Common use of Income Taxes Clause in Contracts

Income Taxes. The provision for income taxes consists of the following: DECEMBER 31, 1999 1998 1997 (IN THOUSANDS) Current: Federal................................................... $11,611 $-- $168 Foreign................................................... 351 -- 90 State..................................................... 1,409 -- 1 13,371 -- 259 Deferred: Federal................................................... (4,143) -- -- Foreign................................................... -- -- -- State..................................................... (1,335) -- -- (5,478) -- -- $ 7,893 $-- $259 ======= === ==== 44 HARMONIC INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The Company's (benefit) provision for income taxes differed from the amount computed by applying the statutory U.S. federal income tax rate to income (loss) before income taxes as follows: DECEMBER 31, 1999 1998 1997 (IN THOUSANDS) Provision at statutory rate........................... $11,051 $(7,294) $ 1,764 Differential (benefit) in rates on foreign earnings... (20) 774 (111) State taxes, net of federal benefit................... 48 -- 1 Foreign sales corporation benefit..................... (307) -- (176) Acquired in-process technology and non-deductible goodwill............................................ 106 4,863 -- Utilization of net operating loss carryovers.......... (597) -- (1,661) Utilization of research credits....................... (548) -- -- Future benefits not currently recognized.............. 508 2,116 364 Realized deferred tax assets previously reserved...... (3,249) -- -- Alternative minimum tax............................... -- -- 51 Others, net........................................... 901 (459) 27 $ 7,893======= $ --======= $ 259======= Deferred tax assets (liabilities) comprise the following: DECEMBER 31, 1999 1998 1997 (IN THOUSANDS) Net operating loss carryovers.......................... $ -- $ 845 $ 303 Research and development credit carryovers............. -- 3,285 2,452 Capitalized research and development costs............. 283 71 234 Reserves not currently deductible...................... 4,863 2,814 1,657 Other.................................................. 332 419 96 Total deferred tax assets.................... 5,478 7,434 4,742 Valuation allowance.................................... -- (7,434) (4,742) Net deferred tax assets................................ $5,478====== $ -- ======= $ --======= The valuation allowance at December 31, 1998 and 1997 was attributed to deferred tax assets. Management believed that sufficient uncertainty existed regarding the realizability of these items such that a full valuation allowance was recorded. The Company's income taxes payable for federal, state, and foreign purposes have been reduced by the tax benefits of disqualifying dispositions of stock options. The Company receives an income tax benefit for compensation expense for tax purposes which is calculated as the difference between the market value of the stock issued at the time of exercise and the option price at the applicable income tax rates. This benefit is recorded as an increase in capital in excess of par value.

Income Taxes. The provision Company utilizes the liability method to account for income taxes consists taxes. This method requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of existing temporary XXXXXX CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) differences between the financial reporting and tax reporting base of assets and liabilities, and operating loss and tax credit carry-forwards for tax purposes. Xxxxxx and Omega each file a separate consolidated U.S. federal income tax return. The combined income tax (provision) benefit from continuing operations consisted of the following: YEAR ENDED DECEMBER 31, 1999 1998 1997 YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31, 2002 2001 2000 ------------ ------------ ------------ (IN THOUSANDS) CurrentCURRENT: Federal................................................... $11,611 $-- $168 Foreign................................................... 351 -- 90 State..................................................... 1,409 -- 1 13,371 -- 259 Deferred: Federal................................................... (4,143) -- -- Foreign................................................... -- -- -- State..................................................... (1,335) -- -- (5,478) -- ................................................ $ -- $ 7,893 45 $ 785 Federal.............................................. -- 16,026 1,208 DEFERRED: State................................................ (142) 415 378 Federal.............................................. (4,978) (3,717) 10,150 ------- ------- -------- (Provision) benefit for income taxes................... $-- (5,120) $259 12,769 $ 12,521 ======= ======= ======== 44 HARMONIC INCThe last remaining portion of investment tax credits, approximately $851,000, expired on September 30, 2001. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The Company's (benefit) provision Company has $12.4 million in net operating loss carry-forwards for income taxes differed from the amount computed by applying the statutory U.S. federal income tax purposes, of which $6.6 million is attributable to Omega and the remaining $5.8 is attributable to Xxxxxx. Since the two companies cannot currently file a consolidated federal income tax return, the ability for each of these companies to utilize its own net operating losses is dependent on the future taxable income that each company separately generates. Net operating loss carry-forwards have a 20year carry-forward period. For Xxxxxx and Omega, the net operating losses will begin to expire in 2020 and 2019, respectively. Additionally, Xxxxxx has approximately $6.6 million in federal alternative minimum tax credits, which can be used to offset future federal tax liabilities. Alternative minimum tax credits do not expire. The following table reconciles the income tax provisions for all periods computed using the U.S. statutory rate of 35% to income (loss) before income taxes the provisions from continuing operations as followsreflected in the financial statements: YEAR ENDED YEAR ENDED YEAR ENDED DECEMBER 31, 1999 1998 1997 DECEMBER 31, DECEMBER 31, 2002 2001 2000 ------------ ------------ (IN THOUSANDS) Provision ------------ (Provision) benefit at statutory rate........................... $11,051 ................... $(7,2945,399) $ 1,764 Differential 2,281 $15,145 Foreign sales corporation exempt income................. 575 216 -- Adjustment for prior year deferred taxes................ -- -- (benefit2,637) Non-deductible costs.................................... -- -- (487) Valuation allowance for deferred tax assets............. -- 10,609 (3,724) Adjustment for basis difference in rates on foreign earnings... subsidiary........... (20514) 774 (111183) 3,368 State taxes, net of federal benefit................... 48 -- 1 Foreign sales corporation benefit..................... (30799) -- 485 1,141 Other................................................... 317 (176) Acquired in-process technology and non-deductible goodwill............................................ 106 4,863 -- Utilization of net operating loss carryovers.......... (597) -- (1,661) Utilization of research credits....................... (548) -- -- Future benefits not currently recognized.............. 508 2,116 364 Realized deferred tax assets previously reserved...... (3,249) -- -- Alternative minimum tax............................... -- -- 51 Others, net........................................... 901 (459) 27 $ 7,893======= $ --======= $ 259======= Deferred tax assets (liabilities) comprise the following: DECEMBER 31, 1999 1998 1997 (IN THOUSANDS) Net operating loss carryovers.......................... $ -- $ 845 $ 303 Research and development credit carryovers............. -- 3,285 2,452 Capitalized research and development costs............. 283 71 234 Reserves not currently deductible...................... 4,863 2,814 1,657 Other.................................................. 332 419 96 Total deferred tax assets.................... 5,478 7,434 4,742 Valuation allowance.................................... -- (7,434639) (4,742285) Net deferred tax assets................................ ------- ------- ------- (Provision) benefit for income taxes.................... $5,478====== $ -- (5,120) $12,769 $12,521 ======= ======= ======= XXXXXX CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Temporary differences and tax credit carryforwards that gave rise to significant portions of deferred tax assets and liabilities are as follows: DECEMBER 31, DECEMBER 31, 2002 2001 (IN THOUSANDS) Deferred tax assets: Asset write-downs and accruals not yet deductible......... $ --======= 3,186 $ 4,516 Alternative minimum tax credit carryforwards.............. 7,771 7,770 Equity in loss of unconsolidated affiliates............... 306 306 Net operating loss carryforward........................... 12,408 15,077 Minimum pension liability................................. 4,532 2,057 State income tax.......................................... 500 750 Other..................................................... 113 123 Total deferred tax assets................................... 28,816 30,599 Deferred tax liabilities: Property and equipment.................................... (9,324) (8,800) Pension................................................... (6,614) (6,616) Write up of subsidiary investment......................... (7,669) (7,094) SFAS No. 115 adjustment on long-term investment........... (8) -- State income tax.......................................... -- -- Total deferred tax liabilities............................ (23,615) (22,510) Net deferred tax assets..................................... $ 5,201======== $ 8,089======== The valuation allowance at Company believes it is more likely than not that its net deferred tax assets as of December 31, 1998 2002 and 1997 was attributed 2001 will be realized. Accordingly, no valuation allowances have been established to offset any deferred tax assets. Management believed that sufficient uncertainty existed regarding The ultimate realization of deferred tax assets could be negatively impacted by market conditions and other variables not known or anticipated at this time. If Xxxxxx or Omega has a change of ownership pursuant to Section 382 of the realizability Internal Revenue Code, utilization of these items such that their respective net operating losses or alternative minimum tax credits could be significantly limited or, in Xxxxxx'x case, possibly eliminated. An ownership change for this purpose is generally a full valuation allowance was recordedchange in the majority ownership of a company over a three year period. The CompanyAs a result of a prior change of ownership, Xxxxxx'x use of approximately $6.3 million of its alternative minimum tax credits will be limited to a maximum of up to approximately $1.5 million per year. Section 541 of the Internal Revenue Code of 1986, as amended (the "IRC"), subjects a corporation, which is a "personal holding company" as defined in the IRC, to a 39.6% penalty tax on "undistributed personal holding company income" in addition to the corporation's normal income taxes payable tax. Generally, undistributed personal holding company income is based on taxable income, subject to certain adjustments, most notably a reduction for federalFederal incomes taxes. Personal holding company income is comprised primarily of passive investment income plus, stateunder certain circumstances, personal service income. Xxxxxx and foreign purposes have been reduced its domestic subsidiaries (other than Omega) could become subject to the penalty tax if (i) 60% or more of its adjusted ordinary gross income is personal holding company income and (ii) 50% or more of its outstanding common stock is owned, directly or indirectly, by five or fewer individuals at any time during the tax benefits last half of disqualifying dispositions of stock optionsthe taxable year. The Company receives believes that five or fewer of Xxxxxx'x stockholders hold 50% or more of its outstanding common stock for purposes of IRC Section 541. However, as of December 31, 2002, Xxxxxx and its domestic subsidiaries (other than Omega) had no undistributed personal holding company income due to XXXXXX CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) losses generated by the consolidated tax filing group and therefore has not recorded a personal holding company tax liability. There can be no assurance that Xxxxxx will not be subject to this tax in the future, that in turn may materially and adversely impact the Company's financial position, results of operations and cash flows. Xxxxxx is undergoing an income tax benefit for compensation expense for tax purposes which is calculated as the difference between the market value Internal Revenue Service audit of the stock issued at tax fiscal years ended September 30, 1997-2001. Although Xxxxxx does not expect that the time results of exercise this audit will have a material impact its financial position, results of operations and the option price at the applicable income tax rates. This benefit is recorded as an increase in capital in excess of par valuecash flows, there can be no assurance that such results will not be material.

Income Taxes. The provision for income taxes consists of the following: DECEMBER 31YEARS ENDED APRIL 30, 1999 1998 1997 (IN THOUSANDS) Current1996 CURRENT: Federal................................................... ............................................. $11,611 $-- $168 Foreign................................................... 351 -- 90 12,132 $ 5,062 $ 1,880 State..................................................... 1,409 -- 1 13,371 -- 259 Deferred............................................... 2,199 1,525 220 Total current....................................... 14,331 6,587 2,100 DEFERRED: Federal................................................... ............................................. (4,1431,597) (2,394) (1,880) State............................................... (152) (400) (220) Total deferred...................................... (1,749) (2,794) (2,100) Provision for income taxes.................. $12,582 $ 3,793 $ -- -- Foreign................................................... -- -- -- State..................................................... (1,335) -- -- (5,478) -- -- $ 7,893 $-- $259 ======= ======= ======= 44 HARMONIC INCDeferred income taxes result from differences in the timing of certain expense items for tax and financial reporting purposes. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 20 The Company's (benefit) provision for income taxes differed differs from the amount computed by applying the statutory U.S. federal income tax rate to income (loss) before income taxes as follows: DECEMBER 31YEARS ENDED APRIL 30, 1999 1998 1997 (IN THOUSANDS) Provision 1996 Tax computed at federal statutory rate........................... ................. $11,051 11,741 $(7,294) 1,415 $ 1,764 Differential (benefit) in rates on foreign earnings... (20) 774 (111) 2,310 State income taxes, net of federal benefit............. 1,482 764 405 Non-deductible acquisition charges related to the IMC acquisition.......................................... -- 2,904 -- Research and experimentation credit.................... (555) (410) (50) Investment tax credit.................................. -- -- (150) Benefit of foreign sales corporation................... 48 -- 1 Foreign sales corporation benefit..................... (307489) (105) -- Tax exempt interest.................................... (176281) Acquired in-process technology and non-deductible goodwill............................................ 106 4,863 -- Utilization of net operating loss carryovers.......... (597184) -- Change in valuation allowance.......................... -- (1,661673) Utilization of research credits....................... (5482,510) Business meal exclusion................................ 100 45 -- -- Future benefits not currently recognized.............. 508 2,116 364 Realized deferred tax assets previously reserved...... (3,249) -- -- Alternative minimum tax............................... -- -- 51 Others, net........................................... 901 (459) 27 $ 7,893======= $ --======= $ 259======= Deferred tax assets (liabilities) comprise the following: DECEMBER 31, 1999 1998 1997 (IN THOUSANDS) Net operating loss carryovers.......................... $ -- $ 845 $ 303 Research and development credit carryovers............. -- 3,285 2,452 Capitalized research and development costs............. 283 71 234 Reserves not currently deductible...................... 4,863 2,814 1,657 Other.................................................. 332 419 96 Total deferred tax assets.................... 5,478 7,434 4,742 Valuation allowance.................................... -- 584 37 (7,4345) (4,742) Net deferred tax assets................................ Provision for income taxes............................. $5,478====== 12,582 $3,793 $ -- ======= $ --======= ====== ======= The valuation allowance income tax benefits associated with dispositions from employee stock transactions reduced taxes currently payable by $4,291, $2,487 and $238, respectively, for fiscal 1998, 1997 and 1996. Income before income taxes is as follows: YEARS ENDED APRIL 30, 1998 1997 1996 Domestic $33,175 $3,983 $6,580 Foreign................................................. 372 60 20 Total $33,547 ======= $4,043====== $6,600====== Current net deferred tax assets are $5,280 and $3,100, as of April 30, 1998 and April 30, 1997, respectively. Non-current net deferred tax assets at December 31April 30, 1998 and 1997 was attributed to of $1,363 and $1,794, respectively, are included in other assets within the accompanying consolidated balance sheets. The components of the Company's net deferred tax assets. Management believed that sufficient uncertainty existed regarding the realizability of these items such that a full valuation allowance was recorded. The Company's income taxes payable for federalassets are as follows: APRIL 30, state, ---------------- 1998 ------ 1997 ------ Reserves and foreign purposes have been reduced by the tax benefits of disqualifying dispositions of stock options. The Company receives an income tax benefit for compensation expense accruals not currently deductible for tax purposes which is calculated as purposes............................................... $4,599 $2,662 Tax benefit of options issued in IMC acquisition.......... 1,074 1,304 Net operating loss carryforwards.......................... 236 116 Depreciation.............................................. 197 369 Deferred rent............................................. 66 80 Capitalized research and development costs................ -- 142 Other..................................................... 471 221 ------ ------ Deferred tax assets............................... $6,643 $4,894 ====== ====== As of April 30, 1998, the difference between the market value Company had federal net operating loss carryforwards of the stock issued at the time of exercise and the option price at the applicable income tax ratesapproximately $674 available to offset future taxable income. This benefit is recorded as an increase These carryforwards expire in capital in excess of par valuefiscal 2010.

Income Taxes. The domestic and international components of income (loss) before income taxes are as follows (in thousands): 1996 1997 1998 United States $(10,877) $105,884 $(348,397) International 118,741 208,935 56,389 Income (loss) before income taxes $107,864 ======== $314,819======== $(292,008)========= The components of the provision (benefit) for income taxes consists of the following: DECEMBER 31are as follows (in thousands): 1996 1997 1998 Current United States....................................... $ 400 $ 29,153 $ (6,195) International....................................... 10,262 9,964 4,905 State............................................... 310 8,106 (501) 10,972 47,223 (1,791) Deferred, 1999 1998 1997 net......................................... (IN THOUSANDS) Current: Federal................................................... $11,611 $-- $168 Foreign................................................... 351 -- 90 State..................................................... 1,409 -- 1 13,371 -- 259 Deferred: Federal................................................... (4,1432) -- -- Foreign................................................... -- -- -- State..................................................... Provision (1,335benefit) -- -- for income taxes.................. $ 10,970 $ 47,223 $ (5,4781,791) -- -- $ 7,893 $-- $259 ======== ======== ========= 44 HARMONIC INCThe tax benefits associated with the exercise of non-qualified stock options, the disqualifying disposition of stock acquired with incentive stock options, and the disqualifying disposition of stock acquired under the employee stock purchase plan reduce taxes currently payable as shown above by $20.2 and $2.3 million for 1997 and 1998, respectively. Such benefits are credited to additional paid-in capital. The total cash paid for income taxes was $4.5 million, $19.2 million and $16.9 million for the years ended June 29, 1996, June 28, 1997 and June 27, 1998, respectively. WESTERN DIGITAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Temporary differences and carryforwards which give rise to a significant portion of deferred tax assets and liabilities at June 28, 1997, and June 27, 1998 are as follows (in thousands): 1997 -------- 1998 --------- Deferred tax assets: NOL carryforward.......................................... $ 11,079 $ 83,649 Business credit carryforward.............................. 30,104 29,323 Reserves and accrued expenses not currently deductible.... 69,557 122,454 All other................................................. 1,854 -------- 112,594 18,920 --------- 254,346 Valuation allowance....................................... Total deferred tax assets......................... Deferred tax liabilities: (86,608) -------- $ 25,986 ======== (254,297) --------- $ 49 ========= Unremitted income of foreign subsidiaries................. $ 40,640 $ 17,163 All other................................................. Total deferred tax liabilities.................... 5 -------- $ 40,645 ======== 3,148 --------- $ 20,311 ========= SFAS 109 requires deferred taxes to be determined for each tax paying component of an enterprise within each tax jurisdiction. The deferred tax assets indicated above are attributable to tax jurisdictions where a history of earnings has not been established. The taxable earnings in these tax jurisdictions is also subject to volatility. Therefore, the Company believes a valuation allowance is needed to reduce the deferred tax asset to an amount that is more likely than not to be realized. The Company increased this valuation allowance in 1998 because of the losses incurred in these jurisdictions. Reconciliation of the United States Federal statutory rate to the Company's effective tax rate is as follows: 1996 1997 1998 U.S. Federal statutory rate............................. 35.0% 35.0% (35.0)% State income taxes, net................................. 0.2 1.7 (0.2) Tax rate differential on international income........... (30.7) (12.7) (15.5) Effect of valuation allowance........................... 3.8 (10.0) 46.5 Other................................................... 1.9 1.0 3.6 Effective tax rate...................................... 10.2% 15.0% (0.6)% ===== ===== ===== Certain income of selected subsidiaries is taxed at substantially lower income tax rates as compared with local statutory rates. The lower rates reduced income taxes and increased net earnings or reduced the net loss by $30.1 million ($.31 per share, diluted), $58.5 million ($.63 per share, diluted) and by $17.1 million ($.20 per share, diluted) in 1996, 1997 and 1998, respectively. These lower rates are in effect through fiscal year 2004. At June 27, 1998, the Company had federal net operating loss carryforwards and tax credits of $218.1 million and $29.3 million, respectively. The loss carryforwards expire in fiscal years 2008 through 2013 and the credit carryforwards expire in fiscal years 1999 through 2012. Net undistributed earnings from international subsidiaries at June 27, 1998 were $523.7 million. The net undistributed earnings are intended to finance local operating requirements. WESTERN DIGITAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 6. SHAREHOLDERS' EQUITY The following table summarizes all shares of common stock reserved for issuance at June 27, 1998 (in thousands): NUMBER OF SHARES --------- Issuable in connection with: Convertible debentures 19,374 Exercise of stock options, including options available for grant 16,430 Employee stock purchase plan.............................. 2,373 ------ 38,177 ====== Stock Option Plans Western Digital's Employee Stock Option Plan ("Employee Plan") is administered by the Compensation Committee of the Board of Directors, which determines the vesting provisions, the form of payment for the shares and all other terms of the options. Terms of the Employee Plan require that the exercise price of options be not less than the fair market value of the common stock on the date of grant. Options granted generally vest 25% one year from the date of grant and in twelve quarterly increments thereafter and have a ten-year term. As of June 27, 1998, 4,659,113 options were exercisable and 3,327,523 options were available for grant. Participants in the Employee Plan may be permitted to utilize stock purchased previously as consideration to exercise options or to exercise on a cashless basis, pursuant to the terms of the Employee Plan. In 1985, the Company adopted the Stock Option Plan for Non-Employee Directors ("Director Plan") and reserved 1.6 million shares for issuance thereunder. The Director Plan was restated and amended in 1995. The Director Plan provides for initial option grants to new directors of 30,000 shares per director and additional grants of 7,500 options per director each year upon their reelection as a director at the annual shareholders' meeting. Terms of the Director Plan require that options have a ten-year term and that the exercise price of options be not less than the fair market value at the date of grant. As of June 27, 1998, 153,750 options were exercisable and 750,964 options were available for grant. The following table summarizes activity under the Employee and Director Plans combined (in thousands, except per share amounts): WEIGHTED AVERAGE NUMBER EXERCISE PRICE OF SHARES PER SHARE --------- ---------------- OPTIONS OUTSTANDING AT JULY 1, 1995.................. 9,176 $ 5.33 Granted.............................................. 3,904 9.30 Exercised, net of value of redeemed shares........... (1,936) 4.00 Canceled or expired.................................. (1,802) 7.32 ------ ------ OPTIONS OUTSTANDING AT JUNE 29, 1996................. 9,342 6.90 Granted.............................................. 3,630 17.26 Exercised, net of value of redeemed shares........... (2,790) 5.11 Canceled or expired.................................. (596) 9.80 ------ ------ OPTIONS OUTSTANDING AT JUNE 28, 1997................. 9,586 11.20 Granted.............................................. 4,433 27.17 Exercised, net of value of redeemed shares........... (1,166) 7.54 Canceled or expired.................................. (502) 20.00 ------ ------ OPTIONS OUTSTANDING AT JUNE 27, 1998................. 12,351 $16.92 ====== ====== 41 42 WESTERN DIGITAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The following tables summarize information about options outstanding and exercisable under the Employee and Director Plans combined at June 27, 1998 (in thousand, except per share amounts): OPTIONS OUTSTANDING OPTIONS EXERCISABLE NUMBER WEIGHTED AVERAGE CONTRACTUAL LIFE WEIGHTED NUMBER WEIGHTED AVERAGE RANGE OF EXERCISE PRICES OF SHARES (IN YEARS) EXERCISE PRICE OF SHARES EXERCISE PRICE $ 1.44 - $ 8.81................... 4,201 6.24 $ 7.11 3,248 $ 6.76 8.88 - 18.56................... 3,321 8.14 12.71 1,272 11.96 18.63 - 34.19................... 4,387 9.20 27.11 244 27.53 34.50 - 48.50................... 442 8.99 40.66 49 34.94 Total................... 12,351====== 7.90==== $16.92====== 4,813===== $ 9.48====== Stock Purchase Rights In 1989, the Company implemented a plan to protect shareholders' rights in the event of a proposed takeover of the Company. Under the plan, each share of the Company's outstanding common stock carries one Right to Purchase Series "A" Junior Participating Preferred Stock (benefit"the Right"). The Right enables the holder, under certain circumstances, to purchase common stock of Western Digital or of the acquiring Company at a substantially discounted price ten days after a person or group publicly announces it has acquired or has tendered an offer for 15% or more of the Company's outstanding common stock. The Rights are redeemable by the Company at $.01 per Right and expire in 1999. Employee Stock Purchase Plan During 1994, the Company implemented an employee stock purchase plan ("ESPP") provision in accordance with Section 423 of the Internal Revenue Code whereby eligible employees may authorize payroll deductions of up to 10% of their salary to purchase shares of the Company's common stock at 85% of the fair market value of common stock on the date of grant or the exercise date, whichever is less. Approximately 7.0 million shares of common stock have been reserved for income taxes differed from issuance under this plan. Approximately 1,292,000, 1,136,000 and 1,231,000 shares were issued under this plan during 1996, 1997 and 1998, respectively. Savings and Profit Sharing Plan Effective July 1, 1991, the amount computed by applying Company adopted an annual Savings and Profit Sharing Plan covering eligible domestic employees. The Company authorized 6.5% and 4.1% of defined pre-tax profits to be allocated to the statutory U.S. federal income tax rate participants in 1996 and 1997, respectively. Payments to participants of the Savings and Profit Sharing Plan were $7.1 and $12.6 million in 1996 and 1997, respectively. No amounts were paid under the plan in 1998. Common Stock Repurchase Program In February 1995, the Company established an open market stock repurchase program. Under this program, the Company has spent $323.4 million in connection with the repurchase of 22.2 million shares of its common stock at an average price of $14.55 per share. The $323.4 million includes the acquisition price of Western Digital common stock and amounts paid to settle certain put option arrangements entered into in connection with the open market stock repurchase program. Pro Forma Information Pro forma information regarding net income (loss) before income taxes and earnings (loss) per share is required by SFAS No. 123. This information is required to be determined as followsif the Company had accounted for its stock options 42 WESTERN DIGITAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (including shares issued under the Stock Option Plans and the ESPP, collectively called "options") granted subsequent to July 1, 1995, under the fair value method of that statement. The fair value of options granted in 1996, 1997 and 1998 reported below has been estimated at the date of grant using a Black-Scholes option pricing model with the following weighted average assumptions: DECEMBER 31, 1999 STOCK OPTION PLANS ESPP PLAN -------------------- -------------------- 1996 1997 1998 1996 1997 1998 ---- ---- ---- ---- ---- ---- Option life (IN THOUSANDS) Provision at statutory in years)............ 5.0 4.0 4.5 2.0 2.0 2.0 Risk-free interest rate........................... $11,051 $(7,294) $ 1,764 Differential (benefit) in rates on foreign earnings... (20) 774 (111) State taxes, net of federal benefit................... 48 -- 1 Foreign sales corporation benefit..................... (307) -- (176) Acquired in-process technology and non-deductible goodwill............................................ 106 4,863 -- Utilization of net operating loss carryovers.......... (597) -- (1,661) Utilization of research credits....................... (548) ........... 6.5% 6.0% 5.5% 6.5% 6.0% 5.5% Stock price volatility............ .49 .58 .76 .49 .58 .76 Dividend yield.................... -- -- Future benefits not currently recognized.............. 508 2,116 364 Realized deferred tax assets previously reserved...... (3,249) -- -- Alternative minimum tax............................... -- -- 51 OthersThe following is a summary of the per share weighted average fair value of stock options granted in the years listed below: 1996 ----- 1997 ----- 1998 ------ Options granted under the Stock Option Plans $4.90 $9.10 $17.10 Shares granted under the ESPP Plan $4.20 $6.75 $ 7.39 The Company applies APB Opinion No. 25 in accounting for its stock option and ESPP plans and, net........................................... 901 (459) 27 $ 7,893======= $ --======= $ 259======= Deferred tax assets (liabilities) comprise accordingly, no compensation expense has been recognized for the following: DECEMBER 31options in the consolidated financial statements. Had the Company determined compensation expense based on the fair value at the grant date for its options under SFAS No. 123, 1999 1998 1997 (IN THOUSANDS) Net operating loss carryovers.......................... $ -- $ 845 $ 303 Research and development credit carryovers............. -- 3,285 2,452 Capitalized research and development costs............. 283 71 234 Reserves not currently deductible...................... 4,863 2,814 1,657 Other.................................................. 332 419 96 Total deferred tax assets.................... 5,478 7,434 4,742 Valuation allowance.................................... -- (7,434) (4,742) Net deferred tax assets................................ $5,478====== $ -- ======= $ --======= The valuation allowance at December 31, 1998 and 1997 was attributed to deferred tax assets. Management believed that sufficient uncertainty existed regarding the realizability of these items such that a full valuation allowance was recorded. The Company's net income taxes payable for federal, state, (loss) and foreign purposes net earnings (loss) per share would have been reduced by to the tax benefits of disqualifying dispositions of stock options. The Company receives an amounts indicated below: YEAR ENDED --------------------------------- JUNE 29, JUNE 28, JUNE 27, 1996 1997 1998 -------- -------- --------- Pro forma net income tax benefit for compensation expense for tax purposes which is calculated as the difference between the market value of the stock issued at the time of exercise and the option price at the applicable income tax rates. This benefit is recorded as an increase (loss) (in capital in excess of par value.thousands)............................... $92,870 $254,831 $(324,178) Pro forma net earnings (loss) per share:

Income Taxes. The provision for income taxes consists A reconciliation of the followingdifference between computed statutory federal income tax expense and actual income tax expense for operations is as follows: YEAR ENDED DECEMBER 31, 1999 1998 1997 31 1996 1995 1994 (IN THOUSANDSTHOUSANDS OF DOLLARS) Computed statutory federal income tax expense................................ $ 122,117 $ 128,235 $ 117,311 Increase (reductions) resulting from: Excess book over tax depreciation............................................ 22,752 19,638 17,473 State income taxes--net of federal income tax benefit........................ 18,596 21,287 19,119 Capitalized expenses not deferred............................................ (11,064) (10,058) (6,589) Amortization of deferred investment tax credits.............................. (2,987) (2,986) (3,024) Resolution of proposed tax deficiency........................................ (3,834) (2,452) 3,850 Other--net................................................................... 2,217 (2,113) (3,478) Total income tax expense................................................. $ 147,797 $ 151,551 $ 144,662 The components of income tax expense are as follows: YEAR ENDED DECEMBER 31 1996 1995 1994 (THOUSANDS OF DOLLARS) Federal Current: Federal................................................... $11,611 $-- $168 Foreign................................................... 351 -- 90 State..................................................... 1,409 -- 1 13,371 -- 259 .................................................................... $ 100,213 $ 119,489 $ 147,647 Deferred: Federal................................................... ................................................................... 17,618 310 (4,14332,500) -- -- Foreign................................................... -- -- -- State..................................................... 117,831 119,799 115,147 State Current.................................................................... 29,624 37,116 44,289 Deferred................................................................... 340 (1,3355,364) -- -- (5,47814,774) -- -- 29,964 31,752 29,515 Total Current.................................................................... 129,837 156,605 191,936 Deferred................................................................... 17,958 (5,054) (47,274) $ 7,893 $-- $259 ======= === ==== 44 HARMONIC INC. 147,795 $ 151,551 $ 144,662 31 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The Company's (benefit) provision for income taxes differed from the amount computed by applying the statutory U.S. federal income tax rate to income (loss) before income taxes as follows: DECEMBER 31, 1999 1998 1997 (IN THOUSANDS) Provision at statutory rate........................... $11,051 $(7,294) $ 1,764 Differential (benefit) in rates on foreign earnings... (20) 774 (111) State taxes, net of federal benefit................... 48 -- 1 Foreign sales corporation benefit..................... (307) -- (176) Acquired in-process technology and non-deductible goodwill............................................ 106 4,863 -- Utilization of net operating loss carryovers.......... (597) -- (1,661) Utilization of research credits....................... (548) -- -- Future benefits not currently recognized.............. 508 2,116 364 Realized deferred tax assets previously reserved...... (3,249) -- -- Alternative minimum tax............................... -- -- 51 Others, net........................................... 901 (459) 27 $ 7,893======= $ --======= $ 259======= Deferred tax assets (liabilities) comprise the following: DECEMBER 31, 1999 1998 1997 (IN THOUSANDS) Net operating loss carryovers.......................... $ -- $ 845 $ 303 Research and development credit carryovers............. -- 3,285 2,452 Capitalized research and development costs............. 283 71 234 Reserves not currently deductible...................... 4,863 2,814 1,657 Other.................................................. 332 419 96 Total deferred tax assets.................... 5,478 7,434 4,742 Valuation allowance.................................... -- (7,434) (4,742) Net deferred tax assets................................ $5,478====== $ -- ======= $ --======= The valuation allowance at December 31, 1998 and 1997 was attributed to deferred tax assets. Management believed that sufficient uncertainty existed regarding the realizability of these items such that a full valuation allowance was recorded. The Company's income taxes payable for federal, state, and foreign purposes have been reduced by the tax benefits of disqualifying dispositions of stock options. The Company receives an income tax benefit for compensation expense for tax purposes which is calculated as the difference between the market value of the stock issued at the time of exercise and the option price at the applicable income tax rates. This benefit is recorded as an increase in capital in excess of par value.)

Income Taxes. Prior to the reorganization in November 1996, the predecessor companies maintained their Small Business Corporation status. Accordingly, no provision for actual income tax has been made as it relates to periods prior to the reorganization except for certain state taxes which are applicable to Small Business Corporations. However, pro forma income tax expense has been recognized in the statement of operations as if the reorganized company had been subject to federal and state corporate income taxes for all periods. The pro forma provision for income taxes consists tax expense represents a combined federal and state tax rate. Components of the followingactual income tax expense are as follows: YEAR ENDED DECEMBER 31, 1999 1998 -------------- 1997 (IN THOUSANDS) Current1996 ------- ------ Current income tax expense: Federal................................................... .................................................... $11,611 20,417 $-- 1,079 State...................................................... 1,975 622 ------- ------ 22,392 1,701 Deferred income tax expense: ------- ------ Federal.................................................... 966 2,446 State...................................................... 44 66 ------- ------ 1,010 2,512 ------- ------ $168 Foreign................................................... 351 -- 90 State..................................................... 1,409 -- 1 13,371 -- 259 Deferred: Federal................................................... (4,143) -- -- Foreign................................................... -- -- -- State..................................................... (1,335) -- -- (5,478) -- -- $ 7,893 23,402 $-- $259 4,213 ======= ====== The difference between the U.S. Federal statutory tax rate and the Company's effective tax rate are as follows: YEAR ENDED DECEMBER 31, ------------ 1997 1996 ----- ----- Statutory rate................................................. 35.00% 35.00% State income tax effect........................................ 3.48% 1.05% Other.......................................................... -- 0.26% ----- ----- 38.48% 36.31% ===== ===== 44 HARMONIC INC. WEST TELESERVICES CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS STATEMENTS--(CONTINUED) YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (CONTINUEDDOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS) The Company's (benefit) provision for income taxes differed from the amount computed by applying the statutory U.S. federal income Significant temporary differences between reported financial and taxable earnings that give rise to deferred tax rate to income (loss) before income taxes assets and liabilities were as follows: YEAR ENDED DECEMBER 31, 1999 1998 ------------- 1997 (IN THOUSANDS) Provision at statutory rate........................... $11,051 $(7,294) $ 1,764 Differential (benefit) in rates on foreign earnings... (20) 774 (111) State taxes, net of federal benefit................... 48 -- 1 Foreign sales corporation benefit..................... (307) -- (176) Acquired in-process technology and non-deductible goodwill............................................ 106 4,863 -- Utilization of net operating loss carryovers.......... (597) -- (1,661) Utilization of research credits....................... (548) -- -- Future benefits not currently recognized.............. 508 2,116 364 Realized 1996 ------ ------ Net current deferred tax assets previously reserved...... (3,249) -- -- Alternative minimum tax............................... -- -- 51 Others, net........................................... 901 (459) 27 asset: Allowance for doubtful accounts............................. $ 7,893======= 162 $ --======= $ 259======= Deferred tax assets (liabilities) comprise the following: DECEMBER 31, 1999 1998 1997 (IN THOUSANDS) 88 Net operating loss carryovers.......................... $ -- $ 845 $ 303 Research and development credit carryovers............. -- 3,285 2,452 Capitalized research and development costs............. 283 71 234 Reserves not currently deductible...................... 4,863 2,814 1,657 Other.................................................. 332 419 96 Total long-term deferred tax assets.................... 5,478 7,434 4,742 Valuation allowance.................................... liabilities: Depreciation................................................ 3,684 2,566 Other....................................................... -- (7,434) (4,742) 34 ------ ------ Net long-term deferred tax assets................................ liabilities........................ 3,684 2,600 ------ ------ Net total deferred tax liabilities............................ $5,478====== $ -- 3,522 $2,512 ====== ======= $ --======= The valuation allowance at December 31, 1998 and 1997 was attributed to deferred tax assets. Management believed that sufficient uncertainty existed regarding the realizability of these items such that a full valuation allowance was recorded. The Company's income taxes payable for federal, state, and foreign purposes have been reduced by the tax benefits of disqualifying dispositions of stock options. The Company receives an income tax benefit for compensation expense for tax purposes which is calculated as the difference between the market value of the stock issued at the time of exercise and the option price at the applicable income tax rates. This benefit is recorded as an increase in capital in excess of par value.

Income Taxes. The provision for income taxes consists is as follows (in thousands): FISCAL YEAR ENDED FEBRUARY 2,2003 FEBRUARY 3,2002 FEBRUARY 4,2001 Current expense (benefit) Federal........................................... $(3,876) $3,149 $5,077 State and local................................... 235 504 750 Deferred tax expense................................ 6,396 646 1,182 Total provision for income taxes.................. $ 2,755 $4,299 $7,009 As a result of the following: DECEMBER 312001 tax act, 1999 1998 1997 the Company amended its 2001 tax return, which resulted in a tax refund of approximately $2,900. The changes have been reflected in the current year. Significant components of the deferred tax liabilities and assets in the consolidated balance sheets are as follows (IN THOUSANDSin thousands): FISCAL YEAR ENDED FEBRUARY 2, FEBRUARY 3, FEBRUARY 4, 2003 2002 2001 Accelerated depreciation............................ $ 15,482 $11,399 $ 9,474 Static inventory (Smallwares)....................... 3,313 -- -- Preopening costs.................................... (3,298) Current: Federal................................................... $11,611 $-- $168 Foreign................................................... 351 -- 90 State..................................................... 1,409 -- 1 13,371 -- 259 Deferred: Federal................................................... (4,1431,378) -- -- Foreign................................................... -- -- -- State..................................................... Prepaid expenses.................................... 18 152 129 Capitalized interest costs.......................... 1,750 1,740 1,281 Total deferred tax liabilities.................... 17,265 11,913 10,884 Worker's compensation............................... 484 281 304 Leasing transactions................................ 1,365 2,288 1,500 Other............................................... (1,335451) -- -- (5,47819) -- -- $ 7,893 184 Total deferred tax assets......................... 1,398 2,550 1,988 Net deferred tax liability.......................... $-- (15,867) $259 ======= === ==== 44 HARMONIC (9,363) $(8,896) XXXX & BUSTER'S, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The Company's (benefit) provision for income taxes differed from the amount computed by applying the Reconciliation of federal statutory U.S. federal rates to effective income tax rate to income (loss) before income taxes as followsrates: DECEMBER 31FISCAL YEARS ENDED FEBRUARY 2, 1999 1998 1997 (IN THOUSANDS) Provision at FEBRUARY 3, FEBRUARY 4, 2003 2002 2001 Federal corporate statutory rate........................... $11,051 $(7,294) $ 1,764 Differential (benefit) in rates on foreign earnings... (20) 774 (111) .................... 35.0% 35.0% 35.0% State and local income taxes, net of federal income tax benefit................... 48 ....................................... 6.7% 3.1% 2.2% Goodwill amortization and other nondeductible expenses.......................................... 6.0% 1.0% 2.1% FICA tip credits.................................... (15.7)% (4.3)% (2.0)% Effect of change in deferred tax rate............... -- 1 Foreign sales corporation benefit..................... (307) -- (1761.9)% Other............................................... 2.0% 1.4% 1.0% Effective tax rate.................................. 34.0% 36.2% 36.4% NOTE 6: LEASES The Company leases certain properties and equipment under operating leases. Some of the leases include options for renewal or extension on various terms. Most leases require the Company to pay property taxes, insurance and maintenance of the leased assets. Some leases have provisions for additional percentage rentals based on revenues, which we classify as contingent rentals. For 2002, 2001 and 2000, rent expense for operating leases was $23,828, $19,469 and $14,295, respectively including contingent rentals of $624, $1,448 and $1,210, respectively. At February 2, 2003, future minimum lease payments required under operating leases (including the sale/leaseback transactions described below) Acquired inare $25,776 in 2003; $24,825 in 2004; $23,589 in 2005; $23,164 in 2006; $22,554 in 2007 and $287,749 thereafter. During the year ended February 3, 2002, the Company completed the sale/leaseback of two stores (Atlanta and Houston) and the corporate headquarters in Dallas. Cash proceeds of $18,474 were received along with $5,150 in twenty year interest bearing notes receivable at 7-process technology and 7.5%. The locations were sold to non-deductible goodwill............................................ 106 4,863 -- Utilization affiliated entities. Upon execution of net the sale/leaseback transactions for Atlanta and Houston, property costs of $27,360 and accumulated depreciation of $3,832 were removed from the Company's books resulting in a loss of $272 which was recognized in 2001 and a gain of $713 on one facility being amortized over the term of the operating loss carryovers.......... lease. Future operating lease obligations under the sale/leaseback agreements are as follows: $3,962 in 2003, $4,002 in 2004, $4,051 in 2005, $4,184 in 2006, $4,225 in 2007 and $62,860 thereafter. Future minimum note payments and interest income associated with the sale/leasebacks at San Diego, Houston and Atlanta are as follows: $652 in 2003, $652 in 2004, $652 in 2005, $652 in 2006, $652 in 2007 and $8,935 thereafter. NOTE 7: COMMON STOCK In 1995, the Company adopted the Xxxx & Buster's, Inc. 1995 Stock Option Plan (597the "Plan") -- (1,661) Utilization covering 675 shares of research credits....................... (548) -- -- Future benefits not currently recognized.............. 508 2,116 364 Realized deferred tax assets previously reserved...... (3,249) -- -- Alternative minimum tax............................... -- -- 51 Others, net........................................... 901 (459) 27 $ 7,893======= $ --======= $ 259======= Deferred tax assets (liabilities) comprise the following: DECEMBER 31, 1999 1998 1997 (IN THOUSANDS) Net operating loss carryovers.......................... $ -- $ 845 $ 303 Research and development credit carryovers............. -- 3,285 2,452 Capitalized research and development costs............. 283 71 234 Reserves not currently deductible...................... 4,863 2,814 1,657 Other.................................................. 332 419 96 Total deferred tax assets.................... 5,478 7,434 4,742 Valuation allowance.................................... -- (7,434) (4,742) Net deferred tax assets................................ $5,478====== $ -- ======= $ --======= The valuation allowance at December 31common stock. In 1997, 1998 and 1997 was attributed 2001, the Company increased the shares of common stock covered by the Plan to deferred tax assets. Management believed that sufficient uncertainty existed regarding the realizability of these items such that a full valuation allowance was recorded1,350, 2,350 and 2,950 respectively. The Company's income taxes payable for federal, state, and foreign purposes have been reduced by Plan provides that incentive stock options may be granted at option prices not less than fair market value at date of grant (110% in the tax benefits case of disqualifying dispositions an incentive stock option granted to any person who owns more than 10% of the total combined voting power of all classes of stock optionsof the Company). The Company receives an income tax benefit Non-qualified stock options may not be granted for compensation expense for tax purposes which is calculated as less than 85% of the difference between the fair market value of the common stock issued at the time of exercise grant and are primarily exercisable over a three to five year period from the date of the grant. In 1996, the Company adopted a stock option price plan for outside directors (the "Directors' Plan"), covering a total of 150 shares of common stock. The options granted under the Directors' Plan vest ratably over a three XXXX & BUSTER'S, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) year period. In 2001, the Company increased the shares of common stock subject to the Directors' Plan from 150 shares to 190 shares. In 2000, the Company amended and restated the Xxxx & Buster's, Inc. 1995 Stock Incentive Plan to allow the Company to grant restricted stock awards. These restricted stock awards will fully vest at the applicable income tax ratesend of the vesting period or the attainment of one or more performance targets established by the Company. This benefit Recipients are not required to provide consideration to the Company other than render service and have the right to vote the shares and to receive dividends. The Company issued in 2001 and 2000, 63.5 and 267 shares of restricted stock at a market value of $6.45-$7.90 and $6.75, respectively, which vest at the earlier of attaining certain performance targets or seven years. The total market value of the restricted shares, as determined at the date of issuance, is recorded treated as an increase unearned compensation and is charged to expense over the vesting period. The charge to expense for the unearned compensation was $226, $139 and $243 in capital 2002, 2001 and 2000, respectively. A summary of the Company's stock option activity and related information is as follows (in excess thousands except share data): FISCAL YEAR ENDED --------------------------------------------------------------------- FEBRUARY 2, FEBRUARY 3, FEBRUARY 4, OPTIONS 2003 ----------- WEIGHTED- AVERAGE EXERCISE PRICE OPTIONS 2002 ----------- WEIGHTED- AVERAGE EXERCISE PRICE OPTIONS 2001 ----------- WEIGHTED- AVERAGE EXERCISE PRICE ------- ----------- ------- ----------- ------- ----------- Outstanding -- beginning of par value.year........................... 2,925 $11.56 1,932 $14.78 1,666 $17.24 Granted.......................... 112 8.62 1,233 6.82 674 7.49 Exercised........................ (121) 7.20 (6) 6.80 -- -- Forfeited........................ (278) 12.76 (234) 13.16 (408) 12.77 Outstanding -- end of year....... 2,638 11.51 2,925 11.56 1,932 14.78

Income Taxes. The provision for income taxes consists of the following: SEVEN MONTHS YEAR ENDED ENDED YEARS ENDED DECEMBER 31, 1999 1998 MAY 31, DECEMBER 31, -------------------------- Current 1995 1995 1996 1997 Federal............. $ 7,602,000 $9,546,000 $ 20,655,000 $ 35,128,000 State............... 1,438,000 1,462,000 3,562,000 6,430,000 Foreign............. 1,070,000 Deferred Federal............. (IN THOUSANDS1,002,000) Current: Federal................................................... (943,000) (1,151,000) (1,963,000) State............... (211,000) (134,000) (106,000) (453,000) ----------- ---------- ------------ ------------ $ 7,827,000 $11,611 $-- $168 Foreign................................................... 351 -- 90 State..................................................... 1,409 -- 1 13,371 -- 259 Deferred: Federal................................................... (4,143) -- -- Foreign................................................... -- -- -- State..................................................... (1,335) -- -- (5,478) -- -- 9,931,000 $ 7,893 $-- $259 22,960,000 $ 40,212,000 =========== ========== ============ 44 HARMONIC ============ TOTAL RENAL CARE HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUEDSTATEMENTS--(CONTINUED) The Company's (benefit) provision for income taxes differed from the amount computed by applying the statutory U.S. federal income Temporary differences which give rise to deferred tax rate to income (loss) before income taxes assets and liabilities are as follows: DECEMBER 31, 1999 1998 ---------------------- 1996 1997 Receivables, primarily allowance for doubtful accounts.......................................... $4,860,000 $8,635,000 Intangibles, primarily patient lists............... 5,241,000 6,055,000 Property and equipment............................. 33,000 Accrued vacation................................... 831,000 2,114,000 Deferred compensation.............................. 107,000 67,000 Foreign NOL carryforward........................... 944,000 Foreign tax credit carryforward.................... 200,000 Other.............................................. 14,000 417,000 ---------- ---------- Gross deferred tax assets.......................... 11,053,000 18,065,000 Depreciation and amortization...................... (IN THOUSANDS1,976,000) Provision at statutory (2,454,000) Intangible assets.................................. (3,442,000) (6,712,000) Change in tax accounting method.................... (313,000) (17,000) ---------- ---------- Gross deferred tax liabilities................... (5,731,000) (9,183,000) Valuation allowance.............................. (1,144,000) ---------- ---------- Net deferred tax assets.......................... $5,322,000 $7,738,000 ========== ========== The valuation allowance relates to deferred tax assets established under SFAS No. 109 for foreign net operating loss carryforwards of $2.86 million and foreign tax credit carryforwards of $200,000. These unutilized loss and credit carryforwards which expire in 2002, will be carried forward to future years for possible utilization. No benefit of these carryforwards has been recognized on the financial statements. The reconciliation between the Company's effective tax rate and the U.S. federal income tax rate on income is as follows: YEAR ENDED SEVEN MONTHS ENDED YEARS ENDED DECEMBER 31, MAY 31, DECEMBER 31, -------------- 1995 1995 1996 1997 Federal income tax rate........................... $11,051 $(7,294) $ 1,764 Differential (benefit) in rates on foreign earnings... (20) 774 (111) ............. 34.0% 35.0% 35.0% 35.0% State taxes, net of federal benefit................... 48 -- 1 . 4.0 3.8 4.1 4.1 Foreign sales income taxes................ Nondeductible amortization of intangible assets.................. 0.9 1.5 1.1 0.4 0.8 Federal and state income tax benefit from S corporation benefit..................... status of HCC... (3074.0) -- (1761.1) Acquired in-process technology and non-deductible goodwill............................................ 106 4,863 -- Utilization of net operating loss carryovers.......... (5970.3) -- (1,661) Utilization of research credits....................... (548) -- -- Future benefits not currently recognized.............. 508 2,116 364 Realized deferred tax assets previously reserved...... (3,249) -- -- Alternative minimum tax............................... -- -- 51 Others, net........................................... 901 (459) 27 $ 7,893======= $ --======= $ 259======= Deferred tax assets (liabilities) comprise the following: DECEMBER 31, 1999 1998 1997 (IN THOUSANDS) Net operating loss carryovers.......................... $ -- $ 845 $ 303 Research and development credit carryovers............. -- 3,285 2,452 Capitalized research and development costs............. 283 71 234 Reserves not currently deductible...................... 4,863 2,814 1,657 Other.................................................. 332 419 96 Total deferred tax assets.................... 5,478 7,434 4,742 Valuation allowance.................................... -- ................. 1.2 Other............................... (7,4340.5) 1.1 0.1 0.7 ---- ---- ------ ------ Effective tax rate.................. 34.4 40.3 40.0 42.2 Minority interests in partnerships.. Effective tax rate before minority (4,7422.2) Net deferred tax assets................................ $5,478====== $ -- ---- (2.7) ---- (2.3) ------ (1.9) ------ interests.......................... 32.2% ==== 37.6% ==== 37.7% ====== $ --======= The valuation allowance at December 3140.3% ====== F-16 TOTAL RENAL CARE HOLDINGS, 1998 and 1997 was attributed to deferred tax assetsINC. Management believed that sufficient uncertainty existed regarding the realizability of these items such that a full valuation allowance was recorded. The Company's income taxes payable for federal, state, and foreign purposes have been reduced by the tax benefits of disqualifying dispositions of stock options. The Company receives an income tax benefit for compensation expense for tax purposes which is calculated as the difference between the market value of the stock issued at the time of exercise and the option price at the applicable income tax rates. This benefit is recorded as an increase in capital in excess of par value.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

Income Taxes. The components of the provision for income taxes for the years ended September 30, 1997, 1996 and 1995 are as follows: 1997 1996 1995 - ----------------------------------------------------------------------------- CURRENT PAYABLE: FEDERAL $ 1,737,116 $ 6,977,337 $ 9,505,650 STATE 142,457 920,956 614,100 DEFERRED (1,787,933) (393,153) (84,750) -------------------------------------------- $ 91,640 $ 7,505,140 $ 10,035,000 -------------------------------------------- -------------------------------------------- The net deferred tax asset at September 30, 1997 and 1996 consists of the following: DECEMBER 31, 1999 1998 1997 1996 - ----------------------------------------------------------------------------- VALUATION RESERVES $ 1,791,903 $ 615,631 INVENTORY VALUATION 800,364 432,225 VACATION COSTS 197,107 311,250 DEPRECIATION 193,525 (IN THOUSANDS164,850) Current: Federal................................................... $11,611 $-- $168 Foreign................................................... 351 -- 90 State..................................................... 1,409 -- 1 13,371 -- 259 Deferred: Federal................................................... (4,143) -- -- Foreign................................................... -- -- -- State..................................................... (1,335) -- -- (5,478) -- -- -------------------------- NET DEFERRED TAX ASSET $ 7,893 $-- $259 ======= === ==== 44 HARMONIC 2,982,899 $ 1,194,256 -------------------------- -------------------------- DIGI INTERNATIONAL INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The Company's (benefit) provision for income taxes differed from reconciliation of the amount computed by applying the federal statutory U.S. federal income tax rate to the 1997 1996 1995 - --------------------------------------- STATUTORY INCOME TAX RATE -------------- (34.0)% ------------- 35.0% --------- 35.0% INCREASE (REDUCTION) RESULTING FROM: UTILIZATION OF RESEARCH AND DEVELOPMENT TAX CREDITS (0.9) (1.7) (1.7) STATE TAXES, NET OF FEDERAL BENEFITS 1.0 3.6 2.5 AETHERWORKS CORPORATION NET OPERATING LOSS 12.5 8.0 AETHERWORKS CORPORATION WRITE OFF 9.6 RESTRUCTURING CHARGE 9.3 TAX CONTINGENCY 4.7 FOREIGN AND OTHER (2.1) (0.2) (1.6) ------------ .1% -------------44.7% --------- 34.2% effective income (loss) before income taxes tax rate for the years ended September 30, 1997, 1996 and 1995, are as follows: DECEMBER 31-- -- ------------------------------------ ------------------------------------ 12 FOREIGN SALES AND MAJOR CUSTOMERS The Company maintains foreign sales offices but does not otherwise have any foreign operations. Foreign export sales, 1999 1998 1997 (IN THOUSANDS) Provision at statutory rate........................... $11,051 $(7,294) $ 1,764 Differential (benefit) in rates on foreign earnings... (primarily to Europe, comprised approximately 23.9%, 20) 774 (111) State taxes%, net of federal benefit................... 48 -- 1 Foreign sales corporation benefit..................... (307) -- (176) Acquired in-process technology and non-deductible goodwill............................................ 106 4,863 -- Utilization 20% of net operating loss carryovers.......... sales for the years ended September 30, 1997, 1996 and 1995, respectively. During 1997, one customer (597customer A) -- accounted for 15.1% of net sales while another (1,661customer B) Utilization accounted for 10.5% of research credits....................... net sales. In addition, customer A accounted for 28% of the trade accounts receivable outstanding at September 30, 1997. During 1996, one customer (548customer B) -- -- Future benefits not currently recognized.............. 508 2,116 364 Realized deferred tax assets previously reserved...... accounted for 13.9% of net sales and 11.8% of accounts receivable at September 30, 1996, while another (3,249customer A) -- -- Alternative minimum tax............................... -- -- 51 Othersaccounted for 13.4% of net sales and 14.3% of accounts receivable at September 30, net........................................... 901 1996. During 1995, one customer (459customer A) 27 $ 7,893======= $ --======= $ 259======= Deferred tax assets accounted for 12.5% of net sales and another customer (liabilitiescustomer C) comprise the following: DECEMBER 31, 1999 1998 1997 (IN THOUSANDS) Net operating loss carryovers.......................... $ -- $ 845 $ 303 Research and development credit carryovers............. -- 3,285 2,452 Capitalized research and development costs............. 283 71 234 Reserves not currently deductible...................... 4,863 2,814 1,657 Other.................................................. 332 419 96 Total deferred tax assets.................... 5,478 7,434 4,742 Valuation allowance.................................... -- (7,434) (4,742) Net deferred tax assets................................ $5,478====== $ -- ======= $ --======= The valuation allowance at December 31, 1998 and 1997 was attributed to deferred tax assetsaccounted for 11.7%. Management believed that sufficient uncertainty existed regarding the realizability of these items such that a full valuation allowance was recorded. The Company's income taxes payable for federal, state, and foreign purposes have been reduced by the tax benefits of disqualifying dispositions of stock options. 13 EMPLOYEE BENEFIT PLAN The Company receives an income tax benefit for compensation expense for tax purposes which is calculated as the difference between the market value has a savings and profit sharing plan pursuant to Section 401(k) of the stock issued Internal Revenue Code ("the Code"), whereby eligible employees may contribute up to 15% of their earnings, not to exceed amounts allowed under the Code. In addition, the Company may make contributions at the time discretion of exercise and the option price at Board of Directors. No Company contribution was made in 1997 or 1996. During 1995, the applicable income tax rates. This benefit is recorded as an increase in capital in excess of par valueCompany provided for matching contributions totaling $125,000.

Income Taxes. The provision for Company joins with its 80% or more owned subsidiaries (the "Consolidated Group") in filing consolidated federal income taxes tax returns. Both QVC and Comcast Communications Properties, Inc., an indirect majority owned subsidiary of the Company, file separate consolidated federal income tax returns. Income tax expense consists of the followingfollowing components: 1997 Year Ended December 31, 1996 1995 (Dollars in millions) Current expense Federal.................................................... $94.4 $82.0 $45.2 State...................................................... 24.9 23.3 14.3 Deferred expense (benefit) 119.3----- 105.3 ----- 59.5----- Federal.................................................... (61.1) (20.4) (22.0) State...................................................... (2.6) (0.5) 4.6 (63.7) (20.9) (17.4) Income tax expense......................................... $55.6===== $84.4 ===== $42.1===== COMCAST CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1999 1998 1997, 1996 AND 1995 (Continued) The effective income tax expense of the Company differs from the statutory amount because of the effect of the following items: Year Ended December 31, 1997 1996 1995 (IN THOUSANDSDollars in millions) Current: Federal................................................... Federal tax at statutory rate.............................. ($11,611 80.2) ($-- 5.6) ($168 Foreign................................................... 351 -- 90 State..................................................... 1,409 -- 1 13,371 -- 259 Deferred: Federal................................................... 15.9) Non-deductible depreciation and amortization............... 42.6 32.0 23.7 State income taxes, net of federal benefit................. 14.5 14.8 12.3 Non-deductible foreign losses and equity in net losses of affiliates................................. 53.1 27.5 17.3 Additions to valuation allowance........................... 16.3 18.3 1.4 Other...................................................... 9.3 (4,1432.6) -- -- Foreign................................................... -- -- -- State..................................................... (1,335) -- -- (5,478) -- -- $ 7,893 3.3 Income tax expense......................................... $-- 55.6 $259 =84.4 $42.1 ====== === ==== 44 HARMONIC INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The Company's (benefit) provision for income taxes differed from the amount computed by applying the statutory U.S. federal income tax rate to income (loss) before income taxes as follows: DECEMBER 31, 1999 1998 1997 (IN THOUSANDS) Provision at statutory rate........................... $11,051 $(7,294) $ 1,764 Differential (benefit) in rates on foreign earnings... (20) 774 (111) State taxes, net of federal benefit................... 48 -- 1 Foreign sales corporation benefit..................... (307) -- (176) Acquired in-process technology and non-deductible goodwill............................................ 106 4,863 -- Utilization of net operating loss carryovers.......... (597) -- (1,661) Utilization of research credits....................... (548) -- -- Future benefits not currently recognized.............. 508 2,116 364 Realized deferred tax assets previously reserved...... (3,249) -- -- Alternative minimum tax............................... -- -- 51 Others, net........................................... 901 (459) 27 $ 7,893======= $ --======= $ 259======= Deferred tax assets (liabilities) comprise the following: DECEMBER 31, 1999 1998 1997 (IN THOUSANDS) Net operating loss carryovers.......................... $ -- $ 845 $ 303 Research and development credit carryovers............. -- 3,285 2,452 Capitalized research and development costs............. 283 71 234 Reserves not currently deductible...................... 4,863 2,814 1,657 Other.................................................. 332 419 96 Total deferred tax assets.................... 5,478 7,434 4,742 Valuation allowance.................................... -- (7,434) (4,742) Net deferred tax assets................................ $5,478====== $ -- ======= $ --======= The valuation allowance at Deferred income tax benefit resulted from the following differences between financial and income tax reporting: Year Ended December 31, 1998 1997 1996 1995 (Dollars in millions) Depreciation and 1997 was attributed to amortization......................... ($95.4) ($60.2) ($68.3) Accrued expenses not currently deductible............. (13.2) (6.3) (2.7) Non-deductible reserves for bad debts, obsolete inventory and sales returns................ (10.9) (11.0) (14.2) Non-taxable temporary differences associated with sale or exchange of securities................. 6.4 30.9 22.7 Losses (income) from affiliated partnerships.......... 45.9 25.6 (2.4) Utilization of net operating loss carryforwards....... 41.0 Deferred tax assets arising from current period losses ...................................... (16.6) (23.0) (10.0) Change in valuation allowance and other............... 20.1 23.1 16.5 Deferred income tax benefit........................... ($63.7) ($20.9) ($17.4) ====== ====== ====== - 73 - COMCAST CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (Continued) Significant components of the Company's net deferred tax liability are as follows: December 31, Deferred tax assets. Management believed that sufficient uncertainty existed regarding : 1997 (Dollars in 1996 millions) Net operating loss carryforwards.................... $343.8 $280.9 Differences between book and tax basis of property and equipment and deferred charges.............................. 24.5 24.5 Reserves for bad debts, obsolete inventory and sales returns................................. 84.8 73.9 Other............................................... 62.9 49.7 Less: Valuation allowance........................... (279.5) (263.2) 236.5 165.8 Deferred tax liabilities, principally differences between book and tax basis of property and equipment and deferred charges.................................... 2,256.2 2,228.3 Net deferred tax liability............................ $2,019.7======== $2,062.5======== The deferred tax liability is net of deferred tax assets of $92.5 million and $78.0 million as of December 31, 1997 and 1996, respectively, which are included in other current assets in the realizability of these items such that a full valuation allowance was recordedCompany's consolidated balance sheet. The Company's valuation allowance against deferred tax assets includes approximately $120.0 million for which any subsequent tax benefits recognized will be allocated to reduce goodwill and other noncurrent intangible assets. For income taxes payable tax reporting purposes, the Consolidated Group and Comcast Communications Properties, Inc. have net operating loss carryforwards for federal, state, and foreign purposes which deferred tax assets have been reduced by the tax benefits recorded of disqualifying dispositions of stock optionsapproximately $150.0 million and $30.0 million, respectively, which expire primarily in 2010 and 2011. The Company receives an income tax benefit Remaining net operating loss carryforwards, for compensation expense for tax purposes which is calculated as the difference between the market value of the stock issued at the time of exercise and the option price at the applicable income tax rates. This benefit is recorded as an increase valuation allowances have been established, expire in capital in excess of par valueperiods through 2012.

Income Taxes. The A summary of the provision for income taxes consists is as follows: YEAR ENDED DECEMBER 31, ------------------------------ 1999 -------- 2000 -------- 2001 -------- Federal: Current........................................ $35,658 $27,854 $24,144 Deferred....................................... 12,762 5,606 5,016 State: Current........................................ 6,125 4,537 3,450 Deferred....................................... Provision for income taxes....................... 2,174 ------- $56,719 ======= 955 ------- $38,952 ======= 715 ------- $33,325 ======= The effective income tax rate differs from the amount computed on income before income taxes by applying the U.S. federal income tax rate because of the followingeffect of the following items: YEAR ENDED DECEMBER 31, 1999 2000 2001 Tax at U.S. federal income tax rate................... 35% 35% 35% Nondeductible expenses................................ 3 2 2 State income taxes, net of federal benefit............ 7 4 3 Valuation allowance................................... (1) -- -- -- -- -- 44% 41% 40% == == == The components of deferred tax assets and liabilities are as follows: DECEMBER 31, 1999 1998 1997 ------------------- 2000 2001 -------- -------- Deferred assets (IN THOUSANDSliabilities): State net operating loss carryforwards.................... $ 1,281 $ 2,345 Intangible amortization................................... (35,089) Current: Federal................................................... (43,067) Deferred compensation..................................... 1,934 1,716 Accruals.................................................. 1,248 2,721 -------- -------- (30,626) (36,285) -------- -------- Valuation allowance......................................... (1,281) (1,796) -------- -------- Net deferred income taxes................................... $11,611 (31,907) $-- $168 Foreign................................................... 351 -- 90 State..................................................... 1,409 -- 1 13,371 -- 259 Deferred: Federal................................................... (4,14338,081) -- -- Foreign................................................... -- -- -- State..................................................... (1,335) -- -- (5,478) -- -- $ 7,893 $-- $259 ======== === ====== 44 HARMONIC 45 AFFILIATED MANAGERS GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The Company's 7. INCOME TAXES (benefitCONTINUED) provision for income taxes differed from the amount computed by applying the statutory U.S. federal income tax rate to income (loss) before income taxes as follows: DECEMBER At December 31, 1999 1998 1997 (IN THOUSANDS) Provision at statutory rate........................... $11,051 $(7,294) $ 1,764 Differential (benefit) in rates on foreign earnings... (20) 774 (111) State taxes2001, net of federal benefit................... 48 -- 1 Foreign sales corporation benefit..................... (307) -- (176) Acquired in-process technology and non-deductible goodwill............................................ 106 4,863 -- Utilization of the Company had state net operating loss carryovers.......... (597) -- (1,661) Utilization carryforwards of research credits....................... (548) -- -- Future benefits not currently recognized.............. 508 2,116 364 Realized deferred tax assets previously reserved...... (3,249) -- -- Alternative minimum tax............................... -- -- 51 Others$49,962, net........................................... 901 (459) 27 $ 7,893======= $ --======= $ 259======= Deferred tax assets (liabilities) comprise which expire over a period of 15 years beginning in the following: DECEMBER 31, 1999 1998 1997 (IN THOUSANDS) Net operating loss carryovers.......................... $ -- $ 845 $ 303 Research and development credit carryovers............. -- 3,285 2,452 Capitalized research and development costs............. 283 71 234 Reserves not currently deductible...................... 4,863 2,814 1,657 Other.................................................. 332 419 96 Total deferred tax assets.................... 5,478 7,434 4,742 Valuation allowance.................................... -- (7,434) (4,742) Net deferred tax assets................................ $5,478====== $ -- ======= $ --======= year 2002. The realization of these carryforwards is dependent on generating sufficient taxable income prior to their expiration. The valuation allowance at December 31, 1998 2000 and 1997 was attributed 2001 is related to deferred tax assets. Management believed that sufficient the uncertainty existed regarding of the realizability realization of these items such that a full valuation allowance was recorded. The Company's income taxes payable for federal, state, and foreign purposes have been reduced by the tax benefits of disqualifying dispositions of stock options. The Company receives an income tax benefit for compensation expense for tax purposes which is calculated as the difference between the market value of the stock issued at the time of exercise and the option price at the applicable income tax rates. This benefit is recorded as an increase in capital in excess of par valueloss carryforwards.

Income Taxes. The provision for income taxes consists components of the followingincome tax benefit are as follows: DECEMBER 31YEAR ENDED JUNE 28, 1999 1998 1997 (IN THOUSANDSTHOUSANDS OF DOLLARS) Current: ------------- Current Federal................................................... $11,611 $-- $168 Foreign................................................... 351 -- 90 ................................................. $ (146) State..................................................... 1,409 -- 1 13,371 -- 259 Deferred: Federal................................................... (4,14394) -- -- Foreign------ (240) Deferred Federal................................................. 2,275 State................................................... -- -- -- State..................................................... (1,335) -- -- (5,478) -- -- $ 7,893 120 ------ $-- $259 =2,155 ====== The difference between the U.S. federal statutory tax rate and the Company's effective tax rate are as follows: JUNE 28, 1998 (IN THOUSANDS OF DOLLARS) ------------- Federal statutory tax rate................................ 34 % State income taxes (net of federal federal income tax ben- efit).................................................... 3.8 Reduction in valuation of reserve for deferred tax as- sets..................................................... (64.5) Other..................................................... 2.5 ------ Effective (benefit) tax rate.............................. (24.2)% === ==== 44 HARMONIC The deferred tax assets and deferred tax liabilities recorded on the balance sheet are as follows: DEFERRED TAX ASSETS (LIABILITIES) JUNE 28, 1998 (IN THOUSANDS OF DOLLARS) -------------------- Accounts receivable reserves......................... $3,051 Depreciation and amortization........................ (4,478) Accrued liabilities.................................. 5,656 Inventories.......................................... 1,332 Allowance for bad debts.............................. 693 Loss carryforwards................................... 2,057 Tax credit carryforwards............................. 659 ------ $8,970 ====== As of June 28, 1998, the Company had net operating loss carryforwards for federal and state income tax purposes of approximately $6,049,000 available to reduce taxable income. The Company's net operating loss carryforwards begin expiring in 2005 and will continue to expire WORLD CARPETS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUEDSTATEMENTS--(CONTINUED) The Company's (benefit) provision for income taxes differed from through 2006. During the amount computed by applying year ended June 28, 1998, the statutory U.S. federal income tax rate to income (loss) before income taxes as follows: DECEMBER 31, 1999 1998 1997 (IN THOUSANDS) Provision at statutory rate........................... Company utilized approximately $11,051 $(7,294) $ 1,764 Differential (benefit) in rates on foreign earnings... (20) 774 (111) State taxes, net 6,897,000 of federal benefit................... 48 -- 1 Foreign sales corporation benefit..................... (307) -- (176) Acquired in-process technology and non-deductible goodwill............................................ 106 4,863 -- Utilization of its net operating loss carryovers.......... (597) -- (1,661) Utilization carryforwards to offset current taxable income and reduced its valuation allowance by $5,893,000. Under the Tax Reform Act of research credits....................... (548) -- -- Future benefits not currently recognized.............. 508 2,116 364 Realized deferred tax assets previously reserved...... (3,249) -- -- Alternative minimum tax............................... -- -- 51 Others1986, net........................................... 901 (459) 27 $ 7,893======= $ --======= $ 259======= Deferred tax assets (liabilities) comprise if certain substantial changes in the following: DECEMBER 31Company's ownership were to occur in the future, 1999 1998 1997 (IN THOUSANDS) Net there would be an annual limitation on the amount of operating loss carryovers.......................... $ -- $ 845 $ 303 Research and development credit carryovers............. -- 3,285 2,452 Capitalized research and development costs............. 283 71 234 Reserves not currently deductible...................... 4,863 2,814 1,657 Other.................................................. 332 419 96 Total deferred tax assets.................... 5,478 7,434 4,742 Valuation allowance.................................... -- (7,434) (4,742) Net deferred tax assets................................ $5,478====== $ -- ======= $ --======= The valuation allowance at December 31, 1998 and 1997 was attributed carryforwards which could be used to deferred tax assets. Management believed that sufficient uncertainty existed regarding the realizability of these items such that a full valuation allowance was recorded. The Company's income taxes payable for federal, state, and foreign purposes have been reduced by the tax benefits of disqualifying dispositions of stock options. The Company receives an income tax benefit for compensation expense for tax purposes which is calculated as the difference between the market value of the stock issued at the time of exercise and the option price at the applicable income tax rates. This benefit is recorded as an increase in capital in excess of par valueoffset future taxable income.

Income Taxes. The provision for components of income from continuing operations before taxes consists of the followingare as follows: YEAR ENDED DECEMBER 31, 1999 1998 1997 2000 2001 2002 (IN THOUSANDSMILLIONS) CurrentUnited States $176 Foreign 15 $125 -- $208-- Income from continuing operations before income taxes $191 $125 $208 ==== ==== ==== CERC's current and deferred components of income tax expense are as follows: YEAR ENDED DECEMBER 31, 2000 2001 2002 (IN MILLIONS) Current Federal................................................... $11,611 $-- $168 $ 52 $ 31 $ 56 State..................................................... 9 (3) 9 Foreign................................................... 351 3 -- 90 -- Total current.......................................... 64 28 65 Deferred Federal................................................... 24 29 12 State..................................................... 1,409 -- 1 13,371 -- 259 Deferred: Federal1 11 Foreign................................................... (4,143) 4 -- -- Foreign................................................... -- -- -- State..................................................... (1,335) -- -- (5,478) -- -- Total deferred......................................... 29 30 23 Income tax expense.......................................... $ 7,893 $-- $259 ==93 $ 58 $ 88 ===== ===== ===== 44 HARMONIC 49 CENTERPOINT ENERGY RESOURCES CORP. AND SUBSIDIARIES (AN INDIRECT WHOLLY OWNED SUBSIDIARY OF CENTERPOINT ENERGY, INC. .) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The Company's (benefit) provision for income taxes differed from A reconciliation of the amount computed by applying the federal statutory U.S. federal income tax rate to the effective income (loss) before income taxes tax rate is as follows: YEAR ENDED DECEMBER 31, 1999 1998 1997 2000 2001 2002 (IN THOUSANDSMILLIONS) Provision Income from continuing operations before income taxes....... $ 191 $ 125 $ 208 Federal statutory rate.................................... 35% 35% 35% Income tax expense at statutory rate........................... $11,051 $........................ 67 44 73 Increase (7,294) $ 1,764 Differential (benefitdecrease) in rates on foreign earnings... tax resulting from: Capital loss benefit...................................... -- -- (20) 774 (11172) State income taxes, net of valuation allowances and federal benefit................... 48 income tax benefit(1).......................... 6 (1) 13 Goodwill amortization..................................... 18 16 -- 1 Foreign sales corporation benefit..................... (307) -- (176) Acquired in-process technology and non-deductible goodwill............................................ 106 4,863 -- Utilization of net operating loss carryovers.......... (597) -- (1,661) Utilization of research credits....................... (548) Valuation allowance, capital loss......................... -- -- Future benefits not currently recognized.............. 508 2,116 364 Realized deferred tax assets previously reserved...... (3,249) -- -- Alternative minimum tax............................... -- -- 51 Others72 Other, net........................................... 901 ................................................ 2 (4591) 27 $ 7,893======= $ --======= $ 259======= Deferred tax assets (liabilities) comprise the following: DECEMBER 31, 1999 1998 1997 (IN THOUSANDS) Net operating loss carryovers.......................... $ -- $ 845 $ 303 Research and development credit carryovers............. -- 3,285 2,452 Capitalized research and development costs............. 283 71 234 Reserves not currently deductible...................... 4,863 2,814 1,657 Other2 Total.................................................. 332 419 96 Total deferred tax assets.................... 5,478 7,434 4,742 Valuation allowance.................................... -- (7,434) (4,742) Net deferred tax assets................................ $5,478====== $ -- ======= $ --======= The valuation allowance at December 31, 1998 and 1997 was attributed to deferred tax assets. Management believed that sufficient uncertainty existed regarding the realizability of these items such that a full valuation allowance was recorded. The Company's income taxes payable for federal, state, and foreign purposes have been reduced by the tax benefits of disqualifying dispositions of stock options. The Company receives an income tax benefit for compensation expense for tax purposes which is calculated as the difference between the market value of the stock issued at the time of exercise and the option price at the applicable income tax rates. This benefit is recorded as an increase in capital in excess of par value.26 14 15

Income Taxes. The provision Total income tax expense for income taxes consists the years ended December 31 was allocated as follows: 1995 1994 1993 Income from continuing operations $24,535 $31,446 $30,328 Earnings (loss) from discontinued operations 26,116 2,491 (8,119) Shareholders' equity, for recognition of the following: DECEMBER 31, 1999 1998 1997 unrealized gain (IN THOUSANDSloss) Current: Federal................................................... on debt and marketable equity securities......... 8,778 (2,377) 25,472 $11,611 59,429 $-- 31,560 $168 Foreign................................................... 351 -- 90 State..................................................... 1,409 -- 1 13,371 -- 259 Deferred: Federal................................................... (4,143) -- -- Foreign................................................... -- -- -- State..................................................... (1,335) -- -- (5,478) -- -- $ 7,893 $-- $259 47,681 ======= ======= ======= 44 HARMONIC INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The Company's (benefit) provision for Income tax expense attributable to income taxes from continuing operations differed from the amount computed by applying the statutory U.S. federal income tax rate to pre-tax income as a result of the following: 1995 1994 1993 Tax at the statutory federal rate......................... $23,131 $29,795 $23,552 Dividends received deduction and tax free interest........ (loss1,277) before (1,075) (937) State income taxes as follows: DECEMBER 31, 1999 1998 1997 (IN THOUSANDS) Provision at statutory rate........................... $11,051 $(7,294) $ 1,764 Differential (benefit) in rates on foreign earnings... (20) 774 (111) State taxes, net of federal benefit................... 48 -- 1 Foreign sales corporation benefit..................... (307) -- (176) Acquired in-process technology and non-deductible goodwill............................................ 106 4,863 -- Utilization of net operating loss carryovers.......... (597) -- (1,661) Utilization of research credits....................... (548) -- -- Future benefits not currently recognized.............. 508 2,116 364 Realized )............... 1,916 2,497 1,863 Adjustment to deferred tax assets previously reserved...... (3,249) and liabilities for enacted changes in tax laws and rates................... -- -- Alternative minimum tax............................... -- -- 51 Others3,293 Undistributed earnings of FECI............................ 916 1,245 775 Other, net........................................... 901 ................................................ (459) 27 $ 7,893======= $ --======= $ 259======= Deferred tax assets (liabilities) comprise the following: DECEMBER 31, 1999 1998 1997 (IN THOUSANDS) Net operating loss carryovers.......................... $ -- $ 845 $ 303 Research and development credit carryovers............. -- 3,285 2,452 Capitalized research and development costs............. 283 71 234 Reserves not currently deductible...................... 4,863 2,814 1,657 Other.................................................. 332 419 96 Total deferred tax assets.................... 5,478 7,434 4,742 Valuation allowance.................................... -- (7,434151) (4,7421,016) Net deferred tax assets................................ 1,782 $5,478====== $ -- 24,535 $31,446 $30,328 ======= ======= ======= The tax effects of temporary differences that give rise to significant portions of deferred tax assets and deferred tax liabilities as of December 31 are presented below: 1995 1994 Deferred tax assets: Accrued casualty and other reserves............................ $ --======= The 7,451 $ 7,857 Alternative minimum tax credit carryforward.................... -- 14,315 Other.......................................................... 1,912 1,654 Total deferred tax assets.............................. 9,363 23,826 Deferred tax liabilities: Tax in excess of financial depreciation........................ 114,047 110,732 Deferred gain on land sales.................................... 6,893 6,904 Deferred gain on subsidiary's defeased bonds................... 2,139 2,322 Unrealized gain on debt and marketable equity securities....... 30,902 22,124 Deferred gain on involuntary conversion of land................ 29,160 29,227 Prepaid pension asset recognized for financial reporting....... 8,085 7,804 Other.......................................................... 5,620 4,661 Total gross deferred tax liabilities................... 196,846 183,774 Net deferred tax liability............................. $187,483 $159,948 ======== ======== 41 ST. XXX PAPER COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1995, 1994 AND 1993 (DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS) Based on the timing of reversal of future taxable amounts and the Company's history of reporting taxable income, the Company believes that the deferred tax assets will be realized and a valuation allowance at is not considered necessary. The current deferred tax asset of $4,553 and $4,691 is recorded in other current assets as of December 31, 1998 1995 and 1997 was attributed to deferred tax assets. Management believed that sufficient uncertainty existed regarding the realizability of these items such that a full valuation allowance was recorded. The Company's income taxes payable for federal1994, state, and foreign purposes have been reduced by the tax benefits of disqualifying dispositions of stock optionsrespectively. The Company receives an income has not recognized a deferred tax benefit liability of approximately $17,842 for compensation expense for the undistributed earnings of FECI that arose in 1992 and prior years because the Company does not currently expect those unremitted earnings to reverse and become taxable to the Company in the foreseeable future. A deferred tax purposes which is calculated liability will be recognized when the Company expects that it will recover those undistributed earnings in a taxable manner, such as the difference between the market value through receipt of dividends or sale of the stock issued at investment. As of December 31, 1995, the time undistributed earnings of exercise and the option price at the applicable income subsidiary for which no deferred tax rates. This benefit is recorded as an increase in capital in excess of par valueliability was provided were approximately $48,454.

Income Taxes. The provision for income taxes consists of the following: DECEMBER 31, 1999 -------------------- 1998 1997 1996 ---- ---- ---- (IN THOUSANDS) Current: Federal................................................... $11,611 $$ -- $168 Foreign................................................... 351 -- 90 State..................................................... 1,409 -- 1 13,371 -- 259 Deferred: Federal................................................... (4,143) -- -- $246 Foreign................................................... -- -- -- 90 41 State..................................................... (1,335) -- -- (5,478) -- -- 1 24 ---- ---- ---- $ 7,893 $-- $259 $311 ======= === ==== 44 HARMONIC INC. ==== 41 43 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The Company's (benefit) provision for income taxes differed from the amount computed by applying the statutory U.S. federal income tax provision reconciles to the provision at the federal statutory rate to income (loss) before income taxes as follows: DECEMBER 31, 1999 1998 1997 1996 (IN THOUSANDS) Provision at statutory rate........................... $11,051 ................................. $(7,294) $ 1,764 $2,118 Differential (benefit) in rates on foreign earnings... (20) ................... 774 (111) -- State taxes, net of federal benefit................... 48 ......................... -- 1 16 Foreign sales corporation benefit..................... (307) ........................... -- (176) -- Acquired in-process technology and non-deductible goodwill............................................ 106 .................................................. 4,863 -- -- Utilization of net operating loss carryovers.......... (597) ................ -- (1,661) Utilization of research credits....................... (5482,490) -- -- Future benefits not currently recognized.............. 508 .................... 2,116 364 Realized deferred tax assets previously reserved...... (3,249) -- -- 429 Alternative minimum tax............................... -- ..................................... -- 51 Others, net........................................... 901 162 Other....................................................... (459) 27 $ 7,893======= 76 $ --======= $ 259======= $ 311====== Deferred tax assets (liabilities) comprise the following: DECEMBER 31, 1999 1998 1997 1996 (IN THOUSANDS) Net operating loss carryovers.......................... $ -- ............................... $ 845 $ 303 $ 1,964 Research and development credit carryovers............. -- 3,285 2,452 .................. Capitalized research and development costs............. 283 .................. 3,285 71 2,452 234 2,112 254 Reserves not currently deductible...................... 4,863 ........................... 2,814 1,657 1,187 Other.................................................. 332 ....................................................... 419 96 12 Total deferred tax assets.................... 5,478 ......................... 7,434 4,742 5,529 Valuation allowance.................................... -- ......................................... (7,434) (4,742) (5,529) Net deferred tax assets................................ $5,478====== ......................................... $ -- ======= --======= $ --======= $ --======= The deferred tax assets valuation allowance at December 31, 1998 1998, 1997 and 1997 was 1996 is attributed to federal and state deferred tax assets. Management believed believes that sufficient uncertainty existed exists regarding the realizability of these items such that a full valuation allowance was has been recorded. At December 31, 1998, the Company had approximately $1,968,000 of net operating loss carryovers for federal tax reporting purposes available to offset future taxable income; such carryovers will expire in the years ending 2009 through 2019. The Company's income taxes payable for federalfederal net operating loss carryovers do not include approximately $4,887,000 resulting from disqualifying dispositions or exercises of non-incentive stock options, state, and foreign purposes have been reduced by the tax benefits benefit of disqualifying dispositions of stock options. The Company receives an income tax benefit which, when realized, will be accounted for compensation expense for tax purposes which is calculated as the difference between the market value of the stock issued at the time of exercise and the option price at the applicable income tax rates. This benefit is recorded as an increase in addition to capital in excess of par value., rather than as a reduction of the provision for income taxes. At December 31, 1998, the Company also had approximately $2,175,000, and $1,110,000, of research and development credit carryovers for federal and state tax reporting purposes, respectively. The federal research and development credit carryovers will expire in the years ending 2004 through 2019. The state research and development carryovers will be carried forward indefinitely, until utilized. The amounts of and the benefit from net operating losses and tax credits that can be carried forward may be limited in the event of a cumulative stock ownership change of greater than 50% over a three year period. 44 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 11: RESEARCH AND DEVELOPMENT GRANTS BIRD. In accordance with separate agreements signed with the Israel-U.S. Binational Industrial Research and Development Foundation ("BIRD") in December 1994 and December 1997, the Company obtained grants for research and development projects amounting to 50% of the actual expenditures incurred on each of the two projects subject to a maximum of $560,000 and $845,000, respectively. The Company earned the maximum of $560,000 under the first grant, which was offset against research and development expenses from 1995 through 1997. Under the second grant, the Company earned approximately $81,000 in 1998, which was also offset against research and development expenses for the same period. The Company is not obligated to repay the grants regardless of the outcome of its development efforts; however, it is obligated to pay the BIRD royalties at the rate of 2.5% - 5% of sales of any products or development resulting from such research, but not in excess of 150% of each grant. During 1998, approximately $175,000 of royalty expense was incurred. Chief Scientist. An agreement was signed in May 1998 with the Israeli Chief Scientist Office ("Chief Scientist") in which the Company obtained a grant for a research and development project amounting to 50% of the actual expenditures incurred, subject to a maximum of 1,113,000 Israeli Shekels which translated at the December 31, 1998 exchange rate approximates $265,000. The Company earned $265,000 during 1998, which was offset against research and development expense for the same period. The Company is not obligated to repay the grants regardless of the outcome of its development efforts; however, it is obligated to pay the Chief Scientist royalties at the rate of 3% - 5% of sales of any products or development resulting from such research, but not in excess of 100% of the grant. During 1998, royalty expenses incurred were not significant. NOTE 12: GEOGRAPHIC INFORMATION AND SIGNIFICANT CUSTOMERS The Company operates in one industry segment and markets its products worldwide through its own direct sales force and through systems integrators and distributors. The Company has a manufacturing facility located in the U.S., international sales and support centers in Europe and Asia, and its New Media Communication Ltd. subsidiary and a research and development facility in Israel. YEAR ENDED DECEMBER 31, 1998 1997 1996 (IN THOUSANDS) Geographic information consists of the following: Net Sales: United States....................................... $47,422 $30,651 $26,122 Canada.............................................. 7,208 12,806 9,119 China............................................... 11,647 8,254 1,139 United Kingdom...................................... 3,511 5,530 9,323 Other foreign countries............................. 14,069 17,201 15,191 Total............................................ Long-lived assets: $83,857======= $74,442 ======= $60,894======= United States....................................... $10,384 $ 8,617 $ 8,076 Israel.............................................. 1,501 1,373 675 Other foreign countries............................. 57 87 -- Total............................................ $11,942 $10,077 $ 8,751 ======= ======= ======= The Company sells to a significant number of its end users through distributors. In 1998 sales to one domestic customer and one foreign distributor represented 17% and 11% of total net sales, respectively. In 1997, sales to one distributor represented 17% of total net sales. In 1996, sales to three distributors represented 15%, 15% and 13% of total net sales, respectively. 45 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 13: COMMITMENTS AND CONTINGENCIES Commitments. The Company leases its facilities under noncancelable operating leases which expire at various dates through 2006. Total rent expense related to these operating leases were $1,602,000 $1,413,000, and $828,000, for 1998, 1997 and 1996, respectively. Future minimum lease payments under noncancelable operating leases at December 31, 1998, were as follows: (in thousands)

Income Taxes. (CONTINUED) The provision for income taxes consists tax effects of timing differences that give rise to significant portions of the following: deferred tax assets and deferred tax liabilities consist of the following (in thousands): AS OF DECEMBER 31, 1999 1998 1997 ------------------- 2002 2001 -------- -------- Deferred tax assets: Allowance for credit losses on automobile Loans........... $15,852 $13,532 Reserve for advance losses................................ 4,582 3,179 Allowance for leased vehicle losses....................... 1,193 1,084 Sale of advance receivables............................... -- 3,293 Deferred dealer enrollment fees........................... 222 560 Accrued warranty claims................................... 54 179 Accrued liabilities....................................... 1,032 2,824 Unearned premiums......................................... 151 181 Reserve on notes receivable............................... 491 1,067 Foreign tax credits....................................... 1,852 -- Net operating losses...................................... 327 -- Valuation of receivables.................................. 2,601 -- ------- ------- 28,357 25,899 Less: Valuation allowance.............................. (IN THOUSANDS) Current: Federal................................................... $11,611 $-- $168 Foreign................................................... 351 -- 90 State..................................................... 1,409 -- 1 13,371 -- 259 Deferred: Federal................................................... (4,143437) -- ------- ------- Total deferred tax assets.............................. 27,920 25,899 Deferred tax liabilities: ------- ------- Unearned finance charges.................................. 31,103 32,110 Depreciable assets........................................ 4,299 2,466 Undistributed earnings.................................... 3,090 -- Foreign................................................... Valuation of receivables.................................. -- -- -- State..................................................... (1,335) -- -- (5,478) -- -- $ 7,893 1,175 Deferred credit life and warranty costs................... 27 65 Other, net................................................ 1,068 751 ------- ------- Total deferred tax liabilities......................... 39,587 36,567 ------- ------- Net deferred tax liability.................................. $-- 11,667 $259 10,668 ======= === ===== 44 HARMONIC INC. A reconciliation of the U.S. Federal statutory rate to the Company's effective tax rate were as follows: YEARS ENDED DECEMBER 31, ------------- 2002 ----- 2001 ----- U.S. federal statutory rate................................. 35.0% 35.0% State income taxes.......................................... (2.2) 5.6 Foreign income taxes........................................ (1.4) (1.1) Undistributed foreign earnings.............................. 6.6 -- Valuation allowance......................................... 0.9 -- Other....................................................... Provision for income taxes.................................. -- ---- 38.9% ==== 0.1 ---- 39.6% ==== 57 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The Company's (benefit) provision for income taxes differed from the amount computed by applying the statutory U.S. federal income tax rate to income (loss) before income taxes as follows: DECEMBER 31, 1999 1998 1997 (IN THOUSANDS) Provision at statutory rate........................... $11,051 $(7,294) $ 1,764 Differential (benefit) in rates on foreign earnings... (20) 774 (111) State taxes, net of federal benefit................... 48 -- 1 Foreign sales corporation benefit..................... (307) -- (176) Acquired in-process technology and non-deductible goodwill............................................ 106 4,863 -- Utilization of net operating loss carryovers.......... (597) -- (1,661) Utilization of research credits....................... (548) -- -- Future benefits not currently recognized.............. 508 2,116 364 Realized deferred tax assets previously reserved...... (3,249) -- -- Alternative minimum tax............................... -- -- 51 Others, net........................................... 901 (459) 27 $ 7,893======= $ --======= $ 259======= Deferred tax assets (liabilities) comprise the following: DECEMBER 31, 1999 1998 1997 (IN THOUSANDS) Net operating loss carryovers.......................... $ -- $ 845 $ 303 Research and development credit carryovers............. -- 3,285 2,452 Capitalized research and development costs............. 283 71 234 Reserves not currently deductible...................... 4,863 2,814 1,657 Other.................................................. 332 419 96 Total deferred tax assets.................... 5,478 7,434 4,742 Valuation allowance.................................... -- (7,434) (4,742) Net deferred tax assets................................ $5,478====== $ -- ======= $ --======= The valuation allowance at December 31, 1998 and 1997 was attributed to deferred tax assets. Management believed that sufficient uncertainty existed regarding the realizability of these items such that a full valuation allowance was recorded. The Company's income taxes payable for federal, state, and foreign purposes have been reduced by the tax benefits of disqualifying dispositions of stock options. The Company receives an income tax benefit for compensation expense for tax purposes which is calculated as the difference between the market value of the stock issued at the time of exercise and the option price at the applicable income tax rates. This benefit is recorded as an increase in capital in excess of par value.)

Income Taxes. The provision for income taxes consists significant components of the followingCompany's deferred tax assets and liabilities at December 31, 2000 and 1999 are as follows: YEARS ENDED DECEMBER 31, ------------------------- 2000 ---------- 1999 ------------ Deferred tax assets: Accounts receivable................................. $ 31,755 $ 31,755 Inventory........................................... 185,990 129,097 Operating loss carryforward......................... 175,998 34,417 Accrued expenses.................................... 82,698 1,196,338 Goodwill............................................ 51,368 37,679 Catalog costs....................................... Total deferred tax assets........................... -- -------- 527,809 -------- 8,503 ---------- 1,437,789 ---------- Deferred tax liabilities: Catalog costs....................................... 12,141 -- Pension fund asset.................................. 22,010 18,461 Property, plant and equipment....................... 15,927 42,632 Other............................................... Total deferred tax liabilities........................ Net deferred tax assets............................... 11,741 -------- 61,819 -------- $465,990 ======== 4,695 ---------- 65,788 ---------- $1,372,001 ========== The amount recorded as net deferred tax assets as of December 31, 2000 and 1999 represents the amount of tax benefits of existing deductible temporary differences or carryforwards that are more likely than not to be realized through the generation of sufficient future taxable income within the carryforward period. The Company believes that the net deferred tax asset of $465,990 at December 31, 2000 will more likely than not be realized in the carryforward period. Management reviews the recoverability of deferred tax assets during each reporting period. Income tax expense is based on the following pre-tax income (loss) for the years ended December 31, 2000, 1999 and 1998: YEARS ENDED DECEMBER 31, -------------------------------------- 2000 1999 1998 1997 ------------ ------------ -------- Domestic............................... $(IN THOUSANDS51,098,496) Current: Federal................................................... $11,611 (32,040,219) $-- 115,418 Foreign................................ 2,588,112 2,757,782 738,916 ------------ ------------ -------- $168 Foreign................................................... 351 -- 90 State..................................................... 1,409 -- 1 13,371 -- 259 Deferred: Federal................................................... (4,14348,510,384) -- -- Foreign................................................... -- -- -- State..................................................... $(1,33529,282,437) -- -- (5,478) -- -- $ 7,893 $-- $259 854,334 ============ ============ ======== 44 HARMONIC HARVARD BIOSCIENCE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The Company's (benefit) provision for income taxes differed from the amount computed by applying the statutory U.S. federal income tax rate to income (loss) before income taxes as follows: DECEMBER 31, 1999 1998 1997 (IN THOUSANDS) Provision at statutory rate........................... $11,051 $(7,294) $ 1,764 Differential (benefit) in rates on foreign earnings... (20) 774 (111) State taxes, net of federal benefit................... 48 -- 1 Foreign sales corporation benefit..................... (307) -- (176) Acquired in-process technology and non-deductible goodwill............................................ 106 4,863 -- Utilization of net operating loss carryovers.......... (597) -- (1,661) Utilization of research credits....................... (548) -- -- Future benefits not currently recognized.............. 508 2,116 364 Realized deferred tax assets previously reserved...... (3,249) -- -- Alternative minimum tax............................... -- -- 51 Others, net........................................... 901 (459) 27 $ 7,893======= $ --======= $ 259======= Deferred tax assets (liabilities) comprise the following: DECEMBER 31, 1999 1998 1997 (IN THOUSANDS) Net operating loss carryovers.......................... $ -- $ 845 $ 303 Research and development credit carryovers............. -- 3,285 2,452 Capitalized research and development costs............. 283 71 234 Reserves not currently deductible...................... 4,863 2,814 1,657 Other.................................................. 332 419 96 Total deferred tax assets.................... 5,478 7,434 4,742 Valuation allowance.................................... -- (7,434) (4,742) Net deferred tax assets................................ $5,478====== $ -- ======= $ --======= The valuation allowance at December 31, 1998 and 1997 was attributed to deferred tax assets. Management believed that sufficient uncertainty existed regarding the realizability of these items such that a full valuation allowance was recorded. The Company's income taxes payable for federal, state, and foreign purposes have been reduced by the tax benefits of disqualifying dispositions of stock options. The Company receives an income tax benefit for compensation expense for tax purposes which is calculated as the difference between the market value of the stock issued at the time of exercise and the option price at the applicable income tax rates. This benefit is recorded as an increase in capital in excess of par value.)

Income Taxes. The provision for income taxes consists of the following: SEVEN MONTHS YEARS ENDED DECEMBER YEAR ENDED ENDED 31, MAY 31, DECEMBER 31, 1999 1998 ----------------------- 1995 1995 1996 1997 Current Federal $3,275,000 $3,708,000 $12,803,000 $21,518,000 State.................... 952,000 954,000 2,881,000 4,304,000 Deferred Federal (IN THOUSANDS555,000) Current: Federal................................................... 9,000 544,000 (567,000) State (161,000) (40,000) 123,000 (114,000) ---------- ---------- ----------- ----------- $11,611 3,511,000 $-- 4,631,000 $168 Foreign................................................... 351 -- 90 State..................................................... 1,409 -- 1 13,371 -- 259 Deferred: Federal................................................... (4,143) -- -- Foreign................................................... -- -- -- State..................................................... (1,335) -- -- (5,478) -- -- $ 7,893 16,351,000 $-- $259 25,141,000 ========== ========== =========== 44 HARMONIC =========== TOTAL RENAL CARE HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUEDSTATEMENTS--(CONTINUED) The Company's (benefit) provision for income taxes differed from the amount computed by applying the statutory U.S. federal income Temporary differences which give rise to deferred tax rate to income (loss) before income taxes assets and liabilities are as follows: DECEMBER 31, 1999 1998 ------------------------ 1996 1997 Receivables, primarily allowance for doubtful accounts....................................... $ 2,724,000 $ 4,446,000 Accrued vacation................................ 831,000 1,717,000 Deferred compensation........................... 107,000 67,000 ----------- ----------- Gross deferred tax assets..................... 3,662,000 6,230,000 ----------- ----------- Depreciation and amortization................... (IN THOUSANDS1,811,000) Provision at statutory (2,454,000) Intangible assets............................... (1,173,000) (2,713,000) Change in tax accounting method................. (313,000) (17,000) ----------- ----------- Gross deferred tax liabilities................ (3,297,000) (5,184,000) ----------- ----------- Net deferred tax assets....................... $ 365,000 $ 1,046,000 =========== =========== The reconciliation between the Company's effective tax rate and the U.S. federal income tax rate on income is as follows: YEAR ENDED SEVEN MONTHS DECEMBER YEAR ENDED ENDED 31, MAY 31, DECEMBER 31, ----------- 1995 1995 1996 1997 Federal income tax rate........................... $11,051 $(7,294) $ 1,764 Differential (benefit) in rates on foreign earnings... (20) 774 (111) .............. 34.0% 35.0% 35.0% 35.0% State taxes, net of federal benefit.. 5.9% 5.3% 4.7% 4.5% Nondeductible amortization of intangible assets................... 48 -- 1 Foreign sales corporation benefit..................... (307) -- (176) Acquired in-process technology and non-deductible goodwill............................................ 106 4,863 -- Utilization of net operating loss carryovers.......... (597) -- (1,661) Utilization of research credits....................... (548) -- -- Future benefits not currently recognized.............. 508 2,116 364 Realized deferred tax assets previously reserved...... (3,249) -- -- Alternative minimum tax............................... -- -- 51 Others, net........................................... 901 (459) 27 $ 7,893======= $ --======= $ 259======= Deferred tax assets (liabilities) comprise the following: DECEMBER 31, 1999 1998 1997 (IN THOUSANDS) Net operating loss carryovers.......................... $ -- $ 845 $ 303 Research and development credit carryovers............. -- 3,285 2,452 Capitalized research and development costs............. 283 71 234 Reserves not currently deductible...................... 4,863 2,814 1,657 Other.................................................. 332 419 96 Total deferred tax assets.................... 5,478 7,434 4,742 Valuation allowance.................................... -- (7,434) (4,742) Net deferred tax assets................................ $5,478====== $ -- ======= $ --======= The valuation allowance at December 31, 1998 and 1997 was attributed to deferred tax assets. Management believed that sufficient uncertainty existed regarding the realizability of these items such that a full valuation allowance was recorded. The Company's income taxes payable for federal, state, and foreign purposes have been reduced by the tax benefits of disqualifying dispositions of stock options. The Company receives an income tax benefit for compensation expense for tax purposes which is calculated as the difference between the market value of the stock issued at the time of exercise and the option price at the applicable income tax rates. This benefit is recorded as an increase in capital in excess of par value.1.1% 1.1% 0.8% 0.6%

Income Taxes. The Components of the provision for income taxes consists of the followingare as follows: DECEMBER 31, 1999 1998 1997 1996 1995 ---------- -------- --------- U.S....................................... $ (IN THOUSANDS660,000) Current$183,000 $ 775,000 Foreign................................... 143,000 197,000 -- ferred: Federal................................................... U.S....................................... 3,404,000 (91,000) (603,000) ---------- -------- --------- $11,611 2,887,000 $-- $168 Foreign................................................... 351 -- 90 State..................................................... 1,409 -- 1 13,371 -- 259 Deferred: Federal................................................... (4,143) -- -- Foreign................................................... -- -- -- State..................................................... (1,335) -- -- (5,478) -- -- 289,000 $ 7,893 $-- $259 172,000 ========== === ====== 44 HARMONIC INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The Company's (benefit) provision for income taxes differed from the amount computed by applying the statutory U.S. federal income tax rate to income (loss) before income taxes as follows: DECEMBER 31, 1999 1998 1997 (IN THOUSANDS) Provision at statutory rate........................... $11,051 $(7,294) $ 1,764 Differential (benefit) in rates on foreign earnings... (20) 774 (111) State taxes, net of federal benefit................... 48 -- 1 Foreign sales corporation benefit..................... (307) -- (176) Acquired in-process technology and non-deductible goodwill............................................ 106 4,863 -- Utilization of net operating loss carryovers.......... (597) -- (1,661) Utilization of research credits....................... (548) -- -- Future benefits not currently recognized.............. 508 2,116 364 Realized deferred tax assets previously reserved...... (3,249) -- -- Alternative minimum tax............................... -- -- 51 Others, net........................................... 901 (459) 27 $ 7,893======= $ --======= $ 259======= Deferred tax assets (liabilities) comprise the following: DECEMBER 31, 1999 1998 1997 (IN THOUSANDS) Net operating loss carryovers.......................... $ -- $ 845 $ 303 Research and development credit carryovers............. -- 3,285 2,452 Capitalized research and development costs............. 283 71 234 Reserves not currently deductible...................... 4,863 2,814 1,657 Other.................................................. 332 419 96 Total deferred tax assets.................... 5,478 7,434 4,742 Valuation allowance.................................... -- (7,434) (4,742) Net deferred tax assets................................ $5,478====== $ -- ========= Current: De Approximately $35,000 and $101,000 in 1996 and 1995, respectively, represent the tax benefit from the Company's stock option exercises which directly increased paid-in capital and did not reduce the provision for income taxes. A reconciliation of the expected U.S. tax benefit to the actual consolidated tax provision is as follows: 1997 ----------- 1996 --------- 1995 ----------- Expected tax benefit at U.S. statutory rate.................................... $(5,008,000) $(121,000) $(1,331,000) State taxes.............................. 58,000 50,000 15,000 Foreign taxes............................ 128,000 51,000 75,000 Unbenefitted U.S. losses, net............ 4,810,000 -- -- Increase in U.S. valuation allowance, net..................................... 3,404,000 -- -- Unbenefitted (utilization of) foreign losses, net............................. (530,000) 40,000 1,171,000 Non-deductible goodwill.................. 158,000 165,000 130,000 Other, net............................... (133,000) ----------- $ --======= The valuation allowance at 2,887,000 104,000 --------- $ 289,000 112,000 ----------- $ 172,000 =========== ========= =========== AMTECH CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Components of the Company's deferred tax assets and liabilities as of December 31, 1998 1997 and 1996 are as follows: 1997 was attributed to 1996 ------------ ------------ Deferred tax assets: Non-deductible reserves.......................... $ 3,796,000 $ 1,742,000 Losses of foreign subsidiaries and joint ventures........................................ 7,271,000 10,473,000 U.S. net operating loss carryforwards............ 3,021,000 -- Tax credit carryforwards......................... 2,193,000 490,000 Amortization of intangibles...................... -- 256,000 Other, net....................................... 483,000 536,000 ------------ ------------ Total deferred tax assets. Management believed that sufficient uncertainty existed regarding ...................... 16,764,000 13,497,000 Valuation allowance for deferred tax assets........ (15,680,000) (10,093,000) ------------ ------------ 1,084,000 3,404,000 Deferred tax liabilities: Amortization of intangibles...................... 1,084,000 -- ------------ ------------ Net deferred tax assets.......................... $ -- $ 3,404,000 ============ ============ In 1996, the realizability of these items such that a full valuation allowance primarily represented losses from foreign operations due to the uncertainty of future taxable income in these jurisdictions. In the second quarter of 1997, in light of continued operating losses, the Company determined that future taxable income in the U.S. was recordeduncertain. As a result, all of the Company's U.S. deferred tax assets have been fully reserved in 1997. The Company's income taxes payable for federal, state, and foreign purposes subsidiaries have been reduced by net operating loss carryforwards which begin to expire in the tax benefits of disqualifying dispositions of stock optionsyear 1998. The Company receives an income U.S. subsidiaries have net operating loss carryforwards which expire in 2012. Tax credit carryforwards in the U.S. include research tax benefit for compensation expense for credits which are available through 2012 and alternative minimum tax purposes which is calculated as the difference between the market value of the stock issued at the time of exercise and the option price at the applicable income tax rates. This benefit is recorded as an increase in capital in excess of par valuecredits that do not expire.

Income Taxes. The provision for income taxes consists included the following components: FOR THE YEAR ENDED MAY 31, -------------------------------- 1997 ---------- 1996 --------- 1995 --------- Current Federal............................................................ $ 8,605 $ 4,215 $ 2,255 Foreign............................................................ 535 895 625 State, net of refunds.............................................. Deferred............................................................. 890 ---------- $ 10,030 ---------- (80) ---------- 800 --------- $ 5,910 --------- 860 --------- 780 --------- $ 3,660 --------- 590 --------- $ 9,950 $ 6,770 $ 4,250 ---------- ---------- --------- --------- --------- --------- The deferred tax provisions result primarily from differences between book and tax income arising from depreciation and leveraged leases. Refundable income taxes included within Deferred tax assets, deposits and other, principally represent refunds of Federal income taxes resulting from additional tax benefits generated from export sales and foreign tax credits carried back to prior years. Deferred tax liabilities and assets result primarily from the differences in the timing of the followingrecognition for transactions between book and income tax purposes and consist of the following components: DECEMBER MAY 31, 1999 1998 --------------------- 1997 (IN THOUSANDS) Current---------- 1996 --------- Deferred tax liabilities: Federal................................................... $11,611 $Depreciation.................................................................. $ 9,740 $ 7,390 Leveraged leases.............................................................. 22,230 25,060 Other......................................................................... Total deferred tax liabilities................................................ Deferred tax assets--current: 950 ---------- $ 32,920 ---------- ---------- 950 --------- $ 33,400 --------- --------- Inventory costs............................................................... $ 5,630 $ 5,080 Employee benefits............................................................. 1,320 190 Doubtful account allowance.................................................... 700 620 Other......................................................................... Total deferred tax assets--current............................................ Deferred tax assets--noncurrent: 680 ---------- $ 8,330 ---------- 480 --------- $ 6,370 --------- Postretirement benefits....................................................... $ 360 $ 560 Alternative minimum tax credits............................................... Total deferred tax assets--noncurrent......................................... Total deferred tax assets..................................................... -- $168 Foreign................................................... 351 -- 90 State..................................................... 1,409 -- 1 13,371 -- 259 Deferred: Federal................................................... (4,143) -- -- Foreign................................................... -- -- -- State..................................................... (1,335) -- -- (5,478) -- -- ---------- 360 ---------- $ 7,893 $-- $259 ======= === ==== 44 HARMONIC INC8,690 ---------- ---------- 2,160 --------- 2,720 --------- $ 9,090 --------- --------- 24 AAR CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The Company's (benefit) provision for income taxes differed from the amount computed by applying the statutory U.S. federal income tax rate to income (loss) before income taxes as follows: DECEMBER 31, 1999 1998 1997 (IN THOUSANDS) Provision at statutory rate........................... $11,051 $(7,294) $ 1,764 Differential (benefit) in rates on foreign earnings... (20) 774 (111) State taxes, net of federal benefit................... 48 -- 1 Foreign sales corporation benefit..................... (307) -- (176) Acquired in-process technology and non-deductible goodwill............................................ 106 4,863 -- Utilization of net operating loss carryovers.......... (597) -- (1,661) Utilization of research credits....................... (548) -- -- Future benefits not currently recognized.............. 508 2,116 364 Realized deferred tax assets previously reserved...... (3,249) -- -- Alternative minimum tax............................... -- -- 51 Others, net........................................... 901 (459) 27 $ 7,893======= $ --======= $ 259======= Deferred tax assets (liabilities) comprise the following: DECEMBER 31, 1999 1998 1997 (IN THOUSANDS) Net operating loss carryovers.......................... $ -- $ 845 $ 303 Research and development credit carryovers............. -- 3,285 2,452 Capitalized research and development costs............. 283 71 234 Reserves not currently deductible...................... 4,863 2,814 1,657 Other.................................................. 332 419 96 Total deferred tax assets.................... 5,478 7,434 4,742 Valuation allowance.................................... -- (7,434) (4,742) Net deferred tax assets................................ $5,478====== $ -- ======= $ --======= The valuation allowance at December 31, 1998 and 1997 was attributed to deferred tax assets. Management believed that sufficient uncertainty existed regarding the realizability of these items such that a full valuation allowance was recorded. The Company's income taxes payable for federal, state, and foreign purposes have been reduced by the tax benefits of disqualifying dispositions of stock options. The Company receives an income tax benefit for compensation expense for tax purposes which is calculated as the difference between the market value of the stock issued at the time of exercise and the option price at the applicable income tax rates. This benefit is recorded as an increase in capital in excess of par value.EXCEPT PER SHARE AND PERCENTAGE DATA)

Income Taxes. Effective January 1, 2000, the Company adopted the asset and liability method of accounting for income taxes (note 2). The significant components of the income tax recovery at June 30, 2000, comprise the following: JUNE 30, 2000 -------- Future tax recovery......................................... $ (410) Future income tax benefit resulting from reduction in corporate tax rates....................................... (490) ------- $ (900) ======= The provision for income taxes consists differs from the amount that would have resulted by applying Canadian federal and provincial statutory tax rates of approximately 43% (1999-1997 -- 45%) as described in the followingtable below: JUNE 30, DECEMBER 31, ------------------ ----------------------------- 2000 1999 1999 1998 1997 ------- ------- ------- ------- ------- Income tax recovery calculated using statutory tax rates.... $ (IN THOUSANDS537) Current: Federal................................................... $ 3,841 $ 4,540 $ (296) $11,611 $(9,743) Non-taxable income (losses)................................. -- $168 Foreign................................................... 351 (3,883) (4,766) 227 9,679 Application of unrecognized tax loss carryforwards and deductions................................................ -- 90 State..................................................... 1,409 -- 1 13,371 (82) (119) (16) Unrecognized tax loss carryforwards and deductions.......... -- 259 Deferred: Federal................................................... 42 278 216 -- Non-deductible portion of capital losses.................... 145 -- -- -- -- Large corporations tax...................................... -- 6 12 12 12 Reduction in statutory rates................................ (4,143490) -- -- Foreign................................................... -- -- Other....................................................... (18) -- -- -- State..................................................... (1,3352) -- -- ------- ------- ------- ------- ------- $ (5,478900) -- -- $ 7,893 $-- $259 6 $ (18) $ 40 $ (70) ======= === ===== 44 HARMONIC INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The Company's (benefit) provision for income taxes differed from the amount computed by applying the statutory U.S. federal income tax rate to income (loss) before income taxes as follows: DECEMBER 31, 1999 1998 1997 (IN THOUSANDS) Provision at statutory rate........................... $11,051 $(7,294) $ 1,764 Differential (benefit) in rates on foreign earnings... (20) 774 (111) State taxes, net of federal benefit................... 48 -- 1 Foreign sales corporation benefit..................... (307) -- (176) Acquired in-process technology and non-deductible goodwill............................................ 106 4,863 -- Utilization of net operating loss carryovers.......... (597) -- (1,661) Utilization of research credits....................... (548) -- -- Future benefits not currently recognized.............. 508 2,116 364 Realized deferred tax assets previously reserved...... (3,249) -- -- Alternative minimum tax............................... -- -- 51 Others, net........................................... 901 (459) 27 $ 7,893======= $ --======= $ 259======= Deferred tax assets (liabilities) comprise the following: DECEMBER 31, 1999 1998 1997 (IN THOUSANDS) Net operating loss carryovers.......................... $ -- $ 845 $ 303 Research and development credit carryovers............. -- 3,285 2,452 Capitalized research and development costs............. 283 71 234 Reserves not currently deductible...................... 4,863 2,814 1,657 Other.................................................. 332 419 96 Total deferred tax assets.................... 5,478 7,434 4,742 Valuation allowance.................................... -- (7,434) (4,742) Net deferred tax assets................................ $5,478====== $ -- ======= $ --======= ======= ======= The valuation allowance at December 31, 1998 and 1997 was attributed tax effects of temporary differences that give rise to deferred tax assets. Management believed that sufficient uncertainty existed regarding the realizability of these items such that a full valuation allowance was recorded. The Company's income taxes payable for federal, state, and foreign purposes have been reduced by the tax benefits of disqualifying dispositions of stock options. The Company receives an income tax benefit for compensation expense for tax purposes which is calculated as the difference between the market value significant portions of the stock issued future tax assets and future tax liabilities at the time of exercise and the option price at the applicable income tax rates. This benefit is recorded as an increase in capital in excess of par value.June 30, 2000 are presented below:

Income Taxes. The Company has no deferred provision for income taxes. The current provision for income taxes consists of the following: following (in thousands): YEAR ENDED DECEMBER 31, ------------------------------------ 1999 -------- 1998 -------- 1997 (IN THOUSANDS) -------- Current: Federal................................................... ............................................ $ 65 $11,611 $160 $ -- $168 Foreign................................................... 351 -- 90 State..................................................... 1,409 -- 1 13,371 -- 259 Deferred: Federal................................................... (4,143) -- .............................................. 30 21 -- Foreign................................................... -- -- -- State..................................................... ............................................ 793 ---- $888 ==== 678 ---- $859 ==== 322 ---- $322 ==== Foreign pre-tax income (1,335loss) -- -- was $2.0 million, 0.1 million and (5,478$2.8) -- -- $ 7,893 million in 1999, 1998 and 1997, respectively. The difference between the provision for taxes on income and the amount computed by applying the federal statutory income tax rate to income before provision for income taxes and equity in loss of unconsolidated affiliate is explained below (in thousands): YEAR ENDED DECEMBER 31, ------------------------------ 1999 -------- 1998 -------- 1997 -------- Loss before provision for income taxes $-- (60,942) $259 (42,798) $(72,571) ======== ======== ======== 44 HARMONIC Tax at federal statutory rate $(20,720) $(14,552) $(24,675) Unbenefitted losses............................ 21,074 14,698 24,660 Other.......................................... 534 713 337 -------- -------- -------- $ 888 $ 859 $ 322 ======== ======== ======== At December 31, 1999, the Company had U.S. federal and state net operating loss carryforwards of $413.3 million and $69.8 million, respectively. The federal net operating loss carryforwards will expire at various dates beginning in 2001 through 2019, if not utilized. The state net operating loss carryforwards will expire at various dates from 2000 through 2012, if not utilized. Utilization of net operating losses may be subject to an annual limitation due to ownership change limitations provided in 82 GILEAD SCIENCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The Company's (benefit) provision for income taxes differed from the amount computed by applying the statutory U.S. federal income tax rate to income (loss) before income taxes as follows: DECEMBER 31, 1999 1998 1997 (IN THOUSANDS) Provision at statutory rate........................... $11,051 $(7,294) $ 1,764 Differential (benefit) in rates on foreign earnings... (20) 774 (111) State taxes, net of federal benefit................... 48 -- 1 Foreign sales corporation benefit..................... (307) -- (176) Acquired in-process technology and non-deductible goodwill............................................ 106 4,863 -- Utilization of net operating loss carryovers.......... (597) -- (1,661) Utilization of research credits....................... (548) -- -- Future benefits not currently recognized.............. 508 2,116 364 Realized deferred tax assets previously reserved...... (3,249) -- -- Alternative minimum tax............................... -- -- 51 Others, net........................................... 901 (459) 27 $ 7,893======= $ --======= $ 259======= Deferred tax assets (liabilities) comprise the following: DECEMBER 31, 1999 1998 1997 (IN THOUSANDS) Net operating loss carryovers.......................... $ -- $ 845 $ 303 Research and development credit carryovers............. -- 3,285 2,452 Capitalized research and development costs............. 283 71 234 Reserves not currently deductible...................... 4,863 2,814 1,657 Other.................................................. 332 419 96 Total deferred tax assets.................... 5,478 7,434 4,742 Valuation allowance.................................... -- (7,434) (4,742) Net deferred tax assets................................ $5,478====== $ -- ======= $ --======= The valuation allowance at December 31, 1998 and 1997 was attributed to deferred tax assets. Management believed that sufficient uncertainty existed regarding the realizability of these items such that a full valuation allowance was recorded. The Company's income taxes payable for federal, state, and foreign purposes have been reduced by the tax benefits of disqualifying dispositions of stock options. The Company receives an income tax benefit for compensation expense for tax purposes which is calculated as the difference between the market value of the stock issued at the time of exercise and the option price at the applicable income tax rates. This benefit is recorded as an increase in capital in excess of par value.1999

Income Taxes. The provision YEARS ENDED DECEMBER 31, ------------------------- 1994 1993 1992 ------- ------- ------- (IN THOUSANDS) Earnings before income taxes consist of: Domestic........................................... $51,975 $41,305 $35,499 Foreign............................................ 1,263 7,142 1,338 ------- ------- ------- Provision for income taxes consists of the followingof: DECEMBER 31, 1999 1998 1997 (IN THOUSANDS) Current: Federal................................................... Federal-- $11,611 53,238 $-- 48,447 $168 Foreign................................................... 351 -- 90 State..................................................... 1,409 -- 1 13,371 -- 259 Deferred: Federal................................................... (4,143) -- -- Foreign................................................... -- -- -- State..................................................... (1,335) -- -- (5,478) -- -- $ 7,893 $-- $259 36,837 ======= === ===== 44 HARMONIC INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The Company's (benefit) provision for income taxes differed from the amount computed by applying the statutory U.S. federal income tax rate to income (loss) before income taxes as follows: DECEMBER 31, 1999 1998 1997 (IN THOUSANDS) Provision at statutory rate........................... $11,051 $(7,294) $ 1,764 Differential (benefit) in rates on foreign earnings... (20) 774 (111) State taxes, net of federal benefit................... 48 -- 1 Foreign sales corporation benefit..................... (307) -- (176) Acquired in-process technology and non-deductible goodwill............................................ 106 4,863 -- Utilization of net operating loss carryovers.......... (597) -- (1,661) Utilization of research credits....................... (548) -- -- Future benefits not currently recognized.............. 508 2,116 364 Realized deferred tax assets previously reserved...... (3,249) -- -- Alternative minimum tax............................... -- -- 51 Others, net........................................... 901 (459) 27 $ 7,893======= $ --======= $ 259======= Deferred tax assets (liabilities) comprise the following: DECEMBER 31, 1999 1998 1997 (IN THOUSANDS) Net operating loss carryovers.......................... $ -- $ 845 $ 303 Research and development credit carryovers............. -- 3,285 2,452 Capitalized research and development costs............. 283 71 234 Reserves not currently deductible...................... 4,863 2,814 1,657 Other.................................................. 332 419 96 Total deferred tax assets.................... 5,478 7,434 4,742 Valuation allowance.................................... -- (7,434) (4,742) Net deferred tax assets................................ $5,478====== $ -- ======= Current.......................................... $18,596 $17,428 $10,927 Deferred......................................... (4,475) (4,773) (2,245) ------- ------- ------- 14,121 12,655 8,682 State and local-- ------- ------- ------- Current.......................................... 4,972 4,667 3,693 Deferred......................................... (639) (682) (559) ------- ------- ------- 4,333 3,985 3,134 Foreign-- ------- ------- ------- Current.......................................... (856) 2,407 1,459 Deferred......................................... 1,100 (46) (361) ------- ------- ------- 244 2,361 1,098 ------- ------- ------- Total provision...................................... $18,698 $19,001 $12,914 ======= ======= ======= Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax liabilities and assets as of December 31 are as follows: 1994 1993 ------- ------- (IN THOUSANDS) Deferred tax liabilities: Leveraged leases.............................................. $ --======= The valuation 2,972 $ 3,847 Other......................................................... 3,773 2,805 ------- ------- Deferred tax liabilities.................................... 6,745 6,652 Deferred tax assets: ------- ------- Accrued and unfunded compensation and employee benefits....... 9,776 6,620 Accrued liabilities........................................... 7,487 6,206 Unrealized investment losses.................................. 1,929 -- Other......................................................... 1,875 1,166 ------- ------- Total deferred tax assets................................... 21,067 13,992 Valuation allowance for deferred tax assets................. -- -- ------- ------- Deferred tax assets......................................... 21,067 13,992 ------- ------- Net deferred tax assets......................................... $14,322 $ 7,340 ======= ======= XXXXXX X. XXXXXXXXX & CO. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) A reconciliation of the provision for income taxes with the U.S. federal income tax rate is as follows: YEARS ENDED DECEMBER 31, ----------------------------------------------- 1994 1993 1992 --------------- --------------- --------------- % OF % OF % OF PRETAX PRETAX PRETAX AMOUNT INCOME AMOUNT INCOME AMOUNT INCOME ------- ------ ------- ------ ------- ------ (IN THOUSANDS) Federal statutory rate......... $18,640 35.0 $16,956 35.0 $12,525 34.0 State income taxes--net of federal....................... 2,693 5.1 2,090 4.3 2,035 5.5 Dividend exclusion............. (993) (1.9) (699) (1.5) (888) (2.4) Pre-acquisition earnings of pooled companies taxed to previous owners............... (750) (1.4) 1,158 2.4 (65) (0.1) Foreign taxes.................. 388 .7 1,262 2.6 740 2.0 General business credits....... (2,510) (4.7) (1,655) (3.4) (1,074) (2.9) Other--net..................... 1,230 2.3 (111) (0.2) (359) (1.0) ------- ---- ------- ---- ------- ---- $18,698 35.1 $19,001 39.2 $12,914 35.1 ======= ==== ======= ==== ======= ==== Due to changes in the U.S. federal income tax laws, effective in 1994, the Company began providing for U.S. income taxes on the undistributed earnings of its foreign subsidiaries. Prior to 1994, the Company did not provide for U.S. income taxes on the undistributed earnings ($19,200,000 at December 31, 1998 and 1997 was attributed to 1994) of certain foreign subsidiaries which are considered permanently invested outside of the U.S. The amount of unrecognized deferred tax assetsliability on these undistributed earnings is $5,300,000. Management believed that sufficient uncertainty existed regarding the realizability of these items such that a full valuation allowance was recordedXXXXXX X. XXXXXXXXX & CO. The Company's income taxes payable for federal, state, and foreign purposes have been reduced by the tax benefits of disqualifying dispositions of stock options. The Company receives an income tax benefit for compensation expense for tax purposes which is calculated as the difference between the market value of the stock issued at the time of exercise and the option price at the applicable income tax rates. This benefit is recorded as an increase in capital in excess of par value.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

Income Taxes. The provision for income taxes consists of the following: SEVEN MONTHS YEAR ENDED MAY 31, ENDED YEAR ENDED --------------------- DECEMBER 31, 1999 1998 1997 DECEMBER 31, Current 1994 1995 1995 1996 Federal................... $3,084,000 $3,275,000 $3,708,000 $12,803,000 State..................... 809,000 952,000 954,000 2,881,000 Deferred Federal................... 170,000 (IN THOUSANDS555,000) Current: Federal................................................... 9,000 544,000 State..................... 43,000 (161,000) (40,000) 123,000 ---------- ---------- ---------- ----------- $11,611 4,106,000 $-- 3,511,000 $168 Foreign................................................... 351 -- 90 State..................................................... 1,409 -- 1 13,371 -- 259 Deferred: Federal................................................... (4,143) -- -- Foreign................................................... -- -- -- State..................................................... (1,335) -- -- (5,478) -- -- $ 7,893 4,631,000 $-- $259 16,351,000 ========== ========== ========== 44 HARMONIC =========== TOTAL RENAL CARE HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUEDSTATEMENTS--(CONTINUED) The Company's (benefit) provision for income taxes differed from the amount computed by applying the statutory U.S. federal income Temporary differences which give rise to deferred tax rate to income (loss) before income taxes assets and liabilities are as follows: DECEMBER 31, 1999 1998 1997 ------------------------ 1995 1996 Receivables, primarily allowance for doubtful accounts....................................... $ 1,653,000 $ 2,724,000 Accrued vacation................................ 459,000 831,000 Intangible assets............................... 325,000 Deferred compensation........................... 117,000 107,000 ----------- ----------- Gross deferred tax assets..................... 2,554,000 3,662,000 ----------- ----------- Depreciation and amortization................... (IN THOUSANDS952,000) Provision at statutory (1,811,000) Intangible assets............................... (1,173,000) Change in tax accounting method................. (570,000) (313,000) ----------- ----------- Gross deferred tax liabilities................ (1,522,000) (3,297,000) ----------- ----------- Net deferred tax assets....................... $ 1,032,000 $ 365,000 =========== =========== The reconciliation between the Company's effective tax rate and the U.S. federal income tax rate on income is as follows: YEAR ENDED SEVEN MONTHS MAY 31, ENDED YEAR ENDED ------------- DECEMBER 31, DECEMBER 31, 1994 1995 1995 1996 Federal income tax rate........................... $11,051 $(7,294) $ 1,764 Differential (benefit) in rates on foreign earnings... (20) 774 (111) .......... 34.0% 34.0% 35.0% 35.0% State taxes, net of federal benefit................... 48 -- 1 Foreign sales corporation benefit..................... (307) -- (176) Acquired in-process technology and non-deductible goodwill............................................ 106 4,863 -- Utilization ......................... 5.7% 5.9% 5.3% 4.7% Nondeductible amortization of net operating loss carryovers.......... (597) -- (1,661) Utilization of research credits....................... (548) -- -- Future benefits not currently recognized.............. 508 2,116 364 Realized deferred tax assets previously reserved...... (3,249) -- -- Alternative minimum tax............................... -- -- 51 Others, net........................................... 901 (459) 27 $ 7,893======= $ --======= $ 259======= Deferred tax assets (liabilities) comprise the following: DECEMBER 31, 1999 1998 1997 (IN THOUSANDS) Net operating loss carryovers.......................... $ -- $ 845 $ 303 Research and development credit carryovers............. -- 3,285 2,452 Capitalized research and development costs............. 283 71 234 Reserves not currently deductible...................... 4,863 2,814 1,657 Other.................................................. 332 419 96 Total deferred tax intangible assets.................... 5,478 7,434 4,742 Valuation allowance.................................... -- (7,434) (4,742) Net deferred tax assets................................ $5,478====== $ -- ======= $ --======= The valuation allowance at December 31, 1998 and 1997 was attributed to deferred tax assets. Management believed that sufficient uncertainty existed regarding the realizability of these items such that a full valuation allowance was recorded. The Company's income taxes payable for federal, state, and foreign purposes have been reduced by the tax benefits of disqualifying dispositions of stock options. The Company receives an income tax benefit for compensation expense for tax purposes which is calculated as the difference between the market value of the stock issued at the time of exercise and the option price at the applicable income tax rates. This benefit is recorded as an increase in capital in excess of par value................ 0.7% 1.1% 1.1% 0.8%

Income Taxes. The provision Income tax data from continuing operations is as follows: For the years ended December 31, ------------------------ 2002 ------ 2001 ------ 2000 ------ Pretax income U.S. .............................. $309.2 $190.0 $171.2 Foreign............................ Provision (benefit) for income taxes consists of the following: DECEMBER 31, 1999 1998 1997 (IN THOUSANDS) Current: Federal................................................... tax 199.6 ------ $11,611 $-- $168 Foreign................................................... 351 -- 90 State..................................................... 1,409 -- 1 13,371 -- 259 Deferred: Federal................................................... (4,143) -- -- Foreign................................................... -- -- -- State..................................................... (1,335) -- -- (5,478) -- -- $ 7,893 $-- $259 =508.8 ====== 143.4 ------ $333.4 ====== 248.7 ------ $419.9 ====== Current U.S. federal....................... $(48.0) $ (9.8) $ 58.1 State and local.................... 0.9 5.2 8.3 Foreign............................ Deferred 44.7 ------ (2.4) ------ 32.7 ------ 28.1 ------ 93.2 ------ 159.6 ------ U.S. federal....................... 104.0 71.1 (3.1) State and local.................... - - - Foreign............................ Total income tax expense............ 27.3 ------ 131.3 ------ $128.9 ====== 17.5 ------ 88.6 ------ $116.7 ====== (1.1) ------ (4.2) ------ $155.4 ====== A reconciliation of the tax provision at the U.S. statutory rate to the effective income tax expense rate as reported is as follows: For the years ended December 31, --------------------- 2002 ----- 2001 ----- 2000 ----- Tax provision at U.S. statutory rate..... 35.0% 35.0% 35.0% Foreign tax rate differential............ 0.4 2.1 1.5 Effect of repatriation of foreign earnings................................ (1.6) (4.6) (0.3) State income taxes, net of federal benefit................................. 0.1 1.0 1.3 Goodwill................................. - 2.7 1.9 Research & development credit............ - (0.9) (1.5) Tax benefit of foreign sales corporation............................. (0.9) (1.7) (0.6) Capital loss carryback................... (6.0) - - Other.................................... (1.7) 1.4 (0.3) ---- ---- ---- Effective income tax expense rate........ 25.3% 35.0% 37.0% ==== ==== 44 HARMONIC ==== Deferred income taxes are established for temporary differences between the amount of assets and liabilities recognized for financial reporting purposes and for tax reporting purposes. ITT INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The Company's (benefit) provision for income taxes differed from the amount computed by applying the statutory U.S. federal income tax rate to income (loss) before income taxes as follows: DECEMBER 31, 1999 1998 1997 (IN THOUSANDS) Provision at statutory rate........................... $11,051 $(7,294) $ 1,764 Differential (benefit) in rates on foreign earnings... (20) 774 (111) State taxes, net of federal benefit................... 48 -- 1 Foreign sales corporation benefit..................... (307) -- (176) Acquired in-process technology and non-deductible goodwill............................................ 106 4,863 -- Utilization of net operating loss carryovers.......... (597) -- (1,661) Utilization of research credits....................... (548) -- -- Future benefits not currently recognized.............. 508 2,116 364 Realized deferred tax assets previously reserved...... (3,249) -- -- Alternative minimum tax............................... -- -- 51 Others, net........................................... 901 (459) 27 $ 7,893======= $ --======= $ 259======= Deferred tax assets (liabilities) comprise ), for which no valuation allowances have been provided, include the following: DECEMBER December 31, 1999 1998 1997 --------------- 2002 ------ 2001 ------ Employee benefits............................ $379.2 $ 26.0 Accelerated depreciation..................... (IN THOUSANDS) Net operating loss carryovers.......................... $ -- $ 845 $ 303 Research and development credit carryovers............. -- 3,285 2,452 Capitalized research and development costs............. 283 71 234 Reserves not currently deductible...................... 4,863 2,814 1,657 Other.................................................. 332 419 96 Total deferred tax assets.................... 5,478 7,434 4,742 Valuation allowance.................................... -- (7,43442.1) (4,74231.2) Net deferred tax assets................................ Nondeductible accruals....................... 146.9 250.3 Long-term contracts.......................... 1.1 6.8 Uniform capitalization....................... 9.8 9.3 Loss carryforward............................ - 13.6 Other........................................ 38.0 ------ $5,478====== $ -- =532.9 ====== $ --======= 22.8 ------ $297.6 ====== No provision was made for U.S. taxes payable on accumulated undistributed foreign earnings of certain subsidiaries amounting to approximately $48.6, since these amounts are permanently reinvested. As of December 31, 2002, the Company had approximately $23 of foreign tax credit carryforwards. The valuation allowance credit carryforwards will expire as follows: $0.5 on December 31, 2003, $0.2 on December 31, 2004, $10.2 on December 31, 2005 and $12.1 on December 31, 2006. Shareholders' equity at December 31, 1998 2002 and 1997 was attributed 2001 reflects tax benefits related to deferred tax assets. Management believed that sufficient uncertainty existed regarding the realizability stock options exercised in 2002 and 2001 of these items such that a full valuation allowance was recordedapproximately $40.2 and $30.8, respectively. The Company's IRS is currently examining the federal consolidated tax returns of the Company for the years ended December 31, 1996 and December 31, 1997. The IRS has completed its examination of all years through 1995. As of December 31, 2002, the Company believes the accrual for income taxes payable for federal, state, and foreign purposes have been reduced by the tax benefits of disqualifying dispositions of stock optionsis sufficient to cover potential liabilities arising from these examinations. The Company receives an income tax benefit for compensation expense for tax purposes which is calculated as the difference between the market value of the stock issued at the time of exercise and the option price at the applicable income tax rates. This benefit is recorded as an increase in capital in excess of par value.NOTE 8

Income Taxes. The provision for income taxes consists Significant components of the following: DECEMBER 31, 1999 1998 1997 (IN THOUSANDS) Current: Federal................................................... $11,611 $-- $168 Foreign................................................... 351 -- 90 State..................................................... 1,409 -- 1 13,371 -- 259 Deferred: Federal................................................... (4,143) -- -- Foreign................................................... -- -- -- State..................................................... (1,335) -- -- (5,478) -- -- $ 7,893 $-- $259 ======= === ==== 44 HARMONIC INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The Company's (benefit) provision for income taxes differed from the amount computed by applying the statutory U.S. federal income tax rate to income (loss) before income taxes as follows: DECEMBER 31, 1999 1998 1997 (IN THOUSANDS) Provision at statutory rate........................... $11,051 $(7,294) $ 1,764 Differential (benefit) in rates on foreign earnings... (20) 774 (111) State taxes, net of federal benefit................... 48 -- 1 Foreign sales corporation benefit..................... (307) -- (176) Acquired in-process technology and non-deductible goodwill............................................ 106 4,863 -- Utilization of net operating loss carryovers.......... (597) -- (1,661) Utilization of research credits....................... (548) -- -- Future benefits not currently recognized.............. 508 2,116 364 Realized deferred tax assets previously reserved...... (3,249) -- -- Alternative minimum tax............................... -- -- 51 Others, net........................................... 901 (459) 27 $ 7,893======= $ --======= $ 259======= Deferred tax assets and (liabilities) comprise the followingare as follows at December 31: DECEMBER 31, 1999 1998 1997 (IN THOUSANDS) -------- 2000 -------- Net operating loss carryovers.......................... carryforward........................ $ 8,962 $ 10,354 Effect of state income taxes........................... (1,022) -- $ 845 $ 303 Research and development credit carryovers............. -- 3,285 2,452 Accrued expenses....................................... 333 89 Tax credits............................................ 1,730 2,457 Bad debt reserve....................................... 64 45 Depreciation........................................... (114) (141) Amortization........................................... (1,782) (1,393) Inventory write-downs.................................. 266 137 Capitalized research and development costs............. 283 71 234 Reserves not currently deductible...................... 4,863 2,814 1,657 development................... 2,313 1,963 Deferred revenue....................................... 777 175 Deferred compensation amortization..................... 327 417 Other.................................................. 332 419 96 Total deferred Deferred tax assets.................... 5,478 7,434 4,742 .................................... 3 -------- 11,857 1 -------- 14,104 Valuation allowance.................................... -- (7,434) (4,742) Net deferred tax assets................................ $5,478====== (11,857) -------- $ -- ======== (14,104) -------- $ --======= -- ======== The valuation allowance at December 31increased by $3,486, 1998 $1,762 and 1997 was attributed to deferred tax assets. Management believed that sufficient uncertainty existed regarding the realizability of these items such that a full valuation allowance was recorded$2,247 in 1998, 1999 and 2000, respectively. The Company's effective tax rate differs from the statutory rate of 35% due to federal and state losses which were recorded without tax benefit. At December 31, 2000, the Company has net operating loss carryforwards for federal and state income taxes payable tax purposes of approximately $29,709 and $4,340, respectively, which begin to expire in 2009 and 2001, respectively. In addition, the Company has research and development and other tax credits for federal, statefederal and state income tax purposes of approximately $1,284, and foreign purposes have been reduced by $1,173, respectively, which begin to expire in 2011. Because of the "change of ownership" provision of the Tax Reform Act of 1986, utilization of the Company's net operating loss and research credit carryforwards may be subject to an annual limitation against taxable income in future periods. As a result of the annual limitation, a portion of these carryforwards may expire before ultimately becoming available to reduce future income tax benefits of disqualifying dispositions of stock optionsliabilities. The Company receives an income tax benefit results of operations for compensation expense for tax purposes which is calculated as the difference between years ended December 31, 1998, 1999 and 2000 includes the market value net losses of the stock issued at the time Company's wholly-owned German and majority-owned Japanese subsidiary of exercise $1,029, $177 and the option price at the applicable income tax rates. This benefit is recorded as an increase in capital in excess of par value$176, respectively.

Income Taxes. The provision for income taxes consists of the following: DECEMBER 31, following components (in thousands): 2000 1999 1998 1997 -------- -------- ------- Current...................................... $ (IN THOUSANDS137) Current: Federal................................................... $11,611 $$ -- $168 Foreign................................................... 351 -- 90 State..................................................... 1,409 -- 1 13,371 -- 259 $ (64) Deferred: Federal................................................... (4,143) -- -- Foreign................................................... ..................................... -- -- -- State..................................................... -------- -------- ------- $ (1,335137) -- -- (5,478) -- $ -- $ 7,893 $-- $259 ======= === ==== 44 HARMONIC INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED64) -------- -------- ------- The current income tax expense for the year ended December 31, 2000 is related to the Company's (benefit) international operations in Europe. The provision for income taxes differed differs from the amount computed by applying the statutory U.S. federal income tax rate to income (loss) before income taxes as follows: DECEMBER follows (in thousands): 2000 -------- 1999 -------- 1998 ------- Income tax (provision) / benefit at federal statutory rate of 35%....................... $ 99,728 $ 28,070 $ 9,966 Nondeductible goodwill....................... (46,706) (8,237) (186) Nondeductible acquisition costs.............. (5,079) (1,099) (488) Nondeductible charges for purchased research and development............................. (28,035) (3,220) -- Change in valuation allowance resulting from items other than those attributable to paid-in capital and acquisition adjust- ments....................................... (16,949) (14,305) (7,284) Other........................................ (3,096) -------- (1,209) -------- (2,072) ------- Net tax (provision) / benefit................ $ (137) $ 0 $ (64) -------- -------- ------- INFOSPACE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Years Ended December 31, 2000, 1999 and 1998 1997 (IN THOUSANDS) Provision at statutory rate........................... $11,051 $(7,294) $ 1,764 Differential (benefit) in rates on foreign earnings... (20) 774 (111) State taxes, net The tax effects of federal benefit................... 48 -- 1 Foreign sales corporation benefit..................... (307) -- (176) Acquired in-process technology temporary differences and non-deductible goodwill............................................ 106 4,863 -- Utilization of net operating loss carryovers.......... (597) -- (1,661) Utilization of research credits....................... (548) -- -- Future benefits not currently recognized.............. 508 2,116 364 Realized carryforwards that give rise to the Company's deferred tax assets previously reserved...... and liabilities are as follows (3,249) in thousands): 2000 1999 1998 --------- -------- -------- Deferred Tax Assets: Current Deferred revenue........................ $ 5,366 $ 367 $ 473 Compensation expense--stock options..... -- -- Alternative minimum tax............................... -- -- 51 Others2,002 59 Other, net........................................... 901 (459) 27 $ 7,893======= $ --======= $ 259======= Deferred tax assets (liabilities) comprise the following: DECEMBER 31, 1999 1998 1997 (IN THOUSANDS) .............................. 4,175 5,156 2,535 Total current............................. --------- 9,541 -------- 7,525 -------- 3,067 Non-current Net operating loss carryovers.......................... $ carryforward......... 375,240 51,327 4,262 Tax credit carryforward................. 8,645 1,643 513 Deductible acquisition costs, net....... 5,140 -- $ 845 $ 303 Research and development credit carryovers-- Unrealized investment losses............ 5,501 -- -- Depreciation & amortization............. -- 3,285 2,452 Capitalized research and development costs............. 283 71 234 Reserves not currently deductible...................... 4,863 2,814 1,657 10,595 2,292 233 Other.................................................. 332 419 96 , net.............................. Total non-current......................... Total gross deferred tax assets.................... 5,478 7,434 4,742 Valuation allowance.................................... ............. 7,747 --------- 412,868 --------- 422,409 --------- 17,964 -------- 73,226 -------- 80,751 -------- 8,214 -------- 13,222 -------- 16,289 -------- Deferred Tax Liabilities: Non-current Other unrealized income................. 6,924 -- (7,434) (4,742) Net deferred tax assets................................ $5,478====== $ -- ======= $ --======= The valuation allowance at December 31, 1998 and 1997 was attributed to deferred tax assets. Management believed that sufficient uncertainty existed regarding the realizability of these items such that a full valuation allowance was recorded. The Company's income taxes payable for federal, state, and foreign purposes have been reduced by the tax benefits of disqualifying dispositions of stock options. The Company receives an income tax benefit for compensation expense for tax purposes which is calculated as the difference between the market value of the stock issued at the time of exercise and the option price at the applicable income tax rates. This benefit is recorded as an increase in capital in excess of par value.--

Income Taxes. The provision for income taxes consists of the followingIncome tax expense is summarized as follows: DECEMBER YEARS ENDED JANUARY 31, 2000 1999 1998 1997 (IN THOUSANDS) Current: Federal................................................... .................................................. $11,611 2,601 $ 3,080 $-- $168 1,675 State.................................................... 154 (775) 197 Foreign................................................... 351 -- 90 State..................................................... 1,409 -- 1 13,371 -- 259 .................................................. 1,521 (361) 2,421 Total.................................................. 4,276 1,944 4,293 Deferred: Federal................................................... .................................................. (4,143542) (1,914) 2,449 State.................................................... -- -- 881 (573) Foreign................................................... -- -- -- State..................................................... .................................................. 1,367 227 990 Total.................................................. 825 (1,335806) -- -- (5,478) -- -- 2,866 $5,101 $ 7,893 1,138 $-- $259 7,159 ====== ======= === ==== 44 HARMONIC INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The Company's (benefit) provision for Actual income taxes differed tax expense differs from the amount computed that obtained by applying the statutory U.S. federal Federal income tax rate of 34% (35% in fiscal 1998) to income (loss) before income taxes as follows: DECEMBER YEARS ENDED JANUARY 31, 2000 1999 1998 1997 (IN THOUSANDS) Provision at statutory Statutory Federal income tax rate........................... $11,051 ....................... 34% 34% 35% Computed expected tax expense (benefit)................. $(7,2943,820) $(11,827) $ 1,764 Differential (benefit) in rates on foreign earnings... (20) 774 (111) 5,968 State income taxes, net of federal Federal income tax benefit................... 48 -- 1 ... 102 (806) 815 Incremental tax expense from foreign operations......... (507) 415 203 Foreign sales corporation benefit..................... (307) -- (176) Acquired in-process technology and non-deductible goodwill............................................ 106 4,863 -- Utilization of net operating loss carryovers.......... (597) -- (1,661) Utilization of research credits....................... (548) withholding taxes............................... 768 -- -- Future benefits not currently recognized.............. 508 2,116 364 Realized deferred Net change in valuation allowance....................... 11,407 13,401 (267) Meals and entertainment................................. 426 407 325 Research, AMT and foreign tax assets previously reserved...... credits................... (3,2495,155) (408) (1,135) Foreign dividends....................................... -- -- Alternative minimum tax............................... -- -- 51 Others, net........................................... 901 (459) 27 $ 7,893======= $ --======= $ 259======= Deferred tax assets (liabilities) comprise the following: DECEMBER 31, 1999 1998 1997 (IN THOUSANDS) Net operating loss carryovers.......................... $ -- $ 845 $ 303 Research and development credit carryovers............. -- 3,285 2,452 Capitalized 541 Reduction of research and development costs............. 283 71 234 Reserves not currently deductiblecredits and foreign tax credits previously recorded............... -- -- 600 Tax expense related to prior years...................... 4,863 2,814 1,657 1,599 -- -- Other.................................................. 332 419 96 Total deferred tax assets.................... 5,478 7,434 4,742 Valuation allowance.................................... -- ................................................... 281 (7,43444) (4,742) Net deferred tax assets................................ $5,478====== 109 $ -- 5,101======= $ 1,138 ======== $ --======= The valuation allowance at December 7,159======= QAD INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Significant components of the deferred tax assets and liabilities are as follows: JANUARY 31, 1998 ------------------- 2000 1999 -------- -------- (IN THOUSANDS) Allowance for doubtful accounts and 1997 was attributed to deferred sales adjustments..... $ 1,013 $ 2,231 Accrued vacation.......................................... 1,064 661 Accrued commission........................................ 128 369 Alternative minimum tax................................... 296 91 Research and development credits.......................... 6,387 1,232 Foreign tax assets. Management believed that sufficient uncertainty existed regarding the realizability of these items such that a full valuation allowance was recorded. The Company's income taxes payable for federal, state, credits....................................... 2,265 1,594 Depreciation and foreign purposes have been reduced by the tax benefits of disqualifying dispositions of stock options. The Company receives an income tax benefit for compensation expense for tax purposes which is calculated as the difference between the market value of the stock issued at the time of exercise and the option price at the applicable income tax rates. This benefit is recorded as an increase in capital in excess of par value.amortization............................. 215 269 Net operating loss carryforwards.......................... 18,716 14,937

Income Taxes. The components of the provision for income taxes consists are as follows: YEARS ENDED DECEMBER 31, 2001 2000 1999 Current: Federal.................................................. $ 86.1 $ 93.9 $ 69.9 State.................................................... 8.4 11.7 13.9 Federal and state deferred................................. (10.7) 29.8 50.6 Change in valuation allowance.............................. -- -- (8.7) Provision for income taxes................................. $ 83.8====== $135.4====== $125.7====== A reconciliation of the followingstatutory federal income tax rate to the Company's effective tax rate is shown below: YEARS ENDED DECEMBER 31, 2001 2000 1999 Statutory federal income tax rate........................... 35.0% 35.0% 35.0% Non-deductible expenses..................................... 1.3 1.3 1.2 State income taxes, net of federal benefit.................. 2.6 3.0 3.5 Other, net.................................................. 1.1 (1.3) (1.2) Effective income tax rate................................... 40.0%==== 38.0%==== 38.5%==== Components of deferred income taxes in the accompanying Consolidated Balance Sheets are as follows: DECEMBER 31, 1999 1998 1997 ------------------ 2001 2000 ------- ------- Deferred tax assets (IN THOUSANDSliabilities): Current portion -- Book basis in property over tax basis.................. $ .8 $ .8 Accruals not currently deductible...................... 5.8 (2.6) Current: Federal................................................... $11,611 $-- $168 Foreign................................................... 351 -- 90 State..................................................... 1,409 -- 1 13,371 -- 259 Deferred: Federal................................................... ------- ------- Total............................................. $ 6.6 $ (4,1431.8) -- -- Foreign................................................... -- -- -- State..................................................... (1,335) -- -- (5,478) -- -- $ 7,893 $-- $259 ======= ======= Long-term portion -- Book basis in property over tax basis.................. $(140.1) $(138.3) Accruals not currently deductible...................... 21.4 13.5 ------- ------- Total............................................. $(118.7) $(124.8) ======= ======= 44 HARMONIC In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The Company adjusts the valuation allowance in the period management determines it is more likely than not that deferred tax assets will or will not be realized. The Company made income tax payments of approximately $109.3 million, $89.3 million and $100.3 million for the years ended December 31, 2001, 2000 and 1999, respectively. 67 REPUBLIC SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The Company's (benefit) provision for income taxes differed from the amount computed by applying the statutory U.S. federal income tax rate to income (loss) before income taxes as follows: DECEMBER 31, 1999 1998 1997 (IN THOUSANDS) Provision at statutory rate........................... $11,051 $(7,294) $ 1,764 Differential (benefit) in rates on foreign earnings... (20) 774 (111) State taxes, net of federal benefit................... 48 -- 1 Foreign sales corporation benefit..................... (307) -- (176) Acquired in-process technology and non-deductible goodwill............................................ 106 4,863 -- Utilization of net operating loss carryovers.......... (597) -- (1,661) Utilization of research credits....................... (548) -- -- Future benefits not currently recognized.............. 508 2,116 364 Realized deferred tax assets previously reserved...... (3,249) -- -- Alternative minimum tax............................... -- -- 51 Others, net........................................... 901 (459) 27 $ 7,893======= $ --======= $ 259======= Deferred tax assets (liabilities) comprise the following: DECEMBER 31, 1999 1998 1997 (IN THOUSANDS) Net operating loss carryovers.......................... $ -- $ 845 $ 303 Research and development credit carryovers............. -- 3,285 2,452 Capitalized research and development costs............. 283 71 234 Reserves not currently deductible...................... 4,863 2,814 1,657 Other.................................................. 332 419 96 Total deferred tax assets.................... 5,478 7,434 4,742 Valuation allowance.................................... -- (7,434) (4,742) Net deferred tax assets................................ $5,478====== $ -- ======= $ --======= The valuation allowance at December 31, 1998 and 1997 was attributed to deferred tax assets. Management believed that sufficient uncertainty existed regarding the realizability of these items such that a full valuation allowance was recorded. The Company's income taxes payable for federal, state, and foreign purposes have been reduced by the tax benefits of disqualifying dispositions of stock options. The Company receives an income tax benefit for compensation expense for tax purposes which is calculated as the difference between the market value of the stock issued at the time of exercise and the option price at the applicable income tax rates. This benefit is recorded as an increase in capital in excess of par value.)

Income Taxes. The provision for income taxes consists includes federal, state and foreign taxes currently payable and those deferred because of temporary differences between the financial statement and the tax bases of assets and liabilities. The components of the followingprovision for income taxes follow: FOR THE YEAR ENDED DECEMBER 31, 1997 1998 1999 1998 1997 (IN THOUSANDS) Current: Federal................................................... ............................................ $ 16,126 $11,611 $-- $168 18,316 $ 9,928 State.............................................. 2,639 4,426 1,746 Foreign................................................... 351 -- 90 State..................................................... 1,409 -- 1 13,371 -- 259 ............................................ 28 724 5,508 18,793 23,466 17,182 Deferred: Federal................................................... ............................................ (4,1434,991) 282 532 Foreign............................................ (6,724) 968 8,886 (11,715) 1,250 9,418 Total provision................................. $ 7,078======== $24,716======= $26,600======= The reconciliation between the taxes payable based upon the U.S. federal statutory income tax rate and the recorded provision follows: FOR THE YEAR ENDED DECEMBER 31, 1997 1998 1999 Federal statutory rate.............................. $ 21,352 $35,257 $ 36,162 State taxes, net of federal benefit................. 1,285 2,877 2,028 S Corp. status of AEI through April 28, 1998........ (3,613) (4,500) -- Deferred taxes established at termination of S Corp. status of AEI..................................... -- Foreign................................................... (1,954) -- Income of foreign subsidiaries subject to tax holiday........................................... (5,106) (9,129) (14,860) Foreign exchange (losses)/gains recognized for income taxes...................................... (21,147) 12,602 8,023 Change in valuation allowance....................... 22,000 (8,079) (11,084) Difference in rates on foreign subsidiaries......... (7,693) (3,377) (630) Goodwill and other permanent differences............ -- 1,019 6,961 Total.......................................... $ 7,078======== $24,716======= $ 26,600======== The Company has structured its global operations to take advantage of lower tax rates in certain countries and tax incentives extended to encourage investment. AAAP has a tax holiday in the Philippines which expires at the end of 2002. Foreign exchange (losses)/gains recognized for income taxes relate to unrecognized net foreign exchange (losses)/gains on U.S. dollar denominated monetary assets and liabilities. These (losses)/gains, which are not recognized for financial reporting purposes as the U.S. dollar is the functional currency (see Note 1), result in deferred tax assets that will be realized, for Philippine tax reporting purposes, upon settlement of the related asset or liability. The net deferred tax asset related to these losses increased in 1997 as a result of the dramatic devaluation of the Philippine peso relative to the U.S. dollar. These assets decreased in 1998 and 1999 as they were realized for Philippine tax reporting purposes. The Company's ability to utilize these assets depends on the timing of the settlement of the related assets or liabilities and the amount of taxable income recognized within the Philippine statutory carryforward limit of 66 AMKOR TECHNOLOGY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) three years. During 1999, AAP reversed a valuation allowance established in prior years for a portion of the related deferred tax assets. During 1999, AAP realized all foreign net operating loss carryforwards established in 1998. In addition, minimum corporate income tax credits of $1,182 reversed to offset current foreign tax obligations. The following is a summary of the significant components of the Company's deferred tax assets and liabilities: FOR THE YEAR ENDED DECEMBER 31, 1997 1998 1999 Deferred tax assets (liabilities): Retirement benefits............................... $ 816 $ 1,038 $ 463 Other accrued liabilities......................... 100 4,571 2,579 Receivables....................................... 227 1,717 523 Inventories....................................... 6,509 2,583 3,892 Property, plant and equipment..................... -- (2,139) (2,539) Unrealized foreign exchange losses................ 37,447 15,805 480 Unrealized foreign exchange gains................. (9,084) (3,530) (2,175) Loss on sale of investment in ASI................. -- 1,620 1,620 Net foreign operating loss carryforward........... -- 3,646 -- Minimum corporate income tax...................... -- 1,182 -- Equity in earnings of investees................... -- -- -- State..................................................... 1,148 Other............................................. (1,3352) -- -- 191 191 Net deferred tax asset............................ 36,013 26,684 6,182 Valuation allowance............................... (5,47822,000) -- -- (13,921) (2,837) Net deferred tax asset............................ $ 7,893 $-- $259 14,013 $ 12,763 $ 3,345 ======== ======== ======= 44 HARMONIC Non-U.S. income before taxes and minority interest of the Company was approximately $33,000, $54,000 and $74,000 in 1997, 1998 and 1999, respectively. The company does not pay or record U.S. income taxes on the undistributed earnings of its foreign subsidiaries as long as those earnings are permanently reinvested in the companies that produced them. These cumulative undistributed earnings are included in consolidated retained earnings on the balance sheet and amounted to approximately $112,000 as of December 31, 1999. An estimated $27,000 in U.S. income and foreign withholding taxes would be due if these earnings were remitted as dividends. At December 31, 1998 and 1999 current deferred tax assets of $9,838 and $5,793, respectively, are included in other current assets and noncurrent deferred tax assets of $2,925 and $2,324, respectively, are included in other assets in the consolidated balance sheet. The Company's net deferred tax assets include amounts which, in the opinion of management, are more likely than not to be realizable through future taxable income. In addition, at December 31, 1999, noncurrent deferred tax liabilities of $4,772 are included in other noncurrent liabilities in the consolidated balance sheet. The Company's tax returns have been examined through 1995 in the Philippines and through 1994 in the U.S. The tax returns for open years are subject to changes upon final examination. Changes in the mix of income from the Company's foreign subsidiaries, expiration of tax holidays and changes in tax laws or regulations could result in increased effective tax rates for the Company. 67 AMKOR TECHNOLOGY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The Company's (benefit) provision for income taxes differed from the amount computed by applying the statutory U.S. federal income tax rate to income (loss) before income taxes as follows: DECEMBER 31, 1999 1998 1997 (IN THOUSANDS) Provision at statutory rate........................... $11,051 $(7,294) $ 1,764 Differential (benefit) in rates on foreign earnings... (20) 774 (111) State taxes, net of federal benefit................... 48 -- 1 Foreign sales corporation benefit..................... (307) -- (176) Acquired in-process technology and non-deductible goodwill............................................ 106 4,863 -- Utilization of net operating loss carryovers.......... (597) -- (1,661) Utilization of research credits....................... (548) -- -- Future benefits not currently recognized.............. 508 2,116 364 Realized deferred tax assets previously reserved...... (3,249) -- -- Alternative minimum tax............................... -- -- 51 Others, net........................................... 901 (459) 27 $ 7,893======= $ --======= $ 259======= Deferred tax assets (liabilities) comprise the following: DECEMBER 31, 1999 1998 1997 (IN THOUSANDS) Net operating loss carryovers.......................... $ -- $ 845 $ 303 Research and development credit carryovers............. -- 3,285 2,452 Capitalized research and development costs............. 283 71 234 Reserves not currently deductible...................... 4,863 2,814 1,657 Other.................................................. 332 419 96 Total deferred tax assets.................... 5,478 7,434 4,742 Valuation allowance.................................... -- (7,434) (4,742) Net deferred tax assets................................ $5,478====== $ -- ======= $ --======= The valuation allowance at December 31, 1998 and 1997 was attributed to deferred tax assets. Management believed that sufficient uncertainty existed regarding the realizability of these items such that a full valuation allowance was recorded. The Company's income taxes payable for federal, state, and foreign purposes have been reduced by the tax benefits of disqualifying dispositions of stock options. The Company receives an income tax benefit for compensation expense for tax purposes which is calculated as the difference between the market value of the stock issued at the time of exercise and the option price at the applicable income tax rates. This benefit is recorded as an increase in capital in excess of par value.)

Income Taxes. The components of income from continuing operations before income taxes and the details of the provision for income taxes consists of the followingare as follows: DECEMBER 31, 1999 1998 1997 (IN THOUSANDS) Current----------------------- 1996 1995 1994 ------- ------- ------- Income from continuing operations before income taxes: Federal................................................... Domestic............................................. $11,611 72,005 $-- 51,470 $168 42,995 Foreign................................................... 351 -- 90 State..................................................... 1,409 -- 1 13,371 -- 259 Deferred: Federal................................................... (4,143) -- -- Foreign................................................... -- -- -- State..................................................... (1,335) -- -- (5,478) -- -- $ 7,893 .............................................. 6,655 17,787 14,768 ------- ------- ------- Total............................................ $-- 78,660 $259 69,257 $57,763 ======= === ===== 44 HARMONIC INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The Company's (benefit) provision for income taxes differed from the amount computed by applying the statutory U.S. federal income tax rate to income (loss) before income taxes as follows: DECEMBER 31, 1999 1998 1997 (IN THOUSANDS) Provision at statutory rate........................... $11,051 $(7,294) $ 1,764 Differential (benefit) in rates on foreign earnings... (20) 774 (111) State taxes, net of federal benefit................... 48 -- 1 Foreign sales corporation benefit..................... (307) -- (176) Acquired in-process technology and non-deductible goodwill............................................ 106 4,863 -- Utilization of net operating loss carryovers.......... (597) -- (1,661) Utilization of research credits....................... (548) -- -- Future benefits not currently recognized.............. 508 2,116 364 Realized deferred tax assets previously reserved...... (3,249) -- -- Alternative minimum tax............................... -- -- 51 Others, net........................................... 901 (459) 27 $ 7,893======= $ --======= $ 259======= Deferred tax assets (liabilities) comprise the following: DECEMBER 31, 1999 1998 1997 (IN THOUSANDS) Net operating loss carryovers.......................... $ -- $ 845 $ 303 Research and development credit carryovers............. -- 3,285 2,452 Capitalized research and development costs............. 283 71 234 Reserves not currently deductible...................... 4,863 2,814 1,657 Other.................................................. 332 419 96 Total deferred tax assets.................... 5,478 7,434 4,742 Valuation allowance.................................... -- (7,434) (4,742) Net deferred tax assets................................ $5,478====== $ -- ======= $ --======= The valuation allowance at December 31Provision for income taxes: Current: Federal............................................ $19,837 $12,764 $10,963 Foreign............................................ 2,640 7,378 5,860 State.............................................. 2,580 1,423 258 ------- ------- ------- Total current.................................... 25,057 21,565 17,081 Deferred: ------- ------- ------- Federal............................................ 227 1,851 1,214 Foreign............................................ 1,495 1,410 2,209 State.............................................. 691 674 640 ------- ------- ------- Total deferred................................... 2,413 3,935 4,063 ------- ------- ------- Total provision.................................. $27,470 $25,500 $21,144 ======= ======= ======= 31 AMETEK, 1998 and 1997 was attributed to INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Significant components of the Company's deferred tax assets. Management believed that sufficient uncertainty existed regarding (asset) liability as of December 31 are as follows: (IN THOUSANDS) ------------------ 1996 1995 -------- -------- Current deferred tax asset: Reserves not currently deductible........................ $ (9,171) $ (9,825) Other.................................................... (1,915) (2,000) -------- -------- Net current deferred tax asset......................... (11,086) (11,825) ======== ======== Long-term deferred tax (asset) liability: Differences in basis of property and accelerated depreciation............................................ 23,508 21,547 Purchased tax benefits................................... 10,110 13,268 Reserves not currently deductible........................ (11,528) (13,798) Other.................................................... 13,009 10,910 -------- -------- Net long-term deferred tax liability................... 35,099 31,927 -------- -------- Net deferred tax liability............................. $ 24,013 $ 20,102 ======== ======== The effective rate of the realizability of these items such that a full valuation allowance was recorded. The Company's provision for income taxes payable for federalreconciles to the statutory rate as follows: 1996 1995 1994 ---- ---- Statutory rate................................................ 35.0% 35.0% 35.0% State income taxes, state, and foreign purposes have been reduced by the tax benefits net of disqualifying dispositions of stock options. The Company receives an federal income tax benefit for compensation expense for benefit......... 2.7 2.0 0.9 Foreign Sales Corporation and other tax purposes which is calculated as the difference between the market value credits............... (2.7) (2.7) (3.2) Effect of the stock issued at the time of exercise and the option price at the applicable income tax rates. This benefit is recorded as an increase in capital in excess of par value.foreign operations.................................. 0.9 3.9 4.7 Other......................................................... (1.0) (1.4) (0.8) ---- ---- ----

Income Taxes. The income tax provision for income taxes consists in the accompanying consolidated financial statements of operations relating to Mercom, Inc., a majority-owned subsidiary, is comprised of the following: DECEMBER 31, 1999 1998 1997 (IN THOUSANDS) Current: ---- Current Federal................................................... $11,611 $-- $168 Foreign................................................... 351 -- 90 State..................................................... 1,409 -- 1 13,371 -- 259 Deferred: Federal................................................... (4,143) -- -- Foreign................................................... -- -- $ -- State....................................................... -- ---- Total Current............................................... -- ---- Deferred Federal..................................................... 171 State....................................................... 15 ---- Total Deferred.............................................. 186 ---- Total provision for income taxes............................ $186 ==== The benefit for income taxes is different from the amounts computed by applying the U.S. statutory federal tax rate of 35% for 1998. The differences are as follows: 1998 Loss before provision for income taxes...................... $(1,3358,833) -- -- (5,478) -- -- $ 7,893 $-- $259 ======= === ==== 44 HARMONIC INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Federal tax provision at statutory rates.................... $(CONTINUED3,092) The Company's State income taxes.......................................... (benefit182) provision Allocated to members........................................ 3,082 Goodwill.................................................... 6 ------- Provision for income taxes differed from the amount computed by applying the statutory U.S. federal income tax rate to income (loss) before income taxes as follows: DECEMBER 31, 1999 1998 1997 (IN THOUSANDS) Provision at statutory rate........................... $11,051 $(7,294) taxes.................................. $ 1,764 Differential (benefit) in rates on foreign earnings... (20) 774 (111) State taxes, net of federal benefit................... 48 -- 1 Foreign sales corporation benefit..................... (307) -- (176) Acquired in-process technology and non-deductible goodwill............................................ 106 4,863 -- Utilization of net operating loss carryovers.......... (597) -- (1,661) Utilization of research credits....................... (548) -- -- Future benefits not currently recognized.............. 508 2,116 364 Realized deferred tax assets previously reserved...... (3,249) -- -- Alternative minimum tax............................... -- -- 51 Others, net........................................... 901 (459) 27 $ 7,893======= $ --======= $ 259======= Deferred tax assets (liabilities) comprise the following: DECEMBER 31, 1999 1998 1997 (IN THOUSANDS) Net operating loss carryovers.......................... $ -- $ 845 $ 303 Research and development credit carryovers............. -- 3,285 2,452 Capitalized research and development costs............. 283 71 234 Reserves not currently deductible...................... 4,863 2,814 1,657 Other.................................................. 332 419 96 Total deferred tax assets.................... 5,478 7,434 4,742 Valuation allowance.................................... -- (7,434) (4,742) Net deferred tax assets................................ $5,478====== $ -- 186 ======= $ --======= The valuation allowance at December YEAR TAX NET OPERATING LOSSES EXPIRATION DATE ---- --------- ---------- 1998.................................................... $922 2018 44 AVALON CABLE LLC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1998 and 1997 was attributed (DOLLARS IN THOUSANDS) Temporary differences that give rise to significant portion of deferred tax assets. Management believed that sufficient uncertainty existed regarding the realizability of these items such that a full valuation allowance was recorded. The Company's income taxes payable for federal, state, assets and foreign purposes have been reduced by the tax benefits of disqualifying dispositions of stock options. The Company receives an income tax benefit for compensation expense for tax purposes which is calculated liabilities at December 31 are as the difference between the market value of the stock issued at the time of exercise and the option price at the applicable income tax rates. This benefit is recorded as an increase in capital in excess of par value.follows: 1998 -------

Income Taxes. The provision Company accounts for income taxes consists under the provisions of SFAS No. 109, "Accounting for Income Taxes." SFAS No. 109 requires recognition of deferred tax assets and liabilities for the following: DECEMBER expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial reporting and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The sources of income (loss) before income taxes, equity in net earnings of affiliates and extraordinary loss were as follows for the years ended December 31, 2001, 2000 and 1999 1998 1997 (IN THOUSANDSin millions): 2001 2000 1999 United States.......................................... $ (104.6) Current: Federal................................................... $11,611 $-- $168 $ (109.3) $ (96.9) Foreign................................................... 351 -- 90 State..................................................... 1,409 -- 1 13,371 -- 259 Deferred: Federal................................................... ................................................ 119.3 95.4 64.7 Income (4,143loss) -- -- Foreign................................................... -- -- -- State..................................................... before income taxes, equity in net earnings of affiliates and extraordinary loss........ $ 14.7 $ (1,33513.9) -- -- $ (5,47832.2) -- -- $ 7,893 $-- $259 ======== ======== ======== 44 HARMONIC INC. AGCO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The Company's provision (benefit) provision for income taxes differed from by location of the amount computed by applying taxing jurisdiction for the statutory U.S. federal years ended December 31, 2001, 2000 and 1999 consisted of the following (in millions): 2001 2000 1999 Current: United States: Federal............................................... $ -- $ (7.4) $ (3.3) State................................................. -- (0.2) -- Foreign.................................................. 34.7 37.6 40.3 34.7 30.0 37.0 Deferred: United States: Federal............................................... (33.8) (33.4) (31.2) State................................................. (4.1) (5.2) (4.1) Foreign.................................................. 5.1 1.0 (11.9) (32.8) (37.6) (47.2) $ 1.9 $ (7.6) $(10.2) ====== ====== ====== Certain foreign operations of the Company are subject to United States as well as foreign income tax rate to regulations. Therefore, the preceding sources of income (loss) before income taxes as follows: DECEMBER 31, 1999 1998 1997 (IN THOUSANDS) Provision at statutory rate........................... $11,051 $(7,294) $ 1,764 Differential by location and the provision (benefit) for income taxes by taxing jurisdiction are not directly related. At December 31, 2001, the Company had approximately $639.2 million of undistributed earnings of the Company's foreign subsidiaries. These earnings are considered to be indefinitely invested, and accordingly, no United States federal or state income taxes have been provided on these earnings. Determination of the amount of unrecognized deferred taxes on these earnings is not practical, however, unrecognized foreign tax credits would be available to reduce a portion of the tax liability. A reconciliation of income taxes computed at the United States federal statutory income tax rate (35%) to the provision (benefit) for income taxes reflected in rates on foreign earnings... the Consolidated Statements of Operations for the years ended December 31, 2001, 2000 and 1999 is as follows (20in millions): 2001 2000 1999 Provision (benefit) 774 for income taxes at United States federal statutory rate of 35%............................ $ 5.2 $ (1114.9) $(11.3) State and local income taxes, net of federal income tax benefit................... 48 .................................................. (4.1) (4.3) (3.9) Taxes on foreign income which differ from the United States statutory rate........................................... (2.5) 0.6 (0.7) Losses with no tax benefit................................. 2.8 4.2 6.2 Benefit of foreign sales corporation....................... -- 1 Foreign sales corporation benefit..................... -- (3070.5) Other...................................................... 0.5 (3.2) -- $ 1.9 $ (1767.6) Acquired in-process technology and non-deductible goodwill............................................ 106 4,863 -- Utilization of net operating loss carryovers.......... $(59710.2) -- (1,661) Utilization of research credits....................... (548) -- -- Future benefits not currently recognized.............. 508 2,116 364 Realized deferred tax assets previously reserved...... (3,249) -- -- Alternative minimum tax............................... -- -- 51 Others, net........................................... 901 (459) 27 $ 7,893======= $ --======= $ 259======= Deferred tax assets (liabilities) comprise the following: DECEMBER 31, 1999 1998 1997 (IN THOUSANDS) Net operating loss carryovers.......................... $ -- $ 845 $ 303 Research and development credit carryovers............. -- 3,285 2,452 Capitalized research and development costs............. 283 71 234 Reserves not currently deductible...................... 4,863 2,814 1,657 Other.................................................. 332 419 96 Total deferred tax assets.................... 5,478 7,434 4,742 Valuation allowance.................................... -- (7,434) (4,742) Net deferred tax assets................................ $5,478====== $ -- ======= $ --======= ====== ====== For 2000, the Company has included in "Other" the recognition of a United States tax credit carryback of approximately $2.0 million. AGCO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The valuation allowance significant components of the net deferred tax assets at December 31, 1998 2001 and 1997 was attributed to 2000 were as follows (in millions): 2001 2000 ------ ------ Deferred Tax Assets: Net operating loss carryforwards.......................... $141.6 $139.0 Sales incentive discounts................................. 30.6 22.8 Inventory valuation reserves.............................. 15.0 8.3 Postretirement benefits................................... 7.8 8.2 Other..................................................... 64.2 74.1 Valuation allowance....................................... (52.7) (71.8) ------ ------ Total deferred tax assets. Management believed that sufficient uncertainty existed regarding the realizability ......................... 206.5 180.6 ------ ------ Deferred Tax Liabilities: Tax over book depreciation................................ 23.5 24.2 Tax over book amortization of these items such that a full valuation allowance was recorded. The Company's income taxes payable for federal, state, and foreign purposes have been reduced by the goodwill.................... 18.2 17.9 Other..................................................... 19.1 16.3 ------ ------ Total deferred tax benefits of disqualifying dispositions of stock options. The Company receives an income tax benefit for compensation expense for tax purposes which is calculated as the difference between the market value of the stock issued at the time of exercise and the option price at the applicable income tax rates. This benefit is recorded as an increase in capital in excess of par value.liabilities.................... 60.8 58.4 ------ ------

Income Taxes. The components of the provision for income taxes consists are as follows: YEARS ENDED DECEMBER 31, 2000 1999 1998 Current: Federal................................................... $ 93.9 $ 69.9 $59.8 State..................................................... 11.7 13.9 7.5 Federal and state deferred.................................. 29.8 50.6 23.2 Change in valuation allowance............................... -- (8.7) (4.0) Provision for income taxes.................................. $135.4====== $125.7====== $86.5 ===== A reconciliation of the followingstatutory federal income tax rate to the Company's effective tax rate is shown below: YEARS ENDED DECEMBER 31, 2000 1999 1998 Statutory federal income tax rate........................... 35.0% 35.0% 35.0% Non-deductible expenses..................................... 1.3 1.2 1.3 State income taxes, net of federal benefit.................. 3.0 3.5 2.1 Other, net.................................................. (1.3) (1.2) (2.4) Effective income tax rate................................... 38.0%==== 38.5%==== 36.0%==== 55 REPUBLIC SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Components of the net deferred income tax liability in the accompanying Consolidated Balance Sheets are as follows: DECEMBER 31, ---------------- 2000 1999 1998 1997 ------ ------ Book basis in property over tax basis....................... $137.5 $107.5 Accruals not currently deductible........................... (IN THOUSANDS10.9) Current: Federal................................................... (13.1) ------ ------ Net deferred income tax liability........................... $11,611 $-- $168 Foreign................................................... 351 -- 90 State..................................................... 1,409 -- 1 13,371 -- 259 Deferred: Federal................................................... (4,143) -- -- Foreign................................................... -- -- -- State..................................................... (1,335) -- -- (5,478) -- -- 126.6 $ 7,893 $-- $259 =94.4 ====== === ==== 44 HARMONIC INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The Company's (benefit) provision for income taxes differed from In assessing the amount computed by applying realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the statutory U.S. federal income tax rate to income (loss) before income taxes as follows: DECEMBER 31, 1999 1998 1997 (IN THOUSANDS) Provision at statutory rate........................... $11,051 $(7,294) $ 1,764 Differential (benefit) in rates on foreign earnings... (20) 774 (111) State taxes, net of federal benefit................... 48 -- 1 Foreign sales corporation benefit..................... (307) -- (176) Acquired in-process technology and non-deductible goodwill............................................ 106 4,863 -- Utilization of net operating loss carryovers.......... (597) -- (1,661) Utilization of research credits....................... (548) -- -- Future benefits not currently recognized.............. 508 2,116 364 Realized deferred tax assets previously reserved...... (3,249) -- -- Alternative minimum tax............................... -- -- 51 Others, net........................................... 901 (459) 27 $ 7,893======= $ --======= $ 259======= Deferred tax assets (liabilities) comprise the following: DECEMBER 31, 1999 1998 1997 (IN THOUSANDS) Net operating loss carryovers.......................... $ -- $ 845 $ 303 Research and development credit carryovers............. -- 3,285 2,452 Capitalized research and development costs............. 283 71 234 Reserves will not currently deductible...................... 4,863 2,814 1,657 Other.................................................. 332 419 96 Total deferred tax assets.................... 5,478 7,434 4,742 Valuation allowance.................................... -- (7,434) (4,742) Net deferred tax assets................................ $5,478====== $ -- ======= $ --======= The valuation allowance at December 31, 1998 and 1997 was attributed to deferred tax assets. Management believed that sufficient uncertainty existed regarding the realizability of these items such that a full valuation allowance was recorded. The Company's income taxes payable for federal, state, and foreign purposes have been reduced by the tax benefits of disqualifying dispositions of stock optionsbe realized. The Company receives an income adjusts the valuation allowance in the period management determines it is more likely than not that deferred tax benefit for compensation expense for tax purposes which is calculated as the difference between the market value of the stock issued at the time of exercise and the option price at the applicable income tax rates. This benefit is recorded as an increase in capital in excess of par valueassets will or will not be realized.

Income Taxes. The income tax provision for income taxes consists of the following: following (in thousands): YEARS ENDED DECEMBER 31, 1999 1998 1997 2003 2002 2001 Income (IN THOUSANDSloss) Currentbefore provision (credit) for income taxes: Domestic $49,488 $37,668 $36,289 Foreign............................................... (5,998) 8,855 10,712 Current provision (credit) for income taxes: $43,490======= $46,523======= $47,001======= Federal............................................... $ 1,396 $15,006 $12,621 State................................................. (119) (831) 3,298 Foreign............................................... 1,871 2,464 2,943 3,148 16,639 18,862 Deferred provision (credit) for income taxes: Federal................................................... ............................................... 15,337 2,086 (1,028) State................................................. 625 (554) 454 Foreign............................................... (3,801) (13) 298 12,161 1,519 (276) Provision for income taxes.............................. $11,611 15,309======= $-- 18,158======= $168 Foreign................................................... 351 -- 90 State..................................................... 1,409 -- 1 13,371 -- 259 Deferred: Federal................................................... (4,143) -- -- Foreign................................................... -- -- -- State..................................................... (1,335) -- 18,586======= NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (5,478CONTINUED) The tax effects of timing differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities consist of the following (in thousands): AS OF DECEMBER 31, ------------------- 2003 -------- 2002 -------- Deferred tax assets: Allowance for credit losses............................... $ 4,870 $ 6,448 United Kingdom asset impairment........................... 3,192 -- Allowance for leased vehicle losses....................... 474 1,193 Deferred dealer enrollment fees........................... 455 222 Accrued liabilities....................................... 982 1,032 Unearned premiums......................................... 135 151 Reserve on notes receivable............................... 53 491 Foreign tax credits....................................... -- $ 7,893 1,852 Net operating losses...................................... 555 327 Valuation of receivables.................................. -- 2,601 Deferred revenue.......................................... 654 479 Stock-based compensation.................................. 2,654 1,609 Unrealized loss on currency............................... 1,022 -- Other, net................................................ 484 ------- 15,530 -- ------- 16,405 Less: Valuation allowance.............................. Total deferred tax assets.............................. Deferred tax liabilities: (1,294) ------- 14,236 ------- (437) ------- 15,968 ------- Unearned finance charges.................................. 18,264 17,117 Depreciable assets........................................ 3,211 4,299 Undistributed earnings.................................... -- 3,090 Valuation of receivables.................................. 15,035 -- Deferred origination costs................................ 496 266 Other, net................................................ Total deferred tax liabilities......................... Net deferred tax liability.................................. -- ------- 37,006 ------- $-- $259 22,770 ======= === ==== 44 HARMONIC INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The Company's (benefit) provision for income taxes differed from the amount computed by applying the statutory U.S. federal income tax rate to income (loss) before income taxes as follows: DECEMBER 31, 1999 1998 1997 (IN THOUSANDS) Provision at statutory rate........................... 1,254 ------- 26,026 ------- $11,051 $(7,294) $ 1,764 Differential (benefit) in rates on foreign earnings... (20) 774 (111) State taxes, net of federal benefit................... 48 -- 1 Foreign sales corporation benefit..................... (307) -- (176) Acquired in-process technology and non-deductible goodwill............................................ 106 4,863 -- Utilization of net operating loss carryovers.......... (597) -- (1,661) Utilization of research credits....................... (548) -- -- Future benefits not currently recognized.............. 508 2,116 364 Realized deferred tax assets previously reserved...... (3,249) -- -- Alternative minimum tax............................... -- -- 51 Others, net........................................... 901 (459) 27 $ 7,893======= $ --======= $ 259======= Deferred tax assets (liabilities) comprise the following: DECEMBER 31, 1999 1998 1997 (IN THOUSANDS) Net operating loss carryovers.......................... $ -- $ 845 $ 303 Research and development credit carryovers............. -- 3,285 2,452 Capitalized research and development costs............. 283 71 234 Reserves not currently deductible...................... 4,863 2,814 1,657 Other.................................................. 332 419 96 Total deferred tax assets.................... 5,478 7,434 4,742 Valuation allowance.................................... -- (7,434) (4,742) Net deferred tax assets................................ $5,478====== $ -- 10,058 ======= $ --======= The valuation allowance at December A reconciliation of the U.S. Federal statutory rate to the Company's effective tax rate are as follows: YEARS ENDED DECEMBER 31, 1998 and 1997 -------------------- 2003 ---- 2002 ---- 2001 ---- U.S. federal statutory rate................................. 35.0% 35.0% 35.0% State income taxes........................................ 0.8 (2.3) 5.5 Foreign income taxes...................................... 0.4 (1.4) (1.1) Undistributed foreign earnings............................ (3.0) 6.8 -- Valuation allowance....................................... 2.0 0.9 -- Other..................................................... Provision for income taxes.................................. -- ---- 35.2% ==== -- ---- 39.0% ==== 0.1 ---- 39.5% ==== NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) In 2001, there was attributed to deferred tax assets. Management believed that sufficient uncertainty existed regarding the realizability of these items such that a full valuation allowance was recorded. The Company's income taxes payable for federal, state, and foreign purposes have been reduced by the tax benefits of disqualifying dispositions of stock options. The Company receives an income tax benefit for compensation expense for tax purposes which is calculated as the difference between the market value of the stock issued at the time of exercise and the option price at the applicable income tax rates. This benefit is recorded as an increase in capital state income taxes due to the re-characterization of revenue resulting from the Internal Revenue Service examination. The 2001 state income tax expense is an estimated cumulative amount of taxes owed to various states for the years 1993 to 2001. The decrease in excess state income taxes in 2002 was primarily due to a change in the estimate of par valuethe cumulative amounts owed from 1993 to 2001. During 2002, management determined that the undistributed earnings of the Company's foreign subsidiaries should no longer be considered to be permanently reinvested. As a result of that determination, the Company recorded the amount of U.S. federal income taxes and withholding taxes that would be due upon repatriation of these earnings.

Income Taxes. In 1993, income before income taxes from foreign operations amounted to $6.7 million ($9.1 million in 1992 and $4.9 million in 1991). The details of the provision for (benefit from) income taxes consists of the followingfollow: DECEMBER 31, 1999 1998 1997 (IN THOUSANDS) Current: ------------------------ 1993 1992 1991 ------- ------- ------- Federal................................................... .............................................. $11,611 (7,125) $-- 16,357 $168 13,288 State................................................ (863) 1,327 2,547 Foreign................................................... 351 -- 90 State..................................................... 1,409 -- 1 13,371 -- 259 Deferred: Federal................................................... .............................................. 4,123 4,678 (4,1431,443)* ------- ------- ------- - - - -------- $(3,865) -- -- Foreign................................................... -- -- -- State..................................................... (1,335) -- -- (5,478) -- -- $ 7,893 $-- 22,362 $259 14,392 ======= === ===== 44 HARMONIC INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The Company's (benefit) provision for income taxes differed from the amount computed by applying the statutory U.S. federal income tax rate to income (loss) before income taxes as follows: DECEMBER 31, 1999 1998 1997 (IN THOUSANDS) Provision at statutory rate........................... $11,051 $(7,294) $ 1,764 Differential (benefit) in rates on foreign earnings... (20) 774 (111) State taxes, net of federal benefit................... 48 -- 1 Foreign sales corporation benefit..................... (307) -- (176) Acquired in-process technology and non-deductible goodwill............................................ 106 4,863 -- Utilization of net operating loss carryovers.......... (597) -- (1,661) Utilization of research credits....................... (548) -- -- Future benefits not currently recognized.............. 508 2,116 364 Realized deferred tax assets previously reserved...... (3,249) -- -- Alternative minimum tax............................... -- -- 51 Others, net........................................... 901 (459) 27 $ 7,893======= $ --======= $ 259======= Deferred tax assets (liabilities) comprise the following: DECEMBER 31, 1999 1998 1997 (IN THOUSANDS) Net operating loss carryovers.......................... $ -- $ 845 $ 303 Research and development credit carryovers............. -- 3,285 2,452 Capitalized research and development costs............. 283 71 234 Reserves not currently deductible...................... 4,863 2,814 1,657 Other.................................................. 332 419 96 Total deferred tax assets.................... 5,478 7,434 4,742 Valuation allowance.................................... -- (7,434) (4,742) Net deferred tax assets................................ $5,478====== $ -- ======= $ --======= *Includes the favorable tax effect of combining certain foreign operations. The valuation allowance at provision for (benefit from) income taxes shown above includes a current provision of $14,791, $20,435 and $14,284 and a deferred provision (benefit) of $(18,656), $1,927 and $108 for 1993, 1992 and 1991. Prior to January 1, 1992, the Company followed the provisions of SFAS No. 96, Accounting for Income Taxes. Effective January 1, 1992, the Company adopted the provisions of a new accounting standard for income taxes (SFAS No. 109). The effect of adopting this standard was not material. Significant components of the Company's deferred tax (asset) liability as of December 31, 1998 and 1997 was attributed to 31 are as follows: (IN THOUSANDS) ----------------- 1993 1992 -------- ------- Current deferred tax assets: Reserves not currently deductible......................... $(13,235) $(8,142) Other..................................................... (111) (208) -------- ------- Net current deferred tax asset.......................... (13,346) (8,350) Long-term deferred tax (assets) liabilities: Differences in basis of property and accelerated deprecia- -------- ------- tion..................................................... 23,056 23,220 Purchased tax benefits.................................... 17,654 18,452 Reserves not currently deductible......................... (17,015) (3,763) Other..................................................... 4,253 4,822 -------- ------- Net long-term deferred tax liability.................... 27,948 42,731 -------- ------- Net deferred tax liability.............................. $ 14,602 $34,381 ======== ======= 27 AMETEK, INC. Management believed that sufficient uncertainty existed regarding NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The effective rate of the realizability of these items such that a full valuation allowance was recorded. The Company's provision for (benefit from) income taxes payable for federalreconciles to the statutory rate as follows: 1993 1992 1991 ---- ---- Statutory rate.............................................. (35.0)% 34.0% 34.0% State income taxes, state, and foreign purposes have been reduced by the tax benefits net of disqualifying dispositions of stock options. The Company receives an federal income tax benefit for compensation expense for benefit....... (5.0) 2.2 2.8 Foreign Sales Corporation and other tax purposes which is calculated as the difference between the market value credits............. (15.0) (2.4) (2.9) Effect of the stock issued at the time foreign operations................................ 15.0 1.1 (6.8) Effect of exercise and the option price at the applicable income U.S. federal statutory tax rates. This benefit is recorded as an rate increase in capital in excess of par value.on prior years' deferred taxes............................. 5.9 -- -- Other....................................................... (0.4) (1.4) 0.4 ----- ---- ---- (34.5)% 33.5% 27.5% ===== ==== ====

Income Taxes. The provision Forrester accounts for income taxes in accordance with SFAS No. 109, Accounting for Income Taxes. SFAS No. 109 prescribes an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the financial statement carrying amounts and the tax basis of assets and liabilities. Income before income tax provision consists of the following: DECEMBER 31, following (in thousands): 1998 1999 1998 1997 2000 ------- ------- Domestic................................... $12,239 $16,811 $31,570 Foreign.................................... (IN THOUSANDS100) Current: Federal................................................... 759 2,467 ------- ------- ------- Total............................ $11,611 12,139 $-- 17,570 $168 Foreign................................................... 351 -- 90 State..................................................... 1,409 -- 1 13,371 -- 259 Deferred: Federal................................................... (4,143) -- -- Foreign................................................... -- -- -- State..................................................... (1,335) -- -- (5,478) -- -- $ 7,893 $-- $259 34,037 F-11 ======= ======= ======= 44 HARMONIC 39 XXXXXXXXX RESEARCH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The Company's (benefit) provision for income taxes differed from components of the amount computed by applying the statutory U.S. federal income tax rate to income provisions (lossbenefits) before income taxes as follows: DECEMBER for the years ended December 31, 1998, 1999 and 2000 are as follows (in thousands): 1998 1997 1999 2000 ------ ------- Current -- Federal................................. $3,800 $5,497 $11,031 State................................... 504 628 1,463 Foreign................................. -- -- 968 ------ ------ ------- 4,304 6,125 13,462 Deferred -- ------ ------ ------- Federal................................. 255 415 (IN THOUSANDS471) Provision at statutory rate........................... $11,051 $State................................... 33 49 (7,294139) $ 1,764 Differential (benefit) in rates on foreign earnings... (20) 774 (111) State taxes, net of federal benefit................... 48 Foreign................................. -- 1 Foreign sales corporation benefit..................... (307) -- (176429) Acquired in-process technology and non-deductible goodwill............................................ 106 4,863 -- Utilization of net operating loss carryovers.......... ------ ------ ------- 288 464 (5971,039) -- (1,661) Utilization of research credits....................... (548) -- -- Future benefits not currently recognized.............. 508 2,116 364 Realized deferred ------ ------ ------- Income tax assets previously reserved...... (3,249) -- -- Alternative minimum tax............................... -- -- 51 Others, net........................................... 901 (459) 27 $ 7,893======= $ --======= $ 259======= Deferred tax assets (liabilities) comprise the following: DECEMBER 31, 1999 1998 1997 (IN THOUSANDS) Net operating loss carryovers.......................... $ -- $ 845 $ 303 Research and development credit carryovers............. -- 3,285 2,452 Capitalized research and development costs............. 283 71 234 Reserves not currently deductible...................... 4,863 2,814 1,657 Other.................................................. 332 419 96 Total deferred tax assets.................... 5,478 7,434 4,742 Valuation allowance.................................... -- (7,434) (4,742) Net deferred tax assets................................ provision............... $5,478====== $ -- 4,592 $6,589 $12,423 ====== ====== ======= $ --======= The valuation allowance at A reconciliation of the federal statutory rate to Xxxxxxxxx'x effective tax rate for the years ended December 31, 1998, 1999 and 2000 is as follows: 1998 and 1997 was attributed to deferred 1999 2000 ---- ---- ---- Income tax assets. Management believed that sufficient uncertainty existed regarding the realizability of these items such that a full valuation allowance was recorded. The Company's income taxes payable for federal, state, and foreign purposes have been reduced by the provision at federal statutory rate...... 34.0% 35.0% 35.0% Increase (decrease) in tax benefits of disqualifying dispositions of stock options. The Company receives an income tax benefit for compensation expense for tax purposes which is calculated as the difference between the market value of the stock issued at the time of exercise and the option price at the applicable income tax rates. This benefit is recorded as an increase in capital in excess of par value.resulting from --

Income Taxes. The provision for income taxes consists of the following: following (in thousands): YEAR ENDED DECEMBER 31, 1999 1998 1997 2000 2001 Current -- Federal............................................... $25,622 $ 4,841 $14,683 State and Puerto Rico................................. 4,777 3,534 3,257 30,399 8,375 17,940 Deferred -- Federal............................................... 2,067 (IN THOUSANDS2,679) Current: Federal................................................... (974) State and Puerto Rico................................. (728) 89 (434) 1,339 (2,590) (1,408) $11,611 31,738======= $ 5,785======= $16,532======= The difference in income taxes provided for and the amounts determined by applying the federal statutory tax rate to income before income taxes results from the following (in thousands): YEAR ENDED DECEMBER 31, 1999 2000 2001 Income tax expense (benefit) at the statutory rate...... $25,921 $(3,838) $10,380 Increase resulting from -- State income taxes, net of federal tax effect......... 2,567 1,652 2,154 Non-deductible goodwill amortization.................. 2,730 2,817 2,754 Non-deductible goodwill writeoffs related to restructuring...................................... -- 4,300 -- Non-deductible expenses............................... 492 778 1,225 Other................................................. 28 76 19 $168 Foreign................................................... 351 -- 90 State..................................................... 1,409 -- 1 13,371 -- 259 Deferred: Federal................................................... (4,143) -- -- Foreign................................................... -- -- -- State..................................................... (1,335) -- -- (5,478) -- -- 31,738 $ 7,893 5,785 $-- $259 16,532 ======= ======= ======= 44 HARMONIC Deferred income tax provisions result from current period activity that has been reflected in the financial statements but which is not includable in determining the Company's tax liabilities until future periods. Deferred tax assets and liabilities reflect the tax effect in future periods of all such activity to date that has been reflected in the financial statements but which is not includable in determining the Company's tax liabilities until future periods. 41 COMFORT SYSTEMS USA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The Company's (benefit) provision for income taxes differed from the amount computed by applying the statutory U.S. federal income tax rate to income (loss) before income taxes as follows: -- CONTINUED DECEMBER 31, 1999 1998 1997 ------------------ 2000 2001 ------- -------- (IN THOUSANDS) Provision at statutory rate........................... $11,051 $Deferred income tax assets -- Accounts receivable and allowance for doubtful accounts... $ 2,652 $ 5,153 Accrued liabilities and expenses.......................... 8,210 9,338 Net operating loss........................................ 4,355 5,921 Other..................................................... 541 1,337 ------- -------- Total deferred income tax assets.................. 15,758 21,749 ------- -------- Deferred income tax liabilities -- Property and equipment.................................... (7,2941,729) $ 1,764 Differential (benefit1,628) in rates on foreign earnings... Long-term contracts....................................... (20995) 774 (1111,841) State taxes, net of federal benefit................... 48 -- 1 Foreign sales corporation benefit..................... Goodwill.................................................. (3075,833) (9,248) Other..................................................... (369) -- (176) Acquired in-process technology and non-deductible goodwill............................................ 106 4,863 -- Utilization of net operating loss carryovers.......... (597) -- (1,661) Utilization of research credits....................... (548) -- -- Future benefits not currently recognized.............. 508 2,116 364 Realized deferred tax assets previously reserved...... (3,249) -- -- Alternative minimum tax............................... -- -- 51 Others, net........................................... 901 (459) 27 $ 7,893======= $ --======= $ 259======= Deferred tax assets (liabilities) comprise the following: DECEMBER 31, 1999 1998 1997 (IN THOUSANDS) Net operating loss carryovers.......................... $ -- $ 845 $ 303 Research and development credit carryovers............. -- 3,285 2,452 Capitalized research and development costs............. 283 71 234 Reserves not currently deductible...................... 4,863 2,814 1,657 Other.................................................. 332 419 96 ------- -------- Total deferred income tax liabilities............. (8,926) (12,717) ------- -------- Less -- Valuation allowance................................. (1,951) (2,743) ------- -------- Net deferred income tax assets.................... 5,478 7,434 4,742 Valuation allowance.................................... -- (7,434) (4,742) Net deferred tax assets................................ $5,478====== $ -- 4,881 $ 6,289 ======= ======== The deferred income tax assets and liabilities reflected above are included in the consolidated balance sheets as follows (in thousands): DECEMBER 31, ---------------- 2000 ------ 2001 ------- Deferred income tax assets -- Prepaid expenses and other................................ $4,478 $13,987 Other non-current assets.................................. Total deferred income tax assets............................ Deferred income tax liabilities -- 403 ------ 4,881 ------ -- ------- 13,987 ------- Deferred income taxes..................................... Net deferred income tax assets............................ -- ------ $4,881 ====== (7,698) ------- $ --======= The valuation allowance at 6,289 ======= At December 31, 1998 and 1997 was attributed to 2001, the Company had $5.9 million of available state net operating loss carry forwards for income tax purposes which expire 2013-2021. At December 31, 2001, the Company's net deferred tax assets. Management believed that sufficient uncertainty existed regarding the realizability of these items such that assets are partially offset by a full valuation allowance was recorded. The Company's income taxes payable for federal, state, and foreign purposes have been reduced by the tax benefits of disqualifying dispositions of stock optionsallowance. The Company receives an income will continue to assess the valuation allowance and to the extent it is determined that such allowance is no longer required, the tax benefit for compensation expense for tax purposes which is calculated as the difference between the market value of the stock issued at remaining net deferred tax assets will be recognized in the time of exercise and the option price at the applicable income tax rates. This benefit is recorded as an increase in capital in excess of par valuefuture.

Income Taxes. The income tax provision for income taxes consists (benefit) in the accompanying consolidated financial statements of operations is comprised of the following: 1996 1997 1998 Current Federal..................................................... $(6,700) $ 245 $ 320 State....................................................... -- -- 28 Total Current............................................... (6,700) 245 348 Deferred: Federal..................................................... 988 (4,359) (2,074) State....................................................... -- -- (183) Total Deferred.............................................. 988 (4,359) (2,257) Total (benefit) for income taxes............................ $(5,712)======= $(4,114)======= $(1,909)======= The benefit for income taxes is different from the amounts computed by applying the U.S. statutory federal tax rate of 35% for 1996, 34% for 1997 and 35% for the period from January 1, 1998 to November 5, 1998. The differences are as follows: YEAR ENDED PERIOD FROM DECEMBER 31, 1999 JANUARY 1, 1998 TO -------------------- NOVEMBER 11, 1996 1997 1998 -------- -------- ------------------ (IN THOUSANDSLoss) Current: Federal................................................... before (benefit) for income taxes.............. $11,611 (15,119) $ (8,525) $-- $168 Foreign................................................... 351 -- 90 State..................................................... 1,409 -- 1 13,371 -- 259 Deferred: Federal................................................... (4,14312,368) -- -- Foreign................................................... -- -- -- State..................................................... (1,335) -- -- (5,478) -- -- $ 7,893 $-- $259 ======== === ====== 44 HARMONIC INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The Company's (benefit) provision for income taxes differed from the amount computed by applying the statutory U.S. federal income tax rate to income (loss) before income taxes as follows: DECEMBER 31, 1999 1998 1997 (IN THOUSANDS) Provision at statutory rate........................... $11,051 $(7,294) $ 1,764 Differential (benefit) in rates on foreign earnings... (20) 774 (111) State taxes, net of federal benefit................... 48 -- 1 Foreign sales corporation benefit..................... (307) -- (176) Acquired in-process technology and non-deductible goodwill............................................ 106 4,863 -- Utilization of net operating loss carryovers.......... (597) -- (1,661) Utilization of research credits....................... (548) -- -- Future benefits not currently recognized.............. 508 2,116 364 Realized deferred tax assets previously reserved...... (3,249) -- -- Alternative minimum tax............................... -- -- 51 Others, net........................................... 901 (459) 27 $ 7,893======= $ --======= $ 259======= Deferred tax assets (liabilities) comprise the following: DECEMBER 31, 1999 1998 1997 (IN THOUSANDS) Net operating loss carryovers.......................... $ -- $ 845 $ 303 Research and development credit carryovers............. -- 3,285 2,452 Capitalized research and development costs............. 283 71 234 Reserves not currently deductible...................... 4,863 2,814 1,657 Other.................................................. 332 419 96 Total deferred tax assets.................... 5,478 7,434 4,742 Valuation allowance.................................... -- (7,434) (4,742) Net deferred tax assets................................ $5,478====== $ -- ======== Federal tax (benefit) at statutory rates.............. $ --======= The (5,307) $ (2,899) $ (4,329) State income taxes.................................... -- -- (101) Goodwill.............................................. 175 171 492 Increase (decrease) in valuation allowance at allowance............ (518) (1,190) -- Nondeductible expenses................................ -- 147 2,029 Benefit of rate differential applied to reversing timing differences.................................. -- (424) -- Other, net............................................ (62) 81 -- -------- -------- -------- (Benefit) for income taxes............................ $ (5,712) $ (4,114) $ (1,909) ======== ======== ======== Mercom, which files a separate consolidated income tax return, has the following net operating losses available: YEAR TAX NET OPERATING LOSSES EXPIRATION DATE 1992........................................................ $ 435 2007 1995........................................................ $2,713 2010 In 1997, Mercom was liable for Federal Alternative Minimum Tax (AMT). At December 31, 1997 and at November 5, 1998, the cumulative minimum tax credits are $141 and $141, respectively. This amount can be carried forward indefinitely to reduce regular tax liabilities that exceed AMT in future years. 75 CABLE MICHIGAN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA) DECEMBER 31, 1998 and 1997 was attributed Temporary differences that give rise to a significant portion of deferred tax assets. Management believed that sufficient uncertainty existed regarding the realizability of these items such that a full valuation allowance was recorded. The Company's income taxes payable for federalassets and liabilities are as follows: DECEMBER 31, stateNOVEMBER 5, and foreign purposes have been reduced by the tax benefits of disqualifying dispositions of stock options. The Company receives an income tax benefit for compensation expense for tax purposes which is calculated as the difference between the market value of the stock issued at the time of exercise and the option price at the applicable income tax rates. This benefit is recorded as an increase in capital in excess of par value.1997 1998 ------------ ----------- NOL carryforwards................................... $ 1,588 $ 1,132

Income Taxes. The following reflects the income taxes for the two years ending June 30, 1996 and 1995: GYMNO CORPORATION NOTES TO BALANCE SHEETS YEARS 1996 AND 1995 1996 1995 CALIFORNIA FEDERAL CALIFORNIA FEDERAL Income before provision for income taxes consists of the following................... $ 2,770 $ 2,770 $ 2,413 $ 2,413 Nondeductible expenses ..................................... 0 0 1 1 State Tax Deduction: DECEMBER 31, 1999 1998 1997 Prior fiscal year tax ................................... 0 (IN THOUSANDS800) Current: Federal................................................... 0 (800) Taxable income differential-partnerships ................... 832 812 (1,227) (1,227) ------- ------- ------ ------- Taxable income ............................................. 3,602 2,782 1,187 387 ------- ------- ------ ------- Tax rate (California $11,611 $-- $168 Foreign................................................... 351 -- 90 State..................................................... 1,409 -- 1 13,371 -- 259 Deferred: Federal................................................... (4,143800 minimum) -- -- Foreign................................................... -- -- -- State..................................................... (1,335) -- -- (5,478) -- -- ......................... 9.3% 15% 9.3% 15% ------- -------- ------ ------- Income tax expense ......................................... $ 7,893 $-- $259 800 417 $ 800 $ 58 ======= ======= ====== 44 HARMONIC INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The Company's (benefit) provision for income taxes differed from the amount computed by applying the statutory U.S. federal income tax rate to income (loss) before income taxes as follows: DECEMBER 31, 1999 1998 1997 (IN THOUSANDS) Provision at statutory rate........................... $11,051 $(7,294) $ 1,764 Differential (benefit) in rates on foreign earnings... (20) 774 (111) State taxes, net of federal benefit................... 48 -- 1 Foreign sales corporation benefit..................... (307) -- (176) Acquired in-process technology and non-deductible goodwill............................................ 106 4,863 -- Utilization of net operating loss carryovers.......... (597) -- (1,661) Utilization of research credits....................... (548) -- -- Future benefits not currently recognized.............. 508 2,116 364 Realized deferred tax assets previously reserved...... (3,249) -- -- Alternative minimum tax............................... -- -- 51 Others, net........................................... 901 (459) 27 $ 7,893======= $ --======= $ 259======= Deferred tax assets (liabilities) comprise the following: DECEMBER 31, 1999 1998 1997 (IN THOUSANDS) Net operating loss carryovers.......................... $ -- $ 845 $ 303 Research and development credit carryovers............. -- 3,285 2,452 Capitalized research and development costs............. 283 71 234 Reserves not currently deductible...................... 4,863 2,814 1,657 Other.................................................. 332 419 96 Total deferred tax assets.................... 5,478 7,434 4,742 Valuation allowance.................................... -- (7,434) (4,742) Net deferred tax assets................................ $5,478====== $ -- ======= Above tax liability ........................................ $ --======= The valuation allowance at December 31, 1998 and 1997 was attributed to deferred 800 417 $ 800 $ 58 Estimated tax assets. Management believed that sufficient uncertainty existed regarding the realizability of these items such that a full valuation allowance was recorded. The Company's payments ..................................... 800 60 800 980 -------- ------- ------ ------- Income tax liability (recoverable) ......................... $ 0 357 $ 0 $ (922) ======= ======= ====== ======= Total liability (recoverable) .............................. $ 357 $ (922) ======= ======= California income taxes payable were determined at the greater of 9.3% of taxable income or the minimum tax ($800) and Federal income taxes were determined at the applicable Federal rate (15%). Deferred income taxes are based on timing differences in deductions for federalCalifornia income taxes which are deductible in the year after they apply (i.e. - fiscal year 1996 taxes are deductible in 1997). At both June 30, state1996, and foreign purposes have been reduced by the 1995, there were deferred income tax benefits of disqualifying dispositions $120 relating to the $800 California Franchise Tax deductible in the following year. PRIOR PERFORMANCE TABLES The prior performance tables as referenced in the Prior Performance Summary of stock optionsthe Prospectus present information on programs previously sponsored by the General Partners. The Company receives purpose of the tables is to provide information on the performance of these partnerships to assist prospective investors in evaluating the experience of the General Partners as sponsors of such partnerships. While none of the information represents activities of an entity whose investment objectives and criteria are identical to the Partnership, in the opinion of the General Partners, all of the partnerships included in the tables had investment objectives which were similar to those of the Partnership. Factors considered in making such determination included the type of investments, expected benefits from investment and structure of the programs. Each of such prior programs had the following objectives: (i) annual distributions of cash or credits to a Partner's capital account for additional Mortgage Investments; and (ii) preservation of the Partnership's capital. Redwood Mortgage Investors VI, Redwood Mortgage Investors VII and the Partnership differ from the prior programs in that they will amortize organizational costs over a five (5) year period instead of a ten (10) year period and will invest in a greater percentage of first deeds of trust. In addition, the Partnership's Loan Servicing Fees may be slightly higher and interest earned on the loans made by the Partnership will differ due to economic considerations and other factors at the present time. Accordingly, such prior programs differed in certain respects from the Partnership, and inclusion of these tables does not imply that investors of the Partnership will experience results comparable to those experienced in the partnerships referred to in the tables. The tables consist of: Table I Experience in Raising and Investing Funds. Table II Compensation to General Partners and Affiliates. Table III Operating Results of Prior Limited Partnerships. Table V Payment of Mortgage Investments. Persons who purchase Interests in the Partnership will not thereby acquire any ownership interest in any of the partnerships to which these tables relate. The inclusion of the following tables in the Prospectus does not imply that the Partnership will make investments comparable to those reflected in the tables with respect to cash flow, income tax benefit for compensation expense for tax purposes which is calculated as consequences available to investors, or other factors, nor does it imply that they will experience returns, if any, comparable to those experienced by investors in the difference between partnerships referred to below. The General Partners have sponsored only two (2) other public programs registered with the market value Securities and Exchange Commission. Therefore, the following tables include information about prior non-public programs whose investment objectives are similar to those of the stock issued at Partnership. These partnerships were offered without registration under the time Securities Act of exercise and 1933 in reliance upon the option price at intrastate offering exemption from the applicable income tax ratesregistration requirements thereunder and/or the exemption for transactions not involving a public offering. This benefit Additional information regarding the Description of Open Mortgage Investments of Prior Limited Partnerships is recorded as an increase provided in capital Table VI in excess Part II of par value.this Registration Statement. The Partnership will furnish without charge to each person to whom this Prospectus is delivered, upon request, a copy of Table VI. DEFINITIONS AND GLOSSARY OF TERMS The following terms used in the Tables have the following meanings:

Income Taxes. Prior to the reorganization in November 1996, the predecessor companies maintained their Small Business Corporation status. Accordingly, no provision for actual income tax has been made as it relates to periods prior to the reorganization except for certain state taxes which are applicable to Small Business Corporations. However, pro forma income tax expense has been recognized in the statement of operations as if the reorganized company had been subject to Federal and state corporate income taxes for all periods. The pro forma provision for income taxes consists tax expense represents a combined Federal and state tax rate. Components of the followingactual income tax expense are as follows: DECEMBER Year Ended December 31, 1999 ---------------------- 1998 1997 (IN THOUSANDS) Current1996 ------- ------- ------ Current income tax expense: Federal................................................... ............................................ $11,611 24,450 $-- 20,417 $168 Foreign................................................... 351 -- 90 1,079 State..................................................... 1,409 -- 1 13,371 -- 259 Deferred.............................................. 2,890 1,975 622 ------- ------- ------ 27,340 22,392 1,701 Deferred income tax expense: ------- ------- ------ Federal................................................... (4,143) -- -- Foreign................................................... -- -- -- ............................................ 1,088 966 2,446 State..................................................... (1,335) -- -- (5,478) -- -- $ 7,893 .............................................. 341 44 66 ------- ------- ------ 1,429 1,010 2,512 ------- ------- ------ $-- 28,769 $259 23,402 $4,213 ======= ======= ====== 44 HARMONIC INC. A reconciliation of income tax computed at statutory tax rates compared to actual and proforma income tax rates is as follows: Year Ended December 31, ------------------- 1998 1997 1996 ----- ----- ----- Statutory rate.......................................... 35.00% 35.00% 35.00% State income tax effect................................. 2.33 1.56 1.05 Other................................................... 1.15 1.92 0.26 ----- ----- ----- 38.48% 38.48% 36.31% ===== ===== ===== WEST TELESERVICES CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS STATEMENTS--(Continued) Years Ended December 31, 1998, 1997 and 1996 (CONTINUEDDollars in Thousands Except Per Share Amounts) The Company's (benefit) provision for income taxes differed from the amount computed by applying the statutory U.S. federal income Significant temporary differences between reported financial and taxable earnings that give rise to deferred tax rate to income (loss) before income taxes assets and liabilities are as follows: DECEMBER December 31, 1999 ------------- 1998 1997 (IN THOUSANDS) Provision at statutory rate........................... $11,051 $(7,294) $ 1,764 Differential (benefit) in rates on foreign earnings... (20) 774 (111) State taxes, net of federal benefit................... 48 -- 1 Foreign sales corporation benefit..................... (307) -- (176) Acquired in-process technology and non-deductible goodwill............................................ 106 4,863 -- Utilization of net operating loss carryovers.......... (597) -- (1,661) Utilization of research credits....................... (548) -- -- Future benefits not currently recognized.............. 508 2,116 364 Realized deferred tax assets previously reserved...... (3,249) -- -- Alternative minimum tax............................... -- -- 51 Others, net........................................... 901 (459) 27 $ 7,893======= $ --======= $ 259======= ------ ------ Deferred tax assets (assets: Allowance for doubtful accounts............................. $ 720 $ 162 Deferred tax liabilities) comprise the following: DECEMBER 31, 1999 1998 1997 (IN THOUSANDS) Net operating loss carryovers.......................... $ -- $ 845 $ 303 Research and development credit carryovers............. -- 3,285 2,452 Capitalized research and development costs............. 283 71 234 Reserves not currently deductible...................... 4,863 2,814 1,657 Other.................................................. 332 419 96 Total deferred tax assets.................... 5,478 7,434 4,742 Valuation allowance.................................... -- (7,434) (4,742) Depreciation................................................ 5,799 3,684 ------ ------ Net deferred tax assets................................ liability.................................... $5,478====== $ -- 5,079 $3,522 ====== ======= $ --======= The valuation allowance at December 31, 1998 and 1997 was attributed to deferred tax assets. Management believed that sufficient uncertainty existed regarding the realizability of these items such that a full valuation allowance was recorded. The Company's income taxes payable for federal, state, and foreign purposes have been reduced by the tax benefits of disqualifying dispositions of stock options. The Company receives an income tax benefit for compensation expense for tax purposes which is calculated as the difference between the market value of the stock issued at the time of exercise and the option price at the applicable income tax rates. This benefit is recorded as an increase in capital in excess of par value.

Income Taxes. The provision for income taxes consists An analysis of the followingCompany's income tax expense is as follows: YEAR ENDED DECEMBER 31, 1999 1998 1997 1996 (IN THOUSANDS) Current: Federal................................................... U.S. -- current.................................... $11,611 (110,379) $ (99,001) $(44,950) U.S. -- $168 Foreign................................................... 351 deferred................................... (61,403) (34,650) (17,278) Non-U.S. -- 90 State..................................................... 1,409 -- 1 13,371 -- 259 Deferred: Federal................................................... current................................ (4,14334,790) -- -- Foreign................................................... -- -- -- State..................................................... (1,33517,300) -- (3,486) State and other.................................... -- (5,478505) -- -- $ 7,893 (603) Total.................................... $-- (206,572) $259 (151,456) $(66,317) ========= === ==== 44 HARMONIC INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The Company's (benefit) provision for income taxes differed from the amount computed by applying the statutory U.S. federal income tax rate to income (loss) before income taxes as follows: DECEMBER 31, 1999 1998 1997 (IN THOUSANDS) Provision at statutory rate........................... $11,051 $(7,294) $ 1,764 Differential (benefit) in rates on foreign earnings... (20) 774 (111) State taxes, net of federal benefit................... 48 -- 1 Foreign sales corporation benefit..................... (307) -- (176) Acquired in-process technology and non-deductible goodwill............................................ 106 4,863 -- Utilization of net operating loss carryovers.......... (597) -- (1,661) Utilization of research credits....................... (548) -- -- Future benefits not currently recognized.............. 508 2,116 364 Realized deferred tax assets previously reserved...... (3,249) -- -- Alternative minimum tax............................... -- -- 51 Others, net........................................... 901 (459) 27 $ 7,893======= $ --======= $ 259======= Deferred tax assets (liabilities) comprise the following: DECEMBER 31, 1999 1998 1997 (IN THOUSANDS) Net operating loss carryovers.......................... $ -- $ 845 $ 303 Research and development credit carryovers............. -- 3,285 2,452 Capitalized research and development costs............. 283 71 234 Reserves not currently deductible...................... 4,863 2,814 1,657 Other.................................................. 332 419 96 Total deferred tax assets.................... 5,478 7,434 4,742 Valuation allowance.................................... -- (7,434) (4,742) Net deferred tax assets................................ $5,478====== $ -- ======= $ --======= The valuation allowance at December ======== 42 43 Significant components of the Company's deferred income tax assets and liabilities are as follows: DECEMBER 31, --------------------- 1998 and 1997 was attributed to --------- --------- (IN THOUSANDS) Deferred tax assets: Net operating loss carryforwards.......................... $ 12,236 $ 19,143 Worker's compensation accruals(1)......................... 4,960 6,188 Foreign tax credits....................................... 15,181 9,023 Other..................................................... 10,909 2,007 --------- --------- Total deferred tax assets. Management believed that sufficient uncertainty existed regarding the realizability ......................... 43,286 36,361 Deferred tax liabilities: --------- --------- Depreciation and amortization............................. (252,141) (196,546) Undistributed earnings of these items such that a full valuation allowance was recorded. The Company's income taxes payable for federal, state, and foreign purposes have been reduced by the non-U.S. subsidiaries........... (23,858) (17,668) Non-U.S. deferred taxes................................... (15,402) (15,236) Other..................................................... (10,722) (10,236) --------- --------- Total deferred tax benefits of disqualifying dispositions of stock options. The Company receives an income liabilities......................... (302,123) (239,686) --------- --------- Net deferred tax benefit for compensation expense for tax purposes which is calculated as the difference between the market value of the stock issued at the time of exercise and the option price at the applicable income tax rates. This benefit is recorded as an increase in capital in excess of par value.liability........................ $(258,837) $(203,325) ========= ========= - ---------------

Income Taxes. (CONTINUED) The provision balance of deferred tax liabilities and assets arises from the differences in the timing of the recognition for transactions between book and income taxes tax purposes and consists of the followingfollowing components: DECEMBER MAY 31, 1999 1998 1997 1995 1994 (IN THOUSANDS000'S OMITTED) CurrentDeferred tax liabilities: FederalDepreciation....................................................... $ 8,500 $ 9,710 Leveraged leases................................................... $11,611 $27,590 28,560 Other.............................................................. 910 730 Total deferred tax liabilities................................. $ 37,000 $ 39,000 Deferred tax assets-current: Inventory costs.................................................... $ 5,680 $ 7,800 Employee benefits.................................................. 420 900 Doubtful account allowance......................................... 800 780 Other.............................................................. 310 50 Total deferred tax assets-current.............................. 7,210 9,530 Deferred tax assets-noncurrent: Postretirement benefits............................................ 1,120 1,050 Restructuring expenses............................................. 640 960 Alternative minimum tax credits.................................... 4,580 4,540 Other.............................................................. -- $168 Foreign................................................... 351 -- 90 State..................................................... 1,409 -- 1 13,371 -- 259 Deferred: Federal................................................... (4,143) -- -- Foreign................................................... -- -- -- State..................................................... (1,335) -- -- (5,478) -- -- 60 Total deferred tax assets-noncurrent........................... 6,340 6,610 Total deferred tax assets...................................... $ 7,893 $-- $259 ======= === ==== 44 HARMONIC INC13,550 $ 16,140 The Company has determined, more likely than not, that a valuation allowance is not required, based upon the Company's history of prior operating earnings, its expectations for continued future earnings and the scheduled reversal of deferred tax liabilities, primarily related to leveraged leases, which exceed the amount of the deferred tax assets. AAR CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The Company's (benefit) provision for income taxes differed from the amount computed by applying the statutory U.S. federal income tax rate to income (loss) before income taxes as follows: DECEMBER 31, 1999 1998 1997 (IN THOUSANDS) Provision at statutory rate........................... $11,051 $(7,294) $ 1,764 Differential (benefit) in rates on foreign earnings... (20) 774 (111) State taxes, net of federal benefit................... 48 -- 1 Foreign sales corporation benefit..................... (307) -- (176) Acquired in-process technology and non-deductible goodwill............................................ 106 4,863 -- Utilization of net operating loss carryovers.......... (597) -- (1,661) Utilization of research credits....................... (548) -- -- Future benefits not currently recognized.............. 508 2,116 364 Realized deferred tax assets previously reserved...... (3,249) -- -- Alternative minimum tax............................... -- -- 51 Others, net........................................... 901 (459) 27 $ 7,893======= $ --======= $ 259======= Deferred tax assets (liabilities) comprise the following: DECEMBER 31, 1999 1998 1997 (IN THOUSANDS) Net operating loss carryovers.......................... $ -- $ 845 $ 303 Research and development credit carryovers............. -- 3,285 2,452 Capitalized research and development costs............. 283 71 234 Reserves not currently deductible...................... 4,863 2,814 1,657 Other.................................................. 332 419 96 Total deferred tax assets.................... 5,478 7,434 4,742 Valuation allowance.................................... -- (7,434) (4,742) Net deferred tax assets................................ $5,478====== $ -- ======= $ --======= The valuation allowance at December 31, 1998 and 1997 was attributed to deferred tax assets. Management believed that sufficient uncertainty existed regarding the realizability of these items such that a full valuation allowance was recorded. The Company's income taxes payable for federal, state, and foreign purposes have been reduced by the tax benefits of disqualifying dispositions of stock options. The Company receives an income tax benefit for compensation expense for tax purposes which is calculated as the difference between the market value of the stock issued at the time of exercise and the option price at the applicable income tax rates. This benefit is recorded as an increase in capital in excess of par value.STATEMENTS--(CONTINUED)

Income Taxes. The provision for income taxes for fiscal 2000, 1999 and 1998 consists of the following: DECEMBER 31(Amounts in thousands) June 25, 2000 June 27, 1999 June 28, 1998 1997 (IN THOUSANDS) Current---------------------- ------------- ------------- ------------- Currently payable: Federal................................................... ............................ $ 6,629 $11,611 $-- $168 20,124 $ 43,245 State.............................. 1,682 2,951 5,704 Foreign................................................... 351 -- 90 State..................................................... 1,409 -- 1 13,371 -- 259 ............................ (225) 653 1,474 ------- ------- -------- Total current...................... 8,086 23,728 50,423 Deferred: ------- ------- -------- Federal................................................... ............................ 9,772 10,219 23,799 State.............................. (4,143261) -- -- (5,718) (11,715) Foreign................................................... -- -- -- State..................................................... ............................ 78 140 275 ------- ------- -------- Total deferred..................... 9,589 4,641 12,359 Income taxes before cumulative effect of accounting change (1,335) -- -- (5,478) -- -- 1999 ------- ------- -------- and 1998).......................... $17,675 $28,369 $ 7,893 $-- $259 62,782 ======= === ===== 44 HARMONIC INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The Company's (benefit) provision for income taxes differed from the amount computed by applying the statutory U.S. federal income tax rate to income (loss) before income taxes as follows: DECEMBER 31, 1999 1998 1997 (IN THOUSANDS) Provision at statutory rate........................... $11,051 $(7,294) $ 1,764 Differential (benefit) in rates on foreign earnings... (20) 774 (111) State taxes, net of federal benefit................... 48 -- 1 Foreign sales corporation benefit..................... (307) -- (176) Acquired in-process technology and non-deductible goodwill............................................ 106 4,863 -- Utilization of net operating loss carryovers.......... (597) -- (1,661) Utilization of research credits....................... (548) -- -- Future benefits not currently recognized.............. 508 2,116 364 Realized deferred tax assets previously reserved...... (3,249) -- -- Alternative minimum tax............................... -- -- 51 Others, net........................................... 901 (459) 27 $ 7,893======= $ --======= $ 259======= Deferred tax assets (liabilities) comprise the following: DECEMBER 31, 1999 1998 1997 (IN THOUSANDS) Net operating loss carryovers.......................... $ -- $ 845 $ 303 Research and development credit carryovers............. -- 3,285 2,452 Capitalized research and development costs............. 283 71 234 Reserves not currently deductible...................... 4,863 2,814 1,657 Other.................................................. 332 419 96 Total deferred tax assets.................... 5,478 7,434 4,742 Valuation allowance.................................... -- (7,434) (4,742) Net deferred tax assets................................ $5,478====== $ -- ======== $ --======= The valuation allowance at December 31Income taxes were 31.7%, 32.5% and 32.8% of pretax earnings in fiscal 2000, 1999 and 1998, respectively. A reconciliation of the provision for income taxes (before cumulative effect of accounting changes, in 1999 and 1998) with the amounts obtained by applying the federal statutory tax rate is as follows: June 25, 2000 ------------- June 27, 1999 ------------- June 28, 1998 ------------- Federal statutory tax rate.......... 35.0% 35.0% 35.0% State income taxes net of federal tax benefit........................ 3.7 3.1 2.9 State tax credits net of federal tax benefit............................ (2.1) (5.1) (4.9) Foreign taxes less than domestic rate............................... -- (1.8) (1.9) Foreign tax benefit of losses less than domestic rate................. 2.5 -- -- Foreign Sales Corporation tax benefit............................ (1.1) (0.7) (0.4) Research and 1997 was attributed to experimentation credit............................. (0.1) (0.1) -- Resolution of tax issues............ (7.4) -- -- Nondeductible expenses and other.... Effective tax rate.................. 1.2 ---- 31.7% ==== 2.1 ---- 32.5% ==== 2.1 ---- 32.8% ==== The deferred income taxes reflect the net tax effects of temporary differ- ences between the bases of assets and liabilities for financial reporting pur- poses and their bases for income tax purposes. Significant components of the Company's deferred tax liabilities and assets as of June 25, 2000, and June 27, 1999, were as follows: (Amounts in thousands) June 25, 2000 June 27, 1999 ---------------------- ------------- ------------- Deferred tax liabilities: Property, plant and equipment...................... $ 97,051 $78,241 Investments in equity affiliates................... 19,974 20,883 Other.............................................. 394 -- -------- ------- Total deferred tax liabilities...................... 117,419 99,124 Deferred tax assets: -------- ------- Accrued liabilities and valuation reserves......... 9,795 1,568 State tax credits.................................. 16,511 17,043 Other items........................................ 5,067 2,144 -------- ------- Total deferred tax assets. Management believed that sufficient uncertainty existed regarding the realizability of these items such that a full valuation allowance was recorded. The Company's income taxes payable for federal, state, and foreign purposes have been reduced by the ........................... 31,373 20,755 -------- ------- Net deferred tax benefits of disqualifying dispositions of stock options. The Company receives an income tax benefit for compensation expense for tax purposes which is calculated as the difference between the market value of the stock issued at the time of exercise and the option price at the applicable income tax rates. This benefit is recorded as an increase in capital in excess of par value.liabilities........................ $ 86,046 $78,369 ======== =======

Income Taxes. The components of income (loss) from continuing operations before income taxes and the details of the provision for (benefit from) income taxes consists of the followingare as follows: DECEMBER 31, 1999 1998 1997 (IN THOUSANDS) ------------------------ 1995 1994 1993 ------- ------- -------- Income (loss) from continuing operations before income taxes: Domestic.......................................... $51,470 $42,995 $(19,233) Foreign........................................... 17,787 14,768 6,672 ------- ------- -------- Total......................................... $69,257 $57,763 $(12,561) Provision for (benefit from) income taxes: Current: ------- ------- -------- Federal................................................... ......................................... $11,611 12,764 $-- $168 10,963 $ 10,182 Foreign................................................... 351 -- 90 ......................................... 7,378 5,860 2,001 State..................................................... 1,409 -- 1 13,371 -- 259 ........................................... 1,423 258 2,608 ------- ------- -------- Total current................................. 21,565 17,081 14,791 Deferred: ------- ------- -------- Federal................................................... ......................................... 1,851 1,214 (4,14317,784) -- -- Foreign................................................... -- -- -- ......................................... 1,410 2,209 2,122 State..................................................... ........................................... 674 640 (1,3353,601) -- -- ------- ------- -------- Total deferred................................ 3,935 4,063 (5,47819,263) -- -- ------- ------- -------- Total provision (benefit)..................... $25,500 $21,144 $ 7,893 $-- $259 (4,472) ======= === ===== 44 HARMONIC INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The Company's (benefit) provision for income taxes differed from the amount computed by applying the statutory U.S. federal income tax rate to income (loss) before income taxes as follows: DECEMBER 31, 1999 1998 1997 (IN THOUSANDS) Provision at statutory rate........................... $11,051 $(7,294) $ 1,764 Differential (benefit) in rates on foreign earnings... (20) 774 (111) State taxes, net of federal benefit................... 48 -- 1 Foreign sales corporation benefit..................... (307) -- (176) Acquired in-process technology and non-deductible goodwill............................................ 106 4,863 -- Utilization of net operating loss carryovers.......... (597) -- (1,661) Utilization of research credits....................... (548) -- -- Future benefits not currently recognized.............. 508 2,116 364 Realized deferred tax assets previously reserved...... (3,249) -- -- Alternative minimum tax............................... -- -- 51 Others, net........................................... 901 (459) 27 $ 7,893======= $ --======= $ 259======= Deferred tax assets (liabilities) comprise the following: DECEMBER 31, 1999 1998 1997 (IN THOUSANDS) Net operating loss carryovers.......................... $ -- $ 845 $ 303 Research and development credit carryovers............. -- 3,285 2,452 Capitalized research and development costs............. 283 71 234 Reserves not currently deductible...................... 4,863 2,814 1,657 Other.................................................. 332 419 96 Total deferred tax assets.................... 5,478 7,434 4,742 Valuation allowance.................................... -- (7,434) (4,742) Net deferred tax assets................................ $5,478====== $ -- ======== $ --======= The valuation allowance at December 31AMETEK, 1998 and 1997 was attributed to INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Significant components of the Company's deferred tax assets. Management believed that sufficient uncertainty existed regarding (asset) liability as of December 31 are as follows: (IN THOUSANDS) ------------------ 1995 1994 -------- -------- Current deferred tax asset: Reserves not currently deductible........................ $ (9,825) $(11,106) Other.................................................... (2,000) (1,531) -------- -------- Net current deferred tax asset......................... (11,825) (12,637) Long-term deferred tax (asset) liability: Differences in basis of property and accelerated -------- -------- depreciation............................................ 21,547 19,698 Purchased tax benefits................................... 13,268 15,790 Reserves not currently deductible........................ (13,798) (15,928) Other.................................................... 10,910 6,528 -------- -------- Net long-term deferred tax liability................... 31,927 26,088 -------- -------- Net deferred tax liability............................. $ 20,102 $ 13,451 ======== ======== The effective rate of the realizability of these items such that a full valuation allowance was recorded. The Company's provision for (benefit from) income taxes payable for federal, state, and foreign purposes have been reduced by reconciles to the tax benefits of disqualifying dispositions of stock options. The Company receives an income tax benefit for compensation expense for tax purposes which is calculated statutory rate as the difference between the market value of the stock issued at the time of exercise and the option price at the applicable income tax rates. This benefit is recorded as an increase in capital in excess of par value.follows: 1995 1994 1993 ---- ---- ----- Statutory rate............................................ 35.0% 35.0% (35.0)%

Income Taxes. The provision for income taxes on income before equity in net income of joint ventures and dealer transitions consists of the following: DECEMBER 31(in millions): Year Ended -------------------------------------- February 25, February 26, February 27, 2000 1999 1998 1997 (IN THOUSANDS) Current------------ ------------ ------------ Current income taxes: Federal................................................... ............................. $ 98.9 $11,611 115.7 $-- $168 115.7 State and local..................... 4.5 9.0 9.5 Foreign................................................... 351 -- 90 State..................................................... 1,409 -- 1 13,371 -- 259 Deferred............................. 19.2 2.9 10.4 ------- ------ ------ 122.6 127.6 135.6 ------- ------ ------ Deferred income taxes: Federal................................................... ............................. (4,1434.6) -- -- (3.1) (0.8) State and local..................... (0.1) (0.3) (0.3) Foreign................................................... -- -- -- State..................................................... ............................. (1,3352.4) -- -- 0.7 (5,4783.6) -- -- ------- ------ ------ (7.1) (2.7) (4.7) ------- ------ ------ $ 7,893 115.5 $-- 124.9 $259 130.9 ======= ====== ====== 44 HARMONIC The company has not provided for U.S. income taxes on undistributed earnings of foreign subsidiaries totaling $130.8 million at February 25, 2000, as foreign subsidiary undistributed earnings are considered permanently invested in those businesses. These amounts would be subject to possible U.S. taxation only if remitted as dividends. Foreign withholding taxes could be payable upon remittance of these earnings. Subject to STEELCASE INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUEDSTATEMENTS--(Continued) The Company's (benefit) provision certain limitations, the withholding taxes would then be available for use as credit against the U.S. tax liability. However, the determination of the hypothetical amount of unrecognized deferred U.S. taxes on undistributed earnings of foreign entities is not practicable. Temporary differences between the financial statement carrying amounts and tax bases of assets and liabilities that give rise to significant portions of deferred income taxes differed from relate to the amount computed by applying the statutory U.S. federal following (in millions): February 25, February 26, 2000 1999 ------------ ------------ Deferred income tax rate to assets: Employee benefit plan obligations................ $112.2 $107.9 Reserves and allowances.......................... 50.9 29.2 Foreign losses................................... 3.6 5.8 Other............................................ 7.1 12.3 ------ ------ Total deferred income tax assets................... 173.8 155.2 Deferred income tax liabilities: Property and equipment........................... (loss45.4) before income taxes as follows: DECEMBER 31, 1999 1998 1997 (IN THOUSANDS39.6) Provision at statutory rate........................... $11,051 $Intangible assets................................ (7,294) $ 1,764 Differential (benefit) in rates on foreign earnings... (20) 774 (111) State taxes, net of federal benefit................... 48 -- 1 Foreign sales corporation benefit..................... (30724.0) -- Net leased assets................................ (17612.1) Acquired in-process technology and non-deductible goodwill............................................ 106 4,863 -- Utilization of net operating loss carryovers.......... (5976.4) -- (1,661) Utilization of research credits....................... (548) -- -- Future benefits not currently recognized.............. 508 2,116 364 Realized ------ ------ Net deferred tax assets previously reserved...... (3,249) -- -- Alternative minimum tax............................... -- -- 51 Others, net........................................... 901 (459) 27 $ 7,893======= $ --======= $ 259======= Deferred tax assets (liabilities) comprise the following: DECEMBER 31, 1999 1998 1997 (IN THOUSANDS) Net operating loss carryovers.......................... $ -- $ 845 $ 303 Research and development credit carryovers............. -- 3,285 2,452 Capitalized research and development costs............. 283 71 234 Reserves not currently deductible...................... 4,863 2,814 1,657 Other.................................................. 332 419 96 Total deferred income tax assets.................... 5,478 7,434 4,742 Valuation allowance..................... 92.3 109.2 Current portion.................................... -- (7,434) (4,742) Net deferred tax assets78.1 68.7 ------ ------ Non-current portion................................ $5,478====== $ -- =14.2 $ 40.5 ====== $ --======= ====== The valuation allowance at December 31, 1998 and 1997 was attributed to Company has recorded a deferred tax assetsasset as of February 25, 2000 of $3.6 million reflecting the benefit of foreign operating loss carry-forwards that expire at various dates through 2007. Management believed Realization is dependent on future taxable income of the related foreign operations and tax planning strategies available to the Company. Although realization is not assured, management believes it is more likely than not that sufficient uncertainty existed regarding deferred tax assets will be realized. The effective income tax rate on income before equity in net income of joint ventures and dealer transitions varied from the realizability statutory federal income tax rate as set forth in the following table: Year Ended -------------------------------------- February 25, February 26, February 27, 2000 1999 1998 ------------ ------------ ------------ Statutory federal income tax rate.... 35.0% 35.0% 35.0% State and local income taxes......... 1.6 2.5 2.7 Tax exempt interest.................. -- -- (0.2) Goodwill and intangible asset amortization and write-offs......... 1.0 0.3 0.2 Research and development credit...... (0.3) (0.4) (0.6) Other................................ 1.7 (0.4) 1.4 ---- ---- ---- Effective income tax rate............ 39.0% 37.0% 38.5% ==== ==== ==== During 1999, the provision for income taxes benefited from the favorable resolution of income tax litigation dating back to 1989, primarily related to investment tax credits and accelerated depreciation on the Company's Corporate Development Center. The resolution of these items such that tax matters contributed to a full valuation allowance was recorded. The Company's reduced effective tax rate for 1999 and resulted in interest income taxes payable for federal, state, and foreign purposes have been reduced by the tax benefits of disqualifying dispositions of stock options$5.8 million. The Company receives an made income tax benefit for compensation expense for tax purposes which is calculated as the difference between the market value payments of the stock issued at the time of exercise $123.2 million, $59.3 million and the option price at the applicable income tax rates$116.0 million during 2000, 1999 and 1998, respectively. This benefit is recorded as an increase in capital in excess of par value.STEELCASE INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Income Taxes. For financial reporting purposes, income (loss) before income taxes and extraordinary item, showing domestic and international sources, was as follows: YEARS ENDED DECEMBER 31, 2000 1999 1998 Domestic.................................................... $ 491 $ (42) $(897) International (170) (121) 197 Income (loss) before income taxes and extraordinary item.... $ 321 $(163) $(700) ===== ===== ===== The provision for income taxes consists before extraordinary item consisted of the following: 2000 1999 1998 $238 $(150) $ 356 YEARS ENDED DECEMBER 31, 1999 1998 1997 (IN THOUSANDS) Current: Federal................................................... $11,611 $-- $168 State..................................................... 74 (19) 88 Foreign................................................... 351 -- 90 State..................................................... 1,409 -- 1 13,371 -- 259 41 83 73 353 (86) 517 Deferred: Federal................................................... 50 270 (4,143463) State..................................................... 6 40 (52) Foreign................................................... 9 8 65 65 318 (450) Provision for income taxes........................ $418==== $ 232===== $ 67===== 62 WASTE MANAGEMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The federal statutory rate is reconciled to the effective rate as follows: YEARS ENDED DECEMBER 31, 2000 1999 1998 Income tax expense (benefit) at federal statutory rate..... 35.00% (35.00)% (35.00)% State and local income taxes, net of federal income tax benefit.................................................. 16.17 19.31 3.23 Nondeductible costs relating to acquired intangibles....... 48.40 22.01 16.85 Nondeductible merger costs................................. -- -- 8.22 Writedown of investments in subsidiaries................... 12.81 74.85 -- Minority interest.......................................... 2.54 5.20 0.82 Sale of foreign subsidiaries............................... 23.53 -- -- Deferred tax valuation and other tax reserves.............. 1.21 25.24 8.79 Federal tax on foreign income, net of U.S. benefit......... 3.13 30.30 4.35 Nonconventional fuel tax credit............................ (8.30) -- -- Foreign................................................... -- -- -- State..................................................... (1,3353.61) -- -- Other...................................................... (5,4784.27) -- -- 0.42 5.92 Provision for income taxes....................... 130.22% 142.33% 9.57% ====== ====== ====== The components of the net deferred tax assets (liabilities) at December 31 are as follows: 2000 1999 ------- ------- Deferred tax assets: Net operating loss, capital loss and tax credit carryforwards.......................................... $ 7,893 $-- $259 334 $ 244 Environmental and other reserves.......................... 1,032 1,021 Reserves not deductible until paid........................ 138 205 ------- ------- Subtotal.......................................... 1,504 1,470 Deferred tax liabilities: ------- ------- Property, equipment, intangible assets, and other......... (1,627) (1,574) Valuation allowance......................................... (444) (328) ------- ------- Net deferred tax liabilities...................... $ (567) $ (432) ======= === ===== 44 HARMONIC At December 31, 2000 the Company's subsidiaries have approximately $64 of federal net operating loss ("NOL") carryforwards, $3,700 of state NOL carryforwards, and $116 of foreign NOL carryforwards. The NOL carryforwards have expiration dates through the year 2019. The Company's subsidiaries have $2 of alternative minimum tax credit carryforwards that may be used indefinitely; state tax credit carryforwards of $11; and foreign tax credit carryforwards of $33. Valuation allowances have been established for uncertainties in realizing the benefit of tax loss and credit carryforwards. While the Company expects to realize the deferred tax assets, net of the valuation allowances, changes in estimates of future taxable income or in tax laws may alter this expectation. The valuation allowance increased approximately $116 and $121 in 2000 and 1999, respectively, primarily due to the uncertainty of realizing foreign and state NOL carryforwards and the expiration of foreign tax credits. Prior to the Company's August 1999 decision to divest its WM International operations, the Company did not provide for United States income taxes on unremitted earnings of foreign subsidiaries as it was the intention of management to reinvest the unremitted earnings in its foreign operations. Since the adoption of the strategic plan in August 1999, the Company has provided for United States income taxes on unremitted foreign earnings on its international operations other than in Canada. The amount of United States income tax provided for the repatriation of the Company's international operations other than in Canada was approximately $13 for 1999. For 2000, with respect to its Canadian operations, the Company provided $9 for the 63 WASTE MANAGEMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The Company's (benefit) provision for income taxes differed from the amount computed by applying the statutory U.S. federal income tax rate to income (loss) before income taxes as follows: DECEMBER 31, 1999 1998 1997 (IN THOUSANDS) Provision at statutory rate........................... repatriation of $11,051 58 of capital. Unremitted earnings in Canada were approximately $(7,294) $ 1,764 Differential (benefit) in rates on foreign earnings... (20) 774 (111) State taxes, net of federal benefit................... 48 -- 1 Foreign sales corporation benefit..................... (307) -- (176) Acquired in-process technology and non-deductible goodwill............................................ 106 4,863 -- Utilization of net operating loss carryovers.......... (597) -- (1,661) Utilization of research credits....................... (548) -- -- Future benefits not currently recognized.............. 508 2,116 364 Realized deferred tax assets previously reserved...... (3,249) -- -- Alternative minimum tax............................... -- -- 51 Others, net........................................... 901 (459) 27 $ 7,893======= $ --======= $ 259======= Deferred tax assets (liabilities) comprise the following: DECEMBER 31, 1999 1998 1997 (IN THOUSANDS) Net operating loss carryovers.......................... $ -- $ 845 $ 303 Research and development credit carryovers............. -- 3,285 2,452 Capitalized research and development costs............. 283 71 234 Reserves not currently deductible...................... 4,863 2,814 1,657 Other.................................................. 332 419 96 Total deferred tax assets.................... 5,478 7,434 4,742 Valuation allowance.................................... -- (7,434) (4,742) Net deferred tax assets................................ $5,478====== $ -- ======= $ --======= The valuation allowance 62 at December 31, 1998 and 1997 was attributed 2000, which the Company intends to deferred tax assetsreinvest. Management believed that sufficient uncertainty existed regarding It is not practicable to determine the realizability amount of these items such that a full valuation allowance was recorded. The Company's United States based income taxes that would be payable for federal, state, and foreign purposes have been reduced by the tax benefits of disqualifying dispositions of stock options. The Company receives an income tax benefit for compensation expense for tax purposes which is calculated as the difference between the market value upon remittance of the stock issued at the time of exercise and the option price at the applicable income tax rates. This benefit is recorded as an increase in capital in excess of par valueassets that represent those earnings.

Income Taxes. The provision Income tax expense (benefit) for income taxes consists of the following: DECEMBER years ended December 31, 1999 1998, 1997 and 1996 consists of: Current Deferred Total ------- -------- ------ Year ended December 31, 1998 1997 U.S. Federal.................................... $7,916 $(IN THOUSANDS837) Current: Federal................................................... $11,611 7,079 State, local and other.......................... 1,263 (134) 1,129 ------ ----- ------ Total........................................... $-- 9,179 $168 Foreign................................................... 351 -- 90 State..................................................... 1,409 -- 1 13,371 -- 259 Deferred: Federal................................................... (4,143971) -- -- Foreign................................................... -- -- -- State..................................................... (1,335) -- -- (5,478) -- -- $ 7,893 $-- $259 =8,208 ====== === ==== 44 HARMONIC INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The Company's (benefit) provision for income taxes differed from the amount computed by applying the statutory U.S. federal income tax rate to income (loss) before income taxes as follows: DECEMBER 31, 1999 1998 1997 (IN THOUSANDS) Provision at statutory rate........................... $11,051 $(7,294) $ 1,764 Differential (benefit) in rates on foreign earnings... (20) 774 (111) State taxes, net of federal benefit................... 48 -- 1 Foreign sales corporation benefit..................... (307) -- (176) Acquired in-process technology and non-deductible goodwill............................................ 106 4,863 -- Utilization of net operating loss carryovers.......... (597) -- (1,661) Utilization of research credits....................... (548) -- -- Future benefits not currently recognized.............. 508 2,116 364 Realized deferred tax assets previously reserved...... (3,249) -- -- Alternative minimum tax............................... -- -- 51 Others, net........................................... 901 (459) 27 $ 7,893======= $ --======= $ 259======= Deferred tax assets (liabilities) comprise the following: DECEMBER 31, 1999 1998 1997 (IN THOUSANDS) Net operating loss carryovers.......................... $ -- $ 845 $ 303 Research and development credit carryovers............. -- 3,285 2,452 Capitalized research and development costs............. 283 71 234 Reserves not currently deductible...................... 4,863 2,814 1,657 Other.................................................. 332 419 96 Total deferred tax assets.................... 5,478 7,434 4,742 Valuation allowance.................................... -- (7,434) (4,742) Net deferred tax assets................................ $5,478====== $ -- ======= Year ended December 31, 1997 U.S. Federal.................................... $2,944 $ --======= (82) $2,862 State, local and other.......................... 334 50 384 ------ ----- ------ Total........................................... $3,278 $ (32) $3,246 ====== ===== ====== Year ended December 31, 1996 U.S. Federal.................................... $6,606 $(128) $6,478 State, local and other.......................... 754 (240) 514 ------ ----- ------ Total........................................... $7,360 $(368) $6,992 ====== ===== ====== A reconciliation of the expected Federal income tax expense (benefit) to actual tax expense follows (based upon a tax rate of 35% for 1998, 34% for 1997, and 35% for 1996). 1998 ------ 1997 ------ 1996 ------ Expected Federal income tax expense (benefit)..... $7,476 $ (108) $6,478 Recapitalization expenses not deductible for Federal taxes.................................... (60) 3,029 -- State income taxes, net of related Federal tax effect........................................... 824 425 378 Other, net........................................ (32) ------ $8,208 ====== (100) ------ $3,246 ====== 136 ------ $6,992 ====== F-11 TUESDAY MORNING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 1998, 1997 and 1996 (In thousands, except for share amounts) The valuation allowance tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities at December 31, 1998 and 1997 was attributed to are as follows: 1998 1997 ------ ------ Deferred tax assets: Compensated absences...................................... $ 219 $ 190 NOL carryforward.......................................... 172 143 Other accrued liabilities................................. 803 487 ------ ------ Total gross deferred assets............................. $1,194 $ 820 ====== ====== Deferred tax liabilities: Property and equipment.................................... $2,366 $2,886 Inventory costs........................................... 314 425 Other..................................................... 369 335 ------ ------ Total gross deferred tax assets. liabilities.................... 3,049 3,646 ------ ------ Net deferred tax liability............................. $1,855 $2,826 ====== ====== Management believed that sufficient uncertainty existed regarding expects the realizability deferred tax assets at December 31, 1998 to be recovered through the reversal during the carryforward period of these items such that a full valuation allowance was recorded. The Company's income taxes payable for federal, state, and foreign purposes have been reduced by existing taxable temporary differences giving rise to the tax benefits of disqualifying dispositions of stock options. The Company receives an deferred income tax benefit liability. Accordingly, no valuation allowances for compensation expense for deferred tax purposes which is calculated assets were considered necessary as the difference between the market value of the stock issued at the time of exercise and the option price at the applicable income tax rates. This benefit is recorded as an increase in capital in excess of par valueDecember 31, 1998 or December 31, 1997.

Income Taxes. For financial reporting purposes, income (loss) from continuing operations before income taxes, showing domestic and international sources, is as follows (in thousands): 1998 --------- 1997 --------- 1996 -------- Domestic................................... $(896,875) $(865,783) $757,537 International.............................. Income (loss) from continuing 196,996 --------- 203,286 --------- 16,695 -------- operations..................... $(699,879) ========= $(662,497) ========= $774,232 ======== The provision for income taxes on continuing operations consists of the following: following (in thousands): YEARS ENDED DECEMBER 31, 1999 -------------------------------- 1998 1997 (IN THOUSANDS) 1996 --------- --------- -------- Current: Federal................................................... .................................. $ 356,056 $ 569,935 $11,611 $-- $168 216,814 State.................................... 88,484 83,592 57,860 Foreign................................................... 351 -- 90 State..................................................... 1,409 -- 1 13,371 -- 259 .................................. 72,541 85,357 22,875 --------- --------- -------- 517,081 738,884 297,549 Deferred: --------- --------- -------- Federal................................................... .................................. (4,143463,635) -- -- (369,408) 86,654 State.................................... (51,889) (27,271) 26,936 Foreign................................................... -- -- -- State..................................................... .................................. 65,366 21,136 75,561 --------- --------- -------- (1,335450,158) -- -- (5,478375,543) -- -- 189,151 --------- --------- -------- Provision for income taxes....... $ 7,893 66,923 $ 363,341 $-- $259 486,700 ========= ========= ======== 44 HARMONIC 85 88 WASTE MANAGEMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The Company's federal statutory rate is reconciled to the effective rate as follows: YEARS ENDED DECEMBER 31, ------------------------- 1998 ------ 1997 ------ 1996 ----- Income taxes (benefit) provision for income taxes differed from the amount computed by applying the statutory U.S. at federal income tax rate to income (loss) before income taxes as follows: DECEMBER 31, 1999 1998 1997 (IN THOUSANDS) Provision at statutory rate........................... $11,051 $............................................ (7,294) $ 1,764 Differential 35.00)% (benefit) in rates on foreign earnings... (20) 774 (111) 35.00)% 35.00% State and local income taxes, net of federal income tax benefit................... 48 .............................. 3.23 5.51 7.11 Nondeductible costs relating to acquired intangibles..................................... 16.85 30.88 7.55 Nondeductible merger costs........................ 8.22 1.40 1.33 Writedown of investments in subsidiary............ -- 1 Foreign sales corporation benefit..................... (307) -- (176) Acquired in-process technology and non-deductible goodwill............................................ 106 4,863 -- Utilization 6.46 7.66 Minority interest................................. 0.82 2.40 1.87 Gain on sale of net operating loss carryovers.......... (597) -- (1,661) Utilization of research credits....................... (548) foreign subsidiary................ -- -- Future benefits not currently recognized.............. 508 2,116 364 Realized 2.26 Deferred tax valuation and other tax reserves..... 8.79 40.11 0.90 Federal tax on foreign income..................... 4.35 0.30 1.20 Nonconventional fuel tax credit................... (3.61) (2.80) (1.99) Other............................................. Provision for income taxes...................... 5.91 ------ 9.56% ====== 5.59 ------ 54.85% ====== (0.07) ----- 62.82% ===== The components of the net deferred tax assets previously reserved...... (3,249) -- -- Alternative minimum tax............................... -- -- 51 Others, net........................................... 901 (459) 27 $ 7,893======= $ --======= $ 259======= Deferred tax assets (liabilities) comprise the following: are as follows (in thousands): DECEMBER 31, 1999 ------------------------- 1998 1997 (IN THOUSANDS) ----------- ----------- Deferred tax assets: Net operating loss, capital loss carryovers.......................... and tax credit carryforwards................................. $ -- 322,129 $ 845 $ 303 Research 287,384 Environmental and development credit carryovers............. -- 3,285 2,452 Capitalized research and development costs............. 283 71 234 other reserves................. 670,502 754,195 Reserves not currently deductible...................... 4,863 2,814 1,657 Other.................................................. 332 419 96 Total deferred deductible until paid............... 178,608 291,168 ----------- ----------- Subtotal................................. 1,171,239 1,332,747 Deferred tax liabilities: Property, equipment, intangible assets.................... 5,478 7,434 4,742 , and other......................................... (1,072,138) (1,567,579) Valuation allowance.................................... -- ................................ (7,434331,592) (4,742232,800) ----------- ----------- Net deferred tax assets................................ $5,478====== liabilities............. $ -- (232,491) $ (467,632) =========== $ --======= =========== At December 31, 1998, the Company's subsidiaries have approximately $200,599,000 of federal net operating loss ("NOL") carryforwards, $1,007,749,000 of state NOL carryforwards, and $598,930,000 of foreign NOL carryforwards. Foreign NOL carryforwards of approximately $535,530,000 may be carried forward indefinitely; the remaining NOL carryforwards have expiration dates through 2013. The Company's subsidiaries have $16,062,000 of alternative minimum tax credit carryforwards that may be used indefinitely; state tax credit carryforwards of $5,039,000; federal investment tax credit carryforwards of $381,000; and foreign tax credit carryforwards of $32,614,000. Valuation allowances have been established for uncertainties in realizing the benefit of tax loss and credit carryforwards. While the Company expects to realize the deferred tax assets, net of the valuation allowances, changes in estimates of future taxable income or in tax laws may alter this expectation. During 1997, the valuation allowance increased approximately $101,056,000, composed of increases to allowances due to the uncertainty of realizing alternative minimum tax credits, tax benefits from certain asset impairment writedowns (primarily land), foreign tax credits, and NOL carryforwards partially offset by reductions in allowances attributable primarily to foreign net operating loss carryforwards. In 1998, the 89 WASTE MANAGEMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) valuation allowance increased approximately $98,792,000 primarily due to the uncertainty of realizing foreign NOL carryforwards. The Company does not provide for U.S. income taxes on unremitted earnings of foreign subsidiaries as it is the present intention of management to reinvest the unremitted earnings in its foreign operations. Unremitted earnings of foreign subsidiaries are approximately $498,000,000 at December 31, 1998 and 1997 was attributed 1998. It is not practicable to deferred tax assets. Management believed that sufficient uncertainty existed regarding determine the realizability amount of these items such that a full valuation allowance was recorded. The Company's U.S. income taxes that would be payable for federal, state, and foreign purposes have been reduced by the tax benefits of disqualifying dispositions of stock options. The Company receives an income tax benefit for compensation expense for tax purposes which is calculated as the difference between the market value upon remittance of the stock issued at the time of exercise and the option price at the applicable income tax rates. This benefit is recorded as an increase in capital in excess of par valueassets that represent those earnings.

Income Taxes. The provision for income taxes consists of the following: DECEMBER 31following (in thousands): June 30, 1999 1998 1997 (IN THOUSANDS) Current------------- Current provision: Federal................................................... ........................................................ $ 350 State.......................................................... 200 Foreign........................................................ 1,100 ------ Total current provision.......................................... $11,611 1,650 ====== The difference between the provision for income taxes and the amount computed by applying the Federal statutory income tax rate (35 percent) to income before taxes is explained below (in thousands): For the Period From May 8, 1996 Years Ended June 30, (Date of Inception) --------------------- through 1999 ---------- 1998 ---------- June 30, 1997 ------------------- Tax at federal statutory rate (benefit)......................... $ 11 $ (4,878) $-- $168 Foreign................................................... 351 -- 90 State..................................................... 1,409 -- 1 13,371 -- 259 Deferred: Federal................................................... (4,1432,773) State income tax................... 200 -- -- Foreign................................................... Federal alternative minimum taxes.. 350 -- -- -- State..................................................... (1,335) Foreign taxes...................... 1,100 -- -- Unutilized (5,478utilized) net operating losses............................ (11) 4,878 2,773 Total............................ --------- $ 1,650 ========= ---------- $ -- ========== ------- $ -- ======= Significant components of the Company's deferred tax assets are as follows (in thousands): Years Ended June 30, ---------------------- 1999 1998 ---------- ---------- Deferred tax assets: Net operating loss carryforwards................ $ 1,647 $ 7,448 Tax credit carryforwards........................ 2,238 1,139 Bad debt reserve................................ 801 177 Other reserves and accruals..................... 3,866 807 ---------- ---------- Total deferred tax assets......................... 8,552 9,571 Valuation allowance............................... (8,552) (9,571) ---------- ---------- Net deferred tax assets........................... $ -- $ 7,893 $-- $259 ========== === ==== 44 HARMONIC INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The Company's (benefit) provision for income taxes differed from the amount computed by applying the statutory U.S. federal income tax rate to income (loss) before income taxes as follows: DECEMBER 31, 1999 1998 1997 (IN THOUSANDS) Provision at statutory rate........................... $11,051 $(7,294) $ 1,764 Differential (benefit) in rates on foreign earnings... (20) 774 (111) State taxes, net of federal benefit................... 48 -- 1 Foreign sales corporation benefit..................... (307) -- (176) Acquired in-process technology and non-deductible goodwill............................................ 106 4,863 -- Utilization of net operating loss carryovers.......... (597) -- (1,661) Utilization of research credits....................... (548) -- -- Future benefits not currently recognized.............. 508 2,116 364 Realized deferred tax assets previously reserved...... (3,249) -- -- Alternative minimum tax............................... -- -- 51 Others, net........................................... 901 (459) 27 $ 7,893======= $ --======= $ 259======= Deferred tax assets (liabilities) comprise the following: DECEMBER 31, 1999 1998 1997 (IN THOUSANDS) Net operating loss carryovers.......................... $ -- $ 845 $ 303 Research and development credit carryovers............. -- 3,285 2,452 Capitalized research and development costs............. 283 71 234 Reserves not currently deductible...................... 4,863 2,814 1,657 Other.................................................. 332 419 96 Total deferred tax assets.................... 5,478 7,434 4,742 Valuation allowance.................................... -- (7,434) (4,742) Net deferred tax assets................................ $5,478====== $ -- ======= $ --======= The FASB Statement No. 109 provides for the recognition of deferred tax assets if realization of such assets is more likely than not. Based upon the weight of available evidence, which includes the Company's historical operating performance and the reported cumulative net losses in all prior years, the Company has provided a full valuation allowance at December 31, 1998 and 1997 was attributed to against its net deferred tax assets. Management believed that sufficient uncertainty existed regarding The Company will continue to evaluate the realizability of these items such that the deferred tax assets on a full quarterly basis. The net valuation allowance was recordeddecreased by $ 1,019,000 during the year ended June 30, 1999 and increased by $6,242,000 during the year ended June 30, 1998. The Company's income taxes payable EXTREME NETWORKS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) As of June 30, 1999, the Company had net operating loss carryforwards for federalfederal and state tax purposes of approximately $4,100,000 and $3,900,000, state, and foreign purposes have been reduced by the tax benefits of disqualifying dispositions of stock optionsrespectively. The Company receives an income also had federal and state research and development tax benefit for compensation expense for tax purposes which is calculated as the difference between the market value credit carryforwards of approximately $1,202,000 and $918,000, respectively. The federal and state net operating loss carryforwards will expire at various dates beginning in 2004 through 2019, if not utilized. Utilization of the stock issued at net operating losses and tax credits may be subject to a substantial annual limitation due to the time ownership change limitations provided by the Internal Revenue Code of exercise 1986 and similar state provisions. The annual limitation may result in the option price at the applicable income expiration of net operating losses and tax rates. This benefit is recorded as an increase in capital in excess of par valuecredits before utilization.

Income Taxes. The components of income (loss) before income taxes, an extraordinary item, and the cumulative effect of an accounting change, and the details of the provision for (benefit from) income taxes consists of the followingare as follows: DECEMBER 31, 1999 1998 1997 (IN THOUSANDS) ------------------------- 1994 1993 1992 ------- -------- ------- Income (loss) before income taxes: Domestic........................................... $47,039 $(17,869) $57,619 Foreign............................................ 14,768 6,672 9,100 ------- -------- ------- Total.......................................... $61,807 $(11,197) $66,719 Provision for (benefit from) income taxes: Current: ------- -------- ------- Federal................................................... .......................................... $11,611 10,963 $ 10,182 $-- $168 17,221 Foreign................................................... 351 -- 90 .......................................... 5,860 2,001 1,025 State..................................................... 1,409 -- 1 13,371 -- 259 ............................................ 258 2,608 2,189 ------- -------- ------- Total current.................................. 17,081 14,791 20,435 Deferred: ------- -------- ------- Federal................................................... .......................................... 2,630 (4,14317,307) -- -- (864) Foreign................................................... -- -- -- .......................................... 2,209 2,122 3,653 State..................................................... ............................................ 896 (1,3353,471) -- -- (5,478862) -- -- ------- -------- ------- Total deferred................................. 5,735 (18,656) 1,927 ------- -------- ------- Total provision................................ $22,816 $ 7,893 (3,865) $-- $259 22,362 ======= === ====== 44 HARMONIC INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The Company's (benefit) provision for income taxes differed from the amount computed by applying the statutory U.S. federal income tax rate to income (loss) before income taxes as follows: DECEMBER 31, 1999 1998 1997 (IN THOUSANDS) Provision at statutory rate........................... $11,051 $(7,294) $ 1,764 Differential (benefit) in rates on foreign earnings... (20) 774 (111) State taxes, net of federal benefit................... 48 -- 1 Foreign sales corporation benefit..................... (307) -- (176) Acquired in-process technology and non-deductible goodwill............................................ 106 4,863 -- Utilization of net operating loss carryovers.......... (597) -- (1,661) Utilization of research credits....................... (548) -- -- Future benefits not currently recognized.............. 508 2,116 364 Realized deferred tax assets previously reserved...... (3,249) -- -- Alternative minimum tax............................... -- -- 51 Others, net........................................... 901 (459) 27 $ 7,893======= $ --======= $ 259======= Deferred tax assets (liabilities) comprise the following: DECEMBER 31, 1999 1998 1997 (IN THOUSANDS) Net operating loss carryovers.......................... $ -- $ 845 $ 303 Research and development credit carryovers............. -- 3,285 2,452 Capitalized research and development costs............. 283 71 234 Reserves not currently deductible...................... 4,863 2,814 1,657 Other.................................................. 332 419 96 Total deferred tax assets.................... 5,478 7,434 4,742 Valuation allowance.................................... -- (7,434) (4,742) Net deferred tax assets................................ $5,478====== $ -- ======= $ --======= The valuation allowance at 31 AMETEK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Significant components of the Company's deferred tax (asset) liability as of December 31, 1998 and 1997 was attributed to 31 are as follows: (IN THOUSANDS) ------------------ 1994 1993 -------- -------- Current deferred tax assets. Management believed that sufficient uncertainty existed regarding : Reserves not currently deductible........................ $(11,106) $(13,235) Other.................................................... (1,531) (111) -------- -------- Net current deferred tax asset......................... (12,637) (13,346) Long-term deferred tax (assets) liabilities: Differences in basis of property and accelerated -------- -------- depreciation............................................ 22,075 23,056 Purchased tax benefits................................... 15,790 17,654 Reserves not currently deductible........................ (15,928) (17,015) Other.................................................... 6,545 4,253 -------- -------- Net long-term deferred tax liability................... 28,482 27,948 -------- -------- Net deferred tax liability............................. $ 15,845 $ 14,602 ======== ======== The effective rate of the realizability of these items such that a full valuation allowance was recorded. The Company's provision for (benefit from) income taxes payable for federal, state, and foreign purposes have been reduced by reconciles to the tax benefits of disqualifying dispositions of stock options. The Company receives an income tax benefit for compensation expense for tax purposes which is calculated statutory rate as the difference between the market value of the stock issued at the time of exercise and the option price at the applicable income tax rates. This benefit is recorded as an increase in capital in excess of par value.follows: 1994 1993 1992 ----- ---- Statutory rate............................................. 35.0% (35.0)% 34.0%

Income Taxes. The provision for income taxes consists of the following: following (in thousands): YEAR ENDED DECEMBER 31, 1999 1998 1997 2000 2001 2002 Current -- Federal................................................ $(IN THOUSANDS2,173) Current: $ 6,826 $ 290 State and Puerto Rico.................................. 2,246 2,299 948 73 9,125 1,238 Deferred -- Federal................................................... ................................................ (3,588) (2,000) 2,884 State and Puerto Rico.................................. 323 (220) 781 (3,265) (2,220) 3,665 $11,611 (3,192)======= $ 6,905======= $4,903====== The difference in income taxes provided for and the amounts determined by applying the federal statutory tax rate to income before income taxes results from the following (in thousands): YEAR ENDED DECEMBER 31, 2000 2001 2002 Income tax expense (benefit) at the statutory rate....... $(11,582) $2,055 $3,634 Increase resulting from -- $168 Foreign................................................... 351 State income taxes, net of federal tax effect.......... 1,119 1,605 1,123 Non-deductible goodwill amortization................... 2,267 2,238 -- 90 State..................................................... 1,409 -- 1 13,371 -- 259 Deferred: Federal................................................... (4,143) Non-deductible goodwill writeoffs related to restructuring....................................... 4,300 -- -- Foreign................................................... -- -- -- State..................................................... (1,335) -- -- (5,478) -- Non-deductible expenses................................ 701 987 146 Other.................................................. 3 20 -- $ 7,893 (3,192) $-- 6,905 $259 4,903 ======== ====== ====== 44 HARMONIC Deferred income tax provisions result from current period activity that has been reflected in the financial statements but which is not includable in determining the Company's tax liabilities until future periods. Deferred tax assets and liabilities reflect the tax effect in future periods of all such activity to date that has COMFORT SYSTEMS USA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The been reflected in the financial statements but which is not includable in determining the Company's (benefit) provision for income taxes differed from the amount computed by applying the statutory U.S. federal income tax rate to income (loss) before income taxes as follows: liabilities until future periods. DECEMBER 31, 1999 1998 1997 ----------------- 2001 2002 ------- ------- (IN THOUSANDS) Provision at statutory rate........................... $11,051 $Deferred income tax assets -- Accounts receivable and allowance for doubtful accounts... $ 3,884 $ 2,226 Goodwill.................................................. -- 9,632 Accrued liabilities and expenses.......................... 6,092 7,230 Net operating loss........................................ 2,933 4,055 Other..................................................... 1,663 445 ------- ------- Total deferred income tax assets.................. 14,572 23,588 ------- ------- Deferred income tax liabilities -- Property and equipment.................................... (7,2941,102) $ 1,764 Differential (benefit1,026) in rates on foreign earnings... Long-term contracts....................................... (201,562) 774 (1111,262) State taxes, net of federal benefit................... 48 -- 1 Foreign sales corporation benefit..................... Goodwill.................................................. (3074,205) -- (176) Acquired in-process technology and non-deductible goodwill............................................ 106 4,863 -- Utilization of net operating loss carryovers.......... (597) Other..................................................... -- (1,66146) Utilization of research credits....................... (548) -- -- Future benefits not currently recognized.............. 508 2,116 364 Realized deferred tax assets previously reserved...... (3,249) -- -- Alternative minimum tax............................... -- -- 51 Others, net........................................... 901 (459) 27 $ 7,893======= $ --======= $ 259======= Deferred tax assets (liabilities) comprise the following: DECEMBER 31, 1999 1998 1997 (IN THOUSANDS) Net operating loss carryovers.......................... $ -- $ 845 $ 303 Research and development credit carryovers............. -- 3,285 2,452 Capitalized research and development costs............. 283 71 234 Reserves not currently deductible...................... 4,863 2,814 1,657 Other.................................................. 332 419 96 ------- ------- Total deferred income tax liabilities............. (6,869) (2,334) ------- ------- Less -- Valuation allowance................................. (1,046) (2,545) ------- ------- Net deferred income tax assets.................... 5,478 7,434 4,742 Valuation allowance.................................... -- (7,434) (4,742) Net deferred tax assets................................ $ 6,657 $5,478====== $ -- 18,709 ======= ======= The deferred income tax assets and liabilities reflected above are included in the consolidated balance sheets as follows (in thousands): DECEMBER 31, ----------------- 2001 ------- 2002 ------- Deferred income tax assets -- Prepaid expenses and other................................ $ --======= The valuation allowance at 9,582 $ 9,285 Other non-current assets.................................. Total deferred income tax assets............................ Deferred income tax liabilities -- -- ------- 9,582 ------- 9,424 ------- 18,709 ------- Other long-term liabilities............................... Net deferred income tax assets............................ (2,925) ------- $ 6,657 ======= -- ------- $18,709 ======= At December 31, 1998 and 1997 was attributed to 2002 the Company had $4.1 million of available state net operating loss carry forwards for income tax purposes which expire 2013-2022. At December 31, 2002, the Company's net deferred tax assets. Management believed that sufficient uncertainty existed regarding the realizability of these items such that assets are partially offset by a full valuation allowance was recorded. The Company's income taxes payable for federal, state, and foreign purposes have been reduced by the tax benefits of disqualifying dispositions of stock optionsallowance. The Company receives an income will continue to assess the valuation allowance and to the extent it is determined that such allowance is no longer required, the tax benefit for compensation expense for tax purposes which is calculated as the difference between the market value of the stock issued at remaining net deferred tax assets will be recognized in the time of exercise and the option price at the applicable income tax ratesfuture. This benefit is recorded as an increase in capital in excess of par value.COMFORT SYSTEMS USA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Income Taxes. The provision for income taxes consists included the following components: FOR THE YEAR ENDED MAY 31, 2000 1999 1998 Current Federal.............................................. $ 4,070 $ 6,045 $ 9,950 Foreign.............................................. -- -- 720 State................................................ 723 1,100 1,050 $ 4,793 $ 7,145 $11,720 Deferred 9,570 10,970 3,780 $14,363======= $18,115======= $15,500======= The deferred tax provisions result primarily from differences between financial reporting and tax income arising from depreciation and leveraged leases. Deferred tax liabilities and assets result primarily from the differences in the timing of the followingrecognition for transactions between financial reporting and income tax purposes and consist of the following components: DECEMBER MAY 31, ------------------- 2000 -------- 1999 1998 1997 (IN THOUSANDS) Current-------- Deferred tax liabilities: Federal................................................... Depreciation.............................................. $11,611 28,710 $-- 16,920 Leveraged leases.......................................... 27,120 27,440 Other..................................................... Total deferred tax liabilities............................ Deferred tax assets-current: 630 ------- $168 Foreign................................................... 351 -- 90 State..................................................... 1,409 -- 1 13,371 -- 259 Deferred: Federal................................................... (4,143) -- -- Foreign................................................... -- -- -- State..................................................... (1,335) -- -- (5,478) -- -- $ 7,893 $-- $259 56,460 ======= 620 ------- $44,980 === ===== 44 HARMONIC INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The Company's (benefit) provision for income taxes differed from the amount computed by applying the statutory U.S. federal income tax rate to income (loss) before income taxes as follows: DECEMBER 31, 1999 1998 1997 (IN THOUSANDS) Provision at statutory rate........................... $11,051 $(7,294) Inventory costs........................................... $ 1,764 Differential (benefit) in rates on foreign earnings... (20) 774 (111) State taxes, net of federal benefit................... 48 -- 1 Foreign sales corporation benefit..................... (307) -- (176) Acquired in-process technology and non-deductible goodwill............................................ 106 4,863 -- Utilization of net operating loss carryovers.......... (597) -- (1,661) Utilization of research credits....................... (548) -- -- Future benefits not currently recognized.............. 508 2,116 364 Realized deferred tax assets previously reserved...... (3,249) -- -- 3,160 $ 3,090 Employee benefits......................................... 2,980 2,410 Alternative minimum tax............................... ................................... 1,090 -- -- 51 Others, net........................................... 901 (459) 27 $ 7,893======= $ --======= $ 259======= Deferred tax assets (liabilities) comprise the following: DECEMBER 31, 1999 1998 1997 (IN THOUSANDS) Net operating loss carryovers.......................... $ -- $ 845 $ 303 Research and development credit carryovers............. -- 3,285 2,452 Capitalized research and development costs............. 283 71 234 Reserves not currently deductible...................... 4,863 2,814 1,657 Other.................................................. 332 419 96 ..................................................... Total deferred tax assets.................... 5,478 7,434 4,742 Valuation allowance.................................... -- (7,434) (4,742) -current......................... Deferred tax assets-noncurrent: 240 ------- $ 7,470 ------- 390 ------- $ 5,890 ------- Postretirement benefits................................... Total deferred tax assets-noncurrent...................... Total deferred tax assets................................. Net deferred tax assetsliabilities................................ $ 440 ------- 440 ------- $ 7,910 ======= $5,478====== $ -- 48,550 ======= $ --======= 110 ------- 110 ------- $ 6,000 ======= $38,980 ======= The Company has determined that the realization of deferred tax assets is more likely than not, and that a valuation allowance at December 31, 1998 and 1997 was attributed to deferred tax assets. Management believed that sufficient uncertainty existed regarding is not required based upon the realizability of these items such that a full valuation allowance was recorded. The Company's income taxes payable for federalhistory of prior operating AAR CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN THOUSANDS, state, and foreign purposes have been reduced by the tax benefits of disqualifying dispositions of stock options. The Company receives an income tax benefit for compensation expense for tax purposes which is calculated as the difference between the market value of the stock issued at the time of exercise and the option price at the applicable income tax rates. This benefit is recorded as an increase in capital in excess of par value.EXCEPT PER SHARE AND PERCENTAGE DATA)

Income Taxes. The provision for income taxes consists of the following: DECEMBER 31, 1999 -------------------- 1998 1997 1996 ---- ---- ---- (IN THOUSANDS) Current: Federal................................................... $11,611 $$ -- $168 Foreign................................................... 351 -- 90 State..................................................... 1,409 -- 1 13,371 -- 259 Deferred: Federal................................................... (4,143) -- -- $246 Foreign................................................... -- -- -- 90 41 State..................................................... (1,335) -- -- (5,478) -- -- 1 24 ---- ---- ---- $ 7,893 $-- $259 $311 ======= === ==== 44 HARMONIC INC. ==== 41 43 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The Company's (benefit) provision for income taxes differed from the amount computed by applying the statutory U.S. federal income tax provision reconciles to the provision at the federal statutory rate to income (loss) before income taxes as follows: DECEMBER 31, 1999 1998 1997 1996 (IN THOUSANDS) Provision at statutory rate........................... $11,051 ................................. $(7,294) $ 1,764 $2,118 Differential (benefit) in rates on foreign earnings... (20) ................... 774 (111) -- State taxes, net of federal benefit................... 48 ......................... -- 1 16 Foreign sales corporation benefit..................... (307) ........................... -- (176) -- Acquired in-process technology and non-deductible goodwill............................................ 106 .................................................. 4,863 -- -- Utilization of net operating loss carryovers.......... (597) ................ -- (1,661) Utilization of research credits....................... (5482,490) -- -- Future benefits not currently recognized.............. 508 .................... 2,116 364 Realized deferred tax assets previously reserved...... (3,249) -- -- 429 Alternative minimum tax............................... -- ..................................... -- 51 Others, net........................................... 901 162 Other....................................................... (459) 27 $ 7,893======= 76 $ --======= $ 259======= $ 311====== Deferred tax assets (liabilities) comprise the following: DECEMBER 31, 1999 1998 1997 1996 (IN THOUSANDS) Net operating loss carryovers.......................... $ -- ............................... $ 845 $ 303 $ 1,964 Research and development credit carryovers............. -- 3,285 2,452 .................. Capitalized research and development costs............. 283 .................. 3,285 71 2,452 234 2,112 254 Reserves not currently deductible...................... 4,863 ........................... 2,814 1,657 1,187 Other.................................................. 332 ....................................................... 419 96 12 Total deferred tax assets.................... 5,478 ......................... 7,434 4,742 5,529 Valuation allowance.................................... -- ......................................... (7,434) (4,742) (5,529) Net deferred tax assets................................ $5,478====== ......................................... $ -- ======= --======= $ --======= $ --======= The deferred tax assets valuation allowance at December 31, 1998 1998, 1997 and 1997 was 1996 is attributed to federal and state deferred tax assets. Management believed believes that sufficient uncertainty existed exists regarding the realizability of these items such that a full valuation allowance was has been recorded. At December 31, 1998, the Company had approximately $1,968,000 of net operating loss carryovers for federal tax reporting purposes available to offset future taxable income; such carryovers will expire in the years ending 2009 through 2019. The Company's income taxes payable for federalfederal net operating loss carryovers do not include approximately $4,887,000 resulting from disqualifying dispositions or exercises of non-incentive stock options, state, and foreign purposes have been reduced by the tax benefits benefit of disqualifying dispositions of stock options. The Company receives an income tax benefit which, when realized, will be accounted for compensation expense for tax purposes which is calculated as the difference between the market value of the stock issued at the time of exercise and the option price at the applicable income tax rates. This benefit is recorded as an increase in addition to capital in excess of par value, rather than as a reduction of the provision for income taxes. At December 31, 1998, the Company also had approximately $2,175,000, and $1,110,000, of research and development credit carryovers for federal and state tax reporting purposes, respectively. The federal research and development credit carryovers will expire in the years ending 2004 through 2019. The state research and development carryovers will be carried forward indefinitely, until utilized. The amounts of and the benefit from net operating losses and tax credits that can be carried forward may be limited in the event of a cumulative stock ownership change of greater than 50% over a three year period. 44 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 11: RESEARCH AND DEVELOPMENT GRANTS BIRD. In accordance with separate agreements signed with the Israel-U.S. Binational Industrial Research and Development Foundation ("BIRD") in December 1994 and December 1997, the Company obtained grants for research and development projects amounting to 50% of the actual expenditures incurred on each of the two projects subject to a maximum of $560,000 and $845,000, respectively. The Company earned the maximum of $560,000 under the first grant, which was offset against research and development expenses from 1995 through 1997. Under the second grant, the Company earned approximately $81,000 in 1998, which was also offset against research and development expenses for the same period. The Company is not obligated to repay the grants regardless of the outcome of its development efforts; however, it is obligated to pay the BIRD royalties at the rate of 2.5% - 5% of sales of any products or development resulting from such research, but not in excess of 150% of each grant. During 1998, approximately $175,000 of royalty expense was incurred. Chief Scientist. An agreement was signed in May 1998 with the Israeli Chief Scientist Office ("Chief Scientist") in which the Company obtained a grant for a research and development project amounting to 50% of the actual expenditures incurred, subject to a maximum of 1,113,000 Israeli Shekels which translated at the December 31, 1998 exchange rate approximates $265,000. The Company earned $265,000 during 1998, which was offset against research and development expense for the same period. The Company is not obligated to repay the grants regardless of the outcome of its development efforts; however, it is obligated to pay the Chief Scientist royalties at the rate of 3% - 5% of sales of any products or development resulting from such research, but not in excess of 100% of the grant. During 1998, royalty expenses incurred were not significant. NOTE 12: GEOGRAPHIC INFORMATION AND SIGNIFICANT CUSTOMERS The Company operates in one industry segment and markets its products worldwide through its own direct sales force and through systems integrators and distributors. The Company has a manufacturing facility located in the U.S., international sales and support centers in Europe and Asia, and its New Media Communication Ltd. subsidiary and a research and development facility in Israel. YEAR ENDED DECEMBER 31, 1998 1997 1996 (IN THOUSANDS) Geographic information consists of the following: Net Sales: United States....................................... $47,422 $30,651 $26,122 Canada.............................................. 7,208 12,806 9,119 China............................................... 11,647 8,254 1,139 United Kingdom...................................... 3,511 5,530 9,323 Other foreign countries............................. 14,069 17,201 15,191 Total............................................ Long-lived assets: $83,857======= $74,442 ======= $60,894======= United States....................................... $10,384 $ 8,617 $ 8,076 Israel.............................................. 1,501 1,373 675 Other foreign countries............................. 57 87 -- Total............................................ $11,942======= $10,077 ======= $ 8,751======= The Company sells to a significant number of its end users through distributors. In 1998 sales to one domestic customer and one foreign distributor represented 17% and 11% of total net sales, respectively. In 1997, sales to one distributor represented 17% of total net sales. In 1996, sales to three distributors represented 15%, 15% and 13% of total net sales, respectively.

Income Taxes. The components of the provision for income taxes consists of the following: DECEMBER 31, 1999 1998 1997 are summarized in Table 2. Income (IN THOUSANDSloss) Current: Federal................................................... $11,611 $-- $168 Foreign................................................... 351 -- 90 State..................................................... 1,409 -- 1 13,371 -- 259 Deferred: Federal................................................... (4,143) -- -- Foreign................................................... -- -- -- State..................................................... (1,335) -- -- (5,478) -- -- $ 7,893 $-- $259 ======= === ==== 44 HARMONIC INCbefore taxes is principally attributed to domestic operations. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The Company's (benefit) tax provision for income taxes differed differs from the amount computed amounts obtained by applying the statutory U.S. federal income tax rate to income (loss) before income taxes as shown in Table 3. NOTE 6: INCOME TAXES -- CONTINUED The components of the net deferred tax asset as January 3, 1994 and December 28, 1992 under FAS 109 were as follows: JANUARY 3, DECEMBER 3128, 1999 1998 1997 1994 1992 (DOLLARS IN THOUSANDS) Provision at statutory rateDeferred tax assets: Deferred income on sales to distributors............ $ 3,680 $ 2,177 Inventory reserves and basis differences............ 4,788 3,054 Reserve for restructuring........................... $11,051 $2,351 4,967 Asset valuation and other reserves.................. 3,498 9,265 Other, net.......................................... 3,982 2,386 Total deferred tax asset.................. $ 18,299 $ 21,849 Deferred tax liabilities: Excess of tax over book depreciation................ $ (7,2943,716) $ 1,764 Differential (benefit) in rates on foreign earnings... (20) 774 (1117,774) State taxes, taxes net of federal benefit................... 48 -- 1 Foreign sales corporation benefit..................... .................. (307527) -- (176862) Acquired inOther, net.......................................... (1,399) (866) Total deferred tax liability.............. $ (5,642) $ (9,502) Total deferred tax asset............................ $ 12,657 $ 12,347 The net deferred tax asset at January 3, 1994 is substantially realizable through carry-process technology and non-deductible goodwill............................................ 106 4,863 -- Utilization of net operating loss carryovers.......... (597) -- (1,661) Utilization of research credits....................... (548) -- -- Future benefits not currently recognized.............. 508 2,116 364 Realized back to prior years' taxable income. Other Current Assets include current deferred tax assets previously reserved...... of $17,088,000 at January 3, 1994 and $14,908,000 at December 28, 1992, respectively. TABLE 2. COMPONENTS OF THE PROVISION FOR INCOME TAXES YEARS ENDED -------------------------------------------------------- JANUARY 3, DECEMBER 28, DECEMBER 30, 1994 1992 1991 -------------- ---------------- ---------------- (3,249) -- -- Alternative minimum tax............................... -- -- 51 Others, net........................................... 901 (459) 27 $ 7,893======= $ --======= $ 259======= Deferred tax assets (liabilities) comprise the following: DECEMBER 31, 1999 1998 1997 (DOLLARS IN THOUSANDS) Net operating loss carryovers.......................... Current tax expense (benefit): U.S. Federal.............................. $ -- 9,507 $ 845 (923) $ 303 Research 14,520 State and development credit carryovers............. -- 3,285 2,452 Capitalized research and development costs............. 283 71 234 Reserves not currently deductible...................... 4,863 2,814 1,657 Other.................................................. 332 419 96 local........................... 1,055 398 2,420 Foreign................................... 171 177 176 Total deferred current............................... Deferred tax assets.................... 5,478 7,434 4,742 Valuation allowance.................................... -- expense (7,434benefit): -------------- 10,733 -------------- ---------------- (348) ---------------- ---------------- 17,116 ---------------- U.S. Federal.............................. (5,918) (4,7429,019) Net deferred tax assets................................ $5,478====== $ -- ======= $ --======= The valuation allowance at December 31, 1998 and 1997 was attributed to deferred tax assets. Management believed that sufficient uncertainty existed regarding the realizability of these items such that a full valuation allowance was recorded. The Company's income taxes payable for federal, state, and foreign purposes have been reduced by the tax benefits of disqualifying dispositions of stock options. The Company receives an income tax benefit for compensation expense for tax purposes which is calculated as the difference between the market value of the stock issued at the time of exercise and the option price at the applicable income tax rates. This benefit is recorded as an increase in capital in excess of par value.440

Income Taxes. The Company accounts for income taxes under the provisions of SFAS No. 109, Accounting for Income Taxes. Under the liability method specified by SFAS No. 109, a deferred tax asset or liability is measured based on the difference between the financial statement and tax bases of assets and liabilities, as measured by the enacted tax rates. Income (loss) before provision for (benefit from) income taxes consists of the following: DECEMBER 31following (in thousands): YEARS ENDED JUNE 30, 1997 1998 1999 Domestic $21,312 $22,068 $(43,365) Foreign 3,058 6,617 1,519 Total $24,370 ======= $28,685======= $(41,846)======== The provisions for (benefit from) income taxes shown in the accompanying consolidated statements of operations are composed of the following (in thousands): YEARS ENDED JUNE 30, 1997 1998 1997 1999 Federal -- Current............................................ $ 7,176 $ 8,185 $ (IN THOUSANDS3,655) Deferred........................................... 1,092 1,893 (13,111) State -- Current: Federal................................................... ............................................ 1,011 746 104 Deferred........................................... 198 857 (1,013) Foreign -- Current............................................ 692 2,368 1,564 $11,611 10,169 $-- 14,049 $168 Foreign................................................... 351 -- 90 State..................................................... 1,409 -- 1 13,371 -- 259 Deferred: Federal................................................... (4,14316,111) -- -- Foreign................................................... -- -- -- State..................................................... (1,335) -- -- (5,478) -- -- $ 7,893 $-- $259 ======= === ===== 44 HARMONIC INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The Company's (benefit) provision for income taxes differed from the amount computed by applying the statutory U.S. federal income tax rate to income (loss) before income taxes as follows: DECEMBER 31, 1999 1998 1997 (IN THOUSANDS) Provision at statutory rate........................... $11,051 $(7,294) $ 1,764 Differential (benefit) in rates on foreign earnings... (20) 774 (111) State taxes, net of federal benefit................... 48 -- 1 Foreign sales corporation benefit..................... (307) -- (176) Acquired in-process technology and non-deductible goodwill............................................ 106 4,863 -- Utilization of net operating loss carryovers.......... (597) -- (1,661) Utilization of research credits....................... (548) -- -- Future benefits not currently recognized.............. 508 2,116 364 Realized deferred tax assets previously reserved...... (3,249) -- -- Alternative minimum tax............................... -- -- 51 Others, net........................................... 901 (459) 27 $ 7,893======= $ --======= $ 259======= Deferred tax assets (liabilities) comprise the following: DECEMBER 31, 1999 1998 1997 (IN THOUSANDS) Net operating loss carryovers.......................... $ -- $ 845 $ 303 Research and development credit carryovers............. -- 3,285 2,452 Capitalized research and development costs............. 283 71 234 Reserves not currently deductible...................... 4,863 2,814 1,657 Other.................................................. 332 419 96 Total deferred tax assets.................... 5,478 7,434 4,742 Valuation allowance.................................... -- (7,434) (4,742) Net deferred tax assets................................ $5,478====== $ -- ======== $ --======= F-21 66 ASPEN TECHNOLOGY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) JUNE 30, 1999 The valuation allowance at December 31, 1998 and 1997 was attributed to deferred tax assets. Management believed that sufficient uncertainty existed regarding the realizability of these items such that a full valuation allowance was recorded. The Company's provision for income taxes payable for federaldiffers from the federal statutory rate due to the following: YEARS ENDED JUNE 30, state1997(1) PROVISION 1998(1) PROVISION 1999BENEFIT Federal tax at statutory rate........................... 34.5% 34.5% 35.0% State income tax, net of federal tax benefit............ 5.6 4.2 2.1 Foreign tax............................................. (0.9) (1.0) (2.7) Tax credits generated................................... (4.1) (4.7) 5.3 Permanent differences, net.............................. 1.3 0.6 (0.7) Valuation allowance and foreign purposes have been reduced by the tax benefits of disqualifying dispositions of stock options. The Company receives an other........................... (0.5) -- (0.5) Provision for/Benefit from income tax benefit for compensation expense for tax purposes which is calculated as the difference between the market value of the stock issued at the time of exercise and the option price at the applicable income tax rates. This benefit is recorded as an increase in capital in excess of par value.taxes................. 35.9% 33.6% 38.5% ==== ==== ==== ---------------

Income Taxes. The components of the provision for income taxes for fiscal 1996, 1995 and 1994 are presented in the following table: YEAR ENDED -------------------------------------- (IN THOUSANDS) MARCH 30,1996 APRIL 1, 1995 APRIL 2, 1994 - - ------------------------------------------------------------------------------ Current: Federal $ 21,550 $ 13,849 $ 11,761 State 2,309 1,583 1,680 Deferred: -------------------------------------- 23,859 15,432 13,441 -------------------------------------- Federal (2,166) (1,598) (2,909) State (232) (183) (416) -------------------------------------- (2,398) (1,781) (3,325) -------------------------------------- $ 21,461 $ 13,651 $ 10,116 -------------------------------------- -------------------------------------- Foreign income taxes were not significant for the fiscal years presented. The provision for income taxes consists of the following: DECEMBER 31, 1999 1998 1997 (IN THOUSANDS) Current: Federal................................................... $11,611 $-- $168 Foreign................................................... 351 -- 90 State..................................................... 1,409 -- 1 13,371 -- 259 Deferred: Federal................................................... (4,143) -- -- Foreign................................................... -- -- -- State..................................................... (1,335) -- -- (5,478) -- -- $ 7,893 $-- $259 ======= === ==== 44 HARMONIC INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The Company's (benefit) provision for income taxes differed differs from the amount computed of income tax determined by applying the applicable U.S. statutory U.S. federal income tax rate to pretax income (loss) before income taxes as followsa result of the following differences: DECEMBER 31YEAR ENDED -------------------------------------- MARCH 30, 1999 1998 1997 APRIL 1, APRIL 2, (IN THOUSANDS) Provision 1996 1995 1994 - - ------------------------------------------------------------------------------ Computed income statutory rate tax expense at statutory rate........................... $11,051 $(7,294) the $ 1,764 Differential (benefit) in rates on foreign earnings... (20) 774 (111) 22,136 $ 14,216 $ 11,412 Adjustments for tax effects of: State taxes, net of federal benefit................... 48 -- 1 Foreign sales corporation benefit..................... Research and development credits, current 1,636 (307196) 1,625 (193) 1,630 (272) Research and development and investment tax credit carryforwards -- (176243) Acquired in-process technology and non-deductible goodwill............................................ 106 4,863 -- Utilization (601) Benefit of net operating loss carryovers.......... (597) carryforward -- -- (1,661658) Utilization Nontaxable investment income (1,506) (1,020) (824) Other (609) (734) (571) -------------------------------------- $ 21,461 $ 13,651 $10,116 -------------------------------------- -------------------------------------- The components of research credits....................... (548) -- -- Future benefits not currently recognized.............. 508 2,116 364 Realized the Company's net deferred tax assets previously reserved...... (3,249) -- -- Alternative minimum tax............................... -- -- 51 Othersasset under SFAS No. 109 were as follows: MARCH 30, net........................................... 901 (459) 27 $ 7,893======= $ --======= $ 259======= Deferred tax assets (liabilities) comprise the following: DECEMBER 31APRIL 1, 1999 1998 1997 (IN THOUSANDS) Net operating loss carryovers.......................... 1996 1995 - - ------------------------------------------------------------------------------ Deferred income $ -- 6,343 $ 845 $ 303 Research 4,172 Expenses and development credit carryovers............. -- 3,285 2,452 Capitalized research and development costs............. 283 71 234 Reserves allowances not currently deductible...................... 4,863 2,814 1,657 Other.................................................. 332 419 96 deductible 5,693 5,949 ---------------------- Total deferred tax assets.................... 5,478 7,434 4,742 assets 12,036 10,121 Valuation allowance.................................... -- allowance (7,4342,336) (4,7422,819) Net ---------------------- $ 9,700 $ 7,302 ---------------------- ---------------------- The valuation allowances are recorded to offset deferred tax assets................................ $5,478====== $ -- ======= $ --======= The valuation allowance at December 31, 1998 and 1997 was attributed to deferred tax assetsassets which can only be realized by earning taxable income in distant future years. Management believed established the valuation allowances because it cannot determine if it is more likely than not that sufficient uncertainty existed regarding such income will be earned. NOTE 8. STOCKHOLDERS' EQUITY The Company plans to adopt SFAS No. 123, "Accounting for Stock-Based Compensation" in fiscal 1997. SFAS No. 123 was issued by the realizability Financial Accounting Standards Board in October 1995 and allows companies to choose whether to account for stock-based compensation on a fair value method or to continue to account for stock-based compensation under the current intrinsic value method as prescribed by APB Opinion No. 25, "Accounting for Stock Issued to Employees." The Company plans to continue to follow the provisions of APB Opinion No. 25. Therefore, management of the Company believes that the impact of adoption will not have a significant effect on the Company's financial position or results of operations. COMMON STOCK In November 1995, the Company completed its third public offering, consisting of 2,500,000 shares of common stock at $36.63 per share. Net proceeds to the Company were approximately $86.7 million after deducting underwriting discounts and offering expenses. STOCK WARRANTS The Company has issued to a vendor warrants to purchase a total of 464,125 shares of common stock. Of this amount, 295,500 warrants were issued and 189,000 exercised prior to fiscal 1994. During fiscal 1995 and 1994, the Company issued an additional 62,125 shares at $17.38 per share and 106,500 shares at $20.17 per share, respectively. During fiscal 1996, the vendor exercised warrants for 45,000 shares, at an exercise price of $20.17 per share. During fiscal 1994, the vendor exercised warrants for 106,500 shares; total shares issued to the vendor were 50,904 after surrender of 55,596 shares to cover exercise costs of approximately $1.1 million. The remaining 123,625 warrants were cancelled in exchange for the issuance of a warrant to purchase 67,419 shares of common stock at $34.00 per share which will be earned ratably from March 1996 through February 1997. STOCK OPTION PLAN As of March 30, 1996, the Company had reserved 5,775,000 shares of common stock for issuance to officers and key employees under a stock option plan. The options, which are generally granted at no less than fair market value at the date of grant, are exercisable immediately and expire five years from date of grant. The transfer of certain shares of common stock acquired through exercise of employee stock options is restricted under stock vesting agreements that grant the Company the right to repurchase unvested shares at the exercise price if employment is terminated. Generally, the Company's repurchase rights lapse quarterly over four years. The following table summarizes activity under the plan during the past three years: SHARES UNDER OPTION PRICE RANGE - - ------------------------------------------------------------------------------ Balance, April 3, 1993 2,263,524 $ .07-$17.83 Options granted 491,180 $ 14.88-$23.75 Options canceled (203,266) $ .07-$23.75 Options exercised Balance, April 2, 1994 (371,835) --------- 2,179,603 $ .07-$14.50 $ .27-$23.75 Options granted 548,400 $ 16.38-$23.50 Options canceled (113,790) $ .27-$23.75 Options exercised Balance, April 1, 1995 (393,726) --------- 2,220,487 $ .27-$18.88 $ 3.67-$23.50 Options granted 806,550 $ 31.63-$36.50 Options cancelled (195,865) $ 3.67-$36.50 Options exercised (589,469) $ 3.67-$31.63 Balance, March 30, 1996 --------- 2,241,703 $ 6.17-$36.50 Available for grant at March 30, 1996 --------- --------- 424,046 --------- --------- OUTSIDE DIRECTORS' STOCK OPTION PLAN The 1993 Outside Directors Stock Option Plan was approved by the stockholders in August 1993, replacing the 1990 Amended Outside Directors Stock Option Plan. The new plan provides for the issuance of stock options to members of the Company's Board of Directors who are not employees of the Company; 225,000 shares of the Company's Common Stock are reserved for issuance thereunder. In August 1993, each non-employee director was granted under the new plan an option to purchase 18,000 shares of common stock. These options generally become exercisable quarterly over a four year period beginning on the date of grant. As of March 30, 1996 and April 1, 1995, options to purchase 128,625 shares of common stock had been granted to non-employee directors under the former plan. The last grants under the former plan were made in August 1993, and no additional grants under the former plan are anticipated. The following table summarizes activity under these items such that a full valuation allowance was recorded. plans during the past three years: SHARES UNDER OPTION PRICE RANGE - - ------------------------------------------------------------------------------ Balance, April 3, 1993 54,000 $ 0.27-$17.83 Options granted 100,875 $ 20.17-$23.75 Options exercised (12,375) $ 0.27-$ 9.50 Balance, April 2, 1994 --------- 142,500 $ 3.75-$23.75 Options cancelled (13,500) $23.75 Options exercised (9,000) $ 3.75-$20.17 Balance, April 1, 1995 --------- 120,000 $ 9.50-$23.75 Options exercised (31,500) $ 6.17-$23.75 Balance, March 30, 1996 --------- 88,500 $ 6.67-$23.75 Available for grant at March 30, 1996 --------- --------- 148,500 --------- --------- STOCK PURCHASE PLAN The Company's income taxes payable for federal, stateemployee stock pur-chase plan was approved by the stockholders in August 1990, and foreign purposes have been reduced by the tax benefits of disqualifying dispositions of stock optionsbecame effective January 1, 1991. The Company receives an income tax benefit for compensation expense for tax purposes which plan permits eligible employees to purchase shares of common stock through payroll deductions, not to exceed 10% of the employee's compensation. The purchase price of the shares is calculated as the difference between lower of 85% of the fair market value of the stock issued at the time beginning of exercise and each six-month offering period or 85% of the option price fair market value at the applicable end of such period, but in no event less than the book value per share at the mid-point of each offering period. Amounts accumulated through payroll deductions during the offering period are used to purchase shares on the last day of the offering period. Of the 450,000 shares authorized to be issued under the plan, 54,239, 70,973 and 45,789 shares were issued during fiscal 1996, 1995 and 1994, respectively, and 115,230 shares were available for issuance at March 30, 1996. SHAREHOLDER RIGHTS PLAN A shareholder rights plan approved on September 11, 1991 provides for the issuance of one right for each share of outstanding common stock. With certain exceptions, the rights will become exercisable only in the event that an acquiring party accumulates beneficial ownership of 20% or more of the Company's outstanding common stock or announces a tender or exchange offer, the consummation of which would result in ownership by that party of 20% or more of the Company's outstanding common stock. The rights expire on September 11, 2001 if not previously redeemed or exercised. Each right entitles the holder to purchase, for $60.00, a fraction of a share of the Company's Series A Participating Preferred Stock with economic terms similar to that of one share of the Company's common stock. The Company will generally be entitled to redeem the rights at $0.01 per right at any time on or prior to the tenth day after an acquiring person has acquired beneficial ownership of 20% or more of the Company's common stock. If, prior to the redemption or expiration of the rights, an acquiring person or group acquires beneficial ownership of 20% or more of the Company's outstanding common stock, each right not beneficially owned by the acquiring person or group will entitle its holder to purchase, at the rights' then current exercise price, that number of shares of common stock having a value equal to two times the exercise price. NOTE 9. TRANSACTIONS WITH PRINCIPAL SUPPLIERS Substantially all of the Company's silicon wafers are currently manufactured by Seiko Epson Corporation ("Seiko Epson") in Japan and are sold to the Company through Seiko Epson's affiliated U.S. distributor, S-MOS Systems Inc. ("SMOS"). The Chairman of the Board of SMOS is a member of the Company's Board of Directors. In connection with the series of agreements recently entered into with UMC as described in Note 4 to the Consolidated Financial Statements, UMC committed to supply the Company with sub-micron wafers beginning in the first calendar quarter of 1996 and continuing with phased increases for several years. A significant interruption in supply from Seiko Epson through SMOS, or interruptions in supply from UMC, would have a material adverse effect on the Company's business. In July 1994, the Company signed an agreement with Seiko Epson under which it advanced $44 million during fiscal 1995 to be used in conjunction with the construction of additional wafer fabrication capacity and technological development. The advance is being repaid in the form of semiconductor wafers over a multi-year period. No interest income tax ratesis recorded. This benefit is recorded as an increase in capital in excess Total wafer receipts under this agreement aggregated approximately $10,713,000 and $1,430,000 during fiscal 1996 and 1995, respectively. The balance sheet caption "Prepaid expenses and other current assets" includes management's estimate of par valuesuch wafers to be received under the agreement during fiscal 1997, aggregating $17,350,000. The Company continues to purchase a portion of its wafer supply from Seiko Epson for cash using commercial terms. Wafer purchases totalled $34.7 million, $27.8 million and $25.4 million for fiscal 1996, 1995 and 1994, respectively. Accounts payable and accrued expenses at March 30, 1996 and April 1, 1995 include $4.0 and $4.1 million, respectively, due this vendor. Open purchase commitments to this vendor approximated $15.2 million at March 30, 1996.

Income Taxes. The provision for Pretax income (income before income taxes consists and extraordinary item) and income tax expense consist of the following: DECEMBER 31, 1997 1998 1999 1998 1997 (IN THOUSANDS) CurrentPretax income: Federal................................................... United States........................................... $11,611 6,214 $-- 19,352 $168 Foreign................................................... 351 -- 90 State..................................................... 1,409 -- 1 13,371 -- 259 Deferred: Federal................................................... (4,143) -- -- Foreign................................................... -- -- -- State..................................................... (1,335) -- -- (5,478) -- -- $ 7,893 26,929 Outside the United States............................... 3,391 2,440 10,669 Total pretax income....................................... $-- $259 9,605 21,792 37,598 ====== ======= ======= Income tax expense (benefit): Current: Federal............................................... $2,926 $ 3,533 $ 7,908 Foreign............................................... (176) 1,667 3,988 State................................................. 17 (164) 528 Total current........................................... 2,767 5,036 12,424 Deferred: Federal............................................... (842) 2,243 784 Foreign............................................... 809 (606) 55 State................................................. 685 724 199 Total deferred............................................ 652 2,361 1,038 $3,419 $ 7,397 $13,462 ====== ======= 44 HARMONIC INC======= In June 1998, a tax benefit of $1,263 was recorded in conjunction with the loss on early extinguishment of debt. The following reconciles the Federal statutory income tax rate with the Company's effective tax rate: 1997 -------- 1998 -------- 1999 -------- Statutory Federal income tax rate........................... 35.0% 35.0% 35.0% DISC/FSC commission income.................................. (1.2) (1.6) (0.7) Effect of foreign items and rate differentials.............. 0.3 0.8 1.6 State income taxes, net..................................... 4.9 4.1 1.2 Reduction of prior year tax provision....................... (3.0) (2.8) (2.0) Other....................................................... (0.4) ---- 35.6% ==== (1.6) ---- 33.9% ==== 0.7 ---- 35.8% ==== F-20 RAYOVAC CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The Company's (benefit) provision for income taxes differed from the amount computed by applying the statutory U.S. federal income tax rate to income (loss) before income taxes as follows: DECEMBER 31, 1999 1998 1997 (IN THOUSANDS) Provision at statutory rate........................... $11,051 $(7,294) $ 1,764 Differential (benefit) in rates on foreign earnings... (20) 774 (111) State taxes, net of federal benefit................... 48 -- 1 Foreign sales corporation benefit..................... (307) -- (176) Acquired in-process technology and non-deductible goodwill............................................ 106 4,863 -- Utilization of net operating loss carryovers.......... (597) -- (1,661) Utilization of research credits....................... (548) -- -- Future benefits not currently recognized.............. 508 2,116 364 Realized deferred tax assets previously reserved...... (3,249) -- -- Alternative minimum tax............................... -- -- 51 Others, net........................................... 901 (459) 27 $ 7,893======= $ --======= $ 259======= Deferred tax assets (liabilities) comprise the following: DECEMBER 31, 1999 1998 1997 (IN THOUSANDS) Net operating loss carryovers.......................... $ -- $ 845 $ 303 Research and development credit carryovers............. -- 3,285 2,452 Capitalized research and development costs............. 283 71 234 Reserves not currently deductible...................... 4,863 2,814 1,657 Other.................................................. 332 419 96 Total deferred tax assets.................... 5,478 7,434 4,742 Valuation allowance.................................... -- (7,434) (4,742) Net deferred tax assets................................ $5,478====== $ -- ======= $ --======= The valuation allowance at December 31, 1998 and 1997 was attributed to deferred tax assets. Management believed that sufficient uncertainty existed regarding the realizability of these items such that a full valuation allowance was recorded. The Company's income taxes payable for federal, state, and foreign purposes have been reduced by the tax benefits of disqualifying dispositions of stock options. The Company receives an income tax benefit for compensation expense for tax purposes which is calculated as the difference between the market value of the stock issued at the time of exercise and the option price at the applicable income tax rates. This benefit is recorded as an increase in capital in excess of par value.EXCEPT PER SHARE AMOUNTS)

Income Taxes. The provision for Deferred income taxes consists result from differences in the recognition of expenses for tax and financial reporting purposes, as well as operating loss and tax credit carryforwards. Significant components of the following: DECEMBER Company's deferred income tax assets as of December 31, are as follows (in thousands): 2000 -------- 1999 1998 1997 (IN THOUSANDS) Current-------- Deferred tax assets: Federal................................................... $11,611 $Net operating loss carryforwards..................... $ 11,606 $ 6,230 Research and development credit carryforwards........ 5,255 4,820 Capitalized research and development expenses........ -- $168 Foreign................................................... 351 -- 90 State..................................................... 1,409 -- 1 13,371 -- 259 Deferred: Federal................................................... (4,143) -- -- Foreign................................................... -- -- -- State..................................................... (1,335) -- 534 Inventory reserve.................................... 3,063 6,100 Accruals and other................................... 4,294 5,163 Deferred gain........................................ -- (5,478272) Depreciation......................................... 3,002 -------- 27,220 4,974 -------- 27,549 Valuation allowance.................................... Total........................................ (27,220) -------- $ -- -- $ 7,893 $-- $259 ======== (27,549) -------- $ -- === ====== 44 HARMONIC For federal and state income tax reporting purposes, net operating loss carryforwards of approximately $33,535 and $5,742 are available to reduce future taxable income, if any. The federal net operating loss carryforwards expire on various dates through 2020. The state net operating loss carryforwards expire on various dates through 2010. VIVUS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The Company's (benefit) provision for income taxes differed consists of the following components for the years ended December 31, 2000 and 1999. There was no provision recorded in 1998 due to the net loss of $80,253 reported for that year. 2000 1999 ---- ---- Current Federal................................................... $805 $730 State..................................................... 40 95 Foreign................................................... 10 164 ---- ---- Total current provision for income taxes.......... $855 $989 ==== ==== The provisions for income taxes differs from the amount computed by applying the statutory U.S. federal income tax rate to income (loss) before income taxes rates as follows: DECEMBER , for the years ended December 31, 2000, 1999 and 1998: 2000 ---- 1999 ---- 1998 1997 ---- Provision computed at federal statutory rates 35% 35% (IN THOUSANDS) Provision at statutory rate........................... $11,051 $(7,294) $ 1,764 Differential (benefit) in rates on foreign earnings... (20) 774 (111) 35)% State income taxes, net of federal benefit................... 48 tax effect........... 6 6 (6) Net operating losses utilized (25) (31) -- 1 Foreign sales corporation benefit..................... Tax credits............................................. (3075) -- (1761) Acquired in-process technology Change in valuation allowance........................... 5 -- 36 Loss/(Income) not subject to federal and non-deductible goodwill............................................ 106 4,863 -- Utilization of net operating loss carryovers.......... state taxation.............................................. (597) -- (1,661) Utilization of research credits....................... (548) -- -- Future benefits not currently recognized.............. 508 2,116 364 Realized deferred tax assets previously reserved...... (3,249) -- -- Alternative minimum tax............................... -- -- 51 Others, net........................................... 901 (459) 27 $ 7,893======= $ --======= $ 259======= Deferred tax assets (liabilities) comprise the following: DECEMBER 31, 1999 1998 1997 (IN THOUSANDS) Net operating loss carryovers.......................... $ -- $ 845 $ 303 Research and development credit carryovers............. -- 3,285 2,452 Capitalized research and development costs............. 283 71 234 Reserves not currently deductible...................... 4,863 2,814 1,657 Other.................................................. 332 419 96 Total deferred tax assets.................... 5,478 7,434 4,742 Valuation allowance.................................... -- (7,4347) (4,7424) Net deferred tax assets................................ $5,478====== $ -- 5 Other................................................... 1 (1) 1 --- --- --- Provision for income taxes.................... 10% 5% 0% === === ======= $ --======= The valuation allowance at December 31, 1998 and 1997 was attributed to deferred tax assets. Management believed that sufficient uncertainty existed regarding the realizability of these items such that a full valuation allowance was recorded. The Company's income taxes payable for federal, state, and foreign purposes have been reduced by the tax benefits of disqualifying dispositions of stock options. The Company receives an income tax benefit for compensation expense for tax purposes which is calculated as the difference between the market value of the stock issued at the time of exercise and the option price at the applicable income tax rates. This benefit is recorded as an increase in capital in excess of par value.

Income Taxes. The provision Forrester accounts for income taxes in accordance with SFAS No. 109, Accounting for Income Taxes. SFAS No. 109 requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the financial statement and tax base of assets and liabilities as well as operating loss carryforwards. Forrester measures deferred taxes based on enacted tax rates assumed to be in effect when these differences reverse. Income (loss) before income tax provision (benefit) for the years ended December 31, 2001, 2002, and 2003 consists of the following: DECEMBER following (in thousands): 2001 2002 2003 Domestic................................................... $22,760 $(581) $1,446 Foreign.................................................... 4,282 859 1,730 Total.................................................... $27,042======= $ 278===== $3,176====== F-20 XXXXXXXXX RESEARCH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The components of the income tax provision (benefit) for the years ended December 31, 1999 1998 1997 2001, 2002, and 2003 are as follows (IN THOUSANDSin thousands): 2001 2002 2003 Current -- Federal................................................ $ 8,424 $(1,187) Current: $ 335 State.................................................. 1,038 80 (84) Foreign................................................ 2,153 625 420 11,615 (482) 671 Deferred -- Federal................................................... $11,611 $-- $168 ................................................ (1,846) (614) 174 State.................................................. (158) (330) 140 Foreign................................................... 351 -- 90 State..................................................... 1,409 -- 1 13,371 -- 259 Deferred: Federal................................................... ................................................ (4,143686) (416) -- (2,690) (1,360) 314 Less -- Foreign................................................... valuation allowance.............................. -- 1,531 -- Income tax provision (benefit)........................... $ 8,925======= $ (311)======= $ 985====== A reconciliation of the federal statutory rate to Xxxxxxxxx'x effective tax rate for the years ended December 31, 2001, 2002 and 2003 is as follows: 2001 2002 2003 ------ ----- Income tax provision at federal statutory rate.............. 35.0% 35.0% 35.0% Increase (decrease) in tax resulting from -- State..................................................... State tax provision, net of federal benefit............... 2.8 2.9 1.2 Non-deductible expenses................................... 0.5 30.8 3.7 Tax-exempt interest income................................ (1,3355.8) (679.1) (17.7) Other, net................................................ 0.5 (52.2) 8.8 Change in valuation allowance............................. -- 550.7 -- ---- ------ ----- Effective income tax rate................................... 33.0% (5,478111.9)% 31.0% ==== ====== ===== The components of deferred income taxes as of December 31, 2002 and 2003 are as follows (in thousands): 2002 2003 ------- ------- Non-deductible reserves and accruals........................ $ 5,057 $ 2,953 Depreciation and amortization............................... 1,171 738 Deferred commissions........................................ (1,286) (2,189) Net operating loss and other carryforwards.................. 18,219 40,188 ------- ------- Gross deferred tax asset.................................... 23,161 41,690 Less -- -- $ 7,893 Valuation allowance................................. (1,531) (1,531) ------- ------- Net deferred tax asset...................................... $-- 21,630 $259 40,159 ======= === ===== 44 HARMONIC Forrester has aggregate net operating loss carryforwards for federal tax purposes of approximately $104.7 million primarily related to exercises of employee stock options and operating loss carryforwards acquired in connection with the acquisition of Giga. The net operating losses relating to the exercises of stock F-21 XXXXXXXXX RESEARCH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The Company's (benefit) provision for income taxes differed from the amount computed by applying the statutory U.S. federal income tax rate options were recorded as a benefit to income (loss) before income taxes as follows: DECEMBER 31, 1999 1998 1997 (IN THOUSANDS) Provision at statutory rate........................... $11,051 $(7,294) $ 1,764 Differential (benefit) additional paid-in rates on foreign earnings... (20) 774 (111) State taxes, net of federal benefit................... 48 -- 1 Foreign sales corporation benefit..................... (307) -- (176) Acquired in-process technology and non-deductible goodwill............................................ 106 4,863 -- Utilization of capital within stockholders' equity. These net operating loss carryovers.......... (597) -- (1,661) Utilization carryforwards will expire between the years 2015 and 2023. The use of research credits....................... (548) -- -- Future benefits these net operating loss carryforwards may be limited pursuant to Internal Revenue Code Section 382 as a result of future ownership changes. During the year ended December 31, 2002, Forrester recorded a valuation allowance of $1.5 million primarily related to net operating loss carryforwards in Germany. Forrester has not currently recognized.............. 508 2,116 364 Realized provided a valuation allowance for the remaining net deferred tax assets, primarily its federal net operating loss carryforwards, as management believes Forrester will have sufficient time to realize these assets during the twenty-year carryforward period. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets previously reserved...... (3,249) -- -- Alternative minimum tax............................... -- -- 51 Others, net........................................... 901 (459) 27 $ 7,893======= $ --======= $ 259======= Deferred will not be realized. The ultimate realization of deferred tax assets (liabilities) comprise is dependent upon the following: DECEMBER 31generation of future taxable income during the periods in which those temporary differences become deductible and the carryforwards expire. Although realization is not assured, 1999 1998 1997 (IN THOUSANDS) Net operating loss carryovers.......................... $ -- $ 845 $ 303 Research based upon the level of historical taxable income of Forrester and development credit carryovers............. -- 3,285 2,452 Capitalized research and development costs............. 283 71 234 Reserves not currently deductible...................... 4,863 2,814 1,657 Other.................................................. 332 419 96 Total projections for Xxxxxxxxx'x future taxable income over the periods during which the deferred tax assets.................... 5,478 7,434 4,742 Valuation allowance.................................... -- (7,434) (4,742) Net assets are deductible and the carryforwards expire, management believes it is more likely than not that Forrester will realize the benefits of these deductible differences. The amount of the deferred tax assets................................ $5,478====== $ -- ======= $ --======= The valuation allowance at December 31asset considered realizable, 1998 and 1997 was attributed to deferred tax assets. Management believed that sufficient uncertainty existed regarding however, could be reduced in the realizability near term if estimates of these items such that a full valuation allowance was recorded. The Company's future taxable income taxes payable for federal, state, and foreign purposes have been reduced by during the tax benefits of disqualifying dispositions of stock options. The Company receives an income tax benefit for compensation expense for tax purposes which is calculated as the difference between the market value of the stock issued at the time of exercise and the option price at the applicable income tax rates. This benefit is recorded as an increase in capital in excess of par valuecarry-forward period are reduced.

Income Taxes. The provision for For financial reporting purposes, loss from continuing operations before income taxes consists of the following: taxes, showing domestic and international sources, is as follows (in thousands): YEARS ENDED DECEMBER 31, 1999 1998 1997 Domestic.......................................... $ (IN THOUSANDS41,588) $(896,875) $(865,783) International..................................... (121,144) 196,996 203,286 Loss from continuing operations................. $(162,732)========= $(699,879)========= $(662,497)========= The provision for income taxes on continuing operations consists of the following (in thousands): YEARS ENDED DECEMBER 31, 1999 1998 1997 Current: Federal................................................... ......................................... $11,611 $-- $168 (149,519) $ 356,056 $ 569,935 State........................................... (19,265) 88,484 83,592 Foreign................................................... 351 -- 90 State..................................................... 1,409 -- 1 13,371 -- 259 ......................................... 83,284 72,541 85,357 (85,500) 517,081 738,884 Deferred: Federal................................................... ......................................... 270,499 (4,143463,635) -- -- (369,408) State........................................... 39,621 (51,889) (27,271) Foreign................................................... -- -- -- State..................................................... ......................................... 7,699 65,366 21,136 317,819 (1,335450,158) -- (375,543) Provision for income taxes.............. $ 232,319========= $ 66,923========= $ 363,341========= 91 WASTE MANAGEMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (5,478CONTINUED) The federal statutory rate is reconciled to the effective rate as follows: YEARS ENDED DECEMBER 31, 1999 1998 1997 Income tax benefit at federal statutory rate............ (35.00)% (35.00)% (35.00)% State and local income taxes, net of federal income tax benefit............................................... 19.31 3.23 5.51 Nondeductible costs relating to acquired intangibles.... 22.01 16.85 30.88 Nondeductible merger costs.............................. -- 8.22 1.40 Writedown of investments in subsidiary.................. 74.85 -- $ 7,893 $6.46 Minority interest....................................... 5.20 0.82 2.40 Deferred tax valuation and other tax reserves........... 25.24 8.79 40.11 Federal tax on foreign income........................... 30.30 4.35 0.30 Nonconventional fuel tax credit......................... -- $259 (3.61) (2.80) Other................................................... 0.85 5.91 5.59 Provision for income taxes 142.76% 9.56% 54.85% ======= ====== ====== 44 HARMONIC The components of the net deferred tax assets (liabilities), excluding $80 million of net deferred tax liability related to operations held for sale, are as follows (in thousands): DECEMBER 31, 1999 1998 Deferred tax assets: Net operating loss, capital loss and tax credit carryforwards......................................... $ 244,228 $ 322,129 Environmental and other reserves......................... 1,020,880 670,502 Reserves not deductible until paid....................... 205,245 178,608 Subtotal......................................... 1,470,353 1,171,239 Deferred tax liabilities: Property, equipment, intangible assets, and other........ (1,573,893) (1,072,138) Valuation allowance........................................ (327,929) (331,592) Net deferred tax liabilities..................... $ (431,469) $ (232,491) =========== =========== At December 31, 1999 the Company's subsidiaries have approximately $142.4 million of federal net operating loss ("NOL") carryforwards, $1.8 billion of state NOL carryforwards, and $522.5 million of foreign NOL carryforwards. Foreign NOL carryforwards of approximately $287.3 million may be carried forward indefinitely; the remaining NOL carryforwards have expiration dates through 2019. The Company's subsidiaries have approximately $1.0 million of alternative minimum tax credit carryforwards that may be used indefinitely; state tax credit carryforwards of $13.6 million; federal investment tax credit carryforwards of approximately $0.1 million; and foreign tax credit carryforwards of $50.7 million. Certain foreign NOL carryforwards are included in operations held for sale. Valuation allowances have been established for uncertainties in realizing the benefit of tax loss and credit carryforwards. While the Company expects to realize the deferred tax assets, net of the valuation allowances, changes in estimates of future taxable income or in tax laws may alter this expectation. The valuation allowance increased approximately $121.2 million and $98.8 million in 1999 and 1998, respectively, primarily due to the uncertainty of realizing foreign tax credits and NOL carryforwards. However, valuation allowances of $124 million for certain foreign deferred tax assets are included in operations held for sale. Prior to the Board of Directors' adoption of the strategic plan in August 1999, which included the divestiture of the Company's WM International operations, the Company did not provide for United States income taxes on unremitted earnings of foreign subsidiaries as it was the intention of management to reinvest the unremitted earnings in its foreign operations. Since the adoption of the strategic plan in August 1999, the 92 WASTE MANAGEMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The Company's (benefit) provision Company has provided for United States income taxes differed from the on unremitted foreign earnings on its international operations other than in Canada. The amount computed by applying the statutory U.S. federal of United States income tax rate provided for the repatriation of its international operations other than in Canada in 1999 is approximately $13.0 million. With respect to income (loss) before income taxes as follows: DECEMBER 31its Canadian operations, 1999 1998 1997 (IN THOUSANDS) Provision at statutory rate........................... the Company intends to reinvest its earnings. Unremitted earnings in Canada are approximately $11,051 $(7,294) $ 1,764 Differential (benefit) in rates on foreign earnings... (20) 774 (111) State taxes, net of federal benefit................... 48 -- 1 Foreign sales corporation benefit..................... (307) -- (176) Acquired in-process technology and non-deductible goodwill............................................ 106 4,863 -- Utilization of net operating loss carryovers.......... (597) -- (1,661) Utilization of research credits....................... (548) -- -- Future benefits not currently recognized.............. 508 2,116 364 Realized deferred tax assets previously reserved...... (3,249) -- -- Alternative minimum tax............................... -- -- 51 Others, net........................................... 901 (459) 27 $ 7,893======= $ --======= $ 259======= Deferred tax assets (liabilities) comprise the following: DECEMBER 31, 1999 1998 1997 (IN THOUSANDS) Net operating loss carryovers.......................... $ -- $ 845 $ 303 Research and development credit carryovers............. -- 3,285 2,452 Capitalized research and development costs............. 283 71 234 Reserves not currently deductible...................... 4,863 2,814 1,657 Other.................................................. 332 419 96 Total deferred tax assets.................... 5,478 7,434 4,742 Valuation allowance.................................... -- (7,434) (4,742) Net deferred tax assets................................ $5,478====== $ -- ======= $ --======= The valuation allowance 28.0 million at December 31, 1998 and 1997 was attributed 1999. It is not practicable to deferred tax assets. Management believed that sufficient uncertainty existed regarding determine the realizability amount of these items such that a full valuation allowance was recorded. The Company's United States income taxes that would be payable for federal, state, and foreign purposes have been reduced by the tax benefits of disqualifying dispositions of stock options. The Company receives an income tax benefit for compensation expense for tax purposes which is calculated as the difference between the market value upon remittance of the stock issued at the time of exercise and the option price at the applicable income tax rates. This benefit is recorded as an increase in capital in excess of par valueassets that represent those earnings.

Income Taxes. Income before income taxes is as follows: YEARS ENDED APRIL 30, 2000 1999 1998 Domestic............................................. $105,806 $45,617 $33,175 Foreign.............................................. 8,600 11,373 372 Total...................................... $114,406======== $56,990======= $33,547======= The provision for income taxes consists of the following: DECEMBER 31YEARS ENDED APRIL 30, 2000 1999 1998 1997 (IN THOUSANDS) CurrentCURRENT: Federal................................................... ............................................ $ 41,475 $11,611 20,094 $12,132 State.............................................. 7,973 3,098 2,199 Foreign............................................ 2,780 3,269 -- $168 Foreign................................................... 351 -- 90 State..................................................... 1,409 -- 1 13,371 -- 259 DeferredTotal current...................................... 52,228 26,461 14,331 DEFERRED: Federal................................................... ............................................ (4,1438,631) -- -- Foreign................................................... -- -- -- (4,078) (1,597) State..................................................... .............................................. (1,3352,983) -- -- (5,4781,006) -- -- (152) Total deferred..................................... (11,614) (5,084) (1,749) Provision for income taxes................. $ 7,893 40,614 $-- 21,377 $259 12,582 ======== ======= ======= 44 HARMONIC The provision for income taxes differs from the amount computed by applying the statutory federal income tax rate as follows: YEARS ENDED APRIL 30, 2000 1999 1998 Tax computed at federal statutory rate................ $40,042 $19,947 $11,741 State income taxes, net of federal benefit............ 5,720 2,850 1,482 Federal and state credits............................. (2,623) (1,802) (555) Benefit of foreign sales corporation.................. -- (142) (489) Tax exempt interest................................... (3,301) (547) (281) Other................................................. 776 1,071 684 Provision for income taxes............................ $40,614 $21,377 $12,582 ======= ======= ======= The income tax benefits associated with dispositions from employee stock transactions of $56,248, $17,776 and $4,291, respectively, for fiscal 2000, 1999 and 1998, were recognized as additional paid in capital. 39 NETWORK APPLIANCE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLAR AND SHARE AMOUNTS IN THOUSANDS, EXCEPT PER-SHARE DATA) The Company's (benefit) provision for income taxes differed from the amount computed by applying the statutory U.S. federal income components of net deferred tax rate to income (loss) before income taxes assets are as follows: DECEMBER 31YEARS ENDED APRIL 30, ---------------------- 2000 --------- 1999 1998 1997 (IN THOUSANDS) Provision at statutory rate........................... --------- Inventory reserves.......................................... $11,051 $(7,294) 12,732 $ 1,764 Differential (benefit) in rates on foreign earnings... (20) 774 (111) State taxes, net of federal benefit................... 48 -- 1 Foreign sales corporation benefit..................... (307) -- (176) Acquired in-process technology 5,120 Reserves and non-accruals not deductible goodwill............................................ 106 4,863 -- Utilization of net operating loss carryovers.......... (597) -- (1,661) Utilization of research credits....................... (548) -- -- Future benefits not currently recognized.............. 508 2,116 364 Realized deferred for tax assets previously reserved...... (3,249) -- -- Alternative minimum tax............................... -- -- 51 Others, net........................................... 901 (459) 27 $ 7,893======= $ --======= $ 259======= Deferred tax assets (liabilities) comprise the following: DECEMBER 31, 1999 1998 1997 (IN THOUSANDS) Net operating loss carryovers.......................... $ -- $ 845 $ 303 purposes....... 5,197 2,654 Research and development credit carryovers............. -- 3,285 2,452 Capitalized research and development costs............. 283 71 234 Reserves not currently deductible...................... 4,863 2,814 1,657 credits............................ 4,285 2,227 Tax benefit of options issued in IMC acquisition............ 532 913 Depreciation................................................ 544 585 Other.................................................. 332 419 96 Total deferred ....................................................... Deferred tax assets.................... 5,478 7,434 4,742 Valuation allowance.................................... -- (7,434) (4,742) Net deferred tax assets................................ ............................... 51 ------- $5,478====== $ -- 23,341 ======= $ --======= The valuation allowance at December 31, 1998 and 1997 was attributed to 228 ------- $11,727 ======= Current net deferred tax assetsassets are $22,215 and $10,134, as of April 30, 2000 and April 30, 1999, respectively. Management believed that sufficient uncertainty existed regarding Non-current net deferred tax assets at April 30, 2000 and 1999 of $1,126 and $1,593, respectively, are included in other assets within the realizability accompanying consolidated balance sheets. As of April 30, 2000, the federal and state net operating loss carryforwards for income tax purposes were approximately $209,702 and $136,814, respectively. The federal net operating loss carryforwards will begin to expire in 2020, and the state net operating loss carryforwards will begin to expire in 2006. As of April 30, 2000, we had federal and state research and development credit carryforwards of approximately $6,440 and $6,135, respectively, available to offset future taxable income. These federal credit carryforwards will begin to expire in 2013. Deferred tax assets of approximately $89,493 consisting of certain net operating loss and credit carryforwards resulting from the exercise of employee stock options have not been recognized in the financial statements. When utilized, the tax benefit of these items such that loss and credit carryforwards will be accounted for as a full valuation allowance was recorded. The Company's income taxes payable for federal, state, and foreign purposes have been reduced by the tax benefits of disqualifying dispositions of stock options. The Company receives an income tax benefit for compensation expense for tax purposes which is calculated as the difference between the market value of the stock issued at the time of exercise and the option price at the applicable income tax rates. This benefit is recorded as an increase credit to additional paid in capital in excess of par valuecapital.

Income Taxes. The provision for Deferred income taxes consists result from differences in the recognition of expenses for tax and financial reporting purposes, as well as operating loss and tax credit carryforwards. Significant components of the followingCompany's deferred income tax assets as of December 31 are as follows (in thousands): 1998 ------- 1997 -------- Deferred tax assets: DECEMBER 31, 1999 1998 1997 (IN THOUSANDS) Current: Federal................................................... Net operating loss carryforwards..................... $11,611 $17,309 $ -- $168 Foreign................................................... 351 Research and development credit carryforwards........ 4,625 -- 90 State..................................................... 1,409 -- 1 13,371 -- 259 Deferred: Federal................................................... (4,143) Capitalized research and development expenses........ 1,385 1,947 Inventory reserve.................................... 5,808 3,022 Amortization......................................... -- -- Foreign................................................... -- -- -- State..................................................... Accruals and other................................... 11,007 648 Deferred gain........................................ (1,335573) -- -- (5,478859) -- Depreciation......................................... 5,466 ------- 45,027 1,260 -------- 6,018 Valuation allowance.................................... (45,027) 6,018 ------- -------- Total........................................ $ -- $ 7,893 $-- $259 ======= === ====== For federal and state income tax reporting purposes, net operating loss carryforwards of approximately $53,304,000 and $8,981,000 are available to reduce future taxable income, if any. These carryforwards begin to expire in 2018. In 1995, the Company implemented an international product distribution strategy for its products. Implementation included the transfer of international product manufacturing and marketing rights to VIVUS International Limited in a taxable transaction. The transfer of rights and related allocation of research and development costs resulted in the current utilization of $29,467,000 of the net operating loss carryforward. Should significant changes in the Company's ownership occur, the annual amount of tax loss and credit carryforwards available for future use would be limited. The provision for income taxes consisted of the following components as of December 31, 1997, (in thousands): 1997 Current Federal $2,170 State 1,332 ------ Total current..................................... 3,502 Deferred (prepaid) Federal................................................... (318) State..................................................... 0 ------ Total deferred (prepaid), net..................... (318) ------ Total provision for income taxes $3,184 ====== 41 44 HARMONIC VIVUS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The Company's (benefit) provision provisions for income taxes differed differs from the amount computed by applying the statutory U.S. federal income tax rate to income (loss) before income taxes rates as follows: DECEMBER , as of December 31, 1999 1998 1997: 1997 (IN THOUSANDS) ---- Provision computed at federal statutory rate........................... $11,051 $(7,294) $ 1,764 Differential (benefit) in rates on foreign earnings... (20) 774 (111) rates............... 35% State income taxes, net of federal benefit................... 48 -- 1 Foreign sales corporation benefit..................... (307) -- (176) Acquired in-process technology and non-deductible goodwill............................................ 106 4,863 -- Utilization of net operating loss carryovers.......... (597) -- (1,661) Utilization of research credits....................... (548) -- -- Future benefits not currently recognized.............. 508 2,116 364 Realized deferred tax assets previously reserved...... (3,249) -- -- Alternative minimum tax............................... -- -- 51 Others, net........................................... 901 (459) 27 $ 7,893======= $ --======= $ 259======= Deferred tax assets (liabilities) comprise the following: DECEMBER 31, 1999 1998 1997 (IN THOUSANDS) effect............... 6 Net operating loss carryovers.......................... $ -- $ 845 $ 303 Research losses utilized............................... (20) Tax credits utilized........................................ (10) Income not subject to federal and development credit carryovers............. -- 3,285 2,452 Capitalized research and development costs............. 283 71 234 Reserves not currently deductible...................... 4,863 2,814 1,657 state taxation............ (4) Other.................................................. 332 419 96 Total deferred tax assets.................... 5,478 7,434 4,742 Valuation allowance.................................... -- (7,434) (4,742) Net deferred tax assets................................ $5,478====== $ -- ====....................................................... 1 Provision for income taxes........................ --- 8% === $ --======= NOTE 12. LEGAL MATTERS In December 1997, the Company reached a settlement agreement with a former consultant of the Company whereby the former consultant dropped his claims against the Company and certain of its officers and directors. The valuation allowance at December 31Company agreed to pay the former consultant $5.1 million. The Company recorded the settlement in 1997 and paid the $5.1 million on January 5, 1998 in accordance with the agreement. In February 1998, the Company and certain of its officers and directors were named in a class action lawsuit filed in California state court alleging violations of state securities laws. The lawsuit involves events which allegedly took place between May 15, 1997 and December 9, 1997. In March 1998, a purported shareholder class action was attributed filed in the United States District Court for the Northern District in California. The federal complaints were filed on behalf of a purported class of persons who purchased stock between May 2, 1997 and December 9, 1997. The Company believes that the allegations of this lawsuits are without merit and intends to deferred tax assetsvigorously defend these cases. Management believed The Company does not believe that sufficient uncertainty existed regarding the realizability resolution of these items such that cases will have an adverse material impact on the operations or financial position of the Company. In October 1998, the Company was named in a full valuation allowance was recordedcivil action filed in the Superior Court of New Jersey. This complaint seeks specific performance and other relief in connection with the Company's leased manufacturing facilities, located in Lakewood, New Jersey. The Company's income taxes payable for federal, state, and foreign purposes have been reduced by lease agreement requires that the tax benefits Company provide a removal security deposit in the form of disqualifying dispositions cash or a letter of stock optionscredit. The Company receives an income tax benefit and lessor ("plaintiff") have not been able to agree on the amount of such deposit and the plaintiff filed suit asking for compensation expense for tax purposes which specific performance in the amount of $3.3 million. The Company believes that the amount sought by the plaintiff is calculated as excessive and not mandated by the difference between the market value terms of the stock issued at lease. However, if the time Company is required to post a deposit of exercise $3.3 million, this will have a material adverse effect on the financial condition of the Company. In the normal course of business, the Company receives and makes inquiries regarding patent infringement and other legal matters. The Company believes that it has meritorious claims and defenses and intends to pursue any such matters vigorously. The Company is not aware of any asserted or unasserted claims against it, excluding the option price at settlement above, where the applicable income tax ratesresolution would have an adverse material impact on the operations or financial position of the Company. This benefit is recorded as an increase NOTE 13. COMPREHENSIVE INCOME The Company has adopted SFAS No. 130, "Reporting Comprehensive Income" in capital in excess 1998. Accordingly, the Consolidated Statements of par valueComprehensive Income appear on page 29 of this report.

Income Taxes. The provision for income taxes consists of the following: DECEMBER 31YEARS ENDED APRIL 30, 1999 1998 1997 (IN THOUSANDS) Current1996 Federal............................................. $12,132 $ 5,062 $ 1,880 State............................................... 2,199 1,525 220 Total current....................................... 14,331 6,587 2,100 EFERRED: Federal................................................... ............................................. (1,597) (2,394) (1,880) State............................................... (152) (400) (220) Total deferred...................................... (1,749) (2,794) (2,100) Provision for income taxes.................. $11,611 12,582======= $ 3,793======= $ --======= CURRENT: D Deferred income taxes result from differences in the timing of certain expense items for tax and financial reporting purposes. 30 The provision for income taxes differs from the amount computed by applying the statutory federal income tax rate as follows: YEARS ENDED APRIL 30, 1998 1997 1996 Tax computed at federal statutory rate................. $11,741 $1,415 $ 2,310 State income taxes, net of federal benefit............. 1,482 764 405 Non-deductible acquisition charges related to the IMC acquisition.......................................... -- $168 Foreign................................................... 351 2,904 -- 90 State..................................................... 1,409 -- 1 13,371 -- 259 Deferred: Federal................................................... Research and experimentation credit.................... (4,143555) -- -- Foreign................................................... -- -- -- State..................................................... (1,335410) (50) Investment tax credit.................................. -- -- (5,478150) Benefit of foreign sales corporation................... (489) (105) -- Tax exempt interest.................................... (281) (184) -- Change in valuation allowance.......................... -- (673) (2,510) Business meal exclusion................................ 100 45 -- Other.................................................. 584 37 (5) Provision for income taxes............................. $12,582 $3,793 $ 7,893 $-- $259 ======= === ==== 44 HARMONIC INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The Company's (benefit) provision for income taxes differed from the amount computed by applying the statutory U.S. federal income tax rate to income (loss) before income taxes as follows: DECEMBER 31, 1999 1998 1997 (IN THOUSANDS) Provision at statutory rate........................... $11,051 $(7,294) $ 1,764 Differential (benefit) in rates on foreign earnings... (20) 774 (111) State taxes, net of federal benefit................... 48 -- 1 Foreign sales corporation benefit..................... (307) -- (176) Acquired in-process technology and non-deductible goodwill............................................ 106 4,863 -- Utilization of net operating loss carryovers.......... (597) -- (1,661) Utilization of research credits....................... (548) -- -- Future benefits not currently recognized.............. 508 2,116 364 Realized deferred tax assets previously reserved...... (3,249) -- -- Alternative minimum tax............................... -- -- 51 Others, net........................................... 901 (459) 27 $ 7,893======= $ --======= $ 259======= Deferred tax assets (liabilities) comprise the following: DECEMBER 31, 1999 1998 1997 (IN THOUSANDS) Net operating loss carryovers.......................... $ -- $ 845 $ 303 Research and development credit carryovers............. -- 3,285 2,452 Capitalized research and development costs............. 283 71 234 Reserves not currently deductible...................... 4,863 2,814 1,657 Other.................................................. 332 419 96 Total deferred tax assets.................... 5,478 7,434 4,742 Valuation allowance.................................... -- (7,434) (4,742) Net deferred tax assets................................ $5,478====== $ -- ======= $ --======= The valuation allowance income tax benefits associated with dispositions from employee stock transactions reduced taxes currently payable by $4,291, $2,487 and $238, respectively, for fiscal 1998, 1997 and 1996. Income before income taxes is as follows: YEARS ENDED APRIL 30, 1998 1997 1996 Domestic $33,175 $3,983 $6,580 Foreign................................................. 372 60 20 Total $33,547 ======= $4,043====== $6,600====== Current net deferred tax assets are $5,280 and $3,100, as of April 30, 1998 and April 30, 1997, respectively. Non-current net deferred tax assets at December 31April 30, 1998 and 1997 was attributed to of $1,363 and $1,794, respectively, are included in other assets within the accompanying consolidated balance sheets. The components of the Company's net deferred tax assets. Management believed that sufficient uncertainty existed regarding the realizability of these items such that a full valuation allowance was recorded. The Company's income taxes payable for federalassets are as follows: APRIL 30, state, ---------------- 1998 1997 ------ ------ Reserves and foreign purposes have been reduced by the tax benefits of disqualifying dispositions of stock options. The Company receives an income tax benefit for compensation expense accruals not currently deductible for tax purposes which is calculated as the difference between the market value purposes............................................... $4,599 $2,662 Tax benefit of the stock options issued at the time of exercise and the option price at the applicable income tax rates. This benefit is recorded as an increase in capital in excess of par value.IMC acquisition.......... 1,074 1,304 Net operating loss carryforwards.......................... 236 116

Income Taxes. In the fourth quarter of 1993, the Company adopted SFAS No. 109, "Accounting for Income Taxes," retroactive to October 1, 1992. The provision Company recognized the cumulative effect of adoption, which resulted in an increase to net income for the year ended September 30, 1993, of approximately $17,100,000. Income before income taxes consists and the cumulative effect of the followingaccounting changes was as follows: DECEMBER 31YEARS ENDED SEPTEMBER 30, 1999 1998 1997 1995 1994 1993 ---- ---- ---- (DOLLARS IN THOUSANDS) Domestic $102,980 $ 30,388 $32,780 Foreign 153,362 87,937 35,120 Total $256,342 ======== $118,325======== $67,900======== 45 CABOT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) A summary of taxes on income is as follows: YEARS ENDED SEPTEMBER 30, 1995 1994 1993 ---- ---- ---- (DOLLARS IN THOUSANDS) Current........................................... $ 64,204 $ (3,131) $16,798 Deferred.......................................... (25,794) 15,644 (5,305) Total..................................... $ 38,410======== $ 12,513======== $11,493======== oreign: Federal................................................... Current........................................... $ 61,039 $ 21,010 $11,611 26,077 Deferred.......................................... 1,631 11,440 (6,871) Total..................................... $ 62,670 $ 32,450 $-- 19,206 U.S. federal and state: F Total U.S. and Foreign.................... $168 Foreign................................................... 351 -- 90 State..................................................... 1,409 -- 1 13,371 -- 259 Deferred: Federal................................................... (4,143) -- -- Foreign................................................... -- -- -- State..................................................... (1,335) -- -- (5,478) -- -- 101,080 $ 7,893 44,963 $-- $259 30,699 ======== === ====== 44 HARMONIC INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The Company's (benefit) provision for income taxes differed from the amount computed by applying the statutory U.S. federal income tax rate to income (loss) before income taxes as follows: DECEMBER 31, 1999 1998 1997 (IN THOUSANDS) Provision at statutory rate........................... $11,051 $(7,294) $ 1,764 Differential (benefit) in rates on foreign earnings... (20) 774 (111) State taxes, net of federal benefit................... 48 -- 1 Foreign sales corporation benefit..................... (307) -- (176) Acquired in-process technology and non-deductible goodwill............................................ 106 4,863 -- Utilization of net operating loss carryovers.......... (597) -- (1,661) Utilization of research credits....................... (548) -- -- Future benefits not currently recognized.............. 508 2,116 364 Realized deferred tax assets previously reserved...... (3,249) -- -- Alternative minimum tax............................... -- -- 51 Others, net........................................... 901 (459) 27 $ 7,893======= $ --======= $ 259======= Deferred tax assets (liabilities) comprise the following: DECEMBER 31, 1999 1998 1997 (IN THOUSANDS) Net operating loss carryovers.......................... $ -- $ 845 $ 303 Research and development credit carryovers............. -- 3,285 2,452 Capitalized research and development costs............. 283 71 234 Reserves not currently deductible...................... 4,863 2,814 1,657 Other.................................................. 332 419 96 Total deferred tax assets.................... 5,478 7,434 4,742 Valuation allowance.................................... -- (7,434) (4,742) Net deferred tax assets................................ $5,478====== $ -- ======== The provision for income taxes at the Company's effective tax rate differed from the provision for income taxes at the statutory rate as follows: YEARS ENDED SEPTEMBER 30, 1995 1994 1993 ---- ---- ---- (DOLLARS IN THOUSANDS) Computed tax expense at the expected statutory rate............................................... $ --======= 89,720 $41,414 $23,596 Foreign income: Impact of taxation at different rates, repatriation and other....................................... 5,407 (257) 2,412 Impact of foreign losses for which a current tax benefit is not available........................ 529 701 2,158 State taxes, net of federal effect................... 5,560 2,655 407 Foreign sales corporation............................ (1,500) (1,158) (1,000) Increase in U.S. tax rate............................ -- -- (812) Other, net........................................... 1,364 1,608 3,938 Provision for income taxes......................... $101,080======== $44,963======= $30,699======= CABOT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Significant components of deferred income taxes were as follows: SEPTEMBER 30, --------------------- 1995 1994 -------- -------- (DOLLARS IN THOUSANDS) Deferred tax assets: Property, plant and equipment................................ $ 28,467 $ 23,257 Pension and other benefits................................... 44,640 43,572 Environmental issues......................................... 18,008 14,761 Restructuring charges........................................ 5,633 10,337 Investments.................................................. 10,850 -- State and local taxes........................................ 5,449 1,804 Net operating loss and other tax carryforwards............... 12,132 14,568 Other........................................................ 33,373 25,338 -------- -------- Subtotal.................................................. 158,552 133,637 -------- -------- Valuation allowances........................................... (9,318) (14,915) -------- -------- Total deferred tax assets............................ $149,234 $118,722 Deferred tax liabilities: -------- -------- Property, plant and equipment................................ $ 71,629 $ 72,379 Pension and other benefits................................... 10,235 10,967 Investments.................................................. 36,629 34,480 Other........................................................ 100,532 99,894 -------- -------- Total deferred tax liabilities....................... $219,025 $217,720 ======== ======== The valuation allowance for deferred tax assets decreased $5,597,000 in 1995 primarily because of improved business results which allowed realization of deferred tax assets for which a valuation allowance had been previously established. The major component of the valuation allowance at December 31September 30, 1998 and 1997 was attributed 1995 relates to the uncertainty of realizing certain foreign deferred tax assets. Management believed that sufficient uncertainty existed regarding Approximately $45,415,000 of net operating losses and other tax carryforwards remain at September 30, 1995, $24,005,000 of which expire in the realizability years 1996 through 2002, and $21,410,000 of which can be carried forward indefinitely. The benefits of these items such that carryforwards are dependent on taxable income during the carryforward period in those foreign jurisdictions wherein they arose, and accordingly, a full valuation allowance was recordedhas been provided where the Company has determined that it is more likely than not that the carryforwards will not be utilized. The Company's United States income tax returns for fiscal years 1990 and 1991 are currently under examination by the Internal Revenue Service. Assessments, if any, are not expected to have a material adverse effect on the financial statements. Provision has not been made for U.S. income taxes payable for federal, state, or foreign withholding taxes on approximately $130,000,000 of undistributed earnings of foreign subsidiaries as these earnings are considered indefinitely reinvested. These earnings could become subject to U.S. income taxes and foreign purposes have been reduced by withholding taxes (subject to a reduction for foreign tax credits) if they were remitted as dividends, if foreign earnings were loaned to the Company or a U.S. subsidiary, or if the Company should sell its stock in the subsidiaries. However, the Company believes that U.S. foreign tax benefits of disqualifying dispositions of stock options. The Company receives an credits would largely eliminate any U.S. income tax benefit and offset any foreign withholding tax that might otherwise be due. 47 CABOT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Cash paid for compensation expense for tax purposes which is calculated as the difference between the market value of the stock issued at the time of exercise income taxes during 1995, 1994 and the option price at the applicable income tax rates. This benefit is recorded as an increase in capital in excess of par value1993 totalled $60,340,000, $23,855,000 and $25,934,000, respectively.