##### Table of Contents

---



UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549



---



FORM 10-Q



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



| |  | For the thirteen-week period ended: December 27, 2002
| |  | -----------------------------------------------------



OR



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



---



C-COR.net Corp.

(Exact Name of Registrant as
Specified in Charter)



|Pennsylvania                                   |  | 0-10726                  |  | 24-0811591                       
|---------------------------------------------- |  | ------------------------ |  | ---------------------------------
|(State or Other Jurisdiction of Incorporation) |  | (Commission File Number) |  | (IRS Employer Identification No.)



|60 Decibel Road State College, PA        |  | 16801     
|---------------------------------------- |  | ----------
|(Address of Principal Executive Offices) |  | (Zip Code)



(814)
238-2461

(Registrants Telephone Number, Including Area Code)



---



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



APPLICABLE ONLY TO CORPORATE ISSUERS



Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the
latest practicable date.



Common Stock, $.05 Par
Value36,368,725 shares as of January 23, 2003.



---



---

##### Table of Contents



C-COR.net Corp.



|                             |  |                                                                                                                |  | Page 
|---------------------------- |  | -------------------------------------------------------------------------------------------------------------- |  | -----
|                            
|Part IFINANCIAL INFORMATION |  |                                                                                                               
|                            
|Item 1.                      |  | Financial Statements                                                                                           |  |      
|                            
|                             |  | Independent Accountants Review Report                                                                         |  | 2    
|                            
|                             |  | Condensed Consolidated Balance Sheets:As of December 27, 2002 and June 28, 2002                                |  | 3    
|                            
|                             |  | Condensed Consolidated Statements of Operations:Thirteen Weeks Ended December 27, 2002 and December 28, 2001   |  | 4    
|                            
|                             |  | Condensed Consolidated Statements of Operations:Twenty-six Weeks Ended December 27, 2002 and December 28, 2001 |  | 5    
|                            
|                             |  | Condensed Consolidated Statements of Cash Flows:Twenty-six Weeks Ended December 27, 2002 and December 28, 2001 |  | 6    
|                            
|                             |  | Notes to Condensed Consolidated Financial Statements                                                           |  | 7-17 
|                            
|Item 2.                      |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                          |  | 18-25
|                            
|Item 3.                      |  | Quantitative and Qualitative Disclosures About Market Risk                                                     |  | 26   
|                            
|Item 4.                      |  | Controls and Procedures                                                                                        |  | 27   
|                            
|Part IIOTHER INFORMATION    |  |                                                                                                               
|                            
|Item 4.                      |  | Submission of Matters to a Vote of Shareholders                                                                |  | 28   
|                            
|Item 6.                      |  | Exhibits and Reports on Form 8-K                                                                               |  | 29   
|                            
|Signatures                   |  | 30                                                                                                            
|                            
|Certifications               |  | 31-32                                                                                                         



---

##### Table of Contents



Independent Accountants Review Report



The Board of Directors and Shareholders

C-COR.net Corp.:



We have reviewed the condensed consolidated balance sheet of
C-COR.net Corp. and subsidiaries as of December 27, 2002, and the related condensed consolidated statements of operations and cash flows for the thirteen-week and twenty-six week periods ended December 27, 2002 and December 28, 2001. These condensed
consolidated financial statements are the responsibility of the Companys management.



We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying
analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the
United States of America, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.



Based on our review, we are not aware of any material modifications that should be made to the condensed consolidated
financial statements referred to above for them to be in conformity with accounting principles generally accepted in the United States of America.



We have previously audited, in accordance with auditing standards generally accepted in the United States of America, the consolidated balance sheet of
C-COR.net Corp. and subsidiaries as of June 28, 2002, and the related consolidated statements of operations, cash flows, and shareholders equity for the year then ended (not presented herein); and in our report dated August 9, 2002, except as
to Note U, which is as of September 16, 2002, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of June 28, 2002, is
fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.



|                                         
|-----------------------------------------
|/s/     KPMG LLP                         
|Harrisburg, Pennsylvania January 10, 2003



2



---

##### Table of Contents



PART I FINANCIAL INFORMATION



Item 1. Financial Statements



C-COR.net Corp.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)



|                                                                                                                                           |  | December 27, 2002 |         |   | June 28, 2002 |  
|------------------------------------------------------------------------------------------------------------------------------------------ |  | ----------------- | ------- | - | ------------- | -
|                                                                                                                                           |  | (Unaudited)       |         |   |               |  
|ASSETS                                                                                                                                     |  |                   |         |   |               |  
|Current assets                                                                                                                             |  |                   |         |   |               |  
|Cash and cash equivalents                                                                                                                  |  | $                 | 35,198  |   |               | $
|Restricted cash                                                                                                                            |  |                   | 2,585   |   |               |  
|Accounts and notes receivables, net                                                                                                        |  |                   | 38,315  |   |               |  
|Inventories                                                                                                                                |  |                   | 47,589  |   |               |  
|Refundable income taxes                                                                                                                    |  |                   | 888     |   |               |  
|Deferred taxes                                                                                                                             |  |                   | 18,462  |   |               |  
|Other current assets                                                                                                                       |  |                   | 4,403   |   |               |  
|                                                                                                                                           |  |                   |         |   |               |  
|Total current assets                                                                                                                       |  |                   | 147,440 |   |               |  
|Property, plant and equipment, net                                                                                                         |  |                   | 26,851  |   |               |  
|Goodwill and other intangible assets, net                                                                                                  |  |                   | 75,691  |   |               |  
|Deferred taxes                                                                                                                             |  |                   | 28,410  |   |               |  
|Other long-term assets                                                                                                                     |  |                   | 3,392   |   |               |  
|                                                                                                                                           |  |                   |         |   |               |  
|Total assets                                                                                                                               |  | $                 | 281,784 |   |               | $
|                                                                                                                                           |  |                   |         |   |               |  
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                       |  |                   |         |   |               |  
|Current liabilities                                                                                                                        |  |                   |         |   |               |  
|Accounts payable                                                                                                                           |  | $                 | 21,921  |   |               | $
|Accrued liabilities                                                                                                                        |  |                   | 49,289  |   |               |  
|Current portion of long-term debt                                                                                                          |  |                   | 642     |   |               |  
|                                                                                                                                           |  |                   |         |   |               |  
|Total current liabilities                                                                                                                  |  |                   | 71,852  |   |               |  
|Long-term debt, less current portion                                                                                                       |  |                   | 1,125   |   |               |  
|Other long-term liabilities                                                                                                                |  |                   | 2,036   |   |               |  
|                                                                                                                                           |  |                   |         |   |               |  
|Total liabilities                                                                                                                          |  |                   | 75,013  |   |               |  
|                                                                                                                                           |  |                   |         |   |               |  
|Shareholders equity                                                                                                                       |  |                   |         |   |               |  
|Preferred stock, no par value; authorized shares of 2,000,000; none
issued                                                                 |  |                   |        |   |               |  
|Common stock, $.05 par; authorized shares of 100,000,000; issued shares of 40,004,206
on December 27, 2002 and 39,945,219 on June 28, 2002 |  |                   | 2,000   |   |               |  
|Additional paid-in capital                                                                                                                 |  |                   | 264,072 |   |               |  
|Accumulated other comprehensive income                                                                                                     |  |                   | 619     |   |               |  
|Accumulated deficit                                                                                                                        |  |                   | (25,588 | ) |               |  
|Treasury stock at cost, 3,645,339 shares as of December 27, 2002 and 3,629,506
sharesas of June 28, 2002                                   |  |                   | (34,332 | ) |               |  
|                                                                                                                                           |  |                   |         |   |               |  
|Shareholders equity                                                                                                                       |  |                   | 206,771 |   |               |  
|                                                                                                                                           |  |                   |         |   |               |  
|Total liabilities and shareholders equity                                                                                                 |  | $                 | 281,784 |   |               | $
|                                                                                                                                           |  |                   |         |   |               |  





See independent accountants review report and notes to condensed consolidated financial statements.



3



---

##### Table of Contents



C-COR.net Corp.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)



|                                                             |  | Thirteen Weeks Ended |       
|------------------------------------------------------------ |  | -------------------- | ------
|                                                             |  | December 27, 2002    |       
|Net sales                                                    |  | $                    | 53,974
|Cost of sales                                                |  |                      | 41,390
|                                                             |  |                      |       
|Gross margin                                                 |  |                      | 12,584
|                                                             |  |                      |       
|Operating expenses:                                          |  |                      |       
|Selling and administrative                                   |  |                      | 12,489
|Research and product development                             |  |                      | 7,404 
|Amortization of goodwill and other intangibles               |  |                      | 496   
|Restructuring costs (credits)                                |  |                      | (13   
|                                                             |  |                      |       
|Total operating expenses                                     |  |                      | 20,376
|                                                             |  |                      |       
|Income(loss) from operations                                 |  |                      | (7,792
|Interest expense                                             |  |                      | (14   
|Investment income                                            |  |                      | 138   
|Foreign exchange gain                                        |  |                      | 468   
|Other income, net                                            |  |                      | 23    
|                                                             |  |                      |       
|Income (loss) before income taxes                            |  |                      | (7,177
|Income tax expense (benefit)                                 |  |                      | (2,469
|                                                             |  |                      |       
|Net income (loss)                                            |  | $                    | (4,708
|                                                             |  |                      |       
|Net income (loss) per share:                                 |  |                      |       
|Basic                                                        |  | $                    | (0.13 
|Diluted                                                      |  | $                    | (0.13 
|Weighted average common shares and common share equivalents: |  |                      |       
|Basic                                                        |  |                      | 36,355
|Diluted                                                      |  |                      | 36,355



See
independent accountants review report and notes to condensed consolidated financial statements.



4



---

##### Table of Contents



C-COR.net Corp.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)



|                                                             |  | Twenty-six Weeks Ended |        
|------------------------------------------------------------ |  | ---------------------- | -------
|                                                             |  | December 27, 2002      |        
|Net sales                                                    |  | $                      | 98,609 
|Cost of sales                                                |  |                        | 75,816 
|                                                             |  |                        |        
|Gross margin                                                 |  |                        | 22,793 
|                                                             |  |                        |        
|Operating expenses:                                          |  |                        |        
|Selling and administrative                                   |  |                        | 24,256 
|Research and product development                             |  |                        | 13,806 
|Amortization of goodwill and other intangibles               |  |                        | 789    
|Acquired in-process technology charge                        |  |                        | 1,560  
|Restructuring costs                                          |  |                        | 198    
|                                                             |  |                        |        
|Total operating expenses                                     |  |                        | 40,609 
|                                                             |  |                        |        
|Loss from operations                                         |  |                        | (17,816
|Interest expense                                             |  |                        | (236   
|Investment income                                            |  |                        | 729    
|Foreign exchange gain (loss)                                 |  |                        | (1,241 
|Other income (expense), net                                  |  |                        | 756    
|                                                             |  |                        |        
|Loss before income taxes                                     |  |                        | (17,808
|Income tax benefit                                           |  |                        | (5,842 
|                                                             |  |                        |        
|Net loss                                                     |  | $                      | (11,966
|                                                             |  |                        |        
|Net loss per share:                                          |  |                        |        
|Basic                                                        |  | $                      | (0.33  
|Diluted                                                      |  | $                      | (0.33  
|Weighted average common shares and common share equivalents: |  |                        |        
|Basic                                                        |  |                        | 36,351 
|Diluted                                                      |  |                        | 36,351 



See
independent accountants review report and notes to condensed consolidated financial statements.



5



---

##### Table of Contents



C-COR.net Corp.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)



|                                                                                          |  | Twenty-six Weeks Ended |        
|----------------------------------------------------------------------------------------- |  | ---------------------- | -------
|                                                                                          |  | December 27, 2002      |        
|Operating Activities:                                                                     |  |                        |        
|Net loss                                                                                  |  | $                      | (11,966
|Adjustments to reconcile net loss to net cash provided by (used in) operating
activities: |  |                        |        
|Depreciation and amortization                                                             |  |                        | 7,330  
|Acquired in-process technology charge                                                     |  |                        | 1,560  
|Provision for deferred retirement salary plan                                             |  |                        |       
|Loss on sale of property, plant and equipment                                             |  |                        | 119    
|Tax benefit deriving from exercise and sale of stock option shares                        |  |                        |       
|Changes in operating assets and liabilities, net of effect of
acquisitions:               |  |                        |        
|Accounts and notes receivable                                                             |  |                        | 9,628  
|Inventories                                                                               |  |                        | 6,212  
|Other assets                                                                              |  |                        | 8,168  
|Accounts payable                                                                          |  |                        | (7,024 
|Accrued liabilities                                                                       |  |                        | (5,426 
|Deferred income taxes                                                                     |  |                        | (6,008 
|                                                                                          |  |                        |        
|Net cash provided by (used in) operating activities                                       |  |                        | 2,593  
|                                                                                          |  |                        |        
|Investing Activities:                                                                     |  |                        |        
|Purchase of property, plant and equipment                                                 |  |                        | (2,304 
|Proceeds from the sale of property, plant and equipment                                   |  |                        | 12     
|Purchases of marketable securities and other short-term investments                       |  |                        |       
|Proceeds from sale of marketable securities and other short-term
investments              |  |                        |       
|Acquisitions, net of cash acquired                                                        |  |                        | (76,983
|                                                                                          |  |                        |        
|Net cash used in investing activities                                                     |  |                        | (79,275
|                                                                                          |  |                        |        
|Financing Activities:                                                                     |  |                        |        
|Payment of debt and capital lease obligations                                             |  |                        | (128   
|Proceeds from issuance of common stock to employee stock purchase plan                    |  |                        | 84     
|Proceeds from exercise of stock options and stock warrants                                |  |                        | 55     
|Purchase of treasury stock                                                                |  |                        | (73    
|                                                                                          |  |                        |        
|Net cash used in financing activities                                                     |  |                        | (62    
|                                                                                          |  |                        |        
|Effect of exchange rate changes on cash                                                   |  |                        | 84     
|                                                                                          |  |                        |        
|Decrease in cash and cash equivalents                                                     |  |                        | (76,660
|Cash and cash equivalents at beginning of period                                          |  |                        | 111,858
|                                                                                          |  |                        |        
|Cash and cash equivalents at end of period                                                |  | $                      | 35,198 
|                                                                                          |  |                        |        
|Supplemental cash flow information:                                                       |  |                        |        
|Non-cash investing and financing activities                                               |  |                        |        
|Fair value adjustment of available-for-sale securities                                    |  | $                      | (11    



See
independent accountants review report and notes to condensed consolidated financial statements



6



---

##### Table of Contents



C-COR.net Corp.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands except per share data)



1. The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and, in the opinion of management, contain all adjustments (consisting only of normal, recurring adjustments)
necessary to fairly present C-COR.net Corp.s (the Company) financial position as of December 27, 2002 and the results of operations for the thirteen-week and twenty-six week periods ended December 27, 2002 and December 28, 2001. Operating
results for the thirteen-week and twenty-six week periods ended December 27, 2002 are not necessarily indicative of the results that may be expected for the year ending June 27, 2003, due to the cyclical nature of the industry in which the Company
operates, fluctuations in currencies related to its foreign operations, and changes in overall conditions that could affect the carrying value of its assets and liabilities. For further information, refer to the consolidated financial statements and
footnotes thereto included in the Companys Form 10-K for the fiscal year ended June 28, 2002.



2. DESCRIPTION OF BUSINESS



The Company designs, manufactures, and markets network distribution and transmission products and provides services and operational support systems to
operators of advanced hybrid fiber coax broadband networks. The Company operates in three industry segments: Broadband Communications Products, Broadband Network Services, and Broadband Management Solutions.



The Broadband Communications Products Division is responsible for research,
development, management, production, support, and sales of advanced fiber optic and radio frequency equipment. The Broadband Network Services Division provides outsourced technical services, including network engineering and design, construction,
activation, optimization, certification, maintenance, and operations. The Broadband Management Solutions Division is responsible for the development, integration, management, implementation, support and sales of operational support systems that
focus on network services management and mobile workforce management solutions.



3. ACCOUNTING CHANGE AND ACCOUNTING PRONOUNCEMENTS



In June 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets (Statement 142).
Statement 142 addresses how intangible assets that are acquired individually or with a group of other assets (but not those acquired in a business combination) should be accounted for in financial statements upon their acquisition. Statement 142
also addresses how goodwill and other intangible assets should be accounted for after they have been initially recognized in the financial statements. Statement 142 requires that goodwill and intangible assets with indefinite useful lives no longer
be amortized, but instead be tested for impairment at least annually. Statement 142 also requires that intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values and
reviewed for impairment in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (Statement 144).



The Company adopted the provisions of Statement 142 effective June 29, 2002. As of the date of adoption, the Company had unamortized goodwill in the
amount of $7,246 and unamortized identifiable intangible assets in the amount of $1,597 that are subject to the transition provisions of Statements 142. In connection with Statement 142s transitional goodwill impairment evaluation, the Company
was required to perform an assessment of whether there was an indication



7



---

##### Table of Contents



that goodwill was impaired as
of the date of adoption. To accomplish this, the Company identified its reporting units and determined the carrying value of each reporting unit by assigning the assets and liabilities, including the existing goodwill and intangible assets, to those
reporting units as of the date of adoption. The Company then determined the fair value of each reporting unit. The fair value was determined by an independent third party appraisal, using a discounted cash flow model. As a result of this evaluation,
the Company did not have an impairment of goodwill as of June 29, 2002. The Company is required to reevaluate whether goodwill is impaired on an annual basis. Although an estimate is not available at this time, it is possible that a portion of the
$71,228 in goodwill reflected on the December 27, 2002 balance sheet will be determined to be impaired through the annual assessment test, which would require that a goodwill impairment charge against earnings be reflected in the fourth quarter of
fiscal year 2003.



The following information is provided to
report what net income (loss) for the thirteen-week and twenty-six week periods ended December 27, 2002 and December 28, 2001 would have been, exclusive of amortization expense (including any related tax effects)recognized related to goodwill and
intangible assets that are no longer being amortized as a result of the adoption of Statement 142:



|                                                          |  | Thirteen Weeks Ended
|--------------------------------------------------------- |  | --------------------
|                                                          |  | December 27, 2002   
|Reported net income (loss)                                |  | $                   
|Add back: Goodwill and workforce amortization, net of tax |  |                     
|                                                          |  |                     
|Adjusted net income (loss)                                |  | $                   
|                                                          |  |                     
|Basic and diluted net loss per share:                     |  |                     
|Reported net income (loss) per share (diluted)            |  | $                   
|Add back: Goodwill and workforce amortization, net of tax |  |                     
|                                                          |  |                     
|Adjusted net income (loss)                                |  | $                   
|                                                          |  |                     



|                                                          |  | Twenty-six Weeks Ended |        
|--------------------------------------------------------- |  | ---------------------- | -------
|                                                          |  | December 27, 2002      |        
|Reported net loss                                         |  | $                      | (11,966
|Add back: Goodwill and workforce amortization, net of tax |  |                        |       
|                                                          |  |                        |        
|Adjusted net loss                                         |  | $                      | (11,966
|                                                          |  |                        |        
|Basic and diluted net loss per share:                     |  |                        |        
|Reported net loss                                         |  | $                      | (0.33  
|Add back: Goodwill and workforce amortization, net of tax |  |                        |       
|                                                          |  |                        |        
|Adjusted net loss                                         |  | $                      | (0.33  
|                                                          |  |                        |        



8



---

##### Table of Contents



In August 2001, the FASB
issued Statement 144, which supersedes both SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of (Statement 121) and the accounting and reporting provisions of APB Opinion No. 30, Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions (Opinion 30), for the disposal of a segment of a business (as previously defined in that Opinion). Statement 144 retains the fundamental provisions in Statement 121 for
recognizing and measuring impairment losses on long-lived assets held for use and long-lived assets to be disposed of by sale, while also resolving significant implementation issues associated with Statement 121. For example, Statement 144 provides
guidance on how a long-lived asset that is used as part of a group should be evaluated for impairment, establishes criteria for when a long-lived asset is held for sale, and prescribes the accounting for a long-lived asset that will be disposed of
other than by sale. Statement 144 retains the basic provisions of Opinion 30 on how to present discontinued operations in the income statement but broadens that presentation to include a component of an entity (rather than a segment of a business).
Unlike Statement 121, an impairment assessment under Statement 144 will never result in a write-down of goodwill. Rather, goodwill is evaluated for impairment under Statement 142.



The Company adopted Statement 144 effective June 29, 2002. The adoption of Statement 144 for long-lived assets held for use
did not have a material impact on the consolidated financial statements. The provisions of Statement 144 for assets held for sale or other disposal generally are required to be applied prospectively after the adoption date to newly initiated
disposal activities.



In June 2002, the FASB issued SFAS No. 146,
Accounting for Costs Associated with Exit or Disposal Activities (Statement 146), which replaces Emerging Issues Task Force No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring). Statement 146 requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or
disposal plan. The provisions of Statement 146 are effective for exit or disposal activities that are initiated after December 31, 2002.



In November 2002, the FASB issued Interpretation No. 45, Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others (the Interpretation), which addresses the disclosure to be made by a guarantor in its interim and annual financial statements about its obligations under guarantees. The Interpretation also requires
the recognition of a liability by a guarantor at the inception of certain guarantees.



The Interpretation requires the guarantor to recognize a liability for the non-contingent component of the guarantee, which is the obligation to stand ready to perform in the event that specified triggering events or
conditions occur. The initial measurement of this liability is the fair value of the guarantee at inception. The recognition of the liability is required even if is not probable that payments will be required under the guarantee or if the guarantee
was issued with a premium payment or as part of a transaction with multiple elements.



The Company has adopted the disclosure requirements of the Interpretation (see Note 12) and will apply the recognition and measurement provisions for all guarantees entered into or modified after December 31, 2002.





4. BUSINESS COMBINATIONS



Fiscal Year 2003



On September 16, 2002, the Company acquired certain assets and liabilities of Philips Broadband Networks (PBN) from Royal Philips Electronics. PBN is a provider of broadband products, including transmission products, network
optimizing technologies, and element management systems. PBN is supported by sales and services organizations worldwide, with a strong customer base in Europe and the Asia Pacific region. The purchase included assets in various countries, cable
infrastructure products, and a design and production facility in Manlius, New York. These assets and the facility became part of our Broadband Communications Products Division. The purchase of these net assets and operations provides the Company
with an opportunity to increase its customer and installed equipment base, primarily in the international markets of Europe and Asia, and to capitalize on the combined synergies of the Companys skilled workforce, market focus, and product
offerings. The purchase price for the acquisition was 79,950 Euros, which is subject to certain adjustments. During the quarter ended December 27, 2002, the Company announced the closing of its Manlius, New York and Louviers, France facilities (see
Note 8).



The effective date of the acquisition was August 26,
2002 (PBNs fiscal month end). Accordingly, the results of operations of PBN are included in the consolidated financial statements from August 26, 2002. At closing on September 16, 2002, the Company made an initial cash payment of 75,000 Euros
($72,507 U.S. dollars, which is net of $200 of imputed interest) to Royal Philips Electronics, with subsequent payments subject to certain adjustments. The



9



---

##### Table of Contents



Company anticipates additional
consideration to be paid of approximately $2,576 during the quarter ending March 28, 2003. In addition, the Company incurred direct transaction costs of approximately $1,202 to consummate the acquisition. The Company used its available cash to fund
the acquisition. The acquisition was accounted for as a purchase.



The excess of the purchase price and related costs over the fair value of the acquired net assets of the business was recorded as goodwill. The following table summarizes the estimated fair value of the net assets acquired from Royal
Philips Electronics, including goodwill, as of the effective date of the acquisition.



|Current assets                |  | $ | 34,581  |  
|----------------------------- |  | - | ------- | -
|Property, plant and equipment |  |   | 6,771   |  
|Other long-term assets        |  |   | 1,600   |  
|Intangible assets             |  |   | 5,215   |  
|Current liabilities           |  |   | (33,150 | )
|Goodwill                      |  |   | 61,268  |  
|                              |  |   |         |  
|Total purchase price          |  | $ | 76,285  |  
|                              |  |   |         |  



One of the acquired
intangible assets was in-process research and development, representing research and development projects that were commenced but not yet completed at the date of the acquisition, and which if unsuccessful, have no alternative future use in research
and development activities or otherwise. The estimated value allocated to in-process research and development as of the acquisition date was $1,560. The amount allocated to in-process research and development was charged to expense as an acquired
in-process technology charge in the condensed consolidated statement of operations during the thirteen-week period ended September 27, 2002. The Company anticipates finalizing the third-party valuation of certain intangible assets in the
thirteen-week period ending March 28, 2003; thus the allocation of the purchase price is preliminary and subject to change as of December 27, 2002. A significant portion of the amount of the goodwill from the acquisition is expected to be deductible
for tax purposes. However, due to expected basis differences in the book versus tax purchase price allocation, which has not been completed to date, the amount of the goodwill which will be deductible has not yet been determined.



As of December 27, 2002, the net book value of intangible assets with definite
useful lives, resulting from all of the Companys business combinations, was $4,463. These intangible assets are being amortized over their estimated useful life of 36 months. The weighted-average life remaining on these intangible assets is 27
months.



Pro Forma



The following selected unaudited pro forma information is provided to present
a summary of the combined results of the Companys operations, as if the acquisition of certain operations of Philips and ADC Telecommunications, Inc.(ADC) had occurred as of June 30, 2001, after giving effect to purchase accounting
adjustments. The pro forma data are for informational purposes only and may not necessarily reflect the results of operations of the Company had the operations acquired from Philips and ADC operated as part of the Company for the twenty-six weeks
ended December 27, 2002 and December 28, 2001, respectively.



|                                     |  | Twenty-six Weeks Ended |        
|------------------------------------ |  | ---------------------- | -------
|                                     |  | December 27, 2002      |        
|Net sales                            |  | $                      | 113,141
|Net loss                             |  | $                      | (10,934
|Net loss per sharebasic and diluted |  | $                      | (0.30  



10



---

##### Table of Contents



5. INVENTORIES



Inventories include material,
labor and overhead and are stated at the lower of cost or market. Cost is determined on the first-in, first-out method. Inventories as of December 27, 2002 and June 28, 2002 consisted of the following:



|                  |  | December 27, 2002 |        | June 28, 2002
|----------------- |  | ----------------- | ------ | -------------
|Finished goods    |  | $                 | 13,498 |              
|Work-in-process   |  |                   | 6,966  |              
|Raw materials     |  |                   | 27,125 |              
|                  |  |                   |        |              
|Total inventories |  | $                 | 47,589 |              
|                  |  |                   |        |              



6. CREDIT AGREEMENT



On November 7, 2002, the
Company entered into a new financing agreement with a commercial lender. The new financing agreement is a two-year secured revolving credit facility, to be used for working capital and general corporate purposes, and provides an initial commitment
up to an aggregate amount of $20,000. The financing agreement allows for issuance of letters of credit and cash borrowings. Letters of credit outstanding are limited to no more than $6,000. Cash borrowings are limited by certain availability
reserves and a borrowing base, primarily a percentage of eligible domestic trade accounts receivables, up to the facilitys maximum availability less letters of credit outstanding.



As security for the financing agreement, the Company has pledged the following collateral: trade accounts receivables,
inventory, general intangibles, real estate, equipment, life insurance policies, and certain stock of a wholly owned foreign subsidiary. The financing agreement contains a number of restrictive covenants, including covenants limiting incurrence of
unsubordinated debt, disposal of collateral, and the payment of dividends (except stock dividends). The financing agreement contains no financial covenants.



The financing agreement is committed through November 6, 2004. Borrowings under the financing agreement bear interest at an applicable bank rate or LIBOR
plus two and three-quarters percent (2.75%) per annum, payable monthly. The financing agreement required the payment of a facility fee of $150 at execution of the agreement, a fee on the unused commitment of 0.375% per annum payable monthly, and an
administrative fee of $36 per annum. As of December 27, 2002, the Company had no borrowings outstanding under the financing agreement. Based upon the eligible borrowing base at December 27, 2002, available borrowings under the financing agreement
were $13,268.



As a condition to closing on the new financing
agreement, the Company terminated its prior credit agreement with a bank, whereby $7,500 was available as a revolving line-of-credit, subject to an aggregate sub-limit of $5,000 for issuance of letters of credit. We continue to maintain letters of
credit with the bank in the aggregate of $2,955 as of December 27, 2002 related to our workers compensation program, customer obligations, and equipment lease obligations. A cash compensating balance of $2,955 is maintained to secure the letters of
credit. Of the total cash compensating balance, $2,585 has been classified as a current asset as of December 27, 2002, as the terms for the letters of credit expire in less than one year. An additional $370 has been classified as part of long-term
assets, as it is security for a letter of credit with a term of greater than one year. During the thirteen-week period ended December 27, 2002, an additional letter of credit in the face amount of $600 related to increased requirements under our
workers compensation policy was issued under the new financing agreement.



11



---

##### Table of Contents



7. ACCRUED LIABILITIES



Accrued liabilities as
of December 27, 2002 and June 28, 2002 consisted of the following:



|                                                    |  | December 27, 2002 |        | June 28, 2002
|--------------------------------------------------- |  | ----------------- | ------ | -------------
|Accrued employee benefit expense                    |  | $                 | 1,818  |              
|Accrued vacation expense                            |  |                   | 2,981  |              
|Accrued salary expense                              |  |                   | 3,883  |              
|Accrued warranty expense                            |  |                   | 13,362 |              
|Accrued workers compensation self-insurance expense |  |                   | 994    |              
|Accrued restructuring                               |  |                   | 10,405 |              
|Accrued income tax payable                          |  |                   | 2,217  |              
|Accrued other                                       |  |                   | 13,629 |              
|                                                    |  |                   |        |              
|                                                    |  | $                 | 49,289 |              
|                                                    |  |                   |        |              



8. RESTRUCTURING COSTS AND PLANT CLOSING



During
the thirteen-week period ended December 27, 2002, the Company announced the closing of its Manlius, New York manufacturing facility and its Louviers, France engineering and support operations facility. The decision to close the Manlius manufacturing
facility was a result of a process the Company began, as of the PBN acquisition date, to address redundancy in the product lines and manufacturing capacity resulting from its acquisition of certain assets and liabilities of PBN. The Company
anticipates ceasing manufacturing and operations at each of these facilities by June 27, 2003. For the twenty-six week period ended December 27, 2002, fair value adjustments for property, plant and equipment of $2,612 and exit costs of $9,552, which
includes employee severance and termination benefits, relocation for employees offered employment transfers, and other lease commitment costs, were accounted for as an adjustment to the allocation of the original purchase price, and recorded as
additional goodwill.



During the thirteen-week period ended
December 27, 2002, the Company recorded an adjustment of previously recorded restructuring charges of $13. For the twenty-six week period ended December 27, 2002, the Company recorded $211 related to initiatives to improve its operating performance
by aligning the cost structure across the Company with current business levels. The restructuring charge represents employee termination benefits for 183 employees, all of which was paid as of December 27, 2002.



Details of restructuring charges as of December 27, 2002 are as follows:



|                                            |  | Accrual at June 28, 2002 |       | Restructuring Charges (Recovery) in Fiscal Year 2003 |   |     | Restructuring Charges from Acquisition in Fiscal Year 2003 |  | Cash Paid (Received) |        |  | Non Cash |       | Accrual at December 27, 2002
|------------------------------------------- |  | ------------------------ | ----- | ---------------------------------------------------- | - | --- | ---------------------------------------------------------- |  | -------------------- | ------ |  | -------- | ----- | ----------------------------
|Employee severance and termination benefits |  | $                        | 2,416 |                                                      | $ | 211 |                                                            |  | $                    | 6,652  |  | $        | 2,209 |                             
|Write-off of property,plant and equipment   |  |                          |      |                                                      |   | (13 | )                                                          |  |                      | 2,612  |  |          | (13   | )                           
|Contractual obligations and other           |  |                          | 549   |                                                      |   |    |                                                            |  |                      | 2,900  |  |          | 114   |                             
|                                            |  |                          |       |                                                      |   |     |                                                            |  |                      |        |  |          |       |                             
|Total                                       |  | $                        | 2,965 |                                                      | $ | 198 |                                                            |  | $                    | 12,164 |  | $        | 2,310 |                             
|                                            |  |                          |       |                                                      |   |     |                                                            |  |                      |        |  |          |       |                             



12



---

##### Table of Contents



The Company anticipates the
remaining amounts accrued as of December 27, 2002 will be substantially paid out as of June 27, 2003. The Company intends to continue its initiatives to achieve more cost-effective operations throughout the remainder of fiscal year 2003, which may
result in additional restructuring expenses in amounts that have not yet been determined.



9. COMPREHENSIVE LOSS



The components of accumulated other comprehensive income, net of tax if applicable, are as follows:



|                                         |  | December 27, 2002 |     |   | June 28, 2002 |  
|---------------------------------------- |  | ----------------- | --- | - | ------------- | -
|Unrealized loss on marketable securities |  | $                 | (23 | ) |               | $
|Foreign currency translation gain        |  |                   | 642 |   |               |  
|                                         |  |                   |     |   |               |  
|Accumulated other comprehensive income   |  | $                 | 619 |   |               | $
|                                         |  |                   |     |   |               |  



The
components of comprehensive loss of the Company for the thirteen-week and twenty-six week periods ended December 27, 2002 and December 28, 2001 are as follows:



|                                         |  | Thirteen Weeks Ended |       
|---------------------------------------- |  | -------------------- | ------
|                                         |  | December 27, 2002    |       
|Net income (loss)                        |  | $                    | (4,708
|Other comprehensive income (loss):       |  |                      |       
|Unrealized gain on marketable securities |  |                      | 2     
|Foreign currency translation gain (loss) |  |                      | 113   
|                                         |  |                      |       
|Other comprehensive income (loss)        |  |                      | 115   
|                                         |  |                      |       
|Comprehensive loss                       |  | $                    | (4,593
|                                         |  |                      |       



|                                                |  | Twenty-six Weeks Ended |        
|----------------------------------------------- |  | ---------------------- | -------
|                                                |  | December 27, 2002      |        
|Net loss                                        |  | $                      | (11,966
|Other comprehensive income (loss):              |  |                        |        
|Unrealized gain (loss) on marketable securities |  |                        | (11    
|Foreign currency translation gain (loss)        |  |                        | 84     
|                                                |  |                        |        
|Other comprehensive income (loss)               |  |                        | 73     
|                                                |  |                        |        
|Comprehensive loss                              |  | $                      | (11,893
|                                                |  |                        |        



The Company accounts for
certain intercompany loans that are denominated in various foreign currencies as being permanent in nature, as settlement is not planned or anticipated in the foreseeable future. As such, foreign exchange translation gains and losses related to
these loans are excluded from net income (loss) and reported as a component of other comprehensive income (loss).



10. NET INCOME (LOSS) PER SHARE



Basic net income (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares
outstanding. Diluted net income (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding plus the dilutive effect of options and warrants.



13



---

##### Table of Contents



The dilutive effect of options
and warrants is calculated under the treasury stock method using the average market price for the period. Net income (loss) per share is calculated as follows:



|                                                            |  | Thirteen Weeks Ended   |        
|----------------------------------------------------------- |  | ---------------------- | -------
|                                                            |  | December 27, 2002      |        
|Net income (loss)                                           |  | $                      | (4,708 
|                                                            |  |                        |        
|Weighted average common shares outstanding                  |  |                        | 36,355 
|Common share equivalents                                    |  |                        |       
|                                                            |  |                        |        
|Weighted average common shares and common share equivalents |  |                        | 36,355 
|                                                            |  |                        |        
|Net income (loss) per share:                                |  |                        |        
|Basic                                                       |  | $                      | (0.13  
|Diluted                                                     |  | $                      | (0.13  
|                                                            |  |                        |        
|                                                            |  | Twenty-six Weeks Ended |        
|                                                            |  | December 27, 2002      |        
|Net loss                                                    |  | $                      | (11,966
|                                                            |  |                        |        
|Weighted average common shares outstanding                  |  |                        | 36,351 
|Common share equivalents                                    |  |                        |       
|                                                            |  |                        |        
|Weighted average common shares and common share equivalents |  |                        | 36,351 
|                                                            |  |                        |        
|Net loss per share:                                         |  |                        |        
|Basic                                                       |  | $                      | (0.33  
|Diluted                                                     |  | $                      | (0.33  



For the thirteen-week
period ended December 27, 2002, common share equivalents of 120 were excluded from the diluted net loss per share calculation because they were antidilutive. For the twenty-six week periods ended December 27, 2002 and December 28, 2001, common share
equivalents of 319 and 1,494, respectively, were excluded from the diluted net loss per share calculation because they were antidilutive.



11. SEGMENT INFORMATION



The Company operates in three industry segments: Broadband Communication Products, Broadband Network Services, and Broadband Management Solutions.



The management approach required under SFAS No. 131,
Disclosures About Segments of an Enterprise and Related Information, has been used to present the following segment information. This approach is based upon the way management organizes segments within an enterprise for making operating
decisions and assessing performance.



The following costs and
asset categories are not allocated to our segments, and are reflected in the table as unallocated items:



|- |  | Corporate selling, general and administrative expenses, certain quality assurance costs, and technology oversight functions;
|- |  | ----------------------------------------------------------------------------------------------------------------------------



|- |  | Restructuring costs;
|- |  | --------------------



|- |  | Other intangible asset charges;
|- |  | -------------------------------



14



---

##### Table of Contents



|- |  | Goodwill amortization resulting from acquisitions;
|- |  | --------------------------------------------------



|- |  | Income tax benefit; and
|- |  | -----------------------



|- |  | Identifiable assets of cash and cash equivalents, marketable securities and other short-term investments, and certain other long-term corporate assets.
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------



Information about industry segments for the
thirteen-week and twenty-six week periods ended December 27, 2002 and December 28, 2001 are as follows:



15



---

##### Table of Contents



|                                         |  | Broadband Communications Products |         |   | Broadband Network Services |   |        | Broadband Management Solutions |  |   | Unallocated |   |  | Total |        
|---------------------------------------- |  | --------------------------------- | ------- | - | -------------------------- | - | ------ | ------------------------------ |  | - | ----------- | - |  | ----- | -------
|13 week period ended December 27, 2002   |  |                                   |         |   |                            |   |        |                                |  |   |             |   |  |       |        
|                                         |  |                                   |         |   |                            |   |        |                                |  |   |             |   |  |       |        
|Net sales                                |  | $                                 | 46,059  |   |                            | $ | 6,581  |                                |  | $ | 1,334       |   |  | $     |       
|Depreciation and amortization            |  |                                   | 3,553   |   |                            |   | 176    |                                |  |   | 174         |   |  |       | 408    
|Operating loss                           |  |                                   | (1,673  | ) |                            |   | (36    | )                              |  |   | (2,119      | ) |  |       | (3,964 
|Income tax benefit                       |  |                                   |        |   |                            |   |       |                                |  |   |            |   |  |       | (2,469 
|Identifiable assets at December 27, 2002 |  |                                   | 195,638 |   |                            |   | 24,947 |                                |  |   | 13,884      |   |  |       | 47,315 
|Capital expenditures                     |  |                                   | 1,281   |   |                            |   | 11     |                                |  |   | 20          |   |  |       | 303    
|                                         |  |                                   |         |   |                            |   |        |                                |  |   |             |   |  |       |        
|13 week period ended December 28, 2001   |  |                                   |         |   |                            |   |        |                                |  |   |             |   |  |       |        
|                                         |  |                                   |         |   |                            |   |        |                                |  |   |             |   |  |       |        
|Net sales                                |  | $                                 | 56,924  |   |                            | $ | 10,021 |                                |  | $ | 226         |   |  | $     |       
|Depreciation and amortization            |  |                                   | 2,051   |   |                            |   | 224    |                                |  |   | 1,666       |   |  |       | 474    
|Operating income (loss)                  |  |                                   | 7,859   |   |                            |   | 1,442  |                                |  |   | (5,285      | ) |  |       | (3,759 
|Income tax expense                       |  |                                   |        |   |                            |   |       |                                |  |   |            |   |  |       | 695    
|Identifiable assets at December 28, 2001 |  |                                   | 130,139 |   |                            |   | 24,198 |                                |  |   | 23,758      |   |  |       | 70,117 
|Capital expenditures                     |  |                                   | 397     |   |                            |   | 101    |                                |  |   | 14          |   |  |       | 2,641  
|                                         |  |                                   |         |   |                            |   |        |                                |  |   |             |   |  |       |        
|26 week period ended December 27, 2002   |  |                                   |         |   |                            |   |        |                                |  |   |             |   |  |       |        
|                                         |  |                                   |         |   |                            |   |        |                                |  |   |             |   |  |       |        
|Net sales                                |  | $                                 | 84,430  |   |                            | $ | 12,600 |                                |  | $ | 1,579       |   |  | $     |       
|Depreciation and amortization            |  |                                   | 5,732   |   |                            |   | 386    |                                |  |   | 425         |   |  |       | 787    
|Operating income (loss)                  |  |                                   | (2,742  | ) |                            |   | 9      |                                |  |   | (5,174      | ) |  |       | (9,909 
|Income tax benefit                       |  |                                   |        |   |                            |   |       |                                |  |   |            |   |  |       | (5,842 
|Identifiable assets at December 27, 2002 |  |                                   | 195,638 |   |                            |   | 24,947 |                                |  |   | 13,884      |   |  |       | 47,315 
|Capital expenditures                     |  |                                   | 1,549   |   |                            |   | 54     |                                |  |   | 287         |   |  |       | 414    
|                                         |  |                                   |         |   |                            |   |        |                                |  |   |             |   |  |       |        
|26 week period ended December 28, 2001   |  |                                   |         |   |                            |   |        |                                |  |   |             |   |  |       |        
|                                         |  |                                   |         |   |                            |   |        |                                |  |   |             |   |  |       |        
|Net sales                                |  | $                                 | 100,844 |   |                            | $ | 17,965 |                                |  | $ | 387         |   |  | $     |       
|Depreciation and amortization            |  |                                   | 3,779   |   |                            |   | 457    |                                |  |   | 3,332       |   |  |       | 1,292  
|Operating income (loss)                  |  |                                   | 12,073  |   |                            |   | 1,966  |                                |  |   | (10,417     | ) |  |       | (10,608
|Income tax benefit                       |  |                                   |        |   |                            |   |       |                                |  |   |            |   |  |       | (2,460 
|Identifiable assets at December 28, 2001 |  |                                   | 130,139 |   |                            |   | 24,198 |                                |  |   | 23,758      |   |  |       | 70,117 
|Capital expenditures                     |  |                                   | 513     |   |                            |   | 160    |                                |  |   | 131         |   |  |       | 3,839  



Sales to unaffiliated
customers by geographic region are as follows:



|              |  | Thirteen Weeks Ended  
|------------- |  | ----------------------
|              |  | December 27, 2002     
|United States |  | $                     
|Europe        |  |                       
|Other         |  |                       
|              |  |                       
|Total         |  | $                     
|              |  |                       
|              |  |                       
|              |  | Twenty-six Weeks Ended
|              |  | December 27, 2002     
|United States |  | $                     
|Europe        |  |                       
|Other         |  |                       
|              |  |                       
|Total         |  | $                     
|              |  |                       



16



---

##### Table of Contents



Long-lived assets by
geographic region are as follows:



|              |  | December 27, 2002 |         | December 28, 2001
|------------- |  | ----------------- | ------- | -----------------
|United States |  | $                 | 78,081  |                  
|Europe        |  |                   | 19,574  |                  
|Other         |  |                   | 4,887   |                  
|              |  |                   |         |                  
|Total         |  | $                 | 102,542 |                  
|              |  |                   |         |                  

12.    WARRANTY



The Company warrants its products against defects in materials and workmanship, generally for three to five years, depending
upon product lines. A provision for estimated future costs relating to warranty activities is recorded when the product is shipped, based upon our historical experience. In addition, the recorded amount is adjusted for specifically identified
warranty exposures.



Changes in our warranty liability during the
twenty-six week period ended December 27, 2002 are as follows:



|Balance as of June 28, 2002                                                  |  | $ | 10,762 |  
|---------------------------------------------------------------------------- |  | - | ------ | -
|Warranties recorded during the period                                        |  |   | 2,097  |  
|Fair value of warranty liabilities acquired in acquisition during the
period |  |   | 3,773  |  
|Settlements made during the period                                           |  |   | (2,815 | )
|Changes in the liability for pre-existing warranties during the period       |  |   | (455   | )
|                                                                             |  |   |        |  
|Balance as of December 27, 2002                                              |  | $ | 13,362 |  
|                                                                             |  |   |        |  







17



---

##### Table of Contents



Item 2.
Managements Discussion and Analysis of Financial Condition and Results of Operations



General



The following discussion addresses the financial condition of C-COR.net Corp. as of December 27, 2002, and the results of our operations for the
thirteen-week and twenty-six week periods ended December 27, 2002, compared with the same periods of the prior fiscal year. This discussion should be read in conjunction with the Managements Discussion and Analysis section for the fiscal year
ended June 28, 2002, included in the Companys Annual Report on Form 10-K.



Disclosure Regarding Forward-Looking Statements



Some of the information presented in this report contains forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These
forward-looking statements include, among others, our ability to expand our product offering, fluctuations in demand for telecommunications equipment and broadband management services, the slowdown in network upgrade activity and the level of future
network upgrade activity, the trend toward more fiber in the network, global demand for our products and services, our ability to expand our operations internationally, including the impact of the Philips Broadband Networks (PBN) acquisition, our
assessment of credit risk related to major customers, and statements relating to our business strategy. Forward-looking statements represent our judgment regarding future events. Although we believe we have a reasonable basis for these
forward-looking statements, we cannot guarantee their accuracy and actual results may differ materially from those anticipated due to a number of uncertainties, many of which we are not aware. Factors which could cause actual results to differ from
expectations include, among others, capital spending patterns of the communications industry, our ability to develop new and enhanced products, continued industry consolidation, the development of competing technologies, changes in the credit
profile of major customers that would lead us to restrict new product shipments or record an increase in the allowance for doubtful accounts, and our ability to achieve our strategic objectives. For additional information concerning these and other
important factors that may cause our actual results to differ materially from expectations and underlying assumptions, please refer to the reports filed by us with the Securities and Exchange Commission.



Business Overview



We design, manufacture, and market network distribution and transmission
products and provide services and operational support systems to operators of advanced hybrid fiber coax broadband networks. We operate in three industry segments: Broadband Communications Products, Broadband Network Services, and Broadband
Management Solutions.



Our Broadband Communications Products
Division is responsible for research, development, management, production, support, and sales of advanced fiber optic and radio frequency equipment. Our Broadband Network Services Division provides outsourced technical services, including network
engineering and design, construction, activation, optimization, certification, maintenance, and operations. Our Broadband Management Solutions Division is responsible for the development, integration, management, implementation, support and sales of
operational support systems that focus on network services management and mobile workforce management solutions.



Business Combination



On September 16, 2002, we acquired certain assets and liabilities of PBN from Royal Philips Electronics. PBN is a provider of broadband products,
including transmission products, network optimizing technologies, and element management systems. PBN is supported by sales and services organizations worldwide, with a strong customer base in Europe and the Asia Pacific region. The purchase
included assets in various countries, cable infrastructure products, and a design and production facility in Manlius, New York. These assets and the facility became part of our Broadband Communications Products Division. The purchase price for the
acquisition was approximately 80.0 million Euros, which is subject to certain adjustments.



The effective date of the acquisition was August 26, 2002 (PBNs fiscal month end). Accordingly, the results of operations of PBN are included in the consolidated



18



---

##### Table of Contents



financial statements for the
period from August 26, 2002 through December 27, 2002. At closing on September 16, 2002, the Company made an initial cash payment of 75.0 million Euros ($72.5 million U.S. dollars, which is net of $200,000 of imputed interest) to Royal Philips
Electronics, with subsequent payments subject to certain adjustments. The Company anticipates additional consideration to be paid of approximately $2.6 million during the thirteen-week period ending March 28, 2003. In addition, the Company incurred
direct transaction costs of approximately $1.2 million to consummate the transaction. The Company used its available cash to fund the acquisition. The acquisition was accounted for as a purchase, and resulted in goodwill of $61.3 million.



Plant Closing



During the quarter ended December 27, 2002, we announced the closing of our
Manlius, New York manufacturing facility and our Louviers, France engineering and support services facility. The decision to close the Manlius manufacturing facility is a result of the process we began, as of the PBN acquisition date, to address
redundancy in the product lines and manufacturing capacity resulting from the acquisition of PBN. We anticipate ceasing manufacturing and operations at these facilities by June 27, 2003. For the thirteen-week period ended December 27, 2002, fair
value adjustments for property, plant and equipment of $2.6 million and exit costs of $9.6 million, which include employee severance and termination benefits, relocation for employees offered employment transfers, and other lease commitment costs,
were accounted for as an adjustment to the allocation of the original purchase price, and recorded as additional goodwill (see Notes 3 and 4).



Results of Operations



Net sales for the thirteen-week period ended December 27, 2002 were $54.0 million, a decrease of 20% from the prior years sales of $67.2 million for
the same period. Net sales for the twenty-six week period ended December 27, 2002 were $98.6 million, a decrease of 17% from the prior years sales of $119.2 million for the same period.



Broadband Communications Products segment sales decreased by 19% to $46.1
million during the thirteen-week period, compared to $56.9 million for the same period of the prior year. Broadband Communications Products segment sales decreased by 16% to $84.4 million during the twenty-six week period, compared to $100.8 million
for the same period of the prior year. Sales resulting from the acquisition of the PBN assets and operations during the thirteen-week and twenty-six week periods ended December 27, 2002 were $18.8 million and $28.4 million, respectively. The
decrease for both the quarter and year-to-date period is largely attributable to the lower capital spending levels of our customers, primarily domestic cable operators. The decline in sales affected both our optical and radio frequency product
lines. Optical product sales were $20.5 million and $38.5 million for the thirteen-week and twenty-six week periods ended December 27, 2002, compared to $30.5 million and $52.1 million, respectively, for the same periods of the prior year. Sales of
radio frequency amplifiers were $25.6 million and $45.9 million during the thirteen-week and twenty-six week periods ended December 27, 2002, compared to $26.4 million and $48.7 million, respectively, for the same periods of the prior year. Although
the Company has broadened its customer base and increased its base of installed equipment, the Companys sales of Broadband Communications Products are dependent on the capital spending levels of its customers. Many of our customers have
deferred capital spending, reducing their purchases of broadband communications products. Moreover, certain of our customers have experienced financial difficulties, including Adelphia Communications, which filed a petition for protection under the
federal bankruptcy statutes in June 2002.



Broadband Network
Services segment sales decreased by 34% to $6.6 million during the thirteen-week period, compared to $10.0 million for the same period of the prior year. Broadband Network Services segment sales decreased by 30% to $12.6 million during the
twenty-six week period, compared to $18.0 million for the same period of the prior year. The decrease during the quarter and year-to-date periods resulted from reduced spending by domestic cable operators on technical services. Sales were primarily
attributable to technical services performed in our customers plants, including system sweep, reverse path activation, ingress mitigation, node certification, and system maintenance.



Broadband Management Solutions segment sales increased to $1.3 million during the thirteen-week period ended December 27,
2002, compared to $226,000 for the same period of the prior year. Broadband Management Solutions segment sales increased to $1.6



19



---

##### Table of Contents



million during the twenty-six
week period ended December 27, 2002, compared to $387,000 for the same period of the prior year. The increase in sales for both the quarter and year-to-date period were primarily attributable to mobile workforce software license revenue and
professional services.



Domestic sales as a percentage of
consolidated sales were 70% and 73% for the thirteen-week and twenty-six week periods ended December 27, 2002, compared to 87% and 86%, respectively, for the same periods of the prior year. Sales to domestic customers decreased by 36% to $37.6
million during the thirteen-week period ended December 27, 2002, compared to $58.8 million for the same period of the prior year. Sales to domestic customers decreased by 30% to $71.8 million during the twenty-six week period ended December 27,
2002, compared to $102.4 million for the same period of the prior year. For the quarter and year-to-date periods, the decreases resulted from reductions in both Broadband Communications Products segment and Broadband Network Services segment sales
due to reduced spending by certain domestic multiple system operators (MSOs).



International sales as a percentage of total consolidated sales were 30% and 27% for the thirteen-week and twenty-six week periods ended December 27, 2002, compared to 13% and 14%, respectively, for the same periods of the prior
year. Sales to international customers increased by 95% to $16.4 million for the thirteen-week period ended December 27, 2002, compared to $8.4 million for the same period of the prior year. Sales to international customers increased by 59% to $26.9
million for the twenty-six week period ended December 27, 2002, compared to $16.8 million for the same period of the prior year. The increases for the quarter and year-to-date periods resulted from higher Broadband Communications Products segment
sales, primarily in Europe, Asia and Canada. As a result of our acquisition of the PBN assets and operations, we have increased our customer base and installed equipment base in the markets of Europe and Asia. We have added operations in the
Netherlands, Spain, Portugal, United Kingdom, France, Germany, Singapore and Australia. These operations include engineering, sales and administrative support activities to support the delivery of localized versions of products and services to
customers in Europe and Asia. We expect the demand for our products in international markets will continue to be highly variable. The international markets represent distinct markets in which capital spending decisions for hybrid fiber coax network
distribution equipment can be affected by a variety of factors, including access to financing and general economic conditions.



At December 27, 2002, our backlog of orders was $51.9 million, including $25.9 million for Broadband Communications Products, $19.7 million for Broadband
Network Services, and $6.3 million for Broadband Management Solutions. By comparison, backlog at the beginning of the quarter (September 27, 2002) was $48.5 million, including $24.1 million for Broadband Communications Products, $21.3 million for
Broadband Network Services, and $3.1 million for Broadband Management Solutions.



Gross margins were 23.3% and 23.1% for the thirteen-week and twenty-six week periods ended December 27, 2002, compared to 30.5% and 28.6%, respectively, for the same periods of the prior year. For the Broadband Communications
Products segment, gross margins were 24.1% and 24.7% for the thirteen-week and twenty-six week periods ended December 27, 2002, compared to 32.3% and 30.8%, respectively, for the same periods of the prior year. The decrease in Broadband
Communications Products segment gross margin for the quarter and year-to-date periods was due to decreased volume, resulting in higher manufacturing costs per unit due to allocating higher fixed factory overhead costs, an obsolete inventory
provision of $926,000 related to product rationalization resulting from integration of the PBN acquisition and shifts in product mix. In addition, gross margin was negatively impacted during the quarter by a $915,000 write-down in inventory
resulting from an adjustment to correct the valuation of certain inventories related to a prior period, which was partially offset by a reduction of $445,000 in obsolete inventory reserve requirements, as certain products that had been previously
reserved for were sold during the quarter. For the Broadband Network Services segment, gross margins were 17.8% and 18.5% for the thirteen-week and twenty-six week periods ended December 27, 2002, compared to 27.3% and 24.3%, respectively, for the
same periods of the prior year. The decrease in Broadband Network Services segment gross margin was due to lower service revenues and the requirement to maintain certain fixed operating costs, as well as variability in the gross margins associated
with the service mix. For the Broadband Management Solutions segment, gross margins were $299,000 and ($357,000) for the thirteen-week and twenty-six week periods ended December 27, 2002, compared to ($631,000) and ($1.3 million), respectively, for
the same periods of the prior year. Broadband Management Solutions segment gross margin improved in the quarter and year-to-date periods as a result of higher revenues to



20



---

##### Table of Contents



offset costs associated with
employees who support the deployment of network services management and mobile workforce management solutions, which are included in cost of sales. We anticipate that our future gross margin will continue to be affected by many factors, including
revenue levels in general, sales mix, competitive pricing, the timing of new product introductions and the timing of deployments of our operational support services solutions, since these contracts are being accounted for on a completed contract
basis and are subject to acceptance by the customer.



Selling and
administrative expenses were $12.5 million (23.1% of net sales) for the thirteen-week period ended December 27, 2002, compared to $11.1 million (16.6% of net sales) for the same period of the prior year. Selling and administrative expenses were
$24.3 million (24.6% of net sales) for the twenty-six week period ended December 27, 2002, compared to $21.9 million (18.3% of net sales) for the same period of the prior year. Selling and administrative expenses increased during the thirteen-week
and twenty-six week periods ended December 27, 2002 due to personnel costs and administrative expenses related to our acquisition of PBN assets and operations, effective as of August 26, 2002, compared to the same periods of the prior year. The
increases in selling and administrative expenses for the thirteen-week and the twenty-six week periods ended December 27, 2002 were partially offset by a recovery of bad debts, as $675,000 was collected on certain accounts previously deemed
uncollectible.



Research and product development expenses were
$7.4 million (13.7% of net sales) for the thirteen-week period ended December 27, 2002, compared to $7.6 million (11.4% of net sales) for the same period of the prior year. Research and product development expenses were $13.8 million (14.0% of net
sales) for the twenty-six week period ended December 27, 2002, compared to $14.3 million (12.0% of net sales) for the same period of the prior year. Research and product development expenses in the Broadband Communications Products segment were $5.8
million and $10.7 million for the thirteen-week and twenty-six week periods ended December 27, 2002, compared to $4.9 million and $9.2 million, respectively, for the same periods of the prior year. The increases were primarily due to higher
personnel costs resulting from our acquisition of PBN assets and operations. Research and product development expenses in the Broadband Management Solutions segment were $1.4 million and $2.8 million for the thirteen-week and twenty-six week periods
ended December 27, 2002, compared to $2.4 million and $4.6 million, respectively, for the same periods of the prior year. The decreases were primarily due to lower personnel costs resulting from reductions in the workforce and lower expenses for the
development of mobile workforce management software solutions. Other research and product development expenses, not charged to segments, were $168,000 and $301,000 for the thirteen-week and twenty-six week periods ended December 27, 2002, compared
to $231,000 and $406,000, respectively, for the same periods of the prior year. We believe continued commitment to product development efforts will be required for us to remain competitive, and anticipate continuing investments in research and
product development expenses in future periods related to ongoing initiatives in the development of optical products and network services management and mobile workforce software capabilities.



As a result of the announced plant closings in Manlius, New York and Louviers,
France, we anticipate reductions in selling and administrative expenses and research and product development expenses, but do not anticipate this to occur until the fourth quarter of fiscal year 2003.



Operating loss (excluding unallocated items) for the Broadband Communications
Products segment was $1.7 million and $2.7 million for the thirteen-week and twenty-six week periods ended December 27, 2002, compared to operating income of $7.9 million and $12.1 million, respectively, for the same periods of the prior year. The
decreases in operating income for the quarter and year-to-date periods ended December 27, 2002 were primarily attributable to the lower sales volume and gross margins during the period, and higher operating costs associated with our acquisition of
PBN during the period. Operating income (loss) (excluding unallocated items) for the Broadband Network Services segment was ($36,000) and $9,000 for the thirteen-week and twenty-six week periods ended December 27, 2002, compared to operating income
of $1.4 million and $2.0 million, respectively, for the same periods of the prior year. The decreases in operating income resulted primarily from the lower sales volume and gross margins during the periods. Operating loss (excluding unallocated
items) for the Broadband Management Solutions segment was $2.1 million and $5.2 million for the thirteen-week and twenty-six week periods ended December 27, 2002, compared to operating loss of $5.3 million and $10.4 million, respectively, for the
same periods of the prior year. The decreases in operating loss resulted primarily from lower research and development



21



---

##### Table of Contents



costs associated with the
development of operational support solutions, as well as the elimination of amortization expense associated with identifiable intangible assets that were written off due to their impairment as of June 28, 2002.



Interest expense was $14,000 for the thirteen-week period ended December 27,
2002, compared to $64,000 for the same period of the prior year. Interest expense was $236,000 for the twenty-six week period ended December 27, 2002, compared to $89,000 for the same period of the prior year. Interest expense for the periods
relates primarily to long-term debt obligations. The increase in interest expense for the year-to-date period resulted primarily from an imputed interest charge related to the PBN acquisition recorded in the first quarter.



Investment income was $138,000 for the thirteen-week period ended December 27,
2002, compared to $497,000 for the same period of the prior year. Investment income was $729,000 for the twenty-six week period ended December 27, 2002, compared to $1.0 million for the same period of the prior year. The decreases in investment
income for the quarter and year-to-date periods resulted from a lower average investment balance and lower yields, compared to a year ago.



Foreign currency exchange gain was $468,000 for the thirteen-week period ended December 27, 2002, compared to $456,000 for the same period of the prior
year. The gain for the quarter, which resulted from the revaluation of foreign currency amounts into the functional currency for certain of the Companys operating subsidiaries, was primarily due to a weakening of the US dollar versus the Euro
during the period. Foreign currency exchange loss was $1.2 million for the twenty-six week period ended December 27, 2002, compared to a gain of $435,000 for the same period of the prior year. The foreign currency exchange loss for the year-to-date
period included a $1.6 million loss related to the settlement of a foreign exchange forward contract recorded in the prior quarter.



Other income, net was $23,000 for the thirteen-week period ended December 27, 2002, compared to $46,000 for the same period of the prior year. Other
income, net was $756,000 for the twenty-six week period ended December 27, 2002, compared to other expense, net of $1.7 million for the same period of the prior year. Other income, net for the year-to-date period included $800,000 as a partial
recovery on a note receivable from a third party that had been fully reserved for by the Company in a prior period. Other expense, net for the same period of the prior year included a charge to reserve for the aforementioned note receivable in the
amount of $1.3 million.



Our overall effective income tax rate
was (34.4%) and (32.8%) for the thirteen-week and twenty-six week periods ended December 27, 2002, compared to 58.3% and (33.5%), respectively, for the same periods of the prior year. Fluctuations in the effective income tax rate from period to
period reflect changes in permanent differences, non-deductible amounts, the relative profitability of U.S. versus non-U.S. operations and the differences in statutory tax rates by jurisdiction.



Liquidity and Capital Resources



As of December 27, 2002, cash and cash equivalents totaled $35.2 million, down
from $111.9 million at June 28, 2002. In addition, the Company had an arrangement with a bank at December 27, 2002 whereby a cash compensating balance of $3.0 million is being maintained to secure certain letters of credit issued on behalf of the
Company. Of the total cash compensating balance, $2.6 million has been classified as a current asset at December 27, 2002, as the terms for the letters of credit expire in less than one year. An additional $370,000 has been classified as part of
long-term assets, as it is security for a letter of credit with a term of greater than one year.



Working capital was $75.6 million at December 27, 2002 as compared with $164.7 million as of June 28, 2002. The reduction in working capital was primarily attributable to our acquisition of PBN and
funding the loss from operations during the twenty-six week period.



Net cash provided by operating activities was $2.6 million for the twenty-six week period, compared with cash used by operations of $5.6 million for the same period of the prior year. For the twenty-six week period ended December 27,
2002, net cash provided by operating activities increased due to receipt of $9.4 million related to a federal tax refund included as part of the change in other assets, as well as reductions in accounts receivables and inventories. These changes
were partially



22



---

##### Table of Contents



offset by reductions in
accounts payables, accrued liabilities, and an increase in deferred tax assets, resulting from increased net operating losses in the period. These changes in operating assets and liabilities are net of the effect of acquisitions.



Net cash used in investing activities was $79.3 million for the twenty-six
week period ended December 27, 2002, compared to cash used in investing activities of $21.8 million for the same period of the prior year. The increase in cash used in investing activities during the period was due primarily to utilizing $73.4
million of cash for the acquisition of PBN assets and operations, and $3.6 million for the payment of an earnout provision associated with our Aerotec Communications, Inc. acquisition. In addition to the initial consideration paid for the PBN
assets, additional payments are required under the terms of the acquisition agreement. The Company anticipates additional consideration of approximately $2.6 million to be paid during the quarter ending March 28, 2003. Other uses of cash were for
the purchase of property, plant and equipment of $2.3 million during the period. The major elements of the change in cash used for investing activities for the same period of the prior year were $26.2 million used for the acquisition of operations
of ADC Telecommunications, Inc., $4.6 million for the purchase of property, plant and equipment and $5.0 million for the purchase of marketable securities and other short-term investments. These changes were offset partially by proceeds of $14.1
million from the sale of marketable securities, other short-term investments and property, plant and equipment.



Net cash used in financing activities was $62,000 for the twenty-six week period ended December 27, 2002, compared with cash used in financing activities of $1.8 million for the same period of the
prior year. The current year activity primarily represented payments on long-term debt, which were partially offset by proceeds from the issuance of common stock to our employee stock purchase plan and from the exercise of stock options and
warrants. The major element of the change in cash used for financing activities for the same period of the prior year was $3.0 million for the purchase of treasury stock, which was partially offset by proceeds of $1.3 million from the exercise of
stock options and warrants.



On November 7, 2002, we entered into
a new financing agreement with a commercial lender. The new financing agreement is a two-year secured revolving credit facility, to be used for working capital and general corporate purposes, and provides an initial commitment up to an aggregate
amount of $20.0 million. The financing agreement allows for issuance of letters of credit and cash borrowings. Letters of credit outstanding are limited to no more than $6.0 million. Cash borrowings are limited by certain availability reserves and a
borrowing base, primarily a percentage of eligible domestic trade accounts receivables, up to the facilitys maximum availability less letters of credit outstanding.



As security for the financing agreement, the Company has pledged the following collateral: trade accounts receivables,
inventory, general intangibles, real estate, equipment, life insurance policies, and certain stock of a wholly owned foreign subsidiary. The financing agreement contains a number of restrictive covenants, including covenants limiting incurrence of
unsubordinated debt, disposal of collateral, and the payment of dividends (except stock dividends). The financing agreement contains no financial covenants.



The financing agreement is committed through November 6, 2004. Borrowings under the financing agreement bear interest at an applicable bank rate or LIBOR
plus two and three-quarters percent (2.75%) per annum, payable monthly. The financing agreement required the payment of a facility fee of $150,000 at execution, a fee on the unused commitment of 0.375% per annum payable monthly, and an
administrative fee of $36,000 per annum. As of December 27, 2002, the Company had no borrowings outstanding on the financing agreement. Based upon the eligible borrowing base at December 27, 2002, available borrowings under the financing agreement
were $13.3 million.



As a condition for closing on the financing
agreement, the Company terminated its prior credit agreement with a bank, whereby $7.5 million was available as a revolving line-of-credit, subject to an aggregate sub-limit of $5.0 million for issuance of letters of credit. We continue to maintain
letters of credit with the bank in the aggregate of $3.0 million as of December 27, 2002 related to our workers compensation program, customer obligations, and equipment lease obligations. We are required to maintain cash deposits in the face amount
of these letters of credit as collateral. During the thirteen-week period ended December 27, 2002, an additional letter of



23



---

##### Table of Contents



credit in the face amount of
$600,000 related to increased requirements under our workers compensation policy was issued under the new financing agreement.



Our main source of liquidity is our cash on hand. We will continue to use cash to fund operating losses anticipated in the next quarter, however we expect
to realize cash savings from ongoing restructuring initiatives in the fourth quarter of fiscal year 2003, including the closing of our Manlius, New York manufacturing facility and our Louviers, France operation. We intend to continue our initiatives
to achieve more cost-effective operations throughout the remainder of fiscal year 2003, which may require additional restructuring expenses in amounts that have not yet been determined.



We believe that current cash and cash equivalents balances, as well as our new financing agreement will be adequate to cover
our operating cash requirements, restructuring costs and the additional consideration for the acquisition of certain operations of PBN over the next 12 months. However, we may find it necessary or desirable to seek other sources of financing to
support our capital needs and provide available funds for working capital, or financing strategic initiatives, including acquiring or investing in complementary businesses, products, services, or technologies. Given the current status of the
communications industry and its impact on our near term financial results and the restrictions in the financing agreement, we believe there are limited alternatives available as sources of additional financing. Accordingly, any plan to raise
additional capital would likely involve equity-based financing, such as the issuance of common stock, preferred stock, or unsubordinated convertible debt securities and warrants under the Companys previously filed Registration Statement, which
would be dilutive to existing shareholders.



Accounting Changes and Accounting Pronouncement



In June 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets (Statement 142). Statement 142 addresses how intangible
assets that are acquired individually or with a group of other assets (but not those acquired in a business combination) should be accounted for in financial statements upon their acquisition. Statement 142 also addresses how goodwill and other
intangible assets should be accounted for after they have been initially recognized in the financial statements. Statement 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead be tested
for impairment at least annually. Statement 142 also requires that intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values and reviewed for impairment in accordance
with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (Statement 144).



The Company adopted the provisions of Statement 142 effective June 29, 2002. As of the date of adoption, the Company had unamortized goodwill in the amount of $7.2 million and unamortized identifiable
intangible assets in the amount of $1.6 million that were subject to the transition provisions of Statement 142. In connection with Statement 142s transitional goodwill impairment evaluation, the Company was required to perform an assessment
of whether there was an indication that goodwill was impaired as of the date of adoption. To accomplish this, the Company identified its reporting units and determined the carrying value of each reporting unit by assigning the assets and
liabilities, including the existing goodwill and intangible assets, to those reporting units as of the date of adoption. The Company then determined the fair value of each reporting unit and compared it to the carrying amount of the reporting unit.
The fair value was determined by an independent third party appraisal, using a discounted cash flow model. As a result of this evaluation, the Company did not have an impairment of goodwill as of June 29, 2002. The Company is required to reevaluate
whether goodwill is impaired on an ongoing annual basis. Although an estimate is not available at this time, it is possible that a portion of the $71.2 million in goodwill reflected on the December 27, 2002 balance sheet will be determined to be
impaired through the annual assessment test, which would require that a goodwill impairment charge against earnings be reflected in the fourth quarter of fiscal year 2003.



For additional information and disclosures regarding Statement 142, see Note 3.



In August 2001, the FASB issued Statement 144, which supersedes
both SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of (Statement 121) and the accounting and reporting provisions of APB Opinion No. 30, Reporting the Results of
Operations-Reporting the Effects of Disposal



24



---

##### Table of Contents



of a Segment of a Business,
and Extraordinary, Unusual and Infrequently Occurring Events and Transactions (Opinion 30), for the disposal of a segment of a business (as previously defined in that Opinion). Statement 144 retains the fundamental provisions in Statement 121
for recognizing and measuring impairment losses on long-lived assets held for use and long-lived assets to be disposed of by sale, while also resolving significant implementation issues associated with Statement 121. For example, Statement 144
provides guidance on how a long-lived asset that is used as part of a group should be evaluated for impairment, establishes criteria for when a long-lived asset is held for sale, and prescribes the accounting for a long-lived asset that will be
disposed of other than by sale. Statement 144 retains the basic provisions of Opinion 30 on how to present discontinued operations in the income statement but broadens that presentation to include a component of an entity (rather than a segment of a
business). Unlike Statement 121, an impairment assessment under Statement 144 will never result in a write-down of goodwill. Rather, goodwill is evaluated for impairment under Statement 142.



The Company adopted Statement 144 effective June 29, 2002. The adoption of
Statement 144 for long-lived assets held for use did not have a material impact on the consolidated financial statements. The provisions of Statement 144 for assets held for sale or other disposal generally are required to be applied prospectively
after the adoption date to newly initiated disposal activities.



In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities (Statement 146), which replaces Emerging Issues Task Force No. 94-3, Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). Statement 146 requires companies to recognize costs associated with exit or disposal activities when they are incurred
rather than at the date of a commitment to an exit or disposal plan. The provisions of Statement 146 are effective for exit or disposal activities that are initiated after December 31, 2002.



In November 2002, the FASB issued Interpretation No. 45,
Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others (the Interpretation), which addresses the disclosure to be made by a guarantor in its interim and
annual financial statements about its obligations under guarantees. The Interpretation also requires the recognition of a liability by a guarantor at the inception of certain guarantees.



The Interpretation requires the guarantor to recognize a liability for the non-contingent component of the guarantee, which
is the obligation to stand ready to perform in the event that specified triggering events or conditions occur. The initial measurement of this liability is the fair value of the guarantee at inception. The recognition of the liability is required
even if is not probable that payments will be required under the guarantee or if the guarantee was issued with a premium payment or as part of a transaction with multiple elements.



The Company has adopted the disclosure requirements of the Interpretation (see Note 12) and will apply the recognition and
measurement provisions for all guarantees entered into or modified after December 31, 2002.





25



---

##### Table of Contents



Item 3.
Quantitative and Qualitative Disclosures About Market Risk



Market risk represents the risk of loss that may impact the financial position, results of operations, or cash flow of the Company due to adverse changes in market prices, foreign currency exchange rates, and interest rates. The
Company is exposed to market risk because of changes in foreign currency exchange and interest rates, and changes in the fair market value of its marketable securities portfolios.



The Company is exposed to foreign currency exchange rate risks inherent in our sales commitments, anticipated sales, and
assets and liabilities denominated in currencies other than the United States dollar. As of December 27, 2002, our exposure to foreign currencies relates primarily to additional consideration to be paid for the acquisition of PBN. The Company
anticipates additional consideration to be paid of 2.7 million Euros ($2.6 million U.S. dollars) during the quarter ending March 28, 2003. As of June 28, 2002, the Company had one outstanding foreign exchange forward contract in the notional amount
of 80 million Euros. The Company was using this contract as an economic hedge of the forecasted purchase price of PBN. SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, prohibits the use of hedge accounting for
forecasted transactions of a business combination. Therefore, the Company recorded the change in the fair value of the foreign exchange forward contract in the amount of $1.6 million as a component of other income (expense), net in the consolidated
statements of operations as of June 28, 2002, based on quoted market prices. This contract matured on August 21, 2002. As a result, a reduction in the fair value of the contract at the time of settlement was recorded during the quarter ending
September 27, 2002 resulting in a loss of $1.6 million.



The
Company does not use derivative instruments in its marketable securities portfolio. The Company classifies its investments in its marketable securities portfolio as either available-for-sale or trading, and records them at fair value. For the
Companys available-for-sale securities, unrealized holding gains and losses are excluded from income and are recorded directly to shareholders equity in accumulated other comprehensive income (loss), net of related deferred income taxes.
For the Companys trading securities, unrealized holding gains and losses are included in the statement of operations in the period they arise. Changes in interest rates are not expected to have a material adverse effect on our financial
condition or results of operations.



26



---

##### Table of Contents



Item 4.
Controls and Procedures



The Companys
management is responsible for the preparation, integrity and objectivity of the financial statements and other information presented in this report. The financial statements of the Company have been prepared in accordance with accounting principles
generally accepted in the United States and reflect certain estimates and adjustments by management. The Companys management maintains a system of internal accounting controls and disclosure controls and procedures which management believes
provide reasonable assurance that the transactions are properly recorded and the Companys assets are protected from loss or unauthorized use.



The integrity of the accounting and disclosure systems are based on policies and procedures, the careful selection and training of qualified financial
personnel, a program of internal controls and direct management review. The Companys disclosure control systems and procedures are designed to ensure timely collection and evaluation of information subject to disclosure, to ensure the
selection of appropriate accounting policies and to ensure compliance with the Companys accounting policies and procedures.



Pursuant to Exchange Act Rule 13a-15, an evaluation was carried out under the supervision and with the participation of the Companys management,
including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Companys disclosure controls and procedures as defined in Exchange Act Rule 13a-14. Based upon that evaluation, as of
February 4, 2003 the Chief Executive Officer and the Chief Financial Officer concluded that the design and operation of the disclosure controls and procedures are effective. No significant changes have been made in the Companys internal
controls or in the other factors that could significantly affect these controls since February 4, 2003 and there have been no corrective actions with regard to significant deficiencies or material weaknesses. The Company has made enhancements to its
control environment, as a result of its recently implemented Enterprise Resource Planning (ERP) System and acquisitions, and will continue to do so on an ongoing basis.



27



---

##### Table of Contents



PART II. OTHER INFORMATION



Item 4.
Submission of Matters to a Vote of Shareholders



The Companys annual meeting of shareholders was held on November 6, 2002. The record date was September 27, 2002, on which there were 36,346,737 shares outstanding and entitled to vote at the annual meeting. The following items
were submitted to a vote by shareholders.



1. The election of
three directors for a term of three years.



2. Approve the
amended and restated Incentive Plan.



3. Approve an increase in
director compensation.



4. Ratification of KPMG LLP as
independent auditors for the 2003 fiscal year.



David A. Woodle
and I.N. Rendall Harper, Jr. were re-elected, and Dr. James E. Carnes was elected as directors until the 2005 annual meeting of shareholders.



The voting results for the matters noted above are set forth as follows:



1. The election of three directors for a term of three years.



|Name of Nominee          |  | Votes For  |  | Votes Withheld
|------------------------ |  | ---------- |  | --------------
|David A. Woodle          |  | 34,032,731 |  |              
|I.N. Rendall Harper, Jr. |  | 32,849,912 |  |              
|Dr. James E. Carnes      |  | 34,089,390 |  |              



2.
Approve the amended and restated Incentive Plan.



|Votes For  |  | Votes Against |  | Abstained |  | Unvoted  
|---------- |  | ------------- |  | --------- |  | ---------
|20,449,636 |  | 4,591,235     |  | 922,786   |  | 8,692,198



3.
Approve an increase in director compensation.



|Votes For  |  | Votes Against |  | Abstained
|---------- |  | ------------- |  | ---------
|29,150,065 |  | 4,564,474     |  | 941,316  



4.
Ratification of KPMG LLP as independent auditors for the 2003 fiscal year.



|Votes For  |  | Votes Against |  | Abstained
|---------- |  | ------------- |  | ---------
|32,850,677 |  | 1,761,011     |  | 44,167   



28



---

##### Table of Contents



Item 6.
Exhibits and Reports on Form 8-K



The
following exhibits are included herein:



|   
|---
|(10
|   
|(10
|   
|(15
|   
|(99
|   
|(99



Reports on Form 8-K



On November 21, 2002, the
Registrant filed a Form 8-K/A dated September 16, 2002, to amend the Current Report on Form 8-K dated September 16, 2002 and filed on September 25, 2002, to file the required financial statements and pro forma information required by Item 7 
Financial Statements and Exhibits.



On November 8, 2002, the
Registrant filed a Form 8-K dated November 8, 2002, announcing the Registrant was holding an Analyst Day at its headquarters, and to file the related informational materials.



29



---

##### Table of Contents



SIGNATURES



Pursuant to the requirements
of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



|                       
|-----------------------
|                       
|                       
|Date: February 10, 2003
|                       
|Date: February 10, 2003
|                       
|Date: February 10, 2003



30



---

##### Table of Contents



CERTIFICATIONS



I, David A. Woodle,
certify that:



1. I have reviewed this quarterly report on Form
10-Q of C-COR.net Corp.;



2. Based on my knowledge, this
quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the
period covered by this quarterly report;



3. Based on my
knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the
periods presented in this quarterly report;



4. The
registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:



a. designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;



b. evaluated the effectiveness of the registrants
disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the Evaluation Date); and



c. presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;



5. The registrants
other certifying officer and I have disclosed, based on our most recent evaluation, to the registrants auditors and the audit committee of registrants board of:



a. all significant deficiencies in the design or operation of internal controls which could adversely affect
the registrants ability to record, process, summarize and report financial data and have identified for the registrants auditors any material weaknesses in internal controls; and



b. any fraud, whether or not material, that involves
management or other employees who have a significant role in the registrants internal controls; and



6. The registrants other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.



|                       
|-----------------------
|Date: February 10, 2003
|                       



31



---

##### Table of Contents



CERTIFICATIONS



I, William T. Hanelly, certify that:



1. I have reviewed this quarterly report on Form 10-Q of C-COR.net Corp.;



2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly
report;



3. Based on my knowledge, the financial statements, and
other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;



4. The registrants other certifying officer and I are
responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:



a. designed such disclosure controls and procedures to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;



b. evaluated the effectiveness of the registrants disclosure controls and procedures as of a date
within 90 days prior to the filing date of this quarterly report (the Evaluation Date); and



c. presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;



5. The registrants
other certifying officer and I have disclosed, based on our most recent evaluation, to the registrants auditors and the audit committee of registrants board of directors:



a. all significant deficiencies in the design or operation of internal controls which could adversely affect
the registrants ability to record, process, summarize and report financial data and have identified for the registrants auditors any material weaknesses in internal controls; and



b. any fraud, whether or not material, that involves
management or other employees who have a significant role in the registrants internal controls; and



6. The registrants other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.



|                       
|-----------------------
|Date: February 10, 2003
|                       



32