C-COR Incorporated (C-COR), headquartered in State College, Pennsylvania, is a global provider of integrated network solutions that include access and transport equipment, software solutions, and technical services for broadband networks and for the ongoing transition to packet-based, Internet Protocol networks. Our core strategy is to lead network operators through the transition to Internet Protocol-based networks by leveraging our global installed base of network equipment and experienced workforce to deliver network solutions that meet the business needs of our customers.

C-COR was organized as a corporation under the laws of the Commonwealth of Pennsylvania on June 30, 1953.

C-COR operates through three business segments: C-COR Access and Transport, C-COR Solutions and C-COR Network Services .

C-COR Access and Transport – The C-COR Access and Transport product portfolio includes the flexible, scalable, one Gigahertz amplitude modulation headend/hub optical platform and line of optical nodes, a full offering of radio frequency amplifiers, and a Gigabit Ethernet optical transport system for business services applications. Segment personnel, located in Wallingford, Connecticut, Tijuana, Mexico, and State College, Pennsylvania, are responsible for the development, management, production, and support of our interoperable and modular access and transport products designed to help optimize the performance of existing network infrastructures and operations, as well as for the support of the migration to next-generation, Internet Protocol demand-oriented networks.

C-COR Solutions – The C-COR Solutions product portfolio includes on-demand content management systems, including software and hardware, for delivery of video on demand and digital advertising as well as application-oriented operations support software for network and service assurance, workforce management, and policy management and bandwidth allocation. Segment personnel, located in Beaverton, Oregon, and State College, Pennsylvania, are responsible for development, integration, management, implementation, and support of C-COR Solutions.

C-COR Network Services is headquartered in Atlanta, Georgia, with satellite offices throughout the U.S. C-COR Network Services offers network operators a comprehensive set of technical and operational services, which are designed to facilitate a smoother transition to next-generation network infrastructures and operations, and to better optimize the performance of existing network infrastructures and operations. Services provided by C-COR Network Services include outsourced operational services, network design and engineering, network integration, outside plant and construction services, and consulting.

Our principal customers include all of the largest cable operators in the United States, such as Cablevision Systems, Charter Communications, Comcast Corporation, Cox Communications, Insight Communications, Mediacom Communications, and Time Warner Cable; a number of smaller domestic cable operators; and numerous international cable operators, including Liberty Global, Inc. These customers operate complex, sophisticated broadband networks which deliver a wide variety of video, voice, and data services, including video on demand, high definition television, and voice over Internet Protocol, to homes and businesses. Our customer base also includes telephone companies and broadcasters who purchase various products and services from all three of our business segments.

From January 2006 through June 2006, C-COR implemented a realignment plan designed to achieve company-wide functional efficiencies and better serve the rapidly changing global marketplace. As part of this realignment, two new management groups were formed. Global Strategies is responsible for marketing, business development, and sales functions, and Broadband Systems Solutions focuses on product development,

manufacturing, delivery, and support functions. C-COR’s realignment resulted in the closing of our Sunnyvale, California, and Andover, Massachusetts, facilities and the transfer of manufacturing operations from Wallingford, Connecticut, to C-COR’s facility in Tijuana, Mexico. C-COR Network Services continues to operate as a stand-alone business unit. As a part of the realignment, C-COR’s uncompressed digital video product line was sold.

See Note 23 to the Consolidated Financial Statements in Item 8 of this Form 10-K for financial information relating to each of our business segments for fiscal years 2006, 2005, and 2004.

Industry Overview

According to the National Cable & Telecommunications Association (NCTA), between 1996 and 2005, United States cable operators spent approximately $100 billion to upgrade their networks to deliver digital video and two-way services such as high speed data, video on demand, and telephony. NCTA is currently reporting cable penetration of nearly 60% of the 110 million TV households in the United States. In addition, cable serves over 32 million digital cable subscribers, over 28 million cable modem (broadband Internet) users and more than 6 million telephony customers. As cable operators maximize their investment in their networks, we believe that our business will be driven by the following industry dynamics and trends:

Growth in Enhanced Broadband Services Requires Continued Upgrades by Domestic and International Cable Operators.  Cable operators are offering enhanced broadband services, including high speed Internet, voice over Internet Protocol, digital video, high definition television, and interactive and on demand video services. As these enhanced broadband services continue to attract new subscribers, we expect that cable operators will be required to update their networks to expand bandwidth capacity to support increased customer demand for these services. In the access portion, or “last-mile,” of the network, operators will need to upgrade headends, hubs, nodes, and radio frequency distribution equipment. While many domestic cable operators have substantially completed initial network upgrades necessary to provide enhanced broadband services, they will need to take a scalable approach to continue upgrades as new services are deployed. In addition, many international cable operators have not yet completed the initial upgrades necessary to offer such services.

Growing Demand for “Triple Play” Services—Video, Voice, and Data.  In response to increased competition from telecommunication service providers and direct broadcast satellite operators, cable operators have not only upgraded their networks to cost effectively support and deliver enhanced video, voice, and data, but continue to invest significantly to offer a “triple play” bundle of these services. The ability to cost effectively deliver bundled services helps cable operators reduce subscriber turnover and increase revenue per subscriber. As a result, the focus on such services is driving cable operators to continue to invest in network infrastructure, content management, digital advertising insertion, and back office automation tools.

Cable Operators are Demanding Advanced Network Technologies and Software Solutions.  The increase in volume and complexity of the signals transmitted over broadband networks as a result of the migration to an all digital, on demand network is causing cable operators to deploy new technologies. For example, transport technologies based on Internet Protocol allow cable operators to more cost effectively transport video, voice, and data across a common network infrastructure. Cable operators are also demanding sophisticated network and service management software products and technical field services to minimize operating expenditures and support the complexity of two-way broadband communications systems. As a result, cable operators are focusing on technologies and products that are flexible, cost effective, compliant with open industry standards, and scalable to meet subscriber growth and effectively deliver reliable, enhanced services.

Cable Operators are Developing Strategies to Offer Business Services.  Cable operators are leveraging their investment in existing fiber and coax networks by expanding beyond traditional residential customers to offer voice, video, and data services to commercial (small and medium size businesses), education, healthcare, and

government clients. Using their experience in delivering data, cable operators can bundle both voice and data for commercial subscribers and effectively compete with the telephone companies who have typically focused on large enterprises. Business services are just one of several market segments where cable and telephone companies are trying to penetrate each others’ markets.

Competition Between Cable Operators and Telephone Companies is Increasing.  Telephone companies are aggressively offering high speed data services and are beginning to offer video services to the residential market. AT&T Inc. and Verizon Communications have publicly stated that they will spend billions of dollars to equip their networks to offer video service, once a service offered only by cable and satellite providers. Likewise, telephone companies have been increasingly competitive on pricing and offers for higher speed data services, again to compete with the cable companies. In addition, cable companies are launching Internet Protocol-based telephone service. Independent “over-the-top” providers of multiple services are challenging both cable and telephone companies by using their infrastructures to offer those services at lower prices.

Digital Video Recorders are Impacting Advertising Business.  As the use of digital video recorders and other recording devices becomes more prevalent, advertisers face the need to develop new business models. Since personal recorders allow the viewer to skip over ads, network operators are looking for new ways to attract advertising dollars and deliver a meaningful ad experience to viewers. As a result, many network operators are implementing digital ad insertion, allowing them to transition from all analog to a mix of analog and digital and ultimately to all digital. One benefit is the ability to reallocate bandwidth. More importantly, digital advertising allows network operators to create a more dynamic and interactive experience between advertiser and viewer. Telephone companies are also planning for this transition.

Programming Content is Becoming More Readily Available and Across Multiple Platforms. Increased demand for bandwidth capacity on cable systems is developing as content providers (ABC, CBS, NBC, movie and music studios, gaming vendors) are offering content across multiple venues, such as broadcast network shows over the Internet. Likewise, certain cable operators are experimenting with offering more content through use of network personal video recorders (nPVRs) which, once copyright issues are resolved, will add more traffic to the networks. Another bandwidth intensive service being offered by a major cable operator allows cable video subscribers to re-start programs on demand if they miss the beginning of a television show.

Improved Conditions for Many Large Cable Operators.  During the past few years, the global communications industry experienced a downturn as a result of a economic recession and financial difficulties, including financial restructurings of large cable operators such as Adelphia Communications, NTL Inc., and UPC. On July 31, 2006, Adelphia Communications, historically one of our largest customers, was acquired by Time Warner Cable and Comcast Corporation. With the restructurings and consolidation, we believe the financial condition of many of our cable operator customers has stabilized or improved and that they are now better positioned to invest capital in their networks, particularly for solutions that support deployment of advanced services and reduce operating expenses.

Strategy Overview

Our core strategy is to facilitate the transition by network operators from their existing hybrid fiber coax networks to on demand, Internet Protocol networks by leveraging our extensive installed base of network equipment and dedicated global workforce to deliver complete, interoperable solutions for helping network operators build the infrastructure and reduce the complexity of managing their networks. Our mission is to simplify technology, facilitate its implementation, and enable operators to put their subscribers in control of their entertainment, information, and communication needs. Through a set of business solutions that respond to specific market needs, we are integrating our products, software, and services solutions to work with our customers as they address bandwidth capacity issues, on demand video rollout, Internet Protocol telephony deployment, operations management, network integration, and business services opportunities.

Specific aspects of our strategy include:

Providing a Comprehensive Broadband Access and Transport Product Line.  We offer a full range of radio frequency and fiber optic transmission products with up to one Gigahertz bandwidth capacity to transmit both radio frequency and optical signals in both directions over hybrid fiber coax networks between “the headend and the curb.” C-COR’s Gigabit Ethernet optical transport systems are used in business services applications.

Providing Integrated Software Solutions to Enhance On Demand and Operations Management.  Our applications-oriented Internet Protocol software allows cable operators to automate and proactively manage their network to maximize quality of service and return on investment. Cable operators need enhanced network visibility, flexibility, and scalability to provide the latest services to their customers. C-COR’s modular, interoperable applications provide network operators with the subscriber management, content management, and network optimization and service assurance tools needed to capture revenue-generating opportunities.

Integrating Products, Software, and Services for End-to-End Solutions. C-COR integrates its expertise in access and transport equipment, software solutions and network services to offer customer-focused applications for expanding network capacity, combining video on demand programming with dynamic advertisements, coordinating management of network devices and services with technical workforce, controlling network traffic and verifying subscriber usage levels, and managing the full lifecycle for deploying voice over Internet services.

Leveraging Our Extensive Installed Base of Network Products Worldwide.  We have a large installed base of access and transport products in broadband networks worldwide. Our goal is to continue to leverage that installed base of equipment and our extensive customer relationships as cable operators upgrade and maintain their networks to enable the delivery of enhanced services. We also leverage our global customer base to market our on demand and operations management (OSS) solutions.

Increasing International Sales.  We are currently supplying products and software solutions to a number of international customers, including broadband network operators in Europe, Asia, Canada, and Latin America. With our broad set of offerings, we are supplying comprehensive network solutions to network operators in various international markets who generally prefer to conduct business with suppliers offering a complete product line. We intend to continue to broaden our global customer base across all of our product and software offerings.

Products, Software, and Services

C-COR Access and Transport

During Fiscal Year 2006, C-COR Access and Transport offered a full complement of interoperable and modular optical and radio frequency network transmission and distribution products for hybrid fiber coax networks, and Gigabit Ethernet optical transport systems for business services applications.

Access Products

The traditional hybrid fiber coax network connects a local central content source, typically referred to as the headend, to individual residential or business users through a physical plant of fiber optic and coaxial cables and a variety of electrical and optical devices that modulate, transmit, receive, and amplify the radio frequency and optical signals as they move over the network. The local hybrid fiber coax network consists of three major components: the headend and hubs, nodes, and the radio frequency plant. C-COR offers product lines for all three components in a variety of bandwidths, up to and including one Gigahertz capability, as well as coarse wave division multiplexing (CWDM), which allows multiple wavelengths over a single fiber for increased network capacity.

Headend and Hubs

The headend receives information from a satellite transmission, Internet gateway, telephony network, or other source and converts this information to laser modulated optical signals for transmission across the local network. Larger networks feature both primary headends and a series of secondary headends or hubs. C-COR offers a broad range of headend and hub equipment that combines these components onto one fully managed, scalable platform. The compact design lowers the capital costs of delivering more bandwidth per subscriber while enabling network operators to increase their bandwidth capacity for advanced services, such as video on demand, high definition television, high speed Internet, and voice over Internet Protocol.

Nodes

The general function of the node in the local hybrid fiber coax network is to convert information from optical signals to radio frequency signals for distribution to the home or business. C-COR’s node series offers the performance and cost efficiency required to meet the demands of the most advanced network architectures. Our nodes utilize space and cost-saving scalable technology that allows network operators to have a “pay-as-they-grow” approach in deploying their infrastructure, minimizing capital expenditures while maximizing network service availability and performance.

Radio Frequency Equipment

The radio frequency products transmit information between the optical nodes and subscribers. These products are radio frequency amplifiers which come in various configurations such as trunks, bridgers, and line extenders. A trunk amplifier handles a large amount of information in a network when the node serving area is greater than 500 homes. A bridger splits the signal to send it to a greater number of destinations. Line extenders move the information to the home or business. Representing one of the largest installed bases in the industry, our amplifier series uses drop-in replacement modules to allow cost-saving upgrades and complements optical nodes to provide a wide array of options for distribution to end-of-line.

Transport Products

Converged Multi-Service Transport System for Business Services

C-COR’s converged, multi-service Internet Protocol networking platform offers a scalable, reliable, and cost-effective solution for transporting high volume service offerings such as video on demand, high definition television, voice over Internet Protocol, and high speed data over a single network. By utilizing wave division multiplexing technologies, multiple services can be carried efficiently over a single fiber. This optical transport system can be used for applications in the business services market.

C-COR Solutions

C-COR’s modular, interoperable, application-oriented Internet Protocol solutions are designed to enable network operators to better deploy and manage revenue-generating, on demand entertainment and information services, including video on demand, high definition television, voice over Internet Protocol, high speed data, and digital ad insertion. Built on industry open standards, our solutions can be tailored to the operators’ needs—from a bundled suite to a point-specific application. This provides a smoother, faster

transition to Internet Protocol-oriented network services, with a substantial degree of cost savings. C-COR Solutions offers the following application modules:

Content Management for On Demand and Ad Insertion

C-COR provides on demand media systems, including servers, software, applications, and integration, for cable operators and telecommunications network providers. C-COR simplifies the deployment of on demand content and digital ad insertion systems with a set of management and technical business tools to help cable operators migrate networks to digital in order to save bandwidth and to lower operating costs. To help meet network capacity and intelligence requirements, we offer a new technology, switched digital broadcast, which provides dynamic program management, on demand as subscribers choose to view a specific program at a specific time.

Service Assurance

C-COR’s Service Assurance Solutions deliver a network management suite offering visibility, analysis, and control to address bandwidth management, network optimization, and network assurance needs. A series of integrated network control and analysis applications, C-COR’s Service Assurance Solutions reduce the cost and complexity of managing standards-based (DOCSIS) and hybrid fiber coax networks while speeding deployment of new Internet Protocol services in cable networks.

Workforce Management

C-COR’s suite of field service management tools combines browser-based business applications with real-time connectivity to the mobile workforce through wireless data connections and mobile computing devices. By managing service delivery and network integrity, we help network operators reduce operating expenses by minimizing the need to send technicians on service and maintenance calls.

Policy Service Management

C-COR’s Policy Service Manager automates the effective management of bandwidth for advanced applications along with giving subscribers the ability to select from services on an as-needed basis. Our Key Distribution Manager helps enable secure voice over Internet Protocol deployment and VoiceAssure™ helps operators plan, deploy, and maintain voice services.

C-COR Network Services

C-COR Network Services provides outsourced network assurance and technical services through a nationwide force of experienced and highly skilled personnel who work with network operators to design and keep their networks operating at peak performance. Core competencies include network engineering and design; turnkey construction management; technical operations; project management, with a special focus on launching advanced applications over complex broadband networks; and solutions to move today’s sophisticated networks forward to Internet Protocol and digital services.

Outside Plant Technical Services

These services are comprised of hands-on technical services performed in the customer’s plant, including system sweep, reverse path activation, voice over Internet Protocol assurance, ingress mitigation, node certification to plant hardening, cable testing and repair, fiber audits, system installation and maintenance, aerial and underground construction, and project management.

Network Integration Technical Services and Consulting

Network Services brings together a team of experts in hybrid fiber coax and Internet Protocol networks, as well as in the deployment of new, on demand services, which approach network evolution from the operator’s perspective. With knowledge of multiple vendor equipment platforms, our technicians work with the operator to help them operate their network through assessment, installation, certification, and activation, providing either temporary help or long-term operational support and consulting services.

Outsourced Operational Services

We provide an integrated installation outsourcing program that covers a broad range of needs, including residential/commercial installation, technician dispatching in the field, inventory control, modem installation, direct sales, and construction/maintenance for new build and transfer systems.

Network Design and Field Engineering Services

These services are furnished by designers, drafters, and engineers, equipped with the latest in hardware and design/drafting software. Their expertise helps network operators navigate the transition from today’s widely deployed hybrid fiber coax networks to Internet Protocol, on demand networks. Services include walkout, strand digitizing, radio frequency and optical fiber network design, electronics network drafting, design quality control, drafting and documentation, engineering consultation, system data archiving, and project management.

Significant Customers

During the past fiscal year, our customers have included all of the largest cable system operators in the United States, as well as a number of smaller domestic cable operators, numerous international cable operators, telephone companies, and broadcasters buying digital video transport products. Our largest customer during fiscal year 2006 was Time Warner Cable, accounting for 25% of consolidated net sales. Our largest customers during fiscal year 2005 were Time Warner Cable and Adelphia Communications accounting for 18% and 14%, respectively, of consolidated net sales. Our largest customers during fiscal year 2004 were Adelphia Communications and Time Warner Cable accounting for 20% and 16%, respectively, of consolidated net sales. All of these principal customers purchased various combinations of products, software, and services.

See Note 19 to the Consolidated Financial Statements in Item 8 of this Form 10-K for further information relating to concentration of credit risk.

Sales and Distribution

Our sales and distribution are corporate functions focused on maximizing the synergies of C-COR’s three market offerings—products, software, and services—as a comprehensive network solution. Global sales and distribution efforts are conducted from Centennial, Colorado and from offices in Europe; from regional sales offices located throughout the United States; and through numerous sales representatives, alliances and channel partners around the world.

We sell our products, software, and services in the United States primarily through our direct sales force, which is organized by teams led by corporate account managers who focus on select customers or groups of customers. Working with the corporate account teams, our technical sales staff provides specialized support for our broad range of capabilities. These sales teams work closely with customers to design systems, develop technical proposals, and assist with installation and post-sale support.

International sales in Europe, Asia, and Canada are made both through our direct sales force and channel partners, while sales in Latin America are made primarily through channel partners. Our international sales represented 30%, 36%, and 28% of consolidated net sales for fiscal years 2006, 2005, and 2004, respectively.

See Note 23 to the Consolidated Financial Statements in Item 8 of this Form 10-K for further information relating to sales by geographic region.

Additionally, we provide 24x7 technical support, directly and through channel partners, as well as training for customers and channel partners, as required, both in our facilities and at our customers’ sites.

Our product management function develops strategies for product lines and, in conjunction with the sales force, identifies evolving technical and application needs of customers. In addition, the product management function is responsible for demand forecasting and general support of the sales force.

C-COR’s corporate marketing department works with our executive management, product managers, and sales force to develop and implement a global marketing and communications program.

C-COR utilizes a corporate-wide Enterprise Resource Planning system, accessible by C-COR personnel worldwide. This system automates and standardizes key corporate functions in finance, manufacturing, purchasing, and customer service management.

Backlog

We schedule production of our C-COR Access and Transport equipment based on our backlog, informal commitments from customers, and sales projections. The majority of equipment backlog typically is shipped within one to two quarters. In contrast, backlog in the C-COR Solutions and C-COR Network Services segments typically reflects longer-term systems development and field service projects that convert into revenue over a 12-month period and beyond.

At June 30, 2006, our backlog of orders was $96.7 million, including $27.7 million for C-COR Access and Transport, $46.6 million for C-COR Solutions, of which approximately $36.2 million is expected to be recognized as revenue over the next 12 months and $22.4 million for C-COR Network Services. By comparison, at June 24, 2005, our backlog of orders was $78.0 million, including $28.6 million for C-COR Access and Transport, $30.1 million for C-COR Solutions and $19.3 million for C-COR Network Services. Backlog at June 25, 2004, was $60.8 million, including $27.1 million for C-COR Access and Transport, $2.6 million for C-COR Solutions and $31.1 million for C-COR Network Services.

Anticipated orders from customers may fail to materialize and delivery schedules may be deferred or canceled for a number of reasons, including reductions in capital spending by network operators, customer financial difficulties, annual capital spending budget cycles, and construction delays.

Research and Product Development

We operate in an industry that is subject to rapid changes in technology. Our ability to compete successfully depends in large part upon anticipating such changes. Accordingly, we engage in ongoing research and development activities in response to our customers’ needs with the intention to advance existing product lines and/or develop new offerings. Our current research and product development focus is on optical equipment and emerging packet-based technologies, architectures, and standards that affect critical areas, such as network bandwidth capacity management for multiple cable subscriber services, and software solutions for content management, including on demand video, advertising insertion, and associated back office management;

assurance of service and network quality; and management of workforce resources for field installation and support. Product managers have responsibility for the product life cycle of specific hardware or software products from concept through development, expansion, and end of life. In this role, the product managers coordinate with a variety of C-COR professionals from sales, marketing, engineering, and technical support to develop and implement product plans. Access and Transport utilizes a concurrent product development program to enhance its capability to produce new products within an optimal time frame. The program addresses a number of key business activities, including portfolio management, innovation, product selection, product definition, electronic design and testing, selection of new product components, prototyping and piloting, and the ability to rapidly commercialize a new product.

During the past fiscal year, research and product development expenditures were primarily directed at developing new platforms for next-generation broadband architectures and applications, and expanding the capabilities of our integrated, interoperable software applications. We also continued with product development process improvements to reduce cycle time to design, reduce manufacturing costs, and improve design quality.

During fiscal years 2006, 2005, and 2004, we spent $38.2 million, $37.8 million, and $21.5 million, respectively, on research and product development. Research and product development expenses in the C-COR Access and Transport segment were $16.7 million, $21.6 million, and $16.6 million, respectively, for fiscal years 2006, 2005, and 2004. Research and product development expenses in the C-COR Solutions segment were $20.5 million, $15.2 million, and $4.3 million, respectively, for fiscal years 2006, 2005, and 2004. Other research and product development expenses, not allocated to segments, were $1,031,000, $998,000, and $592,000 respectively, for fiscal years 2006, 2005, and 2004. All research and product development expenditures have been expensed.

Competition

The broadband communications markets are dynamic and highly competitive, requiring substantial resources of those companies that compete in these markets, skilled and experienced personnel, and a capability to anticipate and capitalize on change. Our Access and Transport group competes with other companies, including Motorola’s Connected Home Solutions, Scientific Atlanta, Inc., a Cisco company, and Harmonic, Inc., some of which are large publicly traded companies that may have greater financial, technical, and marketing resources than we do.

Access and Transport equipment is marketed with emphasis on quality, advanced technology, differentiating features, flexibility, and business solutions, and is generally priced competitively with other manufacturers’ product lines. Product reliability and performance, technological innovation, responsive customer service, breadth of product offering, and pricing are several of the key criteria for competition.

Our Solutions group competes with several vendors offering on demand video and digital advertising insertion hardware and software, network management, mobile workforce management, network configuration management, and network capacity management systems in the United States, some of which may currently have greater sales in these areas than we do. However, we believe that we offer a more integrated solution that gives us a competitive advantage in supporting the requirements of both today’s hybrid fiber coax networks and the emerging all-digital, packet- based networks. We believe our acquisitions and integration of on demand and back-office management capabilities in recent years solidify C-COR’s position as a provider of comprehensive solutions for broadband network operators, integrating subscriber management, content management, network and service assurance, and mobile workforce management under one interoperable, modular suite of offerings.

Our Network Services segment competes in the United States with several vendors that offer similar services to those provided by C-COR. We compete on the basis of quality and scope of service and scope of offerings, ability to meet work schedules, and price by offering high-end technical field service support for next-generation optical networks as well as for traditional construction, installation, and maintenance operations. We

can offer a bundled solution with our equipment and/or software, providing our customers with a one-stop shopping solution.

Employees

We had 1,503 employees as of August 24, 2006. C-COR has no employees represented by unions within the United States.

Suppliers

We closely monitor supplier delivery performance and quality. We employ a strategy of limiting the total number of global suppliers to those who are quality leaders in their respective specialties and who will work with us as partners in the supply chain. Typical items purchased are fiber optic lasers, photo receivers, radio frequency hybrids, printed circuit boards, die cast aluminum housings, and standard electronic components. Although some of the components we use are single sourced, they are typically not sole sourced. We have experienced no significant difficulties during the past fiscal year in obtaining adequate quantities of raw materials and component parts.

We outsource the manufacture and repair of certain assemblies and modules where it is cost effective to do so or where there are advantages with respect to delivery times. Current outsourcing arrangements include European versions of amplifiers, certain power supplies, accessories, optical modules, digital return modules, circuit boards, repair services, and small-lot manufacturing.

Intellectual Property

We hold fifty-seven (57) United States patents and have fifty-five (55) patent applications pending in the United States Patent and Trademark Office. In addition, we hold an exclusive license, for use in our field, of numerous patents relating to fiber optic and radio frequency transmission equipment and technology, and network management techniques and services. We attempt to protect our intellectual property through patents, trademarks, copyrights, and a program of maintaining certain technology as trade secrets.

Item 1A. Risk Factors

O UR B USINESS A ND F INANCIAL R ESULTS A RE D EPENDENT O N T HE L EVEL O F C APITAL S PENDING B Y C ABLE N ETWORK O PERATORS .

Historically, most of our sales have been network access and transport equipment, on demand content management and operations support systems, and services to cable network operators in the United States and internationally. We expect this to continue for the foreseeable future. Demand for our offerings depends significantly upon the size and timing of capital spending by cable network operators for building, upgrading, and maintaining network infrastructures and for automated solutions for managing complex services delivered over their networks. We cannot accurately predict the patterns of cable network operators’ spending, but we believe that these patterns will continue to be affected in the near future by a variety of factors, including:

  •   ongoing assessment by cable operators of capital spending requirements with the objective of balancing subscriber demand for advanced services with the financial market expectation of solid financial results and, in particular, an emphasis on generating positive cash flow and increasing revenue generated per subscriber;

  •   the transition of most major domestic operations from large-scale network upgrades to more targeted capital investment tied to the roll-out of advanced services over small network segments;

  •   timing of spending based on economic conditions in the international markets for network upgrades to support two-way capability for advanced video, voice, and data services; and

  •   consolidation of cable equipment suppliers providing network products and services to global broadband operators.

A decline in capital spending, which has historically been cyclical, would adversely affect our business and results of operations.

W E A RE D EPENDENT O N A S MALL N UMBER O F C USTOMERS I N A S INGLE I NDUSTRY .

Most of our sales have been to relatively few customers. Sales to our ten largest customers accounted for approximately 63% of net sales in fiscal year 2006, 58% of net sales in fiscal year 2005, and 64% of net sales in fiscal year 2004. The loss of, or any reduction in orders from, a significant customer would harm our business.

In recent years, there has been significant consolidation of ownership of cable systems, particularly in the United States. As a result, we expect that the concentration of our sales among a limited number of customers will continue. Almost all of our sales are made on a purchase order basis (some of which may be governed by master agreements) and none of our customers have entered into long-term agreements requiring them to purchase our products. We expect that any further consolidation of our customer base may result in delays in receiving new orders or a reduction in the size of orders for our products which may harm our business.

W E C OULD B E A DVERSELY A FFECTED I F N EW T ECHNOLOGIES R EPLACE T HE B ROADBAND P RODUCTS T HAT W E O FFER .

Historically, sales of network access and transport equipment for hybrid fiber coax networks have represented the majority of our sales. Hybrid fiber coax networks can be used for high speed Internet access, telephony, video on demand, high definition television, and digital cable television. Demand for our products depends primarily on our customers’ desire and ability to upgrade their existing networks to offer these services, in addition to basic video service. There are, however, technologies that compete with hybrid fiber coax networks in providing high speed Internet access, telephony, video on demand, high definition television, and digital cable television to end users such as direct broadcast satellite, digital subscriber line, and local multipoint distribution services. Improvements in a competing technology could result in significant price and/or performance advantages for that technology which, in turn, could reduce demand for our offerings.

It is difficult for us to accurately predict the future growth rate, size, and technological direction of the broadband communications market. As this market evolves, it is possible that hybrid fiber coax network operators, telephone companies, or other suppliers of broadband wireless and satellite services will decide to adopt alternative technologies or standards that are incompatible with our products. If we are unable to design, manufacture, and market offerings that incorporate or are compatible with these new technologies or standards, our business would suffer.

I F W E A RE U NABLE T O I NCREASE O UR C ONTENT M ANAGEMENT S YSTEMS A ND O PERATIONS S UPPORT S YSTEMS S OFTWARE R EVENUE T O G ENERATE A DEQUATE P ROFITABILITY , O UR F INANCIAL R ESULTS W OULD B E A DVERSELY A FFECTED .

Our ability to increase the revenue generated by our content management and operations support systems depends on many factors that are beyond our control. For example:

  •   our customers may decide to continue to manage their networks by focusing on limited, individual elements of the network rather than managing their entire network integrity and service delivery processes using a suite of software application modules such as those offered by our Solutions group;

  •   failure of software products;

  •   new and better products developed by competitors;

  •   claims of intellectual property infringement;

  •   our customers may decide to use internally developed software tools to manage their networks rather than license software from us;

  •   the software business is volatile and we may not be able to effectively utilize our resources and meet the needs of our customers if we are unable to forecast the future demands of such customers;

  •   if our customers increase the amount of spending on automated network, service, and content management tools, new suppliers of these tools may enter the market and successfully capture market share; and

  •   we may be unable to hire and retain enough qualified technical and management personnel to support our growth plans.

On-demand content management systems and operations support software have been our fastest growing and highest margin product lines. If we are unable to continue to grow revenues in these areas it would limit our ability to increase earnings and likely have an adverse affect on our stock price.

F LUCTUATIONS I N O UR C ONTENT M ANAGEMENT S YSTEMS S OFTWARE S ALES R ESULT I N G REATER V OLATILITY I N O UR O PERATING R ESULTS .

The level of our content management systems software sales fluctuates significantly quarter to quarter and results in greater volatility of our operating results than has been typical in the past, when the main source of volatility was the high proportion of quick-turn equipment sales. The timing of revenue recognition on software and system sales is based on specific contract terms and, in certain cases, is dependent upon completion of certain activities and customer acceptance which are difficult to forecast accurately. Because the gross margins associated with software and systems sales are substantially higher than our average gross margins, fluctuations in quarterly software sales have a disproportionate effect on operating results and earnings per share and could result in our operating results falling short of the expectations of securities analysts and investors.

W E M AY B E U NABLE T O A CCURATELY F ORECAST T HE D EMAND L EVEL F OR O UR P RODUCTS I N T HE L ONG T ERM .

The major domestic cable operators have upgraded their networks to enable two-way communications. We cannot accurately forecast the level of demand for our products in the long term. We expect the future level of demand for our products to be heavily influenced by the penetration rates of such consumer offerings as video on demand, high definition television, digital television, high speed Internet, and telephony over hybrid fiber coax networks, which are beyond our control. A reduction in future demand would result in lower revenues and earnings and potentially even operating losses. Such reduction could also result in an impairment and write-off of goodwill and other long-lived assets as well as increased charges for excess inventory.

I F W E A RE U NABLE T O D ESIGN , M ANUFACTURE , A ND M ARKET N EW O FFERINGS I N A T IMELY M ANNER , W E M AY N OT R EMAIN C OMPETITIVE .

The broadband communications market is characterized by continuing technological advancement, changes in customer requirements, and evolving industry standards. To compete successfully, we must design, manufacture, and market new offerings that provide increasingly higher levels of performance and reliability. Our inabilities to design, manufacture, and market these products or to achieve broad commercial acceptance of these products would have an adverse effect on our business.

W E M AY P URSUE A CQUISITIONS A ND I NVESTMENTS T HAT C OULD A DVERSELY A FFECT O UR B USINESS .

In the past, we have made acquisitions of and investments in businesses, products, and technologies to complement or expand our business. While we have no plans for additional acquisitions in the near term, future acquisitions may occur. If we identify an acquisition candidate, we may not be able to successfully negotiate or finance the acquisition or integrate the acquired businesses, products, or technologies with our existing business and products. Future acquisitions could result in potentially dilutive issuances of equity securities, the incurrence of debt and contingent liabilities, amortization expenses, and substantial goodwill.

I F W E A RE U NABLE T O R ETAIN O UR K EY P ERSONNEL O R R ECRUIT A DDITIONAL K EY P ERSONNEL I N T HE F UTURE , W E M AY B E U NABLE T O E FFECTIVELY E XECUTE O UR B USINESS S TRATEGY .

Our success depends on our ability to hire, retain, and motivate highly qualified personnel. Competition for qualified technical and other personnel is intense, and we may not successfully attract or retain such personnel. Competitors and others in the past have recruited our employees and may do so in the future. While we require our employees to sign customary agreements concerning confidentiality and ownership of inventions, we generally do not have employment contracts or non-competition agreements with our personnel. If we lose any of our key personnel, are unable to attract qualified personnel, or are delayed in hiring required personnel, particularly engineers and other technical personnel, our business could be negatively affected.

O UR R ELIANCE O N S EVERAL K EY C OMPONENTS , S UBASSEMBLIES , A ND M ODULES U SED I N O UR P RODUCTS A ND S YSTEMS C OULD R ESTRICT P RODUCTION A ND R ESULT I N H IGHER U NIT C OSTS .

We obtain many components, subassemblies, and modules for our products from a single supplier or a limited group of suppliers. Our reliance on single or limited group of suppliers, particularly foreign suppliers, and our increasing reliance on subcontractors, involves several risks. These risks include a potential inability to obtain an adequate supply of required components, subassemblies, or modules, and reduced control over pricing, quality, and timely delivery of these components, subassemblies, or modules. We do not generally maintain long-term agreements with any of our suppliers or subcontractors. An inability to obtain adequate deliveries or any other circumstances requiring us to seek alternative sources of supply could affect our ability to ship our products on a timely basis, which could damage our relationships with current and prospective customers, harm our business resulting in a loss of market share, and reduce quarterly revenues and income.

We generally maintain low inventory levels and do not make binding long-term commitments to suppliers. As a result, it may be difficult in the future to obtain components required for our products or to increase the volume of components, subassemblies, or modules if demand for our products increases. The lower level of commitments to our suppliers may also adversely affect our unit costs which are in many cases based upon volume discounts.

C HANGES I N I NTERNATIONAL T RADE L AWS , R EGULATIONS , O R T HE P OLITICAL C LIMATE I N M EXICO C OULD H INDER O UR P RODUCTION C APACITY .

During fiscal year 2006, we transferred certain manufacturing processes from Wallingford, Connecticut to our Tijuana, Mexico facility. As a result, most of the optical headends, nodes and radio frequency amplifiers that we sell are made in our manufacturing facility in Tijuana, Mexico. This operation is exposed to certain risks as a result of its location, including:

  •   changes in international trade laws, such as the North American Free Trade Agreement, affecting our import and export activities;

  •   changes in, or expiration of, the Mexican government’s Maquiladora program, which provides economic benefits to us;

  •   changes in labor laws and regulations affecting our ability to hire and retain employees;

  •   fluctuations of foreign currency and exchange controls;

  •   potential political instability and changes in the Mexican government;

  •   potential regulatory changes; and

  •   general economic conditions in Mexico.

Any of these risks could interfere with the operation of this facility and result in reduced production, increased costs, or both. In the event that production capacity of this facility is reduced, we could fail to ship products on schedule and could face a reduction in future orders from dissatisfied customers. If our costs to operate this facility increase, our margins would decrease. Reduced shipments and margins would have an adverse effect on our financial results.

C HANGES I N T HE R EGULATORY , P OLITICAL , A ND E CONOMIC E NVIRONMENTS I N E UROPE A ND A SIA C OULD A DVERSELY A FFECT O UR S ALES A ND A DMINISTRATIVE S UPPORT O PERATIONS I N V ARIOUS C OUNTRIES I N W HICH W E H AVE I NTERNATIONAL O PERATIONS .

We have operations in India, The Netherlands, Spain, Portugal, the United Kingdom, France, Germany, and China. These operations mainly perform sales and administrative activities that support the delivery of localized versions of products and services in Europe and Asia. These facilities and operations are subject to certain risks as a result of their location, including:

  •   changes in international trade laws that could affect doing business in the European Common Market;

  •   changes in labor laws and regulations affecting our ability to hire and retain employees;

  •   potential political instability and changes in the government;

  •   potential regulatory changes;

  •   potential changes in tax structures and rates;

  •   foreign currency fluctuations; and

  •   general economic conditions in Europe and Asia.

O UR C OMPETITORS , S OME O F W HOM A RE L ARGER A ND M ORE E STABLISHED , M AY H AVE A C OMPETITIVE A DVANTAGE O VER U S .

The market for network transmission equipment, content and operations management systems, and services is extremely competitive and is characterized by rapid technological change. Our current competitors include significantly larger companies with greater financial, technical, marketing, and other resources. Additional competition could come from new entrants in our markets. These existing and potential competitors may be in a better position to withstand a significant reduction in capital spending by cable network operators and to keep pace with changes in technology. We cannot assure that we will be able to compete successfully in the future or that competition will not harm our business.

Competitive pressures are likely to increase in the current capital spending environment as our competitors attempt to maintain revenue levels by increasing market share. This may result in increased price competition that could adversely affect our margins. Also, it could result in consolidation among our competitors which would have an unpredictable effect on our competitive position.

Cisco Systems, Inc. acquired a major competitor of ours, Scientific-Atlanta, Inc., in an acquisition that was completed in February 2006. In addition, there have recently been announcements of several acquisitions of video on demand vendors by our competitors, including Cisco Systems, Motorola and Harmonic. The ability of larger combined companies to offer a more comprehensive system solution than we can, and their larger capital and personnel resources, may put us at a competitive disadvantage. This could result in a loss of market share and reduced sales and earnings.

W E D EPEND O N I NTERNATIONAL S ALES A ND A RE S UBJECT T O C ERTAIN R ISKS A SSOCIATED W ITH I NTERNATIONAL O PERATIONS .

Sales to customers outside of the U.S accounted for 30%, 36%, and 28% of 2006, 2005, and 2004 consolidated net sales, respectively, and we expect international sales to comprise a significant percentage of our sales in the future. Our sales to international customers are subject to a number of risks, including:

  •   import and export license requirements, duties, tariffs, and taxes;

  •   the burden of complying with various foreign laws and regulations, technical standards, and treaties;

  •   difficulty in staffing and managing foreign operations;

  •   difficulty in collecting accounts receivable;

  •   changes in foreign regulations and telecommunications standards; and

  •   fluctuations in foreign exchange rates.

If we are unable to maintain and grow our international sales, there would be an adverse effect on earnings and financial position.

W E D EPEND O N C HANNEL P ARTNERS T O S ELL O UR P RODUCTS I N C ERTAIN A REAS A ND A RE S UBJECT T O R ISKS A SSOCIATED W ITH T HESE A RRANGEMENTS .

We utilize distributors, value-added resellers, system integrators, and manufacturers’ representatives to sell our products to certain customers and in certain geographic regions, and we expect a growing proportion of our sales to come through such channel partners in the future. Our sales through channel partners are subject to a number of risks, including:

  •   ability of our selected channel partners to effectively sell our products to end customers;

  •   our ability to continue channel partner arrangements into the future since most are for a limited term and subject to mutual agreement to extend;

  •   a reduction in gross margins realized on sale of our products; and

  •   diminution of contact with end customers which, over time, could aversely impact our ability to develop new products that meet customers’ evolving requirements.

W E M AY N EED A DDITIONAL C APITAL I N T HE F UTURE A ND M AY N OT B E A BLE T O S ECURE A DEQUATE F UNDS O N T ERMS A CCEPTABLE T O U S .

We have incurred operating losses for the last two fiscal years that negatively impacted cash flow from operations, and it may do so in the future. We currently anticipate that our existing capital resources, including available cash, will be sufficient to meet our operating needs for the next 12 to 18 months. If our cash flows are less than expected, we may need to borrow or raise additional funds sooner to respond to unforeseen technological or marketing hurdles, satisfy unforeseen liabilities, or take advantage of unanticipated opportunities. A future acquisition could require significant amounts of capital. We may not be able to obtain funds at the time or times needed on terms acceptable to us, or at all. If we are unable to obtain adequate funds on acceptable terms, we may not be able to take advantage of market opportunities, develop new products, or otherwise respond to competitive pressures. We may also need to borrow or raise additional funds to pay the principal of our 3.5% senior unsecured convertible notes (the “Notes”) which mature on December 31, 2009. We may need to refinance all or a portion of our indebtedness under the Notes on or before maturity. We may not be able to refinance the Notes, if necessary, on commercially reasonable terms or at all.

I F O UR S ALES F ORECASTS A RE N OT R EALIZED I N A G IVEN P ERIOD O R I F O UR O PERATING R ESULTS F LUCTUATE I N A NY G IVEN Q UARTER , O UR S TOCK P RICE M AY F ALL .

While we receive periodic forecasts from our customers as to their future requirements, these forecasts may not accurately reflect future purchase orders for our products. Sales of equipment are typically based on purchase orders and a substantial proportion of equipment sales are quick-turn orders that are received and fulfilled in the same quarter. Revenue recognition of software and system sales is based on specific contract terms and, in certain cases, is dependent upon completion of certain activities and customer acceptance which are difficult to forecast accurately. In addition, the sales cycles of many of our products, particularly our software products and our newer products sold internationally, are typically unpredictable and usually involve:

  •   a significant technical evaluation by our customers;

  •   a commitment of capital and other resources by network operators;

  •   delays associated with network operators’ internal procedures to approve large capital expenditures;

  •   time required to engineer the deployment of new technologies or services within broadband networks; and

  •   testing and acceptance of new technologies that affect key operations.

For these and other reasons, our sales cycles generally last three to six months, but can last up to 12 months.

In addition, because a limited number of large customers account for a significant portion of our sales, the timing of their orders can cause significant fluctuation in our quarterly operating results. A substantial portion of our expenses are fixed in the short term and are based on expected sales. If sales are below expectations in any given quarter, the negative impact on our operating results may be increased if we are unable to adjust our spending to compensate for the lower sales. Accordingly, variations in the timing of sales can cause significant fluctuation in our quarterly operating results and may result in a decline in the price of our common stock.

W E M AY B E H ARMED I F W E A RE U NABLE T O A DEQUATELY P ROTECT O UR I NTELLECTUAL P ROPERTY R IGHTS , P ATENT A PPLICATIONS , A ND N ON - EXCLUSIVE L ICENSES F OR U NITED S TATES P ATENTS .

We intend to continue to file patent applications in the future, where we believe appropriate, and to pursue such applications with United States and foreign patent authorities, but we cannot be sure that patents will be issued on such applications or that our patents will not be contested. Also, because issuance of a valid patent does not prevent other companies from using alternative, non-infringing technology, we cannot be sure that any of our patents will provide significant commercial protection. We also rely on trade secrets, technical know-how, copyright, and other unpatented proprietary information relating to our product development and manufacturing activities. We try to protect this information with confidentiality agreements with our employees and other parties. We cannot be sure that these agreements will not be breached, that we will have adequate remedies for any breach, or that our trade secrets and proprietary know-how will not otherwise become known or independently discovered by others.

Particular aspects of our technology could be found to infringe on the claims of other existing or future patents. Other companies may hold or obtain patents on inventions or may otherwise claim proprietary rights to technology necessary to our business which could prevent us from developing new products. We cannot predict the extent to which we may be required to seek licenses, or the extent to which they will be available to us on acceptable terms, if at all.

W E M AY E XPERIENCE I NCREASES I N O UR T AX E XPENSE I F W E B ECOME M ORE P ROFITABLE .

We have a substantial amount of net operating loss carryforwards that will be utilized only if there is income. In fiscal year 2003, we established a full valuation allowance against our deferred tax assets in most jurisdictions as the operating losses realized in fiscal years 2001 through 2003 raised doubts about our ability to utilize those deferred tax assets in the future. As a result, our operating cash flow, reported net income (loss), and earnings (loss) per share reflect a relatively low effective tax rate. If we generate taxable income in a jurisdiction on a consistent basis for multiple consecutive quarters, we might eliminate or reduce the deferred tax asset valuation allowance for that jurisdiction which will have the effect of increasing the amount of income tax expense recorded in the future and decreasing the reported net income and earnings per share.

W E M AY I NCUR S IGNIFICANT L IABILITIES I F W E F AIL T O C OMPLY W ITH E NVIRONMENTAL R EGULATIONS O R I F W E D ID N OT C OMPLY W ITH T HESE R EGULATIONS I N T HE P AST .

We are subject to a variety of Federal, state, and local governmental regulations related to the use, storage, discharge, and disposal of toxic or otherwise hazardous chemicals used in our manufacturing process. Although we believe that our activities conform to environmental regulations, the failure to comply with present or future regulations could result in fines being imposed on us, suspension of production, or a cessation of operations. We cannot assure that we have not in the past violated applicable laws or regulations which could result in required remediation or other liabilities.

W E A RE S UBJECT T O I NCREASED C OSTS O F C OMPLYING W ITH N EW R EGULATIONS O N C ORPORATE G OVERNANCE A ND D ISCLOSURE S TANDARDS A ND O UR S HARE P RICE C OULD B E A DVERSELY A FFECTED I F W E F AIL T O C OMPLY .

Complying with changing laws, regulations, and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002, SEC regulations, and Nasdaq Stock Market rules, is requiring a substantial amount of management and employee time and ongoing expense. Section 404 of the Sarbanes-Oxley Act requires management’s annual review and evaluation of our internal control over financial reporting, and attestation of the effectiveness of our internal control over financial reporting by management and our independent registered public accounting firm in connection with the filing of the annual report on Form 10-K for each fiscal year. We have documented and tested our internal control systems and procedures and no

known material weaknesses exist at this time. However, it is possible that a material weakness may be found in the future and if this occurs, investors may lose confidence in our financial statements, and the price of our stock may suffer.

Item 1B. Unresolved Staff Comments

None