.		Quantitative and Qualitative Disclosures About Market Risk			29
Item 4.		Controls and Procedures			30
PART II.		Other Information			31
Item 1.		Legal Proceedings			31
Item 1A.		Risk Factors			31
Item 6.		Exhibits			43
		Signature			44
EX-10.28
EX-10.29
EX-31.1
EX-31.2
EX-32.1

PART 1. FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

BigBand Networks, Inc.

Condensed Consolidated Balance Sheets
(In thousands, except per share amounts)
(Unaudited)

		As of				As of
		September 30,				December 31,
		2009				2008
ASSETS
Current assets:
Cash and cash equivalents		$	27,527			$	50,981
Marketable securities			134,111				123,654
Accounts receivable, net of allowance for doubtful accounts of $47 and $39 as of September 30, 2009 and December 31, 2008, respectively			23,942				26,361
Inventories, net			4,868				6,123
Prepaid expenses and other current assets			3,918				3,716
Total current assets			194,366				210,835
Property and equipment, net			11,810				15,358
Goodwill			1,656				1,656
Other non-current assets			8,947				6,273
Total assets		$	216,779			$	234,122
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	9,048			$	8,350
Accrued compensation and related benefits			6,004				11,433
Current portion of deferred revenues, net			27,938				39,433
Current portion of other liabilities			6,511				9,221
Total current liabilities			49,501				68,437
Deferred revenues, net, less current portion			13,911				21,129
Other liabilities, less current portion			2,097				2,392
Accrued long-term Israeli severance pay			4,067				3,745
Commitments and contingencies
Stockholders’ equity:
Common stock, $0.001 par value, 250,000 shares authorized as of September 30, 2009 and December 31, 2008; 66,426 and 64,639 shares issued and outstanding as of September 30, 2009 and December 31, 2008, respectively			66				65
Additional paid-in capital			278,850				265,176
Accumulated other comprehensive income			668				58
Accumulated deficit			(132,381	)			(126,880	)
Total stockholders’ equity			147,203				138,419
Total liabilities and stockholders’ equity		$	216,779			$	234,122

See accompanying notes.

BigBand Networks, Inc.

Condensed Consolidated Statements of Operations
(In thousands, except per share amounts)
(Unaudited)

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2009				2008				2009				2008
Net revenues:
Products		$	12,647			$	38,337			$	68,795			$	104,188
Services			9,555				9,946				36,321				27,012
Total net revenues			22,202				48,283				105,116				131,200
Cost of net revenues:
Products			8,211				16,781				34,193				43,459
Services			2,885				2,941				9,169				9,440
Total cost of net revenues			11,096				19,722				43,362				52,899
Gross profit			11,106				28,561				61,754				78,301
Operating expenses:
Research and development			11,698				13,218				34,308				40,430
Sales and marketing			6,009				7,057				18,313				21,923
General and administrative			4,612				5,411				14,109				15,599
Restructuring charges			—				737				1,356				2,230
Amortization of intangible assets			—				112				—				398
Class action litigation charges			—				—				477				—
Total operating expenses			22,319				26,535				68,563				80,580
Operating (loss) income			(11,213	)			2,026				(6,809	)			(2,279	)
Interest income			544				1,215				2,137				4,086
Other income (expense), net			31				(145	)			(62	)			1,302
(Loss) income before provision for (benefit from) income taxes			(10,638	)			3,096				(4,734	)			3,109
Provision for (benefit from) income taxes			220				(35	)			767				651
Net (loss) income		$	(10,858	)		$	3,131			$	(5,501	)		$	2,458
Basic net (loss) income per common share		$	(0.16	)		$	0.05			$	(0.08	)		$	0.04
Diluted net (loss) income per common share		$	(0.16	)		$	0.05			$	(0.08	)		$	0.04
Shares used in basic net (loss) income per common share			66,368				64,061				65,666				63,286
Shares used in diluted net (loss) income per common share			66,368				67,116				65,666				67,208

See accompanying notes.

BigBand Networks, Inc.

Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)

		Nine Months Ended
		September 30,
		2009				2008
Cash Flows from Operating activities
Net (loss) income		$	(5,501	)		$	2,458
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:
Depreciation of property and equipment			6,428				7,417
Amortization of software license			208				—
Amortization of intangible assets			—				398
Loss on disposal of property and equipment			103				245
Stock-based compensation			10,298				8,703
Tax benefit from exercise of stock options			(17	)			—
Net settled unrealized gains (losses) on cash flow hedges			348				(168	)
Changes in operating assets and liabilities:
Decrease in accounts receivable, net			2,419				11,228
Decrease (increase) in inventories, net			1,255				(463	)
Increase in prepaid expenses and other current assets			(121	)			(1,360	)
Increase in other non-current assets			(605	)			(385	)
Increase (decrease) in accounts payable			698				(3,698	)
Increase in long-term Israeli severance pay			322				774
Decrease in accrued and other liabilities			(8,095	)			(2,301	)
Decrease in deferred revenues			(18,713	)			(7,030	)
Net cash (used in) provided by operating activities			(10,973	)			15,818
Cash Flows from Investing activities
Purchase of marketable securities			(119,204	)			(143,228	)
Proceeds from maturities of marketable securities			100,106				110,879
Proceeds from sale of marketable securities			8,500				20,804
Purchase of property and equipment			(2,983	)			(8,820	)
Decrease in restricted cash			223				2
Proceeds from sale of property and equipment			—				9
Purchase of software license			(2,500	)			—
Net cash used in investing activities			(15,858	)			(20,354	)
Cash Flows from Financing activities
Proceeds from issuance of common stock			3,360				4,072
Tax benefit from exercise of stock options			17				—
Net cash provided by financing activities			3,377				4,072
Net decrease in cash and cash equivalents			(23,454	)			(464	)
Cash and cash equivalents as of beginning of period			50,981				55,162
Cash and cash equivalents as of end of period		$	27,527			$	54,698

See accompanying notes.

BigBand Networks, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1. Description of Business

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

2. Summary of Significant Accounting Policies

          Basis of Presentation

          The condensed consolidated financial statements include accounts of the Company and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated. The accompanying condensed consolidated balance sheet as of September 30, 2009, and the condensed consolidated statements of operations for the three and nine months ended September 30, 2009 and 2008, and the condensed consolidated statements of cash flows for the nine months ended September 30, 2009 and 2008 are unaudited. The condensed consolidated balance sheet as of December 31, 2008 was derived from the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008 filed with the U.S. Securities and Exchange Commission (SEC) on March 10, 2009 (Form 10-K). The accompanying condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes contained in the Company’s Form 10-K.

          The accompanying condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) and pursuant to the rules and regulations of the SEC as permitted by such rules. Not all of the financial information and footnotes required for complete financial statements have been presented. Management believes the unaudited condensed consolidated financial statements have been prepared on a basis consistent with the audited consolidated financial statements and include all adjustments necessary of a normal and recurring nature for a fair presentation of the Company’s condensed consolidated balance sheet as of September 30, 2009, the condensed consolidated statements of operations for the three and nine months ended September 30, 2009 and 2008, and the condensed consolidated statements of cash flows for the nine months ended September 30, 2009 and 2008. In preparing these condensed consolidated financial statements, the Company has evaluated subsequent events that occurred between September 30, 2009 and November 6, 2009, the date of issuance of these financial statements.

          There have been no significant changes in the Company’s accounting policies during the nine months ended September 30, 2009 compared to the significant accounting policies described in the Company’s Form 10-K.

          Use of Estimates

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

          Revenue Recognition

          The Company’s software and hardware product applications are sold as solutions and its software is a significant component of these solutions. The Company provides unspecified software updates and enhancements related to products through support contracts. With respect to certain transactions and 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 sales of the Company’s software and hardware products. Software product sales include a perpetual license to the Company’s software. The Company recognizes product revenues upon shipment to its customers, including channel partners, on non-cancellable contracts and purchase orders when all revenue recognition criteria are met, or, if specified in an agreement, upon receipt of final acceptance of the product, provided all other criteria are met. End users and channel partners generally have no rights of return, stock rotation rights, or price protection. Shipping charges billed to customers are included in product revenues and the related shipping costs are included in cost of product revenues.

          Substantially all of the Company’s product sales have been made in combination with support services, which consist of software updates and customer support. The Company’s customer service agreements allow customers to select from plans offering

various levels of technical support, unspecified software upgrades and enhancements on an if-and-when-available basis. Revenues for support services are recognized on a straight-line basis over the service contract term, which is typically one year but can extend to five years for the Company’s telecommunications customers. Revenues from other services, such as installation, program management and training, are recognized when the services are performed.

          The Company uses the residual method to recognize revenues when a customer agreement includes one or more elements to be delivered at a future date and vendor specific objective evidence (VSOE) of the fair value of all undelivered elements exists. Under the residual method, the fair value of the undelivered elements is deferred and the remaining portion of the contract fee is recognized as product revenues. If evidence of the fair value of one or more undelivered elements does not exist, all revenues are deferred and recognized when delivery of those elements 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 service fees (including customer support and professional services such as installation and training) and product revenues, net of the associated costs. Deferred product revenue generally relates to acceptance provisions that have not been met or partial shipment or when the Company does not have VSOE of fair value on the undelivered items. When deferred revenues are recognized as revenues, the associated deferred costs are also recognized as cost of net revenues.

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

          Cash, Cash Equivalents and Marketable Securities

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

          Marketable securities consist principally of corporate debt securities, commercial paper and securities of U.S. agencies with remaining time to maturity of two years or less. If applicable, the Company considers marketable securities with remaining time to maturity greater than one year and in a consistent loss position for at least nine months to be classified as long-term as it expects to hold them to maturity. As of September 30, 2009, the Company did not have any such securities. The Company considers all other marketable securities with remaining time to maturity of less than two years to be short-term marketable securities. The short-term marketable securities are classified as current assets because they can be readily converted into securities with a shorter remaining time to maturity or into cash. The Company determines the appropriate classification of its marketable securities at the time of purchase and re-evaluates such designations as of each balance sheet date. All marketable securities and cash equivalents in the portfolio are classified as available-for-sale and are stated at fair value, with all the associated unrealized gains and losses, reported as a component of accumulated other comprehensive income (loss). Fair value is based on quoted market rates or direct and indirect observable markets for these investments. The amortized cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization and accretion are included in interest income. The cost of securities sold and any gains and losses on sales are based on the specific identification method.

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

          Fair Value of Financial Instruments

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

          Concentration of Credit Risk and Significant Customers

          Concentrations with respect to accounts receivable occur as the Company sells primarily to large, well-established companies including customers outside of the U.S. The Company closely monitors extensions of credit to other parties and, where necessary, utilizes common financial instruments to mitigate risk. When deemed uncollectible, accounts receivable balances are written off against the allowance for doubtful accounts.

          The Company’s customers are impacted by several factors, including an industry downturn and tightening of access to capital. The market that the Company serves is characterized by a limited number of large customers creating a concentration of risk. To date, the Company has not incurred any significant charges related to uncollectible accounts related to large customers. The Company had one and two customers which individually had an accounts receivable balance of greater than 10% of the Company’s total accounts receivable balance as of September 30, 2009 and December 31, 2008, respectively.

          The Company recognized revenues from four and two customers that were 10% or greater of the Company’s total net revenues for the three and nine months ended September 30, 2009, respectively. The Company recognized revenues from four and three customers that were 10% or greater of the Company’s total net revenues for the three and nine months ended September 30, 2008.

          Inventories, Net

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

          Impairment of Long-Lived Assets

          The Company periodically evaluates whether changes have occurred that require revision of the remaining useful life of long-lived assets or would render them not recoverable. If such circumstances arise, the Company compares the carrying amount of the long-lived assets to the estimated future undiscounted cash flows expected to be generated by the long-lived assets. If the estimated aggregate undiscounted cash flows are less than the carrying amount of the long-lived assets, an impairment charge, calculated as the amount by which the carrying amount of the assets exceeds the fair value of the assets, is recorded. Through September 30, 2009, no impairment losses have been recognized.

          Warranty Liabilities

          The Company provides a warranty for its software and hardware products. In most cases, the Company warrants that its hardware will be free of defects in workmanship for one year, and that its software media will be free of defects for 90 days. In master purchase agreements with large customers, however, the Company often warrants that its products (hardware and software) will function in material conformance to 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

          The Company follows ASC 740 Income Taxes, which requires the use of the liability method of accounting for income taxes. The liability method computes income taxes based on a projected effective tax rate for the full fiscal year. For example, the effective tax for the nine months ended September 30, 2009 will be based on the projected effective tax rate for the year ending December 31, 2009. The liability method includes the effects of deferred tax assets or liabilities. Deferred tax assets or liabilities are recognized for the expected tax consequences of temporary differences between the financial statement and tax basis of assets and liabilities using the enacted tax rates that will be in effect when these differences reverse. The Company provides a valuation allowance to reduce deferred tax assets to the amount that is expected, based on whether such assets are more likely than not to be realized.

          Foreign Currency Derivatives

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

          The Company selectively hedges future expenses denominated in Israeli New Shekels by purchasing foreign currency forward contracts or combinations of purchased and sold foreign currency option contracts. When the U.S. dollar strengthens significantly against the Israeli New Shekel, the decrease in the value of future foreign currency expenses is offset by losses in the fair value of the contracts designated as hedges. Conversely, when the U.S. dollar weakens significantly against the Israeli New Shekel, the increase in the value of future foreign currency expenses is offset by gains in the fair value of the contracts designated as hedges. The exposures are hedged using derivatives designated as cash flow hedges under ASC 815 Derivatives and Hedging. The effective portion of the derivative’s gain or loss is initially reported as a component of accumulated other comprehensive income (loss) and, upon occurrence of the forecasted transaction, is subsequently reclassified primarily to research and development expenses in the consolidated statement of operations. The ineffective portion of the gain or loss is recognized immediately in other income (expense), net. For the nine months ended September 30, 2009, this loss was $2,000 and for the nine months ended September 30, 2008 this gain was $1.0 million. These derivative instruments generally have maturities of 180 days or less, and hence all unrealized amounts as of September 30, 2009 will have settled as of March 31, 2010.

          The Company enters into foreign currency forward contracts to reduce the impact of foreign currency fluctuations on assets and liabilities denominated in currencies other than its functional currency, which is the U.S. dollar. The Company 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; therefore, changes in the fair value of these instruments are recorded as other income (expense), net in the statement of operations. These derivative instruments generally have maturities of 90 days. 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.

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

		As of September 30,				As of December 31,
		2009				2008
Derivatives designated as hedging instruments:
Notional amount of currency option contracts: Israeli New Shekels		ILS	27,000			ILS	42,000
Notional amount of currency option contracts: U.S. dollars		$	7,216			$	11,926
Unrealized gains (losses) included in other comprehensive income on condensed consolidated balance sheets:
Settled -underlying derivative was settled but forecasted transaction has not occurred		$	64			$	(285	)
Unsettled -primarily included as other current assets (liabilities)			66				(336	)
Total unrealized gains (losses) included in other comprehensive income		$	130			$	(621	)
Derivatives not designated as hedging instruments:
Notional amount of foreign currency forward contracts: Israeli New Shekels		ILS	5,000			ILS	7,500
Notional amount of foreign currency forward contracts: U.S. dollars		$	1,330			$	1,923
Unrealized (losses) gains included in other income (expense) in condensed consolidated statements of operations:
Fair value included in other current (liabilities) assets on condensed consolidated balance sheets		$	(2	)		$	55

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

		Nine Months Ended September 30,
		2009				2008
Accumulated other comprehensive (loss) income related to cash flow hedges as of beginning of period		$	(621	)		$	45
Changes in settled and unsettled portion of cash flow hedges			(288	)			(147	)
			(909	)			(102	)
Less:
Changes in cash flow hedges — (loss) gain reflected in condensed consolidated statement of operations			(1,039	)			489
Accumulated other comprehensive income (loss) related to cash flow hedges as of end of period		$	130			$	(591	)

          Stock-based Compensation

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

          Recently Adopted Accounting Standards

          In June 2009, the FASB Accounting Standards Codification (the Codification) became the source of authoritative, non-governmental GAAP, except for rules and interpretive releases of the SEC, which are sources of authoritative GAAP for SEC registrants. All other non-grandfathered, non-SEC accounting literature not included in the Codification became non-authoritative. The Company began to use the new guidelines and numbering system prescribed by the Codification when referring to GAAP effective July 1, 2009. As the Codification was not intended to change or alter existing GAAP, the adoption did not have any impact on the Company’s consolidated financial condition, results of operations or cash flows.

          Recently Issued Accounting Standards

          In December 2008, the FASB issued guidance which has been included in Accounting Standards Codification 715 Compensation — Retirement Benefits (ASC 715), and is effective for fiscal years ending after December 15, 2009. This guidance requires an employer to disclose investment policies and strategies, categories, fair value measurements, and significant concentration of risk among its postretirement benefit plan assets. The Company is currently evaluating the potential impact of the adoption of this guidance on its consolidated financial position, results of operations or cash flows.

          In August 2009, the FASB issued Accounting Standards Update (ASU) 2009-05, Fair Value Measurements and Disclosures (Topic 820) — Measuring Liabilities at Fair Value (ASU 2009-05). ASU 2009-05 provides clarification that in circumstances in which a quoted price in an active market for the identical liability is not available, a reporting entity is required to measure fair value of such liability using one or more of the techniques prescribed by the update. ASU 2009-05 is effective in the three months ending December 31, 2009. The Company is currently evaluating the potential impact of the adoption of ASU 2009-05 on its consolidated financial position, results of operations or cash flows.

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

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

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

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2009				2008				2009				2008
Numerator:
Net (loss) income		$	(10,858	)		$	3,131			$	(5,501	)		$	2,458
Denominator:
Weighted average shares used in basic net (loss) income per common share			66,368				64,061				65,666				63,286
Stock options			—				2,909				—				3,696
Warrants			—				146				—				201
Restricted stock units			—				—				—				11
Employee stock purchase plan shares			—				—				—				14
Weighted average shares used in diluted net (loss) income per common share			66,368				67,116				65,666				67,208
Basic net (loss) income per common share		$	(0.16	)		$	0.05			$	(0.08	)		$	0.04
Diluted net (loss) income per common share		$	(0.16	)		$	0.05			$	(0.08	)		$	0.04

     As of September 30, 2009 and 2008, the Company had securities outstanding that could potentially dilute basic net income (loss) per common share in the future, but were excluded from the computation of diluted net (loss) income per common share for the periods presented as their effect would have been anti-dilutive as follows (shares in thousands):

		As of September 30,
		2009				2008
Stock options outstanding			11,649				7,994
Restricted stock units			2,855				580
Employee stock purchase plan shares			269				301
Warrants to purchase common stock			268				—

4. Fair Value

     The fair value of the Company’s cash equivalents and marketable securities is determined in accordance with ASC 820 Fair Value Measurements and Disclosures (ASC 820), which the Company adopted in 2008. ASC 820 clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, ASC 820 establishes a three-tier value hierarchy, which prioritizes the inputs used in measuring fair value as follows: observable inputs such as quoted prices in active markets (Level 1), inputs other than the quoted prices in active markets that are observable either directly or indirectly (Level 2), and unobservable inputs in which there is little or no market data, which 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.

     The Company’s fair value measurements of its financial assets (cash, cash equivalents and marketable securities) as of September 30, 2009 were as follows (in thousands):

		Level 1				Level 2				Level 3				Total
Marketable securities:
U.S. Agency debt securities		$	—			$	78,439			$	—			$	78,439
Corporate debt securities			—				44,798				—				44,798
Commercial paper			—				5,246				—				5,246
Certificates of deposit			4,628				—				—				4,628
Municipal debt securities (taxable)			—				1,000				—				1,000
			4,628				129,483				—				134,111
Cash equivalents:
Money market funds			19,007				—				—				19,007
Commercial paper			—				2,000				—				2,000
			19,007				2,000				—				21,007
Total cash equivalents and marketable securities		$	23,635			$	131,483			$	—			$	155,118
Cash balances															6,520
Total cash, cash equivalents and marketable securities														$	161,638

     The Company’s fair value measurements of its financial assets (cash, cash equivalents and marketable securities) as of December 31, 2008 were as follows (in thousands):

		Level 1				Level 2				Level 3				Total
Marketable securities:
U.S. Agency debt securities		$	—			$	55,296			$	—			$	55,296
Corporate debt securities			—				44,378				—				44,378
Commercial paper			—				22,986				—				22,986
Municipal debt securities (taxable)			—				994				—				994
			—				123,654				—				123,654
Cash equivalents:
Money market funds			30,092				—				—				30,092
Commercial paper			—				9,937				—				9,937
U.S. Agency debt securities			—				4,004				—				4,004
Corporate debt securities			—				999				—				999
			30,092				14,940				—				45,032
Total cash equivalents and marketable securities		$	30,092			$	138,594			$	—			$	168,686
Cash balances															5,949
Total cash, cash equivalents and marketable securities														$	174,635

5. Balance Sheet Data

     Marketable Securities

     Marketable securities, which included available-for-sale securities as of September 30, 2009, were as follows (in thousands):

		Amortized				Unrealized				Unrealized				Estimated fair
		cost				gain				loss				value
U.S. Agency debt securities		$	78,275			$	168			$	(4	)		$	78,439
Corporate debt securities			44,426				378				(6	)			44,798
Commercial paper			5,247				—				(1	)			5,246
Certificates of deposit			4,625				3				—				4,628
Municipal debt securities (taxable)			1,000				—				—				1,000
Total marketable securities		$	133,573			$	549			$	(11	)		$	134,111

     Marketable securities, which included available-for-sale securities as of December 31, 2008, were as follows (in thousands):

		Amortized				Unrealized				Unrealized				Estimated fair
		cost				gain				Loss				value
U.S. Agency debt securities		$	54,852			$	444			$	—			$	55,296
Corporate debt securities			44,247				239				(108	)			44,378
Commercial paper			22,885				101				—				22,986
Municipal debt securities (taxable)			1,000				—				(6	)			994
Total marketable securities		$	122,984			$	784			$	(114	)		$	123,654

     The Company has recognized no other-than-temporary impairments for marketable securities through September 30, 2009. The Company periodically reviews other-than-temporary impairments for available-for-sale debt instruments when it intends to sell or it is more likely than not that it will be required to sell an available-for-sale debt instrument before recovery of its amortized cost basis. If this assessment identifies available-for-sale debt instruments that are considered other-than-temporarily impaired and that the Company does not intend to sell and will not be required to sell prior to recovery of the amortized cost basis, the Company would separate the amount of the impairment into the amount that is credit related and the amount due to all other factors. The credit loss component would be recognized in earnings and would be the difference between the debt instrument’s amortized cost basis and the present value of its expected future cash flows. The remaining difference between the debt instrument’s fair value and the present value of future expected cash flows due to factors that are not credit related would be recognized in other comprehensive income (loss). As of September 30, 2009, the Company did not hold any marketable securities with remaining time to maturity of greater than one year and in a consistent loss position for at least nine months.

     The contractual maturity dates of the marketable securities were as follows (in thousands):

		As of September 30,				As of December 31,
		2009				2008
Due within one year		$	103,246			$	88,118
Due within one to two years			30,865				35,536
Total marketable securities		$	134,111			$	123,654

     Inventories, Net

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

		As of September 30,				As of December 31,
		2009				2008
Finished products		$	4,841			$	6,085
Work-in-progress			27				—
Raw materials, parts and supplies			—				38
Total inventories, net		$	4,868			$	6,123

     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 September 30,				As of December 31,
		2009				2008
Engineering and other equipment		$	29,121			$	29,463
Computers, software and related equipment			19,424				18,973
Leasehold improvements			5,813				5,745
Office furniture and fixtures			1,110				1,192
			55,468				55,373
Less: accumulated depreciation			(43,658	)			(40,015	)
Total property and equipment, net		$	11,810			$	15,358

     Goodwill

     Goodwill is carried at cost and is not amortized. The carrying value of goodwill was approximately $1.7 million as of September 30, 2009 and December 31, 2008.

     Other Non-current Assets

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

		As of September 30,				As of December 31,
		2009				2008
Israeli severance pay		$	3,342			$	2,661
Software license, net			2,292				—
Security deposit			2,101				2,125
Foreign deferred tax assets			578				644
Restricted cash			522				745
Other			112				98
Total other non-current assets		$	8,947			$	6,273

     Software license, net in the above table represents the Company’s purchase of a quadrature amplitude modulation (QAM) edge resource management technology license for $2.5 million on June 30, 2009, net of accumulated amortization. The Company amortizes the amounts paid for the license fee using the straight-line method over the estimated useful life of three years.

     Deferred Revenues, Net

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

		As of September 30,				As of December 31,
		2009				2008
Deferred service revenues, net		$	29,784			$	39,675
Deferred product revenues, net			12,065				20,887
Total deferred revenues, net			41,849				60,562
Less current portion of deferred revenues, net			(27,938	)			(39,433	)
Deferred revenues, net, less current portion		$	13,911			$	21,129

     Other Liabilities

     Other liabilities were comprised as follows (in thousands):

		As of September 30,				As of December 31,
		2009				2008
Accrued warranty		$	2,152			$	3,381
Rent and restructuring liabilities			1,757				1,602
Sales and use tax payable			1,384				831
Accrued professional fees			1,314				721
Foreign, franchise, and other income tax liabilities			1,282				2,071
Accrued class action litigation charges			—				1,504
Other			719				1,503
Total other liabilities			8,608				11,613
Less current portion of other liabilities			(6,511	)			(9,221	)
Other liabilities, less current portion		$	2,097			$	2,392

     Accrued Warranty

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

		Nine Months Ended September 30,
		2009				2008
Balance as of beginning of period		$	3,381			$	4,359
Warranty charged to cost of net revenues			277				1,276
Utilization of warranty			(767	)			(1,418	)
Other adjustments			(739	)			(572	)
Balance as of end of period			2,152				3,645
Less current portion of accrued warranty			(1,148	)			(2,742	)
Accrued warranty, less current portion		$	1,004			$	903

     As part of the transition to switch to all digital broadcasting from analog transmission, the Company recorded a $0.5 million benefit from the reversal of warranty reserves related to the decommissioned analog products in the nine months ended September 30, 2009 (all of which was recorded in the three months ended June 30, 2009). The reversal of this warranty reserve was recorded as a reduction of the Company’s cost of net product revenues, and is included in the above table in other adjustments.

6. Restructuring Charges

     On February 9, 2009, the Audit Committee of the Board of Directors authorized a restructuring plan in order to respond to market and economic conditions pursuant to which employees were terminated. This resulted in cumulative severance costs of approximately $0.7 million from initiation of the plan through September 30, 2009, all of which was recorded in the three months ended March 31, 2009.

     On April 29, 2008, the Audit Committee of the Board of Directors authorized a restructuring plan in connection with the redeployment of resources pursuant to which employees were terminated. This resulted in cumulative net charges of approximately $1.4 million from initiation of the plan through September 30, 2009, including charges of $1.1 million for vacated facility charges and $0.3 million for severance costs. Charges incurred in connection with this April 2008 plan for the nine months ended September 30, 2009 and 2008 were zero and $1.5 million, respectively. Charges incurred in connection with this April 2008 plan for the three months ended September 30, 2009 and 2008 were zero and $0.4 million, respectively.

     On October 29, 2007, the Audit Committee of the Board of Directors authorized a restructuring plan in connection with the retirement of the Company’s cable modem termination system platform (CMTS). This resulted in cumulative net charges of approximately $4.4 million from initiation of the plan through September 30, 2009. Severance and related charges of approximately $2.5 million through September 30, 2009 consisted primarily of salary and expected payroll taxes and medical benefits. The Company’s plans also involved vacating several leased facilities throughout the world resulting in cumulative vacated facility charges, net of sublease income of approximately $1.8 million through September 30, 2009. For the three and nine months ended September 30, 2009, the Company incurred charges of zero and $0.7 million, respectively, to adjust its restructuring liability for

changes in estimated sublease rentals associated with a leased facility that was vacated in 2007 due to an unfavorable leasing environment. Charges incurred in connection with this October 2007 plan for the three and nine months ended September 30, 2008 were $0.3 million and $0.7 million, respectively. The costs associated with facility lease obligations are expected to be paid over the remaining term of the related obligations which extend to March 2012.

     All of the restructuring plans discussed above were essentially complete as of September 30, 2009, including one previously exited facility approved under the October 2007 restructuring plan which is expected to be subleased by March 31, 2010. Total restructuring activity for the nine months ended September 30, 2009 was as follows (in thousands):

						Severance and				Total
		Vacated				related				restructuring
		facilities costs				expenses				liabilities
Balance as of December 31, 2008		$	696			$	—			$	696
Charges/adjustments			699				657				1,356
Cash payments			(385	)			(657	)			(1,042	)
Balance as of September 30, 2009		$	1,010			$	—			$	1,010
Less restructuring liability, current portion											(830	)
Restructuring liability, less current portion										$	180

7. Legal Proceedings

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

     Beginning on October 3, 2007, a series of purported shareholder class action lawsuits were filed in the U.S. 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). 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 IPO. The consolidated complaint alleged 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 platform products in particular. The lead plaintiff purported to represent anyone who purchased the Company’s common stock in the IPO. The consolidated complaint asserted causes of action for violations of Sections 11, 12(a)(2) and 15 of the Securities Act of 1933. The lawsuit sought unspecified monetary damages. On January 27, 2009, the defendants reached an agreement in principle with the lead plaintiff to settle this action. The agreement, which includes contributions from the Company’s insurers, provides a full release for all potential claims arising from the securities laws alleged in the initial and consolidated complaints, including claims for alleged violations of the Securities Act of 1933 and the Securities Exchange Act of 1934. On June 1, 2009, the Court granted preliminary approval of the settlement agreement and scheduled a final approval hearing. Pursuant to the Court’s preliminary approval order, notice was issued to the class members in June 2009. At the final approval hearing held on September 15, 2009, the Court granted final approval of the settlement agreement. On September 22, 2009, the Court entered a final judgment and order of dismissal with prejudice. In accordance with the provisions of ASC 450 Contingencies (ASC 450), the Company recorded an expense of $1.5 million in its consolidated results of operations for the year ended December 31, 2008, and a further expense of $0.4 million for the three months ended June 30, 2009. As a component of this lawsuit, the Company has the obligation to indemnify the underwriters for expenses related to the suit, including the cost of one counsel for the underwriters. However, as of September 30, 2009, the Company has no significant further obligations under this lawsuit.

     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 named as defendants the Company, certain of its officers and directors, and the underwriters of the Company’s IPO. The complaint alleged that the Company’s IPO prospectus contained false and misleading statements regarding the Company’s business prospects, product operability and CMTS platform. The plaintiff purported to represent anyone who purchased the Company’s common stock in the IPO. The complaint sought unspecified monetary damages. The case was removed to the U.S. 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 October 27, 2009, the Court granted the plaintiff’s motion to dismiss the case pursuant to the federal settlement agreement (discussed above). As a component of this lawsuit, the Company has the obligation to indemnify the underwriters for expenses related to the suit, including the cost of one counsel for the underwriters. However, as of September 30, 2009, the Company has no significant further obligations under this lawsuit.

          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 was named as a nominal defendant. The complaint alleged that the defendants violated their fiduciary duties in connection with the Company’s disclosures in connection with the Company’s IPO 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 sought unspecified monetary damages and injunctive relief on behalf of the Company, including unspecified corporate governance reforms. On March 27, 2009, the parties appeared for a status conference at which the Court lifted the stay in the action. The parties stipulated to a schedule for the plaintiff to file a first amended complaint and the defendants to demur to (move to dismiss) the amended complaint. The plaintiff filed his first amended complaint on May 7, 2009. The Company filed its demurrer to the first amended complaint on June 9, 2009. The Court held a hearing on the demurrer on August 3, 2009 and sustained the Company’s demurrer to the complaint and each of its nine separate causes of action. The Court granted the plaintiff 20 days to amend his complaint. On September 4, 2009, the parties stipulated to dismiss the action, with the action being dismissed with prejudice as to the named plaintiff only. The stipulation provided that “no compensation in any form has passed directly or indirectly from any of the defendants to the plaintiff or plaintiff’s attorney.” On September 23, 2009, the Court entered the stipulation as its order and dismissed the action. In accordance with the provisions of ASC 450, the Company recorded an expense for $0.1 million in its consolidated results of operations for the three months ended June 30, 2009 for the cost of legal counsel associated with this lawsuit. As of September 30, 2009, the Company has no significant further obligations under this lawsuit.

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

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

8. Stockholders’ Equity

          Common Stock Warrants

          As of September 30, 2009, 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. These warrants expire on February 20, 2010.

          Equity Incentive Plans

          On January 31, 2007, the Board of Directors approved the 2007 Equity Incentive Plan (2007 Plan), which became effective on March 15, 2007. The Company has options outstanding under its 1999, 2001, and 2003 share option and incentive plans (the Prior Plans), but no longer grants stock options or restricted stock units (RSUs) under any of the Prior Plans. Cancelled or forfeited stock option grants under the Prior Plans will be added to the total amount of shares available for grant under the 2007 Plan. In addition, shares authorized but unissued as of March 15, 2007 under the Prior Plans were added to shares available for grant under the 2007 Plan up to a maximum of 20,005,559 shares. The 2007 Plan contains an “evergreen” provision, pursuant to which the number of shares available for issuance under the 2007 Plan shall be increased on the first day of the fiscal year, in an amount equal to the least of (a) 6,000,000 shares, (b) 5% of the outstanding Shares on the last day of the immediately preceding fiscal year or (c) such number of shares determined by the Board of Directors.

          The 2007 Plan allows the Company to award stock options (incentive and non-qualified), restricted stock, RSUs, 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. 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.

          Shares available for future issuance under the 2007 Plan were as follows (in thousands):

		Shares
Available as of December 31, 2008			7,298
Authorized shares added			3,232
Options and RSUs granted			(3,206	)
Options and RSUs cancelled			737
Available as of September 30, 2009			8,061

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

										Weighted
						Weighted				Average
		Number				Average				Remaining				Aggregate
		of				Exercise				Contractual				Intrinsic
		Options				Price				Life (years)				Value
Outstanding as of December 31, 2008			13,030			$	4.17				7.58			$	22,978
Granted			637				4.43
Exercised			(1,349	)			1.93							$	4,682
Cancelled			(669	)			5.87
Outstanding as of September 30, 2009			11,649			$	4.35				7.14			$	9,880
Vested and expected to vest, net of forfeitures			11,389			$	4.33				7.11			$	9,870

          The intrinsic value of an outstanding option is calculated based on the difference between its exercise price and the closing price of the Company’s common stock on the last trading date in the period, or in the case of an exercised option, it is based on the difference between its exercise price and the actual fair market value of the Company’s common stock on the date of exercise. Stock options with exercise prices greater than the closing price of the Company’s common stock on the last trading day of the period have an intrinsic value of zero. The aggregate intrinsic values for options outstanding in the preceding table are based on the Company’s closing stock prices of $4.01 and $5.52 per share as of September 30, 2009 and December 31, 2008, respectively.

          Restricted Stock Units

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

										Weighted
						Weighted				Average
						Average				Remaining				Aggregate
		Restricted				Grant-Date				Contractual				Intrinsic
		Stock Units				Fair Value				Life (years)				Value
Outstanding as of December 31, 2008			568			$	9.38				1.24			$	3,138
Granted			2,569				5.28
Exercised			(216	)			10.10							$	1,125
Cancelled			(66	)			12.18
Outstanding as of September 30, 2009			2,855			$	5.57				1.79			$	11,466
Vested and expected to vest, net of forfeitures			2,627			$	5.57				1.73			$	10,534

          Employee Stock Purchase Plan

          On January 31, 2007, the Board of Directors approved the 2007 Employee Stock Purchase Plan (ESPP). 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 contains an “evergreen” provision, pursuant to which an annual increase may be added on the first day of each fiscal year, equal to the least of (i) 3,000,000 shares of the Company’s common stock, (ii) 2% of the outstanding shares of the Company’s common stock on the first day of the fiscal year or (iii) an amount determined by the Board of Directors.

          Shares available for future issuance under the ESPP were as follows (in thousands):

		Shares
Available as of December 31, 2008			1,662
Authorized shares added			1,293
Common shares issued			(223	)
Available as of September 30, 2009			2,732

          The ESPP is compensatory in nature, and therefore results in compensation expense. The Company recorded stock-based compensation expense associated with its ESPP of $0.2 million and $0.6 million for the three and nine months ended September 30, 2009, respectively. The Company recorded stock-based compensation expense associated with its ESPP of $0.2 million and $0.7 million for the three and nine months ended September 30, 2008, respectively.

          Stock-Based Compensation

          The Company uses the Black-Scholes option-pricing model to determine the fair value of stock-based awards, including ESPP awards. 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 primarily from the weighted historical volatilities of several comparable companies within the cable and telecommunications equipment industry and to a lesser extent, the Company’s weighted historical volatility following its IPO in March 2007. For the three and nine months ended September 30, 2009 and 2008, the Company has elected to use the simplified method of determining the expected term as permitted by SEC Staff Accounting Bulletin (SAB) 107 as revised by SAB 110.

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

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2009				2008				2009				2008
Stock Options
Expected volatility			74	%			63	%			73-75	%			63-71	%
Expected term		6 years				6 years				6 years				6 years
Risk-free interest rate			2.80	%			3.27	%			2.00-2.80	%			2.95-3.31	%
Expected dividends			0	%			0	%			0	%			0	%
ESPP
Expected volatility			—				—				102-104	%			59-91	%
Expected term			—				—			0.5 years				0.5 years
Risk-free interest rate			—				—				0.32-0.74	%			1.87-3.71	%
Expected dividends			—				—				0	%			0	%

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

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2009				2008				2009				2008
Cost of net revenues		$	562			$	390			$	1,521			$	1,279
Research and development			1,346				984				3,566				2,879
Sales and marketing			687				659				1,751				1,907
General and administrative			1,210				1,007				3,460				2,638
Total stock-based compensation		$	3,805			$	3,040			$	10,298			$	8,703

          As of September 30, 2009, total unrecognized stock compensation expense adjusted for estimated forfeitures, relating to unvested stock options and RSUs was $21.2 million and $12.6 million, respectively. These amounts are expected to be recognized over a weighted-average period of 2.4 years for employee stock options and 3.3 years for RSUs.

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								Nine Months Ended
		September 30,								September 30,
		2009				2008				2009				2008
United States		$	20,294			$	45,810			$	90,962			$	119,070
Asia			1,164				725				8,802				4,363
Europe			524				1,240				3,777				4,212
Americas excluding United States			220				508				1,575				3,555
Total net revenues		$	22,202			$	48,283			$	105,116			$	131,200

          Product revenues were as follows (in thousands):

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2009				2008				2009				2008
Video		$	12,627			$	37,679			$	67,202			$	102,006
Data			20				658				1,593				2,182
Total product revenues		$	12,647			$	38,337			$	68,795			$	104,188

          Service revenues were as follows (in thousands):

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2009				2008				2009				2008
Video		$	9,135			$	8,536			$	35,008			$	22,073
Data			420				1,410				1,313				4,939
Total service revenues		$	9,555			$	9,946			$	36,321			$	27,012

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

		As of September 30,				As of December 31,
		2009				2008
United States		$	6,536			$	8,859
Israel			4,960				6,305
Rest of world			314				194
Total long-lived assets, net		$	11,810			$	15,358

10. Income Taxes

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

          Income tax expense was $0.2 million and $0.8 million for the three and nine months ended September 30, 2009, respectively. This income tax expense was incurred in certain foreign jurisdictions due to cost-plus arrangements. Income tax (benefit) expense was ($35,000) and $0.7 million for the three and nine months ended September 30, 2008, respectively. The effective tax rates for these periods differed from the U.S. federal statutory rate primarily due to the movement in the Company’s valuation allowance, distribution of taxable profits and various tax rates in domestic and international tax jurisdictions, some of which allow loss carryforwards.

11. Comprehensive (Loss) Income

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

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2009				2008				2009				2008
Net (loss) income		$	(10,858	)		$	3,131			$	(5,501	)		$	2,458
Change in cash flow hedges			177				(361	)			751				(636	)
Change in unrealized gain (loss) on marketable securities			(34	)			(397	)			(141	)			(628	)
Comprehensive (loss) income		$	(10,715	)		$	2,373			$	(4,891	)		$	1,194

          Accumulated other comprehensive income includes unrealized gains (losses) on cash flow hedges and marketable securities, net of taxes. Accumulated other comprehensive income as of September 30, 2009 and December 31, 2008 was as follows (in thousands):

		As of September 30,				As of December 31,
		2009				2008
Net unrealized gain (loss) on cash flow hedges		$	130			$	(621	)
Net unrealized gain on marketable securities			538				679
Total accumulated other comprehensive income		$	668			$	58

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

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

Overview

          BigBand Networks develops, markets and sells network-based solutions that enable cable operators and telecommunications companies to offer video services across coaxial, fiber and copper networks. Our customer base includes seven of the ten largest service providers in the U.S. Our revenues from our product applications are influenced by a variety of factors, including the level and timing of capital spending by 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.

          Our sales cycle typically ranges from six to 18 months, but can be longer if the sale relates to new product introductions. Our sales process generally involves several stages before we can recognize revenues on the sale of our products. As a provider of advanced technologies, we seek to actively participate with our existing and potential customers in the evaluation of their technology needs and network architectures, including the development of initial designs and prototypes. Following these activities, we typically respond to a service provider’s request for proposal, configure our products to work within our customer’s network architecture, and test our products first in laboratory testing and then in field environments to ensure interoperability with existing products in the service provider’s network. Following testing, our revenue recognition generally depends on satisfying the acceptance criteria specified in our contract with the customer and our customer’s schedule for roll-out of the product. Completion of several of these stages is substantially outside of our control, which causes our revenue patterns from a given customer to vary widely from period to period. After initial deployment of our products, subsequent purchases of our products typically have a more compressed sales cycle.

          Due to the nature of the cable and telecommunications industries, we sell our products to a limited number of large customers. For the three months ended September 30, 2009 and 2008, we derived 83% and 90%, respectively, of our net revenues from our top five customers. For the nine months ended September 30, 2009 and 2008, we derived 76% and 81%, respectively, of our net revenues from our top five customers. We believe that for the foreseeable future our net revenues will continue to be highly concentrated in a limited number of large customers. The loss of one or more of our large customers, or the cancellation or deferral of purchases by one or more of these customers, would have a material adverse impact on our revenues and operating results.

          We sell our products and services to customers in the U.S. and Canada through our direct sales force. We sell to customers internationally through a combination of direct sales and resellers. In conjunction with recently-introduced products, we expect our proportion of international revenues to gradually increase in 2010.

          Net Revenues. We derive our net revenues principally from sales of, and services for video solutions, with a minimal remaining contribution from our data products, which we retired in October 2007. Our product revenues are comprised of a combination of software licenses and hardware. Our products primarily include Broadcast Video, TelcoTV and Switched Digital Video.

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

          Our order visibility remains limited, but we expect an increase in net revenues for the three months ending December 31, 2009 compared to the three months ended September 30, 2009. We continue to experience lengthened sales cycles in the evaluation and the deployment of our products as customers continue to deal with the challenging macro-economic environment.

          Cost of Net Revenues. Our cost of product revenues consists primarily of payments for components and product assembly, costs of product testing, provisions recorded for excess and obsolete inventory, provisions recorded for warranty obligations, manufacturing overhead and allocated facilities and information technology expense. Cost of service revenues is primarily comprised of personnel costs in providing technical support, costs incurred to support deployment and installation within our customers’ networks, training costs and allocated facilities and information technology expense. We decreased headcount in these functions to 88 employees as of September 30, 2009 from 96 employees as of September 30, 2008. We expect services and manufacturing operations headcount to remain relatively flat in the near term.

          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 mix of revenue between our products, 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 continue to experience competitive pricing pressures on our products and we expect the average selling prices of our products to decline compared to the three months ended September 30, 2009. 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 amount and complexity of design, integration and installation services.

          Operating Expenses. Our operating expenses consist of research and development, sales and marketing, general and administrative, restructuring and other charges. Personnel related costs are the most significant component of our total operating expenses. Our headcount in operating functions, particularly in research and development, has increased to 385 employees as of September 30, 2009 from 376 employees as of September 30, 2008. We have re-invested a portion of our realized expense savings from our February 2009 restructuring plan to fund new product initiatives in strategic areas. Accordingly, we expect expenses to increase in the near term compared to the three months ended September 30, 2009, primarily due to a projected increase in headcount and independent contractors within research and development.

          Research and development expense is the largest functional component of our operating expenses and consists primarily of personnel costs, independent contractor costs, prototype expenses, and other allocated facilities and information technology expense. 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; Shenzhen, Peoples’ Republic of China; Westborough, Massachusetts and Redwood City, California. Due to the long-term opportunities that we see for our business, we are accelerating certain technology projects. Accordingly, we expect our research and development expense to increase in absolute dollars for the three months ending December 31, 2009 compared to the three months ended September 30, 2009, due to new product initiatives in key strategic areas for both new and existing products.

          Sales and marketing expense relates primarily to compensation and associated costs for marketing and sales personnel, sales commissions, promotional and other marketing expenses, travel, trade-show expenses and allocated facilities and information technology expense. Marketing programs are intended to generate revenues from new and existing customers and are expensed as incurred. We expect sales and marketing expense to remain relatively flat in absolute dollars for the three months ending December 31, 2009 compared to the three months ended September 30, 2009.

          General and administrative expense consists primarily of compensation and associated costs for general and administrative personnel, professional services and allocated facilities and information technology expenses. Professional services consist of outside legal, accounting and other consulting costs. We expect that general and administrative expense will increase modestly in absolute dollars for the three months ending December 31, 2009 compared to the three months ended September 30, 2009, primarily due to modest projected increases in our legal fees related to a lawsuit filed by us against Imagine Communications, Inc. alleging patent infringement and other overhead expenses.

          Class action litigation charges are settlement fees and expenses, related to a series of purported shareholder class action lawsuits against officers, directors and underwriters of our initial public offering. In accordance with the provisions of Financial Accounting Standards Board Accounting Standards Codification 450 Contingencies, we recorded an expense of $1.5 million in our consolidated results of operations for the year ended December 31, 2008, and an additional expense of $0.5 million for the nine months ended September 30, 2009 (all of which was recorded in the three months ended June 30, 2009). These lawsuits had been settled or dismissed as of the date of this filing, and hence the Company has no further significant obligations.

Critical Accounting Policies and Estimates

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

          Critical accounting policies that affect our more significant judgments and estimates used in the preparation of our condensed consolidated financial statements include accounting for revenue recognition, the valuation of inventories, warranty liabilities, stock- based compensation, the allowance for doubtful accounts, the impairment of long-lived assets, and income taxes, the policies of which are discussed under the caption “Critical Accounting Policies and Estimates” in our 2008 Form 10-K filed with the SEC on March 10, 2009. For additional information on the recent accounting pronouncements impacting our business, see Note 2 of the Notes to Condensed Consolidated Financial Statements.

Results of Operations

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

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2009				2008				2009				2008
Total net revenues			100.0	%			100.0	%			100.0	%			100.0	%
Total cost of net revenues			50.0				40.8				41.3				40.3
Total gross profit			50.0				59.2				58.7				59.7
Operating expenses:
Research and development			52.7				27.4				32.6				30.8
Sales and marketing			27.1				14.6				17.4				16.7
General and administrative			20.7				11.3				13.4				11.9
Restructuring charges			—				1.5				1.3				1.7
Amortization of intangible assets			—				0.2				—				0.3
Class action litigation charges			—				—				0.5				—
Total operating expenses			100.5				55.0				65.2				61.4
Operating (loss) income			(50.5	)			4.2				(6.5	)			(1.7	)
Interest income			2.5				2.5				2.0				3.1
Other income (expense), net			0.1				(0.3	)			—				1.0
(Loss) income before provision for (benefit from) income taxes			(47.9	)			6.4				(4.5	)			2.4
Provision for (benefit from) income taxes			1.0				(0.1	)			0.7				0.5
Net (loss) income			(48.9)	%			6.5	%			(5.2)	%			1.9	%