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United States

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

For the thirteen-week period ended: December 24, 2004

OR

C-COR Incorporated

(Exact Name of Registrant as Specified in Charter)

(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  ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).    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 - 47,697,390 shares as of January 21, 2005.

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C-COR Incorporated

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Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders

C-COR Incorporated:

We have reviewed the condensed consolidated balance sheet of C-COR Incorporated and subsidiaries as of December 24, 2004, the related condensed consolidated statements of operations for the thirteen-week and twenty-six week periods ended December 24, 2004 and December 26, 2003, and the related condensed consolidated statements of cash flows for the twenty-six week periods ended December 24, 2004 and December 26, 2003. These condensed consolidated financial statements are the responsibility of the Company’s management.

We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), 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 U.S. generally accepted accounting principles.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of C-COR Incorporated and subsidiaries as of June 25, 2004, 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 13, 2004, except as to Note 24, which was as of September 3, 2004, 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 25, 2004, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

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PART I FINANCIAL INFORMATION

Item 1. Financial Statements

C-COR Incorporated

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)

(Unaudited)

See notes to condensed consolidated financial statements.

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C-COR Incorporated

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)

See notes to condensed consolidated financial statements.

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C-COR Incorporated

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)

See notes to condensed consolidated financial statements.

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C-COR Incorporated

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

See notes to condensed consolidated financial statements

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C-COR Incorporated

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands except per share data)

(Unaudited)

1. BASIS OF PRESENTATION

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 except as noted) necessary to fairly present C-COR Incorporated’s (the Company) consolidated financial position as of December 24, 2004 and the consolidated results of operations for the thirteen-week and twenty-six week periods ended December 24, 2004 and December 26, 2003. Operating results for the thirteen-week and twenty-six week periods ended December 24, 2004 are not necessarily indicative of the results that may be expected for the year ending June 24, 2005 due to the cyclical nature of the industry in which the Company operates, timing of recognizing revenues from the sale of certain operational support software systems, fluctuations in currencies related to intercompany foreign currency transactions where settlement is anticipated, and changes in overall conditions that could affect the carrying value of the Company’s 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 25, 2004 (fiscal year 2004).

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 both advanced hybrid fiber coax broadband networks and the emerging packet-based, on-demand, all digital multimedia networks. The Company operates in three industry segments: Broadband Communications Products, Broadband Network Services, and Broadband Management Solutions.

The Broadband Communications Products segment is responsible for the development, management, production, support, and sales of digital video transport, fiber optic, radio frequency, and fiber-to-the-premises equipment for hybrid fiber coax networks as well as the Company’s new optical packet-ring technology solution for the all-digital networks. The Broadband Network Services segment provides outsourced technical services, including network engineering and design, construction, activation, optimization, certification, maintenance, and operations. The Broadband Management Solutions segment is responsible for the development, integration, management, implementation, support, and sale of operational support systems (OSS) solutions to operate and manage reliable, high-quality multi-service networks.

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The accounting and financial reporting policies of the Company are in conformity with U.S. generally accepted accounting principles. The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Management has discussed the development and selection of the Company’s critical accounting estimates with the audit committee of the Company’s Board of Directors and the audit committee has reviewed the Company’s related disclosures. A detailed description of the Company’s significant accounting policies is set forth in the Notes to Consolidated Financial Statements in the Company’s Form 10-K for fiscal year 2004, as filed with the United States Securities and Exchange Commission. There were no significant changes to the Company’s critical accounting policies during the twenty-six week period ended December 24, 2004.

Marketable Securities

Marketable securities at December 24, 2004 and June 25, 2004 consisted of corporate obligations, municipal securities, collateralized mortgage obligations, asset-backed securities, mutual funds, equity securities, and certificates of deposit. The Company classifies its marketable securities portfolios 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 the statement of operations and are recorded directly to shareholders’ equity in accumulated other comprehensive income (loss), net of related deferred income taxes, if applicable. For the Company’s trading securities, unrealized holding gains and losses are included in the statement of operations in the period they arise. The Company classifies marketable securities that are available for current operations as current assets. Marketable securities which are classified as non-current assets represent investments that are available to fund certain long-term liabilities.

The Company periodically reviews its investment securities classified as available-for-sale for potential impairment and records impairment in accordance with Statement of Financial Accounting Standards (SFAS) No. 115, “Accounting for Certain Investments in Debt and Equity Securities.” This includes a review of the fair value of each investment security in relation to its book value, the current grade of the security, and other significant events. Based on management’s review, no investment securities were determined to be other than temporarily impaired, and as a result no impairment charges were recorded during the thirteen-week or twenty-six week periods ended December 24, 2004. There were no securities as of December 24, 2004 in an unrealized-loss position for twelve or more months.

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Accounting for Employee Stock Award Plans

The Company accounts for its stock award plans in accordance with the provisions of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees.” If charges for the Company’s stock plans had been determined based on the fair value method at the grant dates, as prescribed in Statement of Financial Accounting Standards (SFAS) No. 123, “Accounting for Stock-Based Compensation,” the Company’s net income (loss) and net income (loss) per share would have been as follows:

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Recently Issued Accounting Standards

In December 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 123R, “Share-Based Payment (SFAS 123R)”. SFAS 123R is a revision of SFAS No. 123, “Accounting for Stock-Based Compensation,” and supersedes Accounting Principles Board Opinion No. 25 (Opinion No. 25), “Accounting for Stock Issued to Employees,” and its related implementation guidance. SFAS No. 123R focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions. SFAS 123R requires entities to recognize compensation expense for awards of equity instruments to employees based on the grant-date fair value of those awards (with limited exceptions). SFAS No. 123R is effective for the first interim or annual reporting period that begins after June 15, 2005.

The Company is required to adopt SFAS No. 123R on June 25, 2005, using the modified prospective application method of SFAS 123R. Under the modified prospective application method, awards that are granted, modified or settled after the date of adoption will be measured and accounted for in accordance with SFAS 123R. Unvested equity-classified awards that were granted prior to the effective date would continue to be accounted for in accordance with SFAS No. 123 except that amounts must be recognized in the income statement. Adoption of SFAS No. 123R will not affect the Company’s cash flows, but it will reduce reported income and earnings per share because the Company currently uses the intrinsic value method as permitted by Opinion No. 25. Accordingly, no compensation expense is currently recognized for share purchase rights granted under the Company’s employee stock option plans. The adoption of SFAS No. 123R will result in the Company recording compensation cost for employee stock options. Had the Company expensed employee stock options under SFAS No. 123 for the thirteen-week and twenty-six week periods ended December 24, 2004, the Company’s net loss would have increased by $1,196 and $2,467, respectively, and net loss per share would have increased by $0.02 and $0.06, respectively.

In November 2004, the FASB issued SFAS No. 151 “Inventory Costs, an Amendment of ARB No.43 Chapter 4” (SFAS 151). SFAS 151 requires that items such as idle facility expense, excessive spoilage, double freight, and rehandling be recognized as current-period charges rather than being included in inventory regardless of whether the costs meet the criterion of abnormal as defined in ARB 43. SFAS 151 is applicable for inventory costs incurred during fiscal years beginning after June 15, 2005. The Company will adopt SFAS 151 on June 25, 2005 and does not expect the adoption will have a material impact on its financial statements.

4. BUSINESS COMBINATIONS

During the twenty-six week period ended December 24, 2004, the Company completed two acquisitions:

On July 16, 2004, the Company acquired all the outstanding securities of Stargus, Inc. (Stargus), a privately held company headquartered in Andover, Massachusetts. Stargus is a provider of comprehensive network and service management solutions for cable broadband operators. Stargus became part of the Company’s Broadband Management Solutions segment. The purchase price for the acquisition was $17,154, consisting of a cash payment of $17,000, subject to certain adjustments, and direct transaction costs of $154.

On September 3, 2004, the Company acquired certain assets and liabilities of Optinel Systems, Inc. (Optinel), a privately held company located in Elkridge, Maryland. Optinel is a provider of optical Ethernet transport solutions for residential and business services. Optinel became part of the Company’s Broadband Communications Products segment. The purchase price for the acquisition was $9,601, consisting of a cash payment of $9,500, subject to certain adjustments, and direct transaction costs of $101. Additional cash payments of up to $6,000 are required to be made to Optinel shareholders if certain sales objectives are achieved within thirteen months from the date of acquisition. Upon satisfaction of the contingency, the additional consideration will be recorded as additional cost of the acquisition and recorded as goodwill.

The acquisitions resulted in additional goodwill of $19,452, consisting of $15,540 related to Stargus and $3,912 related to Optinel. The goodwill related to the Optinel acquisition is expected to be deductible for tax purposes. None of the goodwill related to the Stargus acquisition is expected to be deductible for tax purposes; however, the Company acquired the historical net operating losses and unused general business credits of Stargus, subject to certain limitations.

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Intangible assets acquired in the acquisitions included $3,500 for completed technology and $360 for customer relationships, which are being amortized over their useful lives of three to five years. In addition, 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 the Company’s research and development activities or otherwise. The fair value allocated to in-process research and development as of the acquisition date was $1,850 based on a third-party valuation. The amount allocated to in-process research and development was charged to expense in the condensed consolidated statement of operations for the thirteen-week period ended September 24, 2004.

The acquisitions have been accounted for as purchases and, accordingly, the results of operations have been included in the consolidated financial statements since the respective dates of acquisition. On an unaudited pro forma basis, the effects of the acquisitions were not significant to the Company’s results of operations.

5. RESTRUCTURING COSTS

During the thirteen-week period ended December 24, 2004, the Company implemented a cost synergy program across its operations to improve its operating performance by aligning the Company’s cost structure with current business levels and eliminating redundancies resulting from acquisitions. The Company recorded $619 of restructuring charges, representing employee termination benefits for 39 employees. Additional restructuring charges of $85 and $63 are expected to be recorded in third and fourth quarters of fiscal year 2005, respectively, due to employee termination benefits contingent upon future services.

The following table provides detail on the activity and remaining restructuring accrual balance by category as of December 24, 2004.

Amounts accrued as of December 24, 2004 for employee severance will be paid out over bi-weekly periods through June 2005.

6. 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 24, 2004 and June 25, 2004 consisted of the following:

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7. GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill was $58,080 and $38,312 as of December 24, 2004 and June 25, 2004, respectively. As of December 24, 2004 and June 25, 2004, goodwill was allocated by segment as follows:

During the twenty-six week period ended December 24, 2004, goodwill increased $19,768, of which $18,918 related to acquisitions and $850 related to fluctuations in foreign currency exchange rates.

Other intangible assets as of December 24, 2004 and June 25, 2004 consisted of the following:

8. LETTER OF CREDIT AGREEMENT

On November 5, 2004, the Company entered into a credit agreement (the “Agreement”) with a bank for a $10,000 revolving letter of credit facility. The Company previously had a two-year secured revolving credit financing agreement, which was terminated by the Company effective November 8, 2004.

Under the Agreement, the $10,000 may be used solely for the issuance of letters of credit which must be fully cash collateralized at the time of issuance. The Company is required to maintain with the bank cash collateral of 102% of the amount that can be drawn on the issued letters of credit. This collateral can be drawn on upon the occurrence of any event of default under the Agreement. The Agreement contains standard event of default provisions, but no financial covenants.

The Agreement is committed through November 4, 2005. The applicable margin under the Agreement is 0.65%, payable quarterly in arrears. In the event that a letter of credit is drawn upon, the interest rate for any unreimbursed drawing is the bank’s floating prime rate.

As of December 24, 2004, the aggregate amount of letters of credit issued under the Agreement was $3,009. A cash compensating balance of $3,074 (includes interest earned on account) is maintained to secure the letters of credit. The cash compensating balance is classified as restricted cash on the condensed consolidated balance sheet.

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9. ACCRUED LIABILITIES

Accrued liabilities as of December 24, 2004 and June 25, 2004 consisted of the following:

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. 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:

For the thirteen-week periods ended December 24, 2004 and December 26, 2003, stock options and warrants representing 5,840 and 2,363 common shares, respectively, were excluded from the diluted net income (loss) per share calculation because they were antidilutive. For the twenty-six week periods ended December 24, 2004 and December 26, 2003, stock options and warrants representing 5,641 and 3,759 common shares, respectively, were excluded from the diluted net income (loss) per share calculation because they were antidilutive.

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11. COMPREHENSIVE INCOME (LOSS)

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

The components of comprehensive income for the thirteen-week and twenty-six week periods ended December 24, 2004 and December 26, 2003 are as follows:

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 currency translation gains and losses related to these loans are excluded from net income (loss) and reported as a component of other comprehensive income.

12. INCOME TAXES

The Company determines income taxes for each of the jurisdictions in which it operates. This involves estimating the Company’s actual current income tax payable and assessing temporary differences resulting from differing treatment of items, such as reserves and accruals, for tax and accounting purposes. Earnings of foreign operations are reinvested in the business and no provision for domestic income tax or foreign withholding tax is made on such earnings until distributed. Deferred taxes arise due to temporary differences in the bases of assets and liabilities and from net operating losses and tax credit carryforwards. In general, deferred tax assets represent future tax benefits to be received when certain expenses previously recognized in the Company’s statement of operations become deductible expenses under applicable income tax laws or net operating loss or tax credit carryforwards are utilized. Accordingly, realization of deferred tax assets is dependent on future taxable income against which these deductions, net operating losses and tax credits can be utilized. In assessing the realizability of deferred tax assets, the Company considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. Historical operating losses, scheduled reversals of deferred tax liabilities, projected future taxable income and tax planning strategies are considered in making this assessment.

Management concluded during the third quarter of fiscal year 2003 that a valuation allowance against net deferred tax assets was appropriate, primarily as a result of the cumulative losses during fiscal years 2001, 2002 and 2003, and recorded a valuation allowance as of that date. As of December 24, 2004, a valuation allowance on substantially all of the deferred tax assets has been recorded, except in certain foreign jurisdictions where the Company is profitable. In addition, the Company expects to maintain valuation allowances on deferred tax assets until the Company can sustain a level of profitability in the applicable tax jurisdiction that demonstrates its ability to utilize these assets. Income tax expense for the thirteen-week and twenty-six week periods ended December 24, 2004 included deferred tax expense and current taxes paid or payable in those foreign jurisdictions where the Company is profitable.

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Under recent changes in tax law, the American Jobs Creation Act of 2004 provides, under certain circumstances, for an 85% dividends received deduction for qualified cash dividends received from controlled foreign corporations, if the funds are reinvested in the U.S. The deduction can result in a much lower rate of U.S. tax on those earnings than the U.S. statutory rate of 35%. The Company has not yet completed its evaluation of the effect of the new tax law on its plans for reinvestment or repatriation of foreign earnings, therefore it is uncertain whether the Company will repatriate these earnings in fiscal years 2005 or 2006. If foreign earnings were repatriated, the effect would likely be to reduce the Company’s U.S. net operating loss carryforwards and corresponding valuation allowance, provide foreign tax credit carryforwards that would be offset with a valuation allowance and, to the extent the dividends were subject to withholding tax in the foreign jurisdiction, result in additional foreign tax expense. The range of these income tax effects has not been determined. The Company does not expect to complete its evaluation until the fourth quarter of fiscal year 2005.

13. GUARANTEES

As of December 24, 2004, the Company did not have any outstanding guarantees, except for product warranties. The Company warrants its products against defects in materials and workmanship, generally for two-to-five years, depending upon product lines and geographic regions. A provision for estimated future costs related to warranty activities is recorded when the product is shipped, based upon historical experience of product failure rates and historical costs incurred in correcting product failures. In addition, from time to time, the recorded amount is adjusted for specifically identified warranty exposures where unforeseen technical problems arise.

Changes in the Company’s warranty liability during the twenty-six week period ended December 24, 2004 are as follows:

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14. SEGMENT INFORMATION

The Company operates in three industry segments: Broadband Communication Products, Broadband Network Services, and Broadband Management Solutions. Due to changes in the structure of the Company’s internal organizations affecting the composition of its reportable segments, the Company has restated the segment information for the thirteen-week and twenty-six week periods ended December 26, 2003, to conform to the current year presentation.

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 the management of the Company organizes segments within an enterprise for making operating decisions and assessing performance.

The following costs and asset categories are not allocated to segments and are reflected in the table as “unallocated items”:

Information about industry segments for the thirteen-week and twenty-six week periods ended December 24, 2004 and December 26, 2003 is as follows: