##### Table of Contents

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



---



FORM 10-K



|þ | Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
|- | ------------------------------------------------------------------------------------



For the fiscal year ended September 30, 2006



Or



| ̈ | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
|- | ----------------------------------------------------------------------------------------



For the transition period from              to



Commission file number 001-32981



Netopia, Inc.

(Exact name of registrant as specified in its charter)



|                                                               |  |                                        
|-------------------------------------------------------------- |  | ---------------------------------------
|Delaware                                                       |  | 94-3033136                             
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification Number)



6001 Shellmound
Street, 4thFloor

Emeryville, California 94608

(Address of principal executive offices, including Zip Code)



(510) 420-7400

(Registrants telephone number, including area code)



Securities registered pursuant to Section 12(b) of the Act:



|                                         |  |                                          
|---------------------------------------- |  | -----------------------------------------
|Title of each class                      |  | Name of each exchange on which
registered
|Common stock, par value $0.001 per Share |  | The NASDAQ Stock Market LLC              



Securities
registered pursuant to Section 12(g) of the Act:

None

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Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.



Yes ̈No  þ



Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.



Yes ̈No  þ



Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.



Yes  þ    No ̈



Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of regulation S-K is not contained herein, and will not be contained, to the best of the registrants knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.



þ



Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2
of the Exchange Act. (Check one):



|                         |  |                      |  |                       
|------------------------ |  | -------------------- |  | ----------------------
|Large accelerated filer ̈ |  | Accelerated filer  þ |  | Non-accelerated filer ̈



Indicate by check mark
whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).



Yes ̈No  þ



As of the last business day of the registrants most recently completed
second fiscal quarter, March 31, 2006, the aggregate market value of the voting and non-voting common stock held by non-affiliates computed by reference to the price at which the common stock was last sold was $104,979,892.



As of December 11, 2006, there were 26,564,461 shares of the
registrants common stock outstanding.



DOCUMENTS
INCORPORATED BY REFERENCE



No documents are incorporated by
reference herein.



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##### Table of Contents

NETOPIA, INC.

FORM 10-K

Table of Contents



|                  |  |                                                                                       |  |     
|----------------- |  | ------------------------------------------------------------------------------------- |  | ----
|                  |  |                                                                                       |  | Page
|                  |  |                                                                                      
|                  |  | PART I                                                                                |  |     
|                  |  |                                                                                      
|Item 1.           |  | Business                                                                              |  | 1   
|                  |  |                                                                                      
|Item 1A.          |  | Risk Factors                                                                          |  | 14  
|                  |  |                                                                                      
|Item 1B.          |  | Unresolved Staff Comments                                                             |  | 23  
|                  |  |                                                                                      
|Item 2.           |  | Properties                                                                            |  | 24  
|                  |  |                                                                                      
|Item 3.           |  | Legal Proceedings                                                                     |  | 25  
|                  |  |                                                                                      
|Item 4.           |  | Submission of Matters to a Vote of Security Holders                                   |  | 26  
|                  |  |                                                                                      
|Item 4A.          |  | Executive Officers of Registrant                                                      |  | 26  
|                  |  |                                                                                      
|                  |  | PART II                                                                               |  |     
|                  |  |                                                                                      
|Item 5.           |  | Market for Registrants Common Equity and Related Stockholder Matters                 |  | 28  
|                  |  |                                                                                      
|Item 6.           |  | Selected Financial Data                                                               |  | 29  
|                  |  |                                                                                      
|Item 7.           |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 30  
|                  |  |                                                                                      
|Item 7A.          |  | Quantitative and Qualitative Disclosures about Market Risk                            |  | 41  
|                  |  |                                                                                      
|Item 8.           |  | Financial Statements and Supplementary Data                                           |  | 43  
|                  |  |                                                                                      
|Item 9.           |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure  |  | 74  
|                  |  |                                                                                      
|Item 9A.          |  | Controls and Procedures                                                               |  | 74  
|                  |  |                                                                                      
|Item 9B.          |  | Other Information                                                                     |  | 74  
|                  |  |                                                                                      
|                  |  | PART III                                                                              |  |     
|                  |  |                                                                                      
|Item 10.          |  | Directors and Executive Officers of the Registrant                                    |  | 75  
|                  |  |                                                                                      
|Item 11.          |  | Executive Compensation                                                                |  | 79  
|                  |  |                                                                                      
|Item 12.          |  | Security Ownership of Certain Beneficial Owners and Management                        |  | 87  
|                  |  |                                                                                      
|Item 13.          |  | Certain Relationships and Related Transactions                                        |  | 89  
|                  |  |                                                                                      
|Item 14.          |  | Principal Accounting Fees and Services                                                |  | 89  
|                  |  |                                                                                      
|                  |  | PART IV                                                                               |  |     
|                  |  |                                                                                      
|Item 15.          |  | Exhibits and Financial Statement Schedules                                            |  | 91  
|                  | 
|Index to Exhibits |  | 91                                                                                   
|                  | 
|Signatures        |  | 93                                                                                   
|                  | 
|Certifications    |  |                                                                                      



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PART I



|ITEM 1. | BUSINESS
|------- | --------



Some of the information in this Form 10-K contains forward-looking statements that involve substantial risks and uncertainties. You can identify these
statements by forward-looking words such as may, will, should, expect, anticipate, potential, believe, estimate, intends and
continue or similar words. You should read statements that contain these words carefully because they: (i) discuss our expectations about our future performance; (ii) contain projections of our future operating results or of
our future financial condition; or (iii) state other forward-looking information. There will be events in the future that we are not able to predict or over which we have no control, which may adversely affect our future results of
operations, financial condition or stock price. The risk factors described in this Form 10-K, as well as any cautionary language in this Form 10-K, provide examples of risks, uncertainties and events that may cause our actual results to differ
materially from the expectations we described in our forward-looking statements. You should be aware that the occurrence of any of the risks, uncertainties, or events described in this Form 10-K could seriously harm our business and that, upon the
occurrence of any of these events, the price of our common stock could decline. All forward-looking statements included in this Form 10-K are based on information available to us on the date hereof. We assume no obligation to update any such
forward-looking statements.



Recent Developments



On November 13, 2006, Netopia entered into a definitive merger
agreement with Motorola, Inc. (Motorola), pursuant to which Motorola intends to purchase all of our outstanding shares of common stock for $7.00 per share in cash. The transaction is subject to Hart-Scott-Rodino review, which is a
federal government antitrust law that requires prior notification to federal antitrust agencies of certain acquisitions before the transaction may be closed, regulatory filings with antitrust authorities in certain European countries, the approval
of our shareholders, and other customary closing conditions. Assuming all approvals are obtained and all closing conditions are met, we expect the acquisition to close during the first calendar quarter of 2007. There can be no assurance that the
merger will be consummated in a timely manner, if at all. In addition, we are subject to a number of operational covenants in the merger agreement that restrict in certain ways our ability to operate freely prior to the closing of the proposed
transaction. We have filed a preliminary proxy statement and intend to file a definitive proxy statement and other relevant materials with the Securities and Exchange Commission (SEC), including a detailed description of the terms of the
merger agreement, as well as other important information about the proposed transaction. SHAREHOLDERS OF NETOPIA ARE URGED TO READ THE PROXY STATEMENT AND OTHER RELEVANT MATERIALS BECAUSE THEY CONTAIN IMPORTANT INFORMATION ABOUT THE PROPOSED
TRANSACTION.



Netopia and its executive officers and
directors may be deemed to be participants in the solicitation of proxies from Netopia shareholders in favor of the proposed transaction. Certain of the executive officers and directors of Netopia have interests in the proposed transaction that may
differ from the interests of our shareholders generally, including acceleration of vesting of stock options, payments in connection with a change in control transaction, payments in connection with anticipated employment by Motorola, and
continuation of director and officer insurance and indemnification. These interests are described in the proxy statement.



All forward-looking statements included in this Annual Report on Form 10-K, including Managements Discussion and Analysis of Financial Condition and
Results of Operations and Risk Factors, are based on a 12-month operational period without consideration given to the pending transaction.



Overview



Netopia, Inc. (the Company) is a developer and provider of high performance broadband customer premises networking equipment and carrier-class
software for the remote management of broadband services and equipment. The Company also develops and provides value-added services for service providers and remote management software for enterprises technical support, help-desks and personal
computers.



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Our broadband equipment includes modems, routers and gateways, and related accessories for use at the
customer premises. Our equipment enables advanced broadband access and services. DSL technologies and standards used to transmit data over copper lines, including integrated wireless (or Wi-Fi) access, are a technology focus for our equipment. The
largest customers for our equipment are telecommunications carriers. These customers deploy our equipment at their broadband customers premises, including residences and distributed businesses.



Our management software enables carriers to remotely manage our gateways, as
well as gateways from third party suppliers, and to deploy new broadband services. Our software enables broadband service providers and enterprises to remotely respond to service problems and calls and to automate the maintenance of the gateways and
broadband services. Our solution also provides for the efficient delivery of value added services. NBBS or Netopia Broadband Server software is the brand name for our remote management software, which we license on both a server license and hosted
basis.



We also license and host software for remotely managing
networks of personal computers. This software is licensed under the brand names Timbuktu and eCare. eCare is a solution designed for carriers and enterprises technical service support and help desks. Our solutions enable remote problem
solving and management of distributed desktop or personal computers.



We sell Web site services, including Web site hosting, development, and tools for Web site development. We offer a Hot-Spot solution and service for distributed enterprises, such as restaurants, hotels and other venues that offer wireless
Internet access to their customers.



Our broadband equipment is
manufactured by outsourced manufacturers in Thailand, China and Mexico. The components included in our equipment are high-quality industry standard components provided by leading vendors. We work closely with the providers of silicon chips, circuits
and switches, antennae and other high-technology components in the development of our products. We develop and maintain the embedded software called firmware included in our equipment.



The markets in which we compete are highly competitive. We continuously strive to make advances and compete based on
forward-looking technology and service innovations, superior performance and quality, and by identifying solutions and opportunities for our customers to attract and retain customers, improve productivity, reduce costs, and achieve competitive
advantage.



For the fiscal year ended September 30, 2006,
we had revenues of approximately $113 million, employed approximately 300 employees and conducted most of our business in North America and Europe. We make significant ongoing investments in research and development and marketing of broadband
equipment, remote management software and broadband enabled services.



We were incorporated in California in 1986 as Farallon Computing, Inc. In 1996, we were reincorporated in Delaware as Farallon Communications, Inc. In November 1997, we changed our name to Netopia, Inc.



Our Internet address is http://www.netopia.com. Our most recent annual
report on Form 10-K and our other filings with the Securities and Exchange Commission (SEC) are available in PDF format through the Investor Relations section of our website. These filings are also available on the SEC website at
http://www.sec.gov. The contents of these websites are not intended to be incorporated by reference into this report or in any report or document we file, and our references to these websites are intended to be inactive textual references
only.



Our principal executive offices are located at 6001
Shellmound Street, 4thFloor, Emeryville, California 94608, and our telephone number is (510) 420-7400.



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Evolving Opportunities and Industry Background



Demand for Broadband Services



The growth and evolution of the Internet, the proliferation of advanced digital media and the advancement of communications infrastructure have
fundamentally changed the way people work, shop, entertain and communicate. The number of online households worldwide is in the hundreds of millions and growing. Of these households, over one hundred million are accessing the Internet through
broadband connections. As the Internet has evolved and content rich applications have been developed, consumers and businesses are increasingly opting for access that provides advanced digital media, video, communications and interactive broadband
applications, including:



| |  |  | Broadcast and high definition television;
| | - |  | -----------------------------------------



| |  |  | Internet Protocol television, or IPTV;
| | - |  | --------------------------------------



| |  |  | Video on demand, or VOD;
| | - |  | ------------------------



| |  |  | Interactive television;
| | - |  | -----------------------



| |  |  | Peer-to-peer file sharing;
| | - |  | --------------------------



| |  |  | Sending and receiving advanced digital media such as music, photos and video;
| | - |  | -----------------------------------------------------------------------------



| |  |  | Video conferencing;
| | - |  | -------------------



| |  |  | Video surveillance;
| | - |  | -------------------



| |  |  | Streaming video and audio;
| | - |  | --------------------------



| |  |  | Online gaming and game hosting;
| | - |  | -------------------------------



| |  |  | Point of sale services;
| | - |  | -----------------------



| |  |  | Business applications including secure virtual private networks, or VPM, for telecommuters; and
| | - |  | -----------------------------------------------------------------------------------------------



| |  |  | Voice over Internet Protocol, or VoIP.
| | - |  | --------------------------------------



Additionally, users are increasingly creating, interacting with and transmitting advanced digital media. As a result, the ability to send information
upstream has become increasingly important along with the ability to receive information downstream. For example, applications such as peer-to-peer file sharing or online gaming have the same high bandwidth requirements for both upstream and
downstream transmissions. As data and media files increase in size, we believe users will become increasingly dissatisfied with their Internet access if they have dial-up connections or first generation broadband technology, which do not maintain
sufficient transmission rates for satisfactory delivery of these advanced digital media, video, communications and interactive broadband applications.



The Service Provider Market Opportunity for High-Speed Broadband Services



Historically, telecommunication carriers have used their copper lines primarily for providing basic voice services, commonly
referred to as POTS, or plain old telephone service. These telecommunication carriers legacy voice revenue is under pressure due to increased competition from cell phone providers, cable operators and other alternative service providers.



Anticipating a significant increase in advanced communications
traffic, carriers upgraded their core and metro area networks with millions of miles of high-capacity optical fiber in the 1990s and this upgrade process has continued to the present. However, broadly deploying fiber directly to the end user on the
access network to provide high-speed broadband has proven costly and time consuming. As a result, there is disparity between bandwidth in the fiber network and the bandwidth available to the end user. Most Internet users are connected to
carriers copper lines, a practical means available to the carriers for delivering high-speed broadband services is to utilize their existing copper lines.



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In an attempt to meet the growth in demand for Internet access and to supplement their legacy voice
revenue, telecommunication service providers have been deploying various generations of broadband technologies in the form of DSL solutions over copper lines. Earlier generations of DSL typically offer transmission rates that are becoming inadequate
for providing the bandwidth necessary for advanced digital media, video and communications applications.



In addition, telecommunication carriers and Internet service providers are increasingly offering interactive broadband, including the combination of data,
voice and video, or Triple Play, services to their subscribers. Interactive broadband provides a richer user experience through the combination of higher upstream and downstream transmission rates, which, together with customizable
applications, such as interactive television, provides more personalized services than broadcast-oriented networks. Moreover, more advanced high-speed broadband equipment enables service providers to offer Triple Play and interactive services that
may effectively compete with the services currently provided by cable operators.



Telecommunications Market Evolution and Opportunity for Broadband Equipment and Software Providers



We expect that the telecommunications market will continue to evolve quickly in future years as enhanced high-speed broadband technology is deployed and
offered to users. This change will require new broadband equipment to be deployed, including new broadband customer premises equipment designed for high-speed broadband services. Service providers also need to manage and support distributed networks
of gateways and services. Our strategy is to be a leading provider of the customer premises equipment and remote management software required to deploy and manage distributed residential and business networks with high-speed broadband connectivity.



Carriers are responding to competitive challenges in their
core voice business, particularly from the cable television network operators, which are increasingly offering a bundle of voice, video and high-speed data to gain market share. We expect that carriers will increasingly add digital video and other
services to their offerings, which already includes voice and high-speed data. Examples of other services include streaming live video, music and pictures.



The strategies that carriers are pursuing to modernize their networks include the deployment of all fiber networks and hybrid fiber/copper networks
without end-to-end fiber connection by leveraging advanced digital subscriber line technology.



The all fiber network strategy is often referred to as fiber to the premises (FTTP). FTTP provides fibers high reliability, ease of service provisioning, and almost unlimited bandwidth. The hybrid
fiber/copper network strategy is often referred to as fiber to the neighborhood (FTTN) or fiber to the curb. FTTN provides sufficient bandwidth to meet the needs of digital video and other applications. FTTN requires the use of
very-high-speed digital subscriber line, or VDSL, a new high performance version of DSL for the connection to the premises. All three largest domestic local exchange carriers, AT&T Corporation, Verizon Communications Inc. and BellSouth, Inc.,
have announced that they are making substantial investments in the expansion of their fiber optic networks to, or closer to, residences. The fiber lines enable the providers to offer voice, video and high-speed data over one connection. Our gateways
and remote management software can be deployed as part of providing and managing these new services.



All these changes will impact the gateway and gateway software management markets in which we compete. For example, as carriers implement FTTP or FTTN and
deploy new residential home networking solutions, we may have the opportunity to compete against incumbent suppliers so that carriers achieve the cost and performance requirements for gateways in the modernized network. We are positioning and
marketing our products for this evolving market and we expect to compete vigorously to win new and retain existing telecommunication and Internet service provider customers. Attracting new or expanding existing customer relationships could
positively benefit our operating performance. Conversely, if we are unable to compete



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effectively, we could lose existing customer relationships, which could negatively harm our operating performance. Given this evolution and change, we expect
the next few years and calendar year 2007 in particular to be a period of intense competition among broadband equipment and remote management software providers with both significant opportunities for growth as well as risk of failure.



Our Strategy



Our objective is to be a leading developer and provider of high performance broadband customer premises networking equipment
and remote management software.



The principal elements of our
strategy are:



Leverage our market and technology
positions.    We believe we have achieved a major position in the higher performance broadband customer premises equipment market. Our remote management software has been deployed at BellSouth Corporation, a wireless
telecommunications service provider in Germany, and other service providers. We have a long history of providing remote management solutions for networks of personal computers. Our equipment and software has been deployed by many leading
telecommunication carriers, Internet service providers, and business enterprises in the United States and Europe.



We are a proven technology leader. We have shipped millions of gateways, including 1.2 million units shipped in the fiscal year ended
September 30, 2006. Our equipment is deployed or being tested by many leading carriers and service providers worldwide. Our five largest customers are BellSouth Corporation, AT&T Inc., Swisscom AG, eircom Group plc and Covad Communications
Group, Inc. Our customers conduct extensive system-level testing and field qualification of gateways over many months to ensure that the gateways meet performance, standards compliance and stability requirements before approval for mass deployment.



We intend to leverage our incumbent position to more broadly
meet our customers gateway and network management requirements, including their upcoming deployments of higher-speed broadband services using newer technologies such as VDSL2 and ADSL2+ bonding for the management and deployment of triple-play
services, such as video on demand. We believe that our close relationships with carriers and service providers provide us with a deep understanding of their needs and enable us to continue to develop customized technology and solutions to meet their
requirements. We believe that we have extensive experience in delivering gateways with advanced firmware features, such as quality of service, or QoS, for triple play services, for this class of customers. In addition, we have long standing
enterprise relationships for remote management software and we intend to maintain and build upon these relationships. We also intend to try to attract new customers worldwide for our broadband equipment and remote management software.



Products and Services



Our broadband solutions include broadband equipment, remote management software and value-added services for service
providers. For the fiscal years ended September 30, 2006 and 2005, revenues from the sale of our broadband equipment accounted for 87% and 89%, respectively, of our total revenues; the balance of revenues was from the sale of software and
services.



Our broadband equipment includes modems, routers and
gateways for homes and distributed businesses, collectively referred to as gateways. This networking equipment is commonly referred to as customer premises equipment or CPE because it resides in the local area network (LAN)
or the premises side of a telecommunications network. Gateways connect the premises to a communication service providers wide area networks (WAN). Once connected, our equipment provides various types of connectivity, wired and
wireless (Wi-Fi) to various types of equipment attached to the gateway, which together form the LAN. Services and attached equipment that pass through and are connected to the gateway might include many combinations, such as data service
through an Internet connection to a personal computer, voice service to an Internet Protocol (IP) phone, or video service to a digital television. The quality-of-service, commonly referred to as QoS, is delivered through the
firmware imbedded in our equipment.



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Our remote management software permits remote management of the broadband equipment and the devices
connected at a customers premises. Remote management enables a service provider to efficiently and effectively provision services and provide help-desk support to their end-users. The types of services that can be provisioned might include
data, voice and video as well as other services that can be delivered through broadband.



We provide remote management software on a licensed or hosted basis. Licensed software is installed by the carrier customer in its own environment. Hosted customers obtain secure access to the software residing in our
server network environment.



Broadband Equipment



We offer multiple broadband equipment product lines that are designed to
address different segments of the broadband market, from entry-level broadband modems through feature rich high-speed broadband gateways. Service providers can choose from our multiple products based upon the services to be delivered to their
customer.



Our gateways connect to carrier lines and enable the
transport of broadband, high-speed data over carrier networks including the local copper wires (often referred to as loop) and new deployments of fiber-optic networks. We have developed gateways that are designed to achieve the optimal
transfer rate that is available from fiber extension over copper network systems based on VDSL2 technology. Our gateways are being designed to enable carriers to exploit the benefits of fiber networks using existing copper lines by delivering
transmission rates of up to 100 Mbps downstream and upstream.



We are introducing gateways that will provide the highest transmission rates achievable over copper telephone lines. These transmission rates enable carriers to deliver advanced digital media, video, communications and interactive broadband
applications such as broadcast television, HDTV, IPTV, VOD, interactive television, peer-to-peer file sharing, sending and receiving advanced digital media, video conferencing, video surveillance, streaming audio and video, online gaming and game
hosting and VoIP, as well as traditional telephony services.



Our gateways serve many carrier network interfaces, including many digital subscriber line standards (ADSL, ADSL2+, Bonded ADSL and VDSL2), Ethernet, and T1. For users devices on the LAN-side of our gateways, our products support
wireless, plastic optical fiber, coaxial cable, Ethernet network connectivity.



As carrier-class gateways, our products are designed to deliver high performance, quality of service, excellent reliability, scalability, and affordability, and to be a platform from which carrier and service
providers can offer their customers additional broadband services and applications, especially triple play voice, video and data services.



We believe that our key competitive advantages include our broadband equipment expertise, the high quality and high-performance of our firmware, our
technology leadership and experience working directly with carriers in mass deployment of this DSL technology as well as the many vendors that provide systems and equipment for provider systems. Our gateways are deployed by many leading
telecommunication and Internet service providers and are also being evaluated by other leading service providers.



Broadband gateway offerings:



Residential Gateways



Our residential modems, routers and gateways are designed to allow service providers to deliver revenue-enhancing services to residential subscribers,
from high-speed data services alone to triple play combined voice, video, and data services.



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MiAVo Series Gateways



Designed explicitly for the triple play of bandwidth-intensive, quality-sensitive voice, video, and data
services, the MiAVo Series consists of VDSL2 gateways for IP and ATM networks, and bonded ADSL2+ gateways that allow providers to bond ADSL2+ lines for double the throughput of standard ADSL2+ networks.



3300 Series Modems and Gateways



The 3300 Series includes gateways with WAN connections that include ADSL,
ADSL2+, and Ethernet for use with cable modems or other WAN devices. LAN interfaces include USB, Ethernet, and 3-D Reach Wi-Fi. The 3300-VGx models feature Netopias QoS technology to enable delivery of quality-sensitive voice services for
double play offering of voice and high-speed Internet, while the 3342 Pocket Modem gives providers a highly cost-effective means to provide low-cost high-speed Internet to single-PC households.



2200 Series ADSL2+ Gateways



The 2200 Series ADSL2+ residential gateways enable lower-cost deployments of
data or data and voice services, with robust features for diverse LAN connectivity, ease of use, and security. Models available include one to four LAN ports with USB and Ethernet connections, and optional 802.11g Wi-Fi.



Business Routers and Gateways



Our portfolio of business-class broadband equipment has a combination of
routing, security, and management features that service providers can use to meet the requirements of small and medium business subscribers and distributed enterprises.



3300 Business Series Routers



The 3300-ENT Series business-class routers are designed for deployment of cable or ADSL/ADSL2+ broadband connectivity in
distributed enterprises, while the 3300-VGx routers offer user-friendly features for small-business subscribers. The 3300 Series enables business service providers and enterprises to deliver business-class functionality for small branch office and
home office environments.



4500 Series Routers



The 4500 Series business-class routers are designed for
cost-effective broadband connectivity using a variety of WAN options, including ADSL, SDSL, IDSL and T1.



4600 Series Routers



The 4600 Series business-class routers combine hardware-based VPN acceleration, built-in software VPN features, an Ethernet switch, and routing and
management tools in a single device. Designed for the needs of small, medium, and distributed enterprises, the 4600 Series offers the WAN options of SDSL, IDSL, and T1.



R-Series Routers



The R-Series routers have modular architecture, enabling cost effective upgrades to different WAN connections such as Ethernet or T1. The R-Series is
designed to support a wide range of networking options, from analog to Ethernet to T1.



Accessories



Designed to make Wi-Fi
connectivity simple for laptops and desktops, we also sell Wi-Fi PC cards and USB adapters.



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Remote Management Software and Value-Added Services for Service Providers:



Our remote management software and broadband enabled solutions include
remote device management, help desk software, network management, and eCommerce solutions. Our remote control and help desk products were designed to increase the capacity of support organizations with virtual hands-on tools in order to reduce call
time and the need for on-site service calls.



We offer two
principal remote management software solutions: NBBS (Netopia Broadband Server software) and eCare/Timbuktu.



Netopia Broadband Server



Netopias NBBS is a service management software platform that was developed to the DSL Forum TR-069 protocol standard for remote management over DSL.
This software performs automated service provisioning and comprehensive device management. NBBS was designed for centralized service and device management for IP-based customer premises equipment, including broadband gateways, modems, VoIP phones,
Webcams, and set-top boxes.



In addition to the TR-069
standard, NBBS also was designed to other standard device interfaces such as command line interface (CLI) and HTTP-based Web interfaces for access to a range of devices for service provisioning, management, and subscriber support. Having multiple
interfaces enables NBBS to manage a variety of third-party IP-enabled devices that do not comply with the TR-069 remote management standard.



NBBS was designed to perform the following functions:



| |  |  | Individual or mass updates to device software and configurations;
| | - |  | -----------------------------------------------------------------



| |  |  | Configuration and management of advanced services such as VPNs, gaming, security, VoIP, and IPTV;
| | - |  | -------------------------------------------------------------------------------------------------



| |  |  | Real-time CPE monitoring and troubleshooting; and
| | - |  | -------------------------------------------------



| |  |  | Customer self-service provisioning and troubleshooting.
| | - |  | -------------------------------------------------------



eCare and Timbuktu



Our eCare and Timbuktu Pro software products provide remote control and computing individual-to-individual and help desk-to-users, for secure remote
control of both Mac and Windows personal computers.



eCare is a
Web-enabled remote support application designed to enable technical support to resolve customers problems through a browser-based connection to an end users desktop over the Internet. eCare was designed for call centers and to complement
existing customer care and customer relationship management (CRM) systems.



Timbuktu Pro software serves enterprise help desk customers and IT organizations, allowing help desks to provide support and configuration on a remote basis when computer users experience problems or require
additional software upgrades for desktop or laptop computers. Remote control of distant computers can use connections over the Internet, local network, or modem-to-modem. The software enables other users to view all, or part of a computers
screen, file sharing, secure encrypted connections and communication by voice intercom, text chat, or instant message. The remote control can be from Mac to PC, or PC to Mac, or across like platforms.



Value-Added Services for Service Providers



Our value-added services for service providers are designed for enterprises
and distributed businesses and are designed to provide carriers and service providers a selection of value-added services capable of generating incremental monthly service revenue opportunities.



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Timbuktu ToGo Private Label.    We offer a Web-based PC remote access and
control service designed for carriers and service providers to offer PC remote access to their subscribers as a value-added service.



Web Site Hosting and eSite Builder.    Our eCommerce solutions were designed to provide Web sites and online stores that we
call eSites and eStores, and include a wide variety of vertical market content packages to suit many business needs, from franchisees to sole proprietors. Our eSite Builder was designed for turnkey Web site development and management product that
allows carriers and Internet service providers to cost effectively deliver customizable Web sites to their small business customers. eSite Builder is based on our eCommerce platform.



Hot Spots.    We offer Wi-Fi Hot Spots featuring 3-D Reach® Extreme Wi-Fi technology for superior wireless gateway performance, Family Friendly
Surfing that guards against content that is not suitable for family audiences, flexible billing options, and customizable merchandising for a full-featured online presence.



Support Services



Our products and services are complemented by a set of support services and managed services that assist our customers in rapidly deploying our solutions.



Technical Support.    We provide
technical support to our customers, including telephone support, and online access to our support personnel and internal technical databases.



Managed Services.    We offer managed services associated with our remote management software and broadband enable services.
These services provide customers flexibility in deploying and running their Netopia solutions by offering various levels of hosting, complete solution outsourcing or remote management of our solutions. Our data centers feature dedicated staff and
scalable advanced technology infrastructure, high system availability, proactive monitoring and disaster recovery capabilities necessary to operate mission-critical services. Our managed services alternatives allow our customers to realize the
benefits of our solution with reduced project risk, complexity and time to market, while simultaneously achieving increased operational efficiency, service and maintenance levels.



Creative Services.    We offer custom website design services for customers who prefer to
outsource website design and maintenance, but who want a more cost-effective alternative to traditional web design firms.



Customers



Our largest customers are telecommunications carriers and service providers. They include regional, national, and international telecommunications
carriers, as well as Internet Service Providers.



Two customers
accounted for more than 10% of revenues in fiscal year 2006. Three customers accounted for 10% or more of revenues in fiscal year 2005. Sales to BellSouth Corporation. were approximately 22% and 20% of revenues in fiscal years 2006 and 2005,
respectively. Sales to Swisscom AG were approximately 20% and 18% of revenues in fiscal years 2006 and 2005, respectively. Sales to eircom Group plc were approximately 10% of revenues in fiscal year 2005 and less than 10% of revenues in fiscal year
2006.



Sales to our top 5 customers accounted for 68% and 64%
of revenues in fiscal years 2006 and 2005, respectively.



Sales and
Marketing



Our Sales and Marketing organization has
primary responsibility for our field sales, relationships with carriers, Internet Service Providers, distributors and resellers, technical sales support, technical services, product management, and marketing. Our field sales force is geographically
disbursed within the United States and Europe.



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We sell our products to customers in the United States, and other parts of the world, primarily in
Europe. Sales to customers in the United States accounted for 60% and 64% of revenues in fiscal years 2006 and 2005, respectively. Sales to customers in Europe accounted for 38% and 33% in fiscal years 2006 and 2005, respectively.



Sales to our largest customers have fluctuated in the past and could
fluctuate significantly from quarter to quarter and year to year. Typically customers provide us with purchase orders for units on an as-needed basis. Because our largest customers are significantly larger than, and are able to exert a high degree
of influence over, us, they may be able to reschedule or cancel orders without significant penalty. Prior to selling our products to large service providers and organizations, we must undergo lengthy evaluation, approval, and purchase processes.



Backlog



Our backlog at September 30, 2006, the last day of fiscal year 2006 was approximately $10.7 million, compared with
backlog of approximately $7.2 million at September 30, 2005. Backlog includes orders confirmed with a purchase order for products scheduled for shipment within 90 days to customers with approved credit status. Because of the generally short
cycle between order and shipment and occasional customer changes in delivery schedules or cancellation of orders (which are made without significant penalty), we do not believe that our backlog at any particular date is necessary indicative of
actual revenues for any future period.



Research and Development



Our research and development efforts are focused on the
development of advanced broadband equipment, related imbedded software and remote management software, and other value-added services. We have experienced engineers who have expertise in advanced broadband networking equipment hardware, firmware and
systems and remote management software. In addition, we work closely with the research and development teams of our vendors and customers. During fiscal years 2006 and 2005, research and development expense was $17.7 million and $13.4 million,
respectively. Substantially all of our expenditures for research and development costs in fiscal years 2006 and 2005 have been expensed as incurred. We expect to continue to devote substantial resources to product and technological development.



Many of our products are standards based, particularly
broadband equipment and remote management software for broadband equipment. We seek to conform with industry-wide standards organizations, which include the DSL Forum, the American National Standards Institute in the United States and the European
Telecommunications Standards Institute, which are responsible for specifying transmission standards for telecommunications technologies. We incorporate these standards into the design of our products and purchase components based on these standards.
Our broadband equipment products depend on semiconductor chips that function according to these standards. Accordingly, our broadband equipment business depends on the availability of semiconductor chips at competitive prices.



The industry in which we compete is subject to rapid technology developments,
evolving standards, changes in customer requirements, and new competitor product introductions and enhancements with increasingly higher levels of performance, reliability, and systems compatibility. As a result, the future of our business depends
in part upon our ability, on a cost-effective and timely basis, to continue to enhance our existing products, to develop or acquire new functionality and features, and to introduce new products that improve performance, enable new services and
reduce total cost of ownership. We continuously evaluate changing market needs to provide customers with new broadband equipment and services incorporating new technologies, standards and functionality. In order to achieve these objectives, our
management and engineering personnel work with customers to identify and respond to customer needs, as well as with vendors and other corporations on strategic product development. We intend to continue developing products that meet key industry
standards and to enable evolving communication service opportunities, particularly Internet protocol services. There can be no assurance that we will be able to successfully develop products to address new customer requirements and technological
changes or that our products will achieve market acceptance.



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Manufacturing



We primarily employ an outsourced manufacturing strategy that relies on third-party outsourcing manufacturers for manufacturing services. Our third-party
outsourcing manufacturers produce our hardware products in factories primarily located in Thailand, China and Mexico. They produce the circuit boards for our broadband equipment and in certain circumstances assemble, package and ship our products
directly to our customers. We presently rely on a three outsourcing manufacturers and on many vendors that sell components. The manufacturing processes and procedures are ISO 9001 certified. We have not entered into any significant long terms
contracts with any outsourcing manufacturer. The arrangements with our outsourcing manufacturers generally do not commit us to purchase any particular amount or quantities beyond certain amounts covered by orders that we submit covering discrete
periods of time. Reliance on third-party subcontractors involves several risks, including the potential absence of adequate capacity, delivery schedules, manufacturing yields and product quality, and cost.



Competition



The markets in which we compete are characterized by rapid technological change, converging technologies, evolving industry
standards, evolving customer requirements, price competition and frequent new product introductions. We face significant to intense competition in all areas of our business. Most of our revenues are from the sale of broadband communications
equipment and the competition in that market is intense. We must continually anticipate market trends and develop new products that meet the requirements of our customers.



We compete with numerous vendors in each product category. The competition in the broadband equipment market has become
increasingly global. Reference designs for customer premises equipment from semiconductor manufacturers have lowered barriers to entry from low-cost manufacturers. As a result, we are seeing more price-focused competitors from Asia, and we
anticipate this will continue. However, because of the high standards and exhaustive lab tests performed by major telecommunication carriers, this class of competitor has not been successful to date in selling to our largest customers.



Increased competition may result in price reductions, reduced gross
margins and loss of market share, any one of which could harm our business.



In the market for broadband equipment and services, we primarily compete with 2Wire, Inc.; Actiontec Electronics, Inc.; Siemens AG; Thomson Corporation; Westell Technologies, Inc.; and ZyXEL Communications Co., among
others.



In the market for our remote management software for
broadband services and equipment, we compete primarily with 2Wire, Inc.; SupportSoft, Inc. and Motive, Inc., among others.



In the market for remote management software for enterprises technical support, help-desks and personal computers, we compete primarily with Altiris,
Inc.; Axeda Systems; CrossTec Corporation; Citrix Systems Inc.; LANDesk Software, Inc.; Microsoft Corporation; SupportSoft, Inc.; Symantec Corporation; WebEx and open source software initiatives.



The market for Web site services is highly fragmented with a large number of
competitors. Some of the prominent competitors include Web.com, Inc. (formerly Interland); Hostopia; United Online, Inc; Website Pros, Inc.; and Affinity Internet, Inc.



Many of our competitors in each product area have significantly greater financial, technical, marketing and other resources,
significantly greater name recognition and a larger base of customers than we do. In addition, many of our competitors have well-established relationships with our current and potential customers and have extensive knowledge of these industries. In
the past, we have lost potential customers to competitors in each



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product area for various reasons, including lower prices and other incentives that we did not match. Furthermore, new competitors or alliances among
competitors may emerge and rapidly acquire significant market share. The worldwide telecommunications industry has and is experiencing consolidation, such as the merger of SBC Communications Inc. and AT&T Corporation, and the pending merger of
AT&T and BellSouth, and we cannot predict the impact of this consolidation on competition in our markets.



We believe that the principal competitive factors in our markets are:



| |  |  | Product feature, functionality and reliability;
| | - |  | -----------------------------------------------



| |  |  | Proven customer results;
| | - |  | ------------------------



| |  |  | Customer service and support;
| | - |  | -----------------------------



| |  |  | Price and performance;
| | - |  | ----------------------



| |  |  | User experience, including ease of installation and use;
| | - |  | --------------------------------------------------------



| |  |  | The ability to timely introduce new products, including products with price-performance advantages and products that respond to customer requirements;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The ability to provide value-added features;
| | - |  | --------------------------------------------



| |  |  | The ability to reduce product costs;
| | - |  | ------------------------------------



| |  |  | Conformance to standards;
| | - |  | -------------------------



| |  |  | Breadth of product line;
| | - |  | ------------------------



| |  |  | The loyalty of customers to incumbent suppliers;
| | - |  | ------------------------------------------------



| |  |  | Brand name recognition; and
| | - |  | ---------------------------



| |  |  | Strategic alliances.
| | - |  | --------------------



We cannot provide assurance that we will be able to compete successfully in the future. An inability to successfully compete would seriously harm our
business.



We also face competition from customers to whom we
sell or with whom we collaborate. For example, our management software manages customer premises equipment manufactured by other vendors, and as a result we must cooperate and at the same time compete with many companies. Balancing cooperation and
competition is inherently challenging. Any inability to effectively manage these complicated relationships with customers and strategic partners could have a material adverse effect on our business, operating results, and financial condition and
according affect our chances of success.



Intellectual Property and Other
Proprietary Rights



Our ability to compete is dependent in
part on our proprietary rights and technology. We rely primarily on a combination of patent, copyright, trademark and trade secret laws, confidentiality procedures and contractual provisions to protect our proprietary rights. We presently hold one
United States patent issued that relates to the remote control technology incorporated in most of our software products. The term of this patent is through August 2010. We also have filed patent applications relating to the design of our broadband
equipment and remote control technology. We generally enter into confidentiality or license agreements with our employees, consultants, resellers, distributors, customers and potential customers and limit access to the distribution of our software,
hardware designs, documentation and other proprietary information. However, in some instances, we may find it necessary to release our source code to certain parties.



Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our products or
obtain and use information that we regard as proprietary. Policing unauthorized use of our products is difficult, and there is no guarantee the safeguards we employ will protect our intellectual property and other



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valuable competitive information. In addition, the laws of some foreign countries where our products are or may be manufactured or sold, particularly
developing countries including various countries in Asia, do not protect our proprietary rights as fully as do the laws of the United States. We rely upon certain software, firmware and hardware designs that we license from third parties, including
firmware that is integrated with our internally developed firmware and used in our products to perform key functions. We cannot be certain that these third-party licenses will continue to be available to us on commercially reasonable terms. The loss
of, or inability to maintain, such licenses could result in shipment delays or reductions until equivalent firmware is developed or licensed, and integrated into our products, which would seriously harm our business.



There has been a substantial amount of litigation in the technology and
Internet industries regarding intellectual property rights. Although we have not been party to any such litigation, we have been subject to claims and in the future, we may be subject to additional third party may claims that our current or
potential future products infringe their intellectual property. The evaluation and defense of any such claims, with or without merit, could be time-consuming and expensive. Furthermore, such claims could cause product shipment delays or require us
to enter into royalty or licensing agreements on financially unattractive terms, which could seriously harm our business.



Employees



As of November 30, 2006, we employed 326 persons, including 121 in research and development, 81 in sales and marketing, 22 in professional services,
37 in customer service and support, 32 in manufacturing operations, and 33 in general and administrative functions. None of our employees is represented by a collective bargaining agreement, nor have we experienced any work stoppage. We consider our
relations with our employees to be positive.



We depend on key
employees and in general our employees are vital to our future performance. Our key management, engineering and other employees are difficult to replace. We do not generally have employment agreements with our employees in the United States. On
December 9, 2005, we entered into an employment agreement effective as of October 1, 2005 with Alan B. Lefkof, our President and Chief Executive Officer. We do not carry key person life insurance. The loss of the services of one or more of
our key personnel could seriously harm our business. Competition for qualified personnel in our industry and geographic location is intense. We believe that our future success depends in part on our continued ability hire, assimilate, and retain
qualified personnel. During fiscal year 2006, we believe that we have been successful in recruiting qualified employees, but there can be no assurance that we will continue to be successful in the future.



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|ITEM 1A. | RISK FACTORS
|-------- | ------------



The following risk factors discussed below should be considered carefully in evaluating our business because such factors may have a significant impact on
our business, operating results and financial condition. As a result of these risk factors and other risks discussed elsewhere in this Annual Report on Form 10-K, and the risks discussed in our other filings with the United States Securities and
Exchange Commission, our actual results could differ materially from those projected in any forward-looking statements. You should carefully consider all these risks and other information in this report before investing in Netopia. The fact that
certain risks are endemic to our industry does not lessen the significance of the risk.



If the proposed acquisition of Netopia by Motorola is not completed, our business could be materially and adversely affected and our stock price could decline.



On November 13, 2006, the Company entered into a Merger Agreement with Motorola. Completion of the merger requires
certain regulatory approvals and satisfaction of other customary closing conditions. The merger is expected to close in the first calendar quarter of 2007, but the merger may not be completed in the expected time period or at all. If our merger
agreement with Motorola is terminated, the market price of our common stock will likely decline, because we believe that our market price reflects an assumption that the proposed merger will be completed. In addition, our stock price may be
adversely affected as a result of the fact that we have incurred and will continue to incur significant expenses related to the proposed merger that will not be recovered if it is not completed. If the merger agreement is terminated, we may be
obligated under certain circumstances to pay Motorola a termination fee of $7.3 million plus certain third-party expenses. As a consequence of the failure of the merger to be completed, as well as of some or all of these potential effects of the
termination of the merger agreement, our business could be materially and adversely affected.



While the merger is pending, current employees may experience uncertainty about their post-merger roles with Motorola, which may materially adversely affect the ability of Netopia to attract and retain key management,
sales, marketing, technical and other personnel. In addition, employees may depart because of issues relating to the uncertainty and difficulty of integration or a desire not to remain employed by Motorola following the merger. Furthermore,
diversion of attention from ongoing operations on the part of management and employees could adversely affect our relationships with customers, suppliers and other parties. Also, while the merger is pending, customers may delay or defer decisions to
purchase our products and services, which could adversely affect our revenues and earnings. In addition, customers may experience uncertainty about continued development and support of products and services after the merger, which may materially
adversely affect our ability to attract new customers and to retain existing customers.



We have a history of losses. We may incur losses and negative cash flow in the future, which could significantly harm our business.



During the fiscal years ended September 30, 2006 and 2005, we incurred net losses of $3.6 million and $7.1 million, respectively. Our cash and cash
equivalents totaled $27.8 million at September 30, 2006. While we generated cash in fiscal year 2006, we may not be able to reach, sustain or increase profitability or generate cash on a quarterly or annual basis in the future, which could
significantly harm our business.



We may find it difficult to raise needed
capital in the future, which could delay or prevent introduction of new products or services, require us to reduce our business operations or otherwise significantly harm our business.



We must continue to enhance and expand our product and service offerings in
order to maintain our competitive position and to increase our market share. As a result, and due to any future net losses and use of cash, the continuing operations of our business may require capital infusions. Whether or when we can achieve cash
flow levels sufficient to support our operations cannot be accurately predicted. Unless such cash flow levels are achieved, we may require additional borrowings or the sale of debt or equity securities, sale of non-strategic



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assets, or some combination thereof, to provide funding for our operations. We believe we have cash, cash equivalents and borrowing capacity adequate to meet
our anticipated capital needs for the next twelve months. However, if we are unable to obtain additional funds to finance our operations when needed, our financial condition and operating results would be materially and adversely affected and we
would not be able to operate our business.



If we are unable to resolve the
private securities class action, the derivative actions and litigation related to and arising out of the restatements of our consolidated financial statements for prior periods in a timely and economic manner, our business could be significantly
harmed.



We currently are named as a defendant in a
consolidated private securities class action. In addition, there are derivative actions pending in state and federal court in California. We also have learned that the United States Attorney for the Northern District of California has opened an
investigation following a referral by the SEC. We do not know the scope or focus of the investigation by the United States Attorneys office. If we were unsuccessful in defending against this or other investigations or proceedings, we could
face civil or criminal penalties that would seriously harm our business and results of operations. In December 2006, we reached a proposed settlement in principle of the securities class litigation contingent upon a number of factors, including the
closing of the acquisition by Motorola and the entering into of a binding agreement regarding the settlement. There can be no assurance that the settlement in principle will become a binding agreement and that all other contingencies to the
settlement will be satisfied. We also have reached a settlement of the state derivative action, subject to court approval. Defending against the government investigations, the private securities class action, the derivative actions and other
litigation matters has required significant attention and resources of management and, regardless of the outcome, has and may further result in significant legal expense. If our defenses ultimately are unsuccessful, or if the settlements reached do
not become effective, we could be liable for large damage awards that could seriously harm our business and results of operation. While we have provided notice of the government investigations and the litigation matters described above to our
directors and officers liability insurance carriers, the insurance carriers have raised certain coverage issues and to date have not reimbursed us for all legal expenses incurred, and may not agree that they are responsible to pay any damages that
ultimately could be awarded to the plaintiffs. Furthermore, we have only a limited amount of insurance, and even if our insurers agree to make payments under the policies, the legal expenses and damage awards or settlements may be greater than the
amount of insurance, and we would in all cases be liable for any amounts in excess of our insurance policy limits.



Substantial sales of our broadband equipment will not occur unless telecommunications carriers and service providers continue to expand their deployments of DSL and
other broadband services, and without continued expansion our revenues may decline, which could significantly harm our business.



The success of our broadband equipment depends upon the extent to which telecommunications carriers and service providers continue to expand their
deployments of DSL and other broadband services. Factors that have impacted such deployments include:



| |  |  | Lengthy approval processes followed by carriers and service providers, including laboratory tests, technical trials, marketing trials, initial commercial deployment and full
commercial deployment;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Improved business opportunities provided by deployment of broadband services by our carrier and other customers;
| | - |  | ----------------------------------------------------------------------------------------------------------------



| |  |  | Lack of compatibility of DSL equipment that is supplied by different manufacturers;
| | - |  | -----------------------------------------------------------------------------------



| |  |  | Rapidly changing industry standards for DSL and other broadband technologies; and
| | - |  | ---------------------------------------------------------------------------------



| |  |  | Government regulations.
| | - |  | -----------------------



We offer to carriers and service providers the opportunity to bundle basic DSL connectivity with value-added features that enable the provider to bundle
differentiated features and services that we believe can justify



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higher recurring revenues from end users. These features and services include VPNs, remote management and configuration using our NBBS software platform, and
hosting of eSites and eStores. We can offer no assurance that our strategy of enabling bundled service offerings will be widely accepted. If telecommunications carriers and service providers do not continue to expand their deployments of DSL and
other broadband services, our revenues could decline and our business could be significantly harmed.



We expect our revenues to be increasingly dependent on our ability to sell our broadband equipment to Independent Local Exchange Carriers (ILECs), and we may incur losses if we cannot successfully market and sell
our products through ILEC channels.



ILECs have been
aggressively marketing DSL services principally focusing on residential services. We have committed resources to expand our sales in the ILEC channel both domestically and internationally. There continue to be barriers associated with such sales
including, but not limited to, lengthy product evaluation cycles, the difficulty in dislodging competitors whose products are currently being utilized, long-term product deployment cycles and intense price competition. ILECs currently obtain
equipment from our competitors, which include 2Wire, Inc., Westell Technologies, Inc., Siemens AG (through its Siemens Subscriber Networks, Inc. subsidiary, formerly known as Efficient Networks), Actiontec Electronics, Inc., Thomson Corporation and
ZyXEL Communications Co., which have proven to be strong competitors. All of these competitors are larger than us and may have greater financial resources. There is no guarantee we will be successful in expanding our presence in the ILEC market. If
we fail to further penetrate the ILEC market for our products and services, our business may be materially and adversely affected.



We expect our revenues to be increasingly dependent on our ability to develop and sell our broadband equipment into the residential broadband gateway market.



Prior to our acquisition of Cayman in October 2001, we
developed, marketed and sold broadband equipment products primarily to CLECs and ISPs serving the small business market for DSL Internet connectivity. With our current products and technology, we now are competing for sales of broadband equipment to
ILECs serving the residential market. There are numerous risks associated with the residential broadband gateway market including, but not limited to:



| |  |  | The ability to design and develop products that meet the needs of the residential market;
| | - |  | -----------------------------------------------------------------------------------------



| |  |  | The ability to market these products successfully to ILECs and to dislodge competitors that are currently supplying residential-class broadband gateways; and
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Intense price pressure.
| | - |  | -----------------------



If we are unable to increase our sales into the residential broadband gateway market, our business will be materially and adversely affected.



The loss of, or decline in, purchases by one or more of our key customers would result
in a significant decline in our revenues and harm our business.



We rely on a small number of customers for a large portion of our revenues. For the fiscal years ended September 30, 2006 2005, there were two and three customers, respectively, that each individually represented at least 10% of our
revenues and in the aggregate our top five customers, accounted for 68% and 64%, respectively, of our total revenues. Our largest customer, BellSouth Corporation, has entered into an agreement pursuant to which it will merge into AT&T (formerly
SBC) following regulatory and shareholder approvals. While AT&T also is one of our largest customers, we believe that our market share is larger at BellSouth than at AT&T, which we believe buys a significantly larger volume of broadband
equipment from 2Wire, Inc., one of our competitors. AT&T also recently made an investment in 2Wire. There is no guarantee that BellSouth will continue to buy our broadband equipment in the same volumes following the merger with AT&T. Certain
of our other major customers also are reported from time to time in the press to be acquisition targets. The telecommunications



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industry generally is experiencing consolidation as companies merge and acquire other companies. Our revenues will decline and our business may be
significantly harmed if one or more of our significant customers stop buying our products, or reduce or delay purchases of our products for any reason, including industry consolidation.



Substantial portions of our revenues are derived from sales to international customers, and currency fluctuations can adversely impact
our operations.



A substantial portion of our revenues is
derived from sales to international customers, mainly in Europe. For the fiscal years ended September 30, 2006 and 2005, our international sales represented 40% and 36%, respectively, of our total revenues. We expect sales to international
customers to continue to comprise a significant portion of our revenues. Sales of broadband equipment products to certain of our European customers are denominated in Euros and Swiss francs. For our international sales that continue to be
denominated in United States dollars, fluctuations in currency exchange rates could cause our products and services to become relatively more expensive to our foreign customers, which could result in decreased sales of our products and services. In
addition, changes in the value of the Euro and the Swiss franc relative to the United States dollar could adversely affect our operating results to the extent we do not adequately hedge sales denominated in Euros and Swiss francs.



Additional risks associated with international operations could adversely affect our sales
and operating results.



Our international operations,
which principally are in Europe, are subject to a number of difficulties and special costs, including, but not limited to:



| |  |  | Costs of customizing products for foreign countries;
| | - |  | ----------------------------------------------------



| |  |  | Laws and business practices favoring local competitors;
| | - |  | -------------------------------------------------------



| |  |  | Compliance with multiple, conflicting and changing governmental laws and regulations;
| | - |  | -------------------------------------------------------------------------------------



| |  |  | Greater difficulty in collecting accounts receivable;
| | - |  | -----------------------------------------------------



| |  |  | Import and export restrictions and tariffs;
| | - |  | -------------------------------------------



| |  |  | Difficulties staffing and managing foreign operations; and
| | - |  | ----------------------------------------------------------



| |  |  | Multiple conflicting tax laws and regulations.
| | - |  | ----------------------------------------------



In addition, if we establish more significant operations overseas, we may incur additional costs that would be difficult to reduce quickly because of
employee-related laws and practices in those countries.



Because the markets
for our products and services are intensely competitive and some of our competitors are larger, better established and have more cash resources, we may not be able to compete successfully against current and future competitors.



We sell products and services in markets that are highly competitive. We
expect competition to intensify as current competitors expand their product and service offerings and new competitors enter the market. Increased competition is likely to result in price reductions, reduced gross margins and could cause loss of
market share, any one of which could seriously harm our business. Competitors vary in size, scope and breadth of the products and services offered.



In the market for broadband equipment, we primarily compete with 2Wire, Inc., Westell Technologies, Inc., Siemens AG (through its Siemens Subscriber
Networks, Inc. subsidiary, formerly known as Efficient Networks), Actiontec Electronics, Inc., Thomson Corporation and ZyXEL Communications Co. In the market for our



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broadband software and services products, we primarily compete with Motive, Inc., 2Wire, Inc., SupportSoft, Inc., Altiris, Inc., Axeda Systems, CrossTec
Corporation, Citrix Systems, Inc., LANDesk Software, Inc., Microsoft Corporation and Symantec Corporation, WebEx and open source initiatives.



Many of our current and potential competitors in all product areas have longer operating histories, significantly greater financial, technical, marketing
and other resources, significantly greater name recognition and a larger base of customers than ours. In addition, many of our competitors have well-established relationships with our current and potential customers and have extensive knowledge of
these industries. In the past, we have lost potential customers to competitors in all product areas for various reasons, including lower prices and other incentives not matched by us. Current and potential competitors also may have established or
may establish cooperative relationships among themselves or with third parties to increase the ability of their products and services to address customer needs. Accordingly, new competitors or alliances among competitors may emerge and rapidly
acquire significant market share. We also expect that competition will increase as a result of industry consolidation.



Our quarterly operating results are likely to fluctuate because of many factors and may cause our stock price to fluctuate.



Our revenues and operating results have varied in the past and are likely to
vary in the future from quarter to quarter. For example, during the past eight quarters ended September 30, 2006, our revenues have ranged from $23.4 million to $31.0 million, and our net results have ranged from $600 thousand of income to a
loss of $2.3 million. As a result, we believe that period-to-period comparisons of our operating results are not necessarily meaningful. Investors should not rely on the results of any one quarter or series of quarters as an indication of our future
performance.



In certain quarters in the past, our operating
results were below the expectations of securities analysts. If the Motorola acquisition does not close, it is likely that in some future quarter, quarters or year, our operating results again will be below the expectations of securities analysts or
investors. When our operating results are below such expectations, the market price of our common stock may decline significantly. In addition to the uncertainties and risks described elsewhere under this Risk Factors heading, variations
in our operating results will likely be caused by factors related to the operation of our business, including, but not limited to:



| |  |  | Variations in the timing and size of orders for our broadband equipment products;
| | - |  | ---------------------------------------------------------------------------------



| |  |  | Increased price competition for our broadband equipment products;
| | - |  | -----------------------------------------------------------------



| |  |  | Our ability to license, and the timing of licenses, of our broadband software and services;
| | - |  | -------------------------------------------------------------------------------------------



| |  |  | The mix of products and services and the gross margins associated with such products and services, including the impact of our increased sales of lower margin broadband equipment as
a percentage of our total revenues and increased sales of lower margin residential-class ADSL products within our family of broadband equipment;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The price and availability of components for our broadband equipment;
| | - |  | ---------------------------------------------------------------------



| |  |  | Foreign currency fluctuations; and
| | - |  | ----------------------------------



| |  |  | The timing and size of expenses, including operating expenses and expenses of developing new products and product enhancements.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------



Other technologies for the broadband gateway market compete with DSL services.



DSL services compete with a variety of different
broadband services, including cable, satellite and other wireless technologies. Many of these technologies compete effectively with DSL services. If any technology competing with DSL technology is more reliable, faster, less expensive, reaches more
customers or has other



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advantages over DSL technology, then the demand for our DSL products and services and our revenues and gross margins will decrease. We cannot guarantee that
we will be able to develop and introduce products for these competing technologies.



We purchase the semiconductor chips for our broadband equipment from a limited number of suppliers, and the inability to obtain in a timely manner a sufficient quantity of chips at an economic price would adversely affect our business.



All of our broadband equipment products rely on special
semiconductor chips that we purchase from fewer than five suppliers. We do not have volume purchase contracts with any of our suppliers and they could cease selling to us at any time. In addition, our suppliers change their selling prices frequently
in response to market trends, which may include increased demand industry-wide. Because we generally have been unable to pass component price increases along to our customers, our gross margins and operating results have been harmed as a result of
component price increases. If we are unable to obtain a sufficient quantity of these semiconductor chips in a timely manner for any reason, sales of our broadband equipment products could be delayed or halted. Further, we could also be forced to
redesign our broadband equipment products and qualify new suppliers of semiconductor chip sets. The resulting stoppage or delay in selling our products and the expense of redesigning our products would adversely affect our business.



If we were unable to obtain components and manufacturing services for our broadband
equipment from independent contractors and specialized suppliers, our business would be harmed.



We do not manufacture any of the components used in our products and perform only limited assembly on some products. All of our broadband equipment relies
on components that are supplied by independent contractors and specialized suppliers. Furthermore, substantially all of our broadband equipment includes printed circuit boards that are manufactured by fewer than five contract manufacturers that
assemble and package our products. We do not have guaranteed supply arrangements with these third parties and they could cease selling components to us at any time. Moreover, the ability of independent contractors and specialized suppliers to
provide us with sufficient components for our broadband equipment also depends on our ability to accurately forecast our future requirements. If we are unable to obtain a sufficient quantity of components from independent contractors or specialized
suppliers in a timely manner for any reason, sales of our broadband equipment could be delayed or halted. Similarly, if supplies of circuit boards or products from our contract manufacturers are interrupted for any reason, we will incur significant
losses until we arrange for alternative sources. In addition, we may be required to pay premiums for components purchased from other vendors should our regular independent contractors and specialized suppliers be unable to timely provide us with
sufficient quantity of components. To the extent we pay any premiums, our gross margins and operating results would be harmed. Further, we could also be forced to redesign our broadband equipment and qualify new suppliers of components. The
resulting stoppage or delay in selling our products and the expense of redesigning our broadband equipment would seriously harm our reputation and business.



Failure to develop, introduce and market new and enhanced products and services in a timely manner could harm our competitive position and operating results.



We compete in markets characterized by continuing
technological advancement, changes in customer requirements and evolving industry standards. To compete successfully, we must design, develop, manufacture and sell new or enhanced products and services that provide increasingly higher levels of
performance, reliability, compatibility, and cost savings for our customers. We will need to continue to integrate our DSL modem and router technology with the architectures of leading central office equipment providers in order to enhance the
reliability, ease-of-use and management functions of our broadband equipment.



Our Netopia Broadband Server (NBBS) software platform enables network operations centers of broadband service providers the ability to remotely manage, support, and troubleshoot installed broadband gateways, thereby
providing the potential for reducing support costs. We believe that NBBS can help differentiate our



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products and services from those of our competitors. However, NBBS is a relatively new product that has required and is expected to continue to require
significant investment of development resources and to date has not generated significant revenues, and we cannot provide any assurance that NBBS will be widely adopted by the customers to whom we are marketing it. In addition, we cannot provide any
assurance that when and if deployed in mass scale, NBBS will perform as expected or that it has no hidden bugs or defects.



We may not be able to develop, introduce, enhance or market successfully these or other products and services necessary to our future success. In
addition, any delay in developing, introducing or marketing these or other products would seriously harm our business. Many of our broadband equipment products and services are relatively new. You should consider our prospects in light of the
difficulties we may encounter because these products are at an early stage of development in a rapidly evolving and intensely competitive market. For example, we may not correctly anticipate market requirements, or introduce rapidly new products
that meet such requirements for performance, price, features and compatibility with other broadband equipment. Failure to continue to develop and market competitive products would harm our competitive position and operating results.



We may experience declining gross margins due to price competition and an increase in
sales of lower margin broadband equipment as a percentage of our total revenues.



We expect that sales of our broadband equipment may account for a larger percentage of our total revenues in future periods. Because our broadband equipment products are sold at lower gross margins than our broadband
software and services products, and sales volumes of our lower margin residential-class DSL products are increasing, our overall gross margins will likely decrease. Further, we expect that the market for broadband equipment will remain highly
competitive and as a result, we will continue to lower the prices we charge for our broadband equipment. If the average selling price of our broadband equipment continues to decline faster than our ability to realize lower manufacturing and product
costs, our gross margins related to such products, as well as our overall gross margins, are likely to decline.



We may incur greater losses if we cannot successfully sell our broadband software and services products. We derive a substantial portion of the recurring revenues from
our broadband software and services products from a small number of large customers.



A substantial portion of our broadband software and services revenues are derived from the sale of higher margin software products for corporate help desks, mostly Timbuktu. For the years ended September 30, 2006
and September 30, 2005, revenue from help desk applications were approximately 40% and 60%, respectively, of total revenues for our broadband software and services products. We anticipate that the market for Timbuktu may continue to decline or
grow more slowly than the market for our other broadband software products and services. Most of the revenue that we generated to date from the NBBS software platform has been from two customers and expect to continue to make a significant
investment of development resources. In addition, we rely on a small number of licensees to promote the use of our broadband software and services for building web sites and stores. We derive the majority of the recurring revenues from our broadband
software and services products from fewer than five customers. The extent and nature of the promotions by licensees of our broadband software and services are outside of our control. If licensees of our eSite and eStore software do not successfully
promote web sites and stores to their customers, our recurring revenues may decrease. If these customers were to choose a competitive platform, our recurring revenues would decline and adversely impact our results.



If hosting services for our broadband software and services perform poorly, our revenue
may decline and we could be sued.



We depend on our
servers, networking hardware and software infrastructure, and third-party service and maintenance of these items to provide reliable, high-performance hosting for eSite and eStore customers and subscribers to our parental controls service. In
addition, our servers are located at third-party facilities. Failure or poor performance by third parties with which we contract for maintenance services could also lead to interruption



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or deterioration of our parental controls, eSite and eStore hosting services. Additionally, a slowdown or failure of our systems for any reason could also
lead to interruption or deterioration of our Site and eStore hosting services. In such a circumstance, our hosting and subscription revenues may decline. In addition, if our parental controls, eSite and eStore hosting services are interrupted,
perform poorly, or are unreliable, we are at risk of litigation from our customers, the outcome of which could harm our business.



Failure to attract or retain key personnel could harm our business.



Our future performance depends on the continued service of our senior management, product development and sales personnel. The loss of the services of one
or more of our key personnel could seriously harm our business. Competition for qualified personnel in our industry and geographic location is intense. Although we believe our personnel turnover rate is consistent with industry norms, our future
success depends on our continuing ability to attract, hire, train and retain highly skilled managerial, technical, sales, marketing and customer support personnel. In addition, new hires frequently require extensive training before they achieve
desired levels of productivity.



Our intellectual property may not be
adequately protected, and our products may infringe upon the intellectual property rights of third parties, which may adversely impact our competitive position and require us to engage in costly litigation.



We depend on our ability to develop and maintain the proprietary aspects of
our technology. To protect our proprietary technology, we rely primarily on a combination of contractual provisions, confidentiality procedures, trade secrets, and patent, copyright and trademark law. We presently hold one United States patent
issued that relates to our remote control technology incorporated in most of our software products. The term of this patent is through August 2010. We also have filed patent applications relating to the design of our Wi-Fi gateways. Despite our
efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our products or obtain and use information that we regard as proprietary. Policing unauthorized use of our products is difficult, and there is no
guarantee that the safeguards that we employ will protect our intellectual property and other valuable competitive information.



There has been a substantial amount of litigation in the software and Internet industries regarding intellectual property rights. Although we have not
been party to any such litigation, in the future third parties may claim that our current or potential future products infringe their intellectual property. The evaluation and defense of any such claims, with or without merit, could be
time-consuming and expensive. Furthermore, such claims could cause product shipment delays or require us to enter into royalty or licensing agreements on financially unattractive terms, which could seriously harm our business.



If we are unable to license necessary software, firmware and hardware designs from third
parties, our business could be harmed.



We rely upon
certain software, firmware and hardware designs that we license from third parties, including firmware that is integrated with our internally developed firmware and used in our products. We cannot be certain that these third-party licenses will
continue to be available to us on commercially reasonable terms. The loss of, or inability to maintain, such licenses could result in product shipment delays until equivalent firmware is developed or licensed, and integrated into our products, which
would seriously harm our business.



Our products are complex and may contain
undetected or unresolved defects.



Our products are
complex and may contain undetected or unresolved defects when first introduced or as new versions are released. Although we historically have not experienced material problems with product defects, if our products do contain undetected or unresolved
defects, we may lose market share, experience delays in or losses of market acceptance or be required to issue a product recall. Similarly, although we have not



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experienced material warranty claims, if warranty claims exceed our reserves for such claims, our business would be seriously harmed. In addition, we would
be at risk of product liability litigation because of defects in our products. Although we attempt to limit our liability to end users through disclaimers of special, consequential and indirect damages and similar provisions, we cannot assure you
that such limitations of liability will be legally enforceable.



Our
industry may become subject to changes in regulations, which could harm our business.



Our industry and industries on which our business depends may be affected by changes in regulations. For example, we depend on telecommunications service providers for sales of our broadband equipment, and companies
in the telecommunications industry must comply with numerous regulations. If our industry or industries on which we depend become subject to regulatory changes that increase the cost of doing business or doing business with us, our revenues could
decline and our business could be harmed. For example, if a regulatory agency imposed restrictions on DSL service that were not also imposed on other forms of high-speed Internet access, our business could be harmed.



Business interruptions that prevent our ability to deliver products and services to our
customers could adversely affect our business.



Our
operations are vulnerable to interruption by fire, earthquake, power loss, telecommunications failure, terrorist attacks, labor disputes by transportation providers, and other events beyond our control. In particular, our headquarters are located
near earthquake fault lines in the San Francisco Bay area and may be susceptible to the risk of earthquakes. If there is an earthquake in the region, our business could be seriously harmed. We do not have a detailed disaster recovery plan. In
addition, our business interruption insurance may not be sufficient to compensate us fully for losses that may occur and any losses or damages incurred by us in the event we are unable to deliver products and services to our customers could have a
material adverse effect on our business.



Our stock price may be volatile,
which may result in substantial losses for our stockholders.



The market price of our common stock may fluctuate significantly in response to many factors, some of which are beyond our control, including the following:



| |  |  | Our ability to maintain the listing standards on The NASDAQ Capital Market;
| | - |  | ---------------------------------------------------------------------------



| |  |  | Variations in our quarterly operating results, including shortfalls in revenues or earnings from securities analysts expectations;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------



| |  |  | Changes in securities analysts estimates of our financial performance;
| | - |  | -----------------------------------------------------------------------



| |  |  | Changes in market valuations and volatility generally of securities of other companies in our industry;
| | - |  | -------------------------------------------------------------------------------------------------------



| |  |  | Announcements by us or our competitors of technological innovations, new products or enhancements, significant contracts, acquisitions, strategic partnerships, joint ventures or
capital commitments; and
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | General conditions in the broadband communications industry.
| | - |  | ------------------------------------------------------------



In recent years the stock market in general, and the market for shares of high technology stocks in particular, have experienced extreme price
fluctuations, which often have been unrelated to the operating performance of affected companies. There can be no assurance that the market price of our common stock will not experience significant fluctuations in the future as it has in the past,
including fluctuations that are unrelated to our performance. Securities class action litigation has often been brought against a company following periods of volatility in market price of its securities. We currently are and may in the future be
the target of securities litigation. Securities litigation has resulted and, if the settlements reached do not become effective, is expected to continue to result in substantial costs and diversion of managements attention and resources, which
could seriously harm our business.



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If our proposed merger with Motorola is not completed, a third party may have difficulty acquiring us, even if doing
so would be beneficial to our stockholders.



Provisions of
our Amended and Restated Certificate of Incorporation, our Bylaws and Delaware law could make it difficult for a third party to acquire us, even if doing so would be beneficial to our stockholders.



Changes in the accounting treatment of stock options has and will adversely affect our
results of operations.



In December 2004, the Financial
Accounting Standards Board (FASB) issued SFAS 123(R), which is a revision of SFAS 123. SFAS 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements
based on their fair values and does not permit pro forma disclosure as an alternative to financial statement recognition. The adoption of the SFAS 123(R) fair value method effective as of October 1, 2005 has and will continue to have a
significant adverse impact on our results of operations because the stock-based compensation expense is charged directly against our reported earnings. See Notes 2 and 9 to the Consolidated Condensed Financial Statements included in this Form 10-K
for further details.



|ITEM 1B. | UNRESOLVED STAFF COMMENTS
|-------- | -------------------------



None



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|ITEM 2. | PROPERTIES
|------- | ----------



The facilities we occupy are generally leased for a term of one to five years. We believe that our existing facilities are adequate for our current needs
and that additional space sufficient to meet our needs for the foreseeable future will be available on reasonable terms. Because our California facilities are located near major earthquake fault lines in the San Francisco Bay area, our business
could be seriously harmed in the event of a major earthquake. The following table sets forth our facilities and their related lease terms as of September 30, 2006:



|                          |  |                                                                                          |  |                                                   |  |            |  |                                            |  |                  |  |               |  |             |  |                  
|------------------------- |  | ---------------------------------------------------------------------------------------- |  | ------------------------------------------------- |  | ---------- |  | ------------------------------------------ |  | ---------------- |  | ------------- |  | ----------- |  | -----------------
|Location                  |  | Primary use                                                                              |  | Operatingsegment                                  |  | Squarefeet |  | Lease term                                 |  | Expires          |  | Renewaloption |  | Renewalterm |  | Renewal commences
|Emeryville, California    |  | Headquarters;research anddevelopment,selling,marketing,service,general andadministrative |  | BroadbandequipmentandBroadbandsoftwareandservices |  | 30,438     |  | 5 years,6 months                           |  | June 30,2008     |  | No            |  | n/a         |  | n/a              
|                          |  |                                                                                          |  |                                                   |  |            |  |                                           
|Chelmsford, Massachusetts |  | Research anddevelopment,customerservice                                                  |  | Broadbandequipment                                |  | 7,750      |  | 5 years                                    |  | March 31,2010    |  | Yes           |  | 3 years     |  | April 1,2010     
|                          |  |                                                                                          |  |                                                   |  |            |  |                                           
|San Leandro, California   |  | Distributioncenter                                                                       |  | BroadbandequipmentandBroadbandsoftwareandservices |  | 28,813     |  | 5 years                                    |  | August 27,2010   |  | No            |  | n/a         |  | n/a              
|                          |  |                                                                                          |  |                                                   |  |            |  |                                           
|Lawrence, Kansas          |  | Research anddevelopment                                                                  |  | Broadbandsoftwareandservices                      |  | 6,858      |  | 5 years                                    |  | June 30,2010     |  | Yes           |  | 3 or 5years |  | July 1,2010      
|                          |  |                                                                                          |  |                                                   |  |            |  |                                           
|Fremont, California       |  | Research anddevelopment                                                                  |  | BroadbandequipmentandBroadbandsoftwareandservices |  | 11,085     |  | 5 years                                    |  | November 30,2007 |  | Yes           |  | 5 years     |  | December 1,2007  
|                          |  |                                                                                          |  |                                                   |  |            |  |                                           
|Addison, Texas            |  | Selling                                                                                  |  | Broadbandsoftwareandservices                      |  | 4,478      |  | 5 years,6 months                           |  | August 31,2008   |  | Yes           |  | 3 years     |  | September 1,2008 
|                          |  |                                                                                          |  |                                                   |  |            |  |                                           
|Paris, France             |  | Selling andmarketing                                                                     |  | BroadbandequipmentandBroadbandsoftwareandservices |  | 1,442      |  | 9 years,with exit atMarch2008, 2011or 2014 |  | February 28,2014 |  | No            |  | n/a         |  | n/a              



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|ITEM 3. | LEGAL PROCEEDINGS
|------- | -----------------



On December 3, 2004, the United States District Court for the Northern District of California issued an order consolidating previously filed class
action cases under the name In re Netopia, Inc. Securities Litigation, and appointing lead plaintiffs and plaintiffs counsel. On June 29, 2005, the lead plaintiffs filed their consolidated amended complaint. On June 19, 2006,
the Court granted plaintiffs motion to certify the class of shareholders who purchased our stock between November 6, 2003 through August 16, 2004. The consolidated amended complaint alleges violations of Sections 10(b) and 20(a) of
the Securities Exchange Act of 1934, as amended (the Exchange Act), based on allegations that during the class period, we made false and misleading statements or failed to disclose material facts, and that the market price of our common
stock was artificially inflated as a result of such alleged conduct. We believe that we have strong defenses to the claims asserted in the consolidated amended complaint. In December 2006, we reached a proposed settlement in principle of this
litigation contingent upon a number of factors, including the closing of the acquisition by Motorola and the entering into of a binding agreement regarding the settlement. There can be no assurance that the settlement in principle will become a
binding agreement and that all other contingencies to the settlement will be satisfied.



In August 2004, the first of five purported derivative actions, Freeport Partners, LLC, Derivatively on Behalf of Nominal Defendant Netopia, Inc., v. Alan B. Lefkof, William D. Baker, Reese M. Jones, Harold S. Wills,
Robert Lee and Netopia, Inc., was filed in the United States District Court for the Northern District of California. Two purported derivative actions are pending in the United States District Court for the Northern District of California, and two
related purported derivative actions are pending in the Superior Court of California for the County of Alameda. These actions make claims against our officers and directors arising out of the alleged misstatements described above in connection with
the purported class action described above. In November 2004, the derivative plaintiffs agreed to coordinate the four derivative actions. The parties have agreed to a stay of the federal derivative actions, which was ordered by the court in January
2005. The state actions have been consolidated under the name In re Netopia, Inc. Derivative Litigation. We have reached a settlement of this action, subject to court approval. The terms of the settlement do not require a material payment by
us to the derivative plaintiffs.



On October 29, 2004, we
were advised by the United States Securities and Exchange Commission (SEC) that an informal inquiry previously commenced by the SEC had become the subject of a formal order of investigation. This investigation was to determine whether
the federal securities laws have been violated. We cooperated fully with the investigation. On March 29, 2006, we entered into a consent decree with the SEC resolving the investigation into our disclosures and accounting practices, primarily
related to our restatement of financial statements for the fiscal years ended September 30, 2003 and 2002. Without admitting or denying any wrongdoing, we consented to the entry of an order with respect to violations of Sections 13(a) and
13(b)(2)(A)-(B) of the Exchange Act, and Rules 12b-20, 13a-1, 13a-11 and 13a-13 promulgated thereunder.



On March 29, 2006, Alan B. Lefkof, our President and Chief Executive Officer, without admitting or denying any wrongdoing, settled with the SEC and
consented to the entry of an order with respect to violations of Sections 17(a)(2)-(3) of the Securities Act of 1933, as amended, and Rule 13b2-1 promulgated under the Exchange Act, and aiding and abetting our violations of Sections 13(a) and
13(b)(2)(A)-(B) of the Exchange Act, and Rules 12b-20 and 13a-11 promulgated thereunder, in connection with a Report on Form 8-K and exhibit furnished to the SEC on July 6, 2004.



In April 2005, we learned that the United States Attorney for the Northern
District of California has opened an investigation following a referral by the SEC. We do not know the scope or focus of the investigation.



In January 2005, we were notified by the Occupational Health and Safety Administration (OSHA) that we were named in an administrative
complaint filed by two former employees alleging violations of Section 806 of the Corporate and Criminal Fraud Accountability Act of 2002, 18 U.S.C. § 1514A, also known as the Sarbanes-Oxley Act. The former employees alleged that we
terminated them in retaliation for their participation in the



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internal accounting review conducted by the audit committee in 2004. On May 11, 2005, following its investigation, OSHA advised us that the complaint
was determined to have no merit. On August 31, 2005, the two former employees refiled these claims in the United States District Court for the Northern District of Texas in an action entitled Frankl v. Netopia et al. The complaint names
the Company and certain current and former officers and directors as defendants. The individual defendants have filed a motion to dismiss based on lack of personal jurisdiction. We believe that our defenses to this action are strong and intend to
defend it vigorously. We currently cannot estimate the extent of the potential damages in this dispute.



Defending against the government investigations, the private securities class action, the derivative actions and other litigation matters described above
has required significant attention and resources of management and, regardless of the outcome, has and may further result in significant legal expense. If our defenses ultimately are unsuccessful, or if the settlements reached do not become
effective, we could be liable for large damage awards that could seriously harm our business and results of operation. While we have provided notice of the government investigations and the litigation matters described above to our directors and
officers liability insurance carriers, the insurance carriers have raised certain coverage issues and to date have not reimbursed us for all legal expenses incurred, and may not agree that they are responsible to pay any damages that ultimately
could be awarded to the plaintiffs. Furthermore, we have only a limited amount of insurance, and even if our insurers agree to make payments under the policies, the legal expenses and damage awards or settlements may be greater than the amount of
insurance, and we would in all cases be liable for any amounts in excess of our insurance policy limits.



|ITEM 4. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
|------- | ---------------------------------------------------



There were no matters submitted to a vote of our security holders during the fiscal fourth quarter ended September 30, 2006.



|ITEM 4A. | EXECUTIVE OFFICERS OF THE REGISTRANT
|-------- | ------------------------------------



Our executive officers, and their ages as of December 14, 2006, are as follows:



|                  |  |     |  |                                                     
|----------------- |  | --- |  | ----------------------------------------------------
|Name              |  | Age |  | Position                                            
|Alan B. Lefkof    |  | 53  |  | President, Chief Executive Officer and Director     
|Charles Constanti |  | 43  |  | Vice President and Chief Financial Officer          
|Brooke A. Hauch   |  | 58  |  | Senior Vice President, Professional Services        
|David A. Kadish   |  | 54  |  | Senior Vice President, General Counsel and Secretary
|Raymond J. Smets  |  | 43  |  | Senior Vice President, Sales and Marketing          



Alan B.
Lefkof.    Mr. Lefkof, President, Chief Executive Officer and Director, joined Netopia as President and a member of the Board of Directors in August 1991 and has been Chief Executive Officer since November 1994.
Mr. Lefkof received a B.S. in computer science from the Massachusetts Institute of Technology in 1975 and a M.B.A. from Harvard Business School in 1977.



Charles Constanti.    Mr. Constanti was appointed Chief Finance Officer in May 2005. From May 2001 to April 2005,
Mr. Constanti served as Vice President of Finance and Corporate Controller of Quantum Corporation, for which he earlier served in different accounting and finance positions since January 1997. Mr. Constanti is a certified public accountant
and earned a B.S. in Accounting from Binghamton University in 1985.



Brooke A. Hauch.Ms. Hauch, Senior Vice President, Professional Services, joined Netopia in October 1991 as Director, MIS. Ms. Hauch was appointed Vice President and Chief Information Officer in May 1997,
and became Senior Vice President in October 2000. Ms. Hauch received a bachelors degree in business from Arizona State University.



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David A. Kadish.    Mr. Kadish, Senior Vice President, General Counsel
and Secretary, joined Netopia in June 1999. Mr. Kadish provided legal services to Netopia as a consultant from September 1996 to June 1999. Mr. Kadish received a B.A. in American history from University of California at Santa Cruz in 1973,
a M.A. in American history from Brandeis University in 1974 and a J.D. from Yale University in 1979.



Raymond J. Smets.    Mr. Smets, Senior Vice President, Sales and Marketing, joined Netopia in January 2006. In 2005,
Mr. Smets served as an advisor to McAfee, Inc., following its spin-off of Network General, Inc., an antivirus and network security software subsidiary. From October 2002 to August 2004, Mr. Smets served as the president of Network General,
Inc. Prior to joining McAfee, Mr. Smets served for over 16 years in executive roles at BellSouth Corporation, including president of BellSouth.net and vice president and corporate officer of BellSouths Network Transformation.
Mr. Smets received an M.B.A from Nova Southeastern University and a B.A. in Engineering from the University of Florida.



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PART II



|ITEM 5. | MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
|------- | ------------------------------------------------------------------------------------------------------------



Netopias common stock is listed on the NASDAQ Capital Market under the
symbol NTPA.



The following table sets forth the range of
quarterly high and low closing sale prices of our common stock for the last two fiscal years ended September 30, 2006 and 2005.



|                                         |  |      |      |      |   |      |  |     |      |  |   |     
|---------------------------------------- |  | ---- | ---- | ---- | - | ---- |  | --- | ---- |  | - | ----
|                                         |  | 2006 |      | 2005
|                                         |  | High |      | Low  |   | High |  | Low
|Fourth fiscal quarter ended September 30 |  | $    | 5.73 |      | $ | 4.05 |  | $   | 3.51 |  | $ | 2.51
|Third fiscal quarter ended June 30       |  |      | 5.35 |      |   | 4.15 |  |     | 3.75 |  |   | 2.91
|Second fiscal quarter ended March 31     |  |      | 4.25 |      |   | 2.60 |  |     | 4.48 |  |   | 3.15
|First fiscal quarter ended December 31   |  |      | 3.00 |      |   | 2.41 |  |     | 3.60 |  |   | 2.09



On December 11,
2006, we had 141 stockholders of record and 26,564,461 shares of common stock outstanding. The closing price of our common stock as reported on the Nasdaq Capital Market was $6.87 per share. Historically, we have neither declared nor paid cash
dividends on our common stock, and we expect this trend to continue. We maintain stock option plans under which we grant options to purchase our common stock and an Employee Stock Purchase Plan under which our common stock is sold to employees
participating in such plans. Additional information with respect to these plans can be found in Note 9 of Notes to Consolidated Financial Statements, which is incorporated herein by reference. We did not repurchase any of our shares of common stock
in the fiscal quarter ended September 30, 2006. We did not sell any equity securities during the fiscal year ended September 30, 2006 that were not registered under the Securities Act of 1933, as amended.



The market price of our common stock may fluctuate significantly in response
to a number of factors, including the following, some of which are beyond our control:



| |  |  | On November 14, 2006, Netopias common stock increased in value by approximately 22% after we announced that we had signed a definitive merger agreement, under which
Motorola will acquire all of the outstanding shares of Netopia for $7.00 per share in cash. In the event that the Merger is not completed, there could be a negative impact upon our stock price and operations;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Developments in our relationships with customers, distributors and suppliers.
| | - |  | -----------------------------------------------------------------------------



| |  |  | Losses of major customers, major projects with major customers or the failure to complete significant licensing transactions;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------



| |  |  | Variations in our quarterly operating results;
| | - |  | ----------------------------------------------



| |  |  | Changes in securities analysts estimates of our financial performance;
| | - |  | -----------------------------------------------------------------------



| |  |  | Changes in market valuations of similar companies;
| | - |  | --------------------------------------------------



| |  |  | Announcements by us or our competitors of technological innovations, new products or enhancements, significant contracts, acquisitions, strategic partnerships, joint ventures or
capital commitments;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Additions or departures of key personnel;
| | - |  | -----------------------------------------



| |  |  | Volatility generally of securities of companies in our industry;
| | - |  | ----------------------------------------------------------------



| |  |  | General conditions in the broadband communications industry, in particular the DSL market, or the domestic and worldwide economies;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------



| |  |  | Decreases or delays in purchases by significant customers;
| | - |  | ----------------------------------------------------------



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| |  |  | A shortfall in revenues or earnings from securities analysts expectations or other announcements by securities analysts; and
| | - |  | -----------------------------------------------------------------------------------------------------------------------------



| |  |  | Our ability to protect and exploit our intellectual property or defend against the intellectual property rights of others.
| | - |  | --------------------------------------------------------------------------------------------------------------------------



In recent years the stock market in general, and the market for shares of
high technology stocks in particular, have experienced extreme price fluctuations, which often have been unrelated to the operating performance of affected companies. There can be no assurance that the market price of our common stock will not
experience significant fluctuations in the future, including fluctuations that are unrelated to our performance.



|ITEM 6. | SELECTED FINANCIAL DATA
|------- | -----------------------



The following selected financial data should be read in conjunction with Item 7. Managements Discussion and Analysis of Financial Condition
and Results of Operations and our Consolidated Financial Statements included in Item 8. Financial Statements and Supplementary Data.



|                                                  |  |      |         |   |      |   |         |      |  |   |         |   |  |      |        |   |  |   |         |  
|------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | - |  | ---- | ------ | - |  | - | ------- | -
|(in thousands, except per share data)             |  | 2006 |         |   | 2005 |   |         | 2004 |  |   | 2003    |   |  | 2002 |       
|RESULTS OF OPERATIONS                             |  |      |         |   |      |   |         |      |  |   |         |   |  |      |        |   |  |   |         |  
|Revenues                                          |  | $    | 113,264 |   |      | $ | 105,817 |      |  | $ | 101,335 |   |  | $    | 84,920 |   |  | $ | 62,923  |  
|Business restructuring                            |  |      |        |   |      |   | 40      |      |  |   | 534     |   |  |      | 395    |   |  |   | 482     |  
|Goodwill impairment                               |  |      |        |   |      |   |        |      |  |   | 465     |   |  |      |       |   |  |   | 9,146   |  
|Net loss (1)                                      |  |      | (3,591  | ) |      |   | (7,133  | )    |  |   | (8,809  | ) |  |      | (8,865 | ) |  |   | (34,276 | )
|Basic and diluted loss per share                  |  | $    | (0.14   | ) |      | $ | (0.28   | )    |  | $ | (0.37   | ) |  | $    | (0.45  | ) |  | $ | (1.86   | )
|                                                  |  |      |         |   |     
|FINANCIAL POSITION                                |  |      |         |   |      |   |         |      |  |   |         |   |  |      |        |   |  |   |         |  
|Cash, cash equivalents and short-term investments |  | $    | 27,761  |   |      | $ | 22,234  |      |  | $ | 23,973  |   |  | $    | 22,208 |   |  | $ | 25,022  |  
|Assets                                            |  |      | 61,852  |   |      |   | 56,435  |      |  |   | 59,587  |   |  |      | 57,019 |   |  |   | 58,969  |  
|Debt                                              |  |      |        |   |      |   |        |      |  |   | 104     |   |  |      | 354    |   |  |   | 4,428   |  
|Stockholders equity                              |  |      | 40,491  |   |      |   | 35,872  |      |  |   | 41,130  |   |  |      | 39,823 |   |  |   | 40,038  |  

---

|(1) | Net loss for fiscal year 2006 included stock-based compensation expense under Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based
Payment, (SFAS 123(R)) of $6 million related to employee stock options and employee stock purchases. There was no stock-based compensation expense related to employee stock options and employee stock purchases under Statement of
Financial Accounting Standards No, 123, Accounting for Stock-Based Compensation (SFAS 123), prior to fiscal year 2006 because the Company did not adopt the recognition provisions of SFAS 123. See note 9 to the Consolidated
Financial Statements.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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|ITEM 7. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|------- | -------------------------------------------------------------------------------------



The following discussion and analysis should be read in conjunction with our Consolidated Financials Statements and
related Notes included elsewhere in this Annual Report on Form 10-K.



Recent Developments



On November 13,
2006, Netopia entered into a definitive merger agreement with Motorola, Inc. (Motorola), pursuant to which Motorola intends to purchase all of our outstanding shares of common stock for $7.00 per share in cash. The transaction is subject
to Hart-Scott-Rodino review, which is a federal government antitrust law that requires prior notification to federal antitrust agencies of certain acquisitions before the transaction may be closed, regulatory filings with antitrust authorities in
certain European countries, the approval of our shareholders, and other customary closing conditions. Assuming all approvals are obtained and all closing conditions are met, we expect the acquisition to close during the first calendar quarter of
2007. There can be no assurance that the merger will be consummated in a timely manner, if at all. In addition, we are subject to a number of operational covenants in the merger agreement that restrict in certain ways our ability to operate freely
prior to the closing of the proposed transaction. We have filed a preliminary proxy statement and intend to file a definitive proxy statement and other relevant materials with the Securities and Exchange Commission (SEC), including a
detailed description of the terms of the merger agreement, as well as other important information about the proposed transaction. SHAREHOLDERS OF NETOPIA ARE URGED TO READ THE PROXY STATEMENT AND OTHER RELEVANT MATERIALS BECAUSE THEY CONTAIN
IMPORTANT INFORMATION ABOUT THE PROPOSED TRANSACTION.



Netopia and its executive officers and directors may be deemed to be participants in the solicitation of proxies from Netopia shareholders in favor of the proposed transaction. Certain of the executive officers and directors of Netopia have
interests in the proposed transaction that may differ from the interests of our shareholders generally, including acceleration of vesting of stock options, payments in connection with a change in control transaction, payments in connection with
anticipated employment by Motorola, and continuation of director and officer insurance and indemnification. These interests are described in the proxy statement.



All forward-looking statements included in this Annual Report on Form 10-K, including Managements Discussion and
Analysis of Financial Condition and Results of Operations and Risk Factors, are based on a 12-month operational period without consideration given to the pending transaction.



Overview



We are a developer and provider of high performance broadband customer premises networking equipment and carrier-class software for the remote management
of broadband services and equipment. We also develop and provide value-added services for service providers and remote management software for enterprises technical support, help-desks and personal computers.



During fiscal year 2006, we made progress against our objective to become a
leading developer and provider of high performing broadband customer premises networking equipment and remote management software. We grew our revenues in fiscal year 2006 and positioned ourselves for further revenue growth in fiscal year 2007. We
also improved our operating results, reducing our net loss and generating cash from operations in fiscal year 2006. Summarizing our progress:



| |  |  | We entered over 20 lab and field trials mostly in Europe and North America for CPE based on VDSL2 technology designed for high-bandwidth voice, video and data, or triple-play
applications. Our CPE was successful in the lab and field trials in Switzerland and selected for the launch of IPTV services in Switzerland in November 2006. The many lab and field trials combined with the deployment in Switzerland increased our
credibility as a leading provider for CPE for triple-play applications. The selection of our CPE for deployment by other customers is an opportunity for revenue growth in fiscal year 2007.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | Our CPE based on ADSL2+ technology was selected for deployment in Denmark with a customer that was new to us in fiscal year 2006.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------



| |  |  | We increased our sales to four of our largest customers, AT&T, BellSouth, eircom, and Swisscom, including being selected for residential deployment at BellSouth, with
corresponding initial revenue in the fourth fiscal quarter of fiscal year 2006.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We had two important achievements in sales of our NBBS remote management software with the acceptance of deployments in North America and Europe, by BellSouth and a wireless
telecommunications service provider in Germany, respectively. These two achievements increased our credibility as a leading provider of remote management software for CPE. The selection of our remote management software for deployment by other
customers is an opportunity for revenue growth in fiscal year 2007.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | During fiscal year 2006, we attracted important talent to our research and development and sales and marketing functions.
| | - |  | -------------------------------------------------------------------------------------------------------------------------



This progress was reflected in the growth of our revenues to $113 million in
fiscal year 2006 from $106 million in the prior fiscal year, an increase of $7 million. In fiscal year 2006, revenue from broadband equipment grew by $4 million and revenue from software and services grew by $3 million. The growth in broadband
equipment revenue reflected the deployment in Denmark and increased sales to our largest customers. The growth in software and services revenue reflected sales of NBBS remote management software.



In fiscal year 2007, we will focus on revenue growth for both our broadband
networking equipment and our software and services. Our objective is to increase sales to existing customers and to attract new customers. Our goal is to leverage our strengths in DSL technologies to meet market requirements for higher bandwidth
services being provided by telecommunications and Internet service providers. This focus includes achieving design wins for higher performance gateways utilizing new technologies, including VDSL2 and ADSL2+ Bonded technologies as well as other
innovations. Software and services revenue growth is largely dependent on sales and revenue from our NBBS remote management software.



Our net loss in fiscal year 2006 was $3.6 million or a diluted $0.14 loss per share, compared with a net loss of $7.1 million or a diluted $0.28 loss per
share in fiscal year 2005. The $3.5 million improvement and changes in our net results reflected:



| |  |  | Increased revenue and gross margin, which increased gross profit by $7.8 million, as we reduced our average unit cost more than the reduction in average unit prices, with a greater
amount of manufacturing in China in fiscal year 2006 compared to fiscal year 2005, and increased higher-margin software and services revenues, which together increased our gross margin to 36% in fiscal year 2006, from 32% in fiscal year 2005;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The recognition of stock-based compensation expense associated with employee stock options and employee stock purchases in our Consolidated Statements of Operations effective at the
beginning of fiscal year 2006, with $6.0 million of stock-based compensation expense recognized in fiscal year 2006, ($215,000 was classified as cost of revenues and $5,738,000 was classified as operating expense);
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Increased spending on research and development and sales and marketing, and lower general and administrative expenses, reflecting increased investment toward our goal of growing
revenue and lower legal expenses because of insurance reimbursements;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Lower acquisition related intangibles amortization, with amortization decreasing to $1.2 million in fiscal year 2006, from $1.5 million in fiscal year 2005; and
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | An equity investment gain of $1.1 million in fiscal year 2006.
| | - |  | --------------------------------------------------------------



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We ended fiscal year 2006 with $27.8 million of cash and cash equivalents, an increase of $5.5 million,
and no long-term debt. The increase in cash and cash equivalents reflected:



| |  |  | Net cash from operating activities of $4.0 million, including $1.9 million of insurance reimbursements of legal costs;
| | - |  | ----------------------------------------------------------------------------------------------------------------------



| |  |  | Purchase of property and equipment of $1.5 million, which we believe was at a sustaining level of investment;
| | - |  | -------------------------------------------------------------------------------------------------------------



| |  |  | Proceeds from the sale of an equity investment of $734,000; and
| | - |  | ---------------------------------------------------------------



| |  |  | Proceeds from the issuance of common stock pursuant to the employee stock purchase plan and the exercise of stock options, which totaled $2.2 million.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------



Critical Accounting Policies and Estimates



Managements discussion and analysis of our financial condition and
results of operations are based upon our Consolidated Financial Statements, which have been prepared in accordance with United States generally accepted accounting principles. We review the accounting policies used in reporting our financial results
on a regular basis. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. On an ongoing basis, we evaluate our processes used to
develop estimates, including those related to revenue recognition, allowance for doubtful accounts and sales returns, reserves for excess and obsolete inventory, warranty costs, compensation expense for share-based payment awards, investment
impairments, income taxes, service costs, loss contingencies, and intangible assets, among others. We base our estimates on historical experience, expectations of future results, and on various other assumptions that are believed to be reasonable
for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates due to actual outcomes being different from those on which we based our
assumptions. These estimates and judgments are reviewed by management on an ongoing basis. The Audit Committee reviews any changes in our methodology for arriving at our estimates, and discusses the appropriateness of any such changes with
management and our independent auditors on a quarterly basis. We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.



Revenue Recognition.    Our broadband equipment
products are integrated with software that is essential to the functionality of the equipment. Accordingly, we account for broadband equipment revenues and any related professional services in accordance with Statement of Position No. 97-2,
Software Revenue Recognition (SOP 97-2), and all related interpretations. Revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and
collectibility is reasonably assured. Determining whether and when some of these criteria have been satisfied often involve assumptions and judgments that can have significant impact on the timing and amount of revenues we report. At the date of
shipment, assuming that the revenue recognition criteria specified above is met, we provide for an estimate of returns and warranty expense based on historical experience of returns of similar products and warranty costs incurred, respectively.



We recognize software license and related services revenues in
accordance with SOP 97-2, as amended by SOP 98-9, and all related interpretations. We have multiple element arrangements that include perpetual software licenses, maintenance and professional services. We allocate and defer revenue for the
undelivered items based on vendor-specific objective evidence, or VSOE, of fair value of the undelivered elements. VSOE of each element is based on the price for which the undelivered element is sold separately. We determine fair value of the
undelivered elements based on historical evidence of our stand-alone sales of these elements to third parties. Software license revenue is recognized when a non-cancelable license agreement has been signed or a properly authorized firm purchase
order is received and the customer acknowledges an unconditional obligation to pay, the software product has been delivered, there are no uncertainties surrounding product acceptance, the fees are fixed and determinable, and collection is considered
probable. Maintenance revenue, including revenue included in multiple element arrangements, is deferred and recognized ratably over the related contract period, generally twelve months.



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For contracts where services are performed which do not qualify for separate accounting treatment as
described by SOP 97-2, the Company has applied the principles of contract accounting in accordance with Accounting Research Bulletin No. 45 Long-Term Construction-Type Contractsand the relevant guidance provided by Statement
of Position 81-1 Accounting for Performance of Construction Type and Certain Production Type Contracts(SOP 81-1). Under the guidance of SOP 81-1, the percentage of completion methodology is applied to software
and related professional services where recognized revenue is determined after certain milestones or deliverables have been met (completed) under the terms of the signed contract.



Our enhanced web site service arrangements involve the delivery or performance of multiple products, services and/or rights
to use assets. We apply the provisions of Emerging Issues Task Force (EITF) Issue No. 00-21, Revenue Arrangements with Multiple Deliverables, to determine whether these arrangements involving multiple deliverables contains more
than one unit of accounting and how the consideration of the arrangement should be allocated to those units of accounting. We allocate the revenue from these arrangements to each element of the arrangement based on the fair value of the elements and
apply the revenue recognition rules to each element separately, pursuant to the guidance in SEC Staff Accounting Bulletin No. 101 Revenue Recognition in Financial Statements (SAB 101) and SEC Staff Accounting
Bulletin No. 104, Revenue Recognition. SAB 101 requires that the fair values used for such allocations should be reliable, verifiable and objectively determinable. We allocate a portion of the arrangement fee to the
undelivered element, generally web site hosting, based on the fair value of the undelivered elements, regardless of any separate prices stated within the contract for each element. Fair value for hosting is based on the price the customer would pay
when sold separately. Fair value for the delivered elements, primarily fulfillment services, is based on the residual amount of the total arrangement fees after deducting the fair value for the undelivered elements. Fulfillment revenue is recognized
when a properly authorized firm purchase order is received and the customer acknowledges an unconditional obligation to pay, there are no uncertainties surrounding product acceptance, the fees are fixed and determinable, collection is considered
probable and the fulfillment has been completed. Hosting revenue is deferred and recognized ratably over the related service period, generally twelve months.



We have adopted the provisions of EITF 01-09, Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendors
Products), for the accounting treatment of marketing incentive programs that have resulted in the provision of rebates, credits and discounts given to our customers directly or indirectly. We presume such incentive programs and rebates, credits
and discounts to be a reduction of the selling prices of our products and/or services and, therefore, are characterized as a reduction of revenue when recognized in our Consolidated Financial Statements.



Goodwill.    We perform goodwill impairment tests
on an annual basis in our fiscal fourth quarter. For additional information about goodwill, see Note 4 to the Consolidated Financial Statements.



Long-Lived Assets, Including Other Intangible Assets.    We evaluate our long-lived assets, including other intangible assets
and test our long-lived assets and other intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable, in accordance with Statement of Financial Accounting
Standards 144 Accounting for Impairment or Disposal of Long Lived Assets. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the estimated undiscounted future net cash
flows expected to be generated by the asset group that represents the lowest level for which identifiable cash flows exist. If an asset group is considered to be impaired, the impairment to be recognized is measured by the amount by which the
carrying amount exceeds the fair value of the assets and is allocated to the long-lived assets of the asset group on a pro rata basis. Fair value is estimated using the discounted cash flow method. Assets to be disposed of are reported at the lower
of carrying values or fair values, less costs of disposal.



Equity Investment.The Company has a carrying value associated with one investment in a privately held company in the amount of $1.4 million and $1.0 million for fiscal years ended September 30, 2006 and
2005, respectively. The Company monitors the investment for impairment and makes appropriate reductions in carrying values if the Company determines that an impairment charge is required based primarily on the financial condition



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and near-term prospects of the privately held company. The Company accounts for its investment under the cost method as defined within Accounting Principles
Board Opinion 18 (APB 18) The Equity Method of Accounting for Investments in Common Stock. As such, the Company evaluates its investments for factors that indicate a decrease in the carrying value of the investment which is other
than temporary and should be recognized.



Allowance for
Doubtful Accounts.    We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments that are deemed uncollectible. Management specifically analyzes
the aging of accounts receivable and also analyzes historical bad debts, customer concentrations, customer credit-worthiness, current economic trends and changes in customer payment terms, when evaluating the adequacy of the allowance for doubtful
accounts in any accounting period. We will continue to monitor our customers ability to pay throughout the term of the applicable arrangement and will adjust the provision for bad debt allowance or defer revenue recognition, as appropriate. If
the financial condition of our customers or channel partners were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.



Allowance for Sales Returns.    We maintain allowances for sales returns from distributors and
resellers. Management specifically analyzes historical trends and current information when evaluating the adequacy of the sales return allowance.



Service Accrual.We expense the costs to provide technical telephone support for certain broadband equipment software
customers at the time that the product is shipped.



Product
Warranty.    We generally provide a product warranty of one to two years. We generally do not offer a warranty on broadband software and services products. We accrue for estimated product warranty costs at the time of
shipment, based upon our historical experience.



Excess and
Obsolete Inventory.    We assess the need for reserves on excess and obsolete inventory based upon monthly forward projections of sales of products. Inventories are recorded at the lower of cost or net realizable value. Cost
is computed using standard costs, which approximate actual costs on a first-in, first-out basis. Cost includes material costs and applicable manufacturing overhead. The provision for potentially obsolete or slow moving inventory is made based upon
managements analysis of inventory levels, forecasted sales, expected product life cycles and market conditions. Once inventory is reserved, the reserve can only be relieved by the subsequent sale or scrapping of the inventory.



Stock-Based Compensation.    On October 1,
2005, the Company adopted Statement of Financial Accounting Standards No. 123 (revised 2004) Share-Based Payment(SFAS 123R), which requires the measurement and recognition of compensation expense for share-based
payment awards made to the Companys employees and non-employee directors, including stock options and employee stock purchases made pursuant to the Employee Stock Purchase Plan (ESPP), based on estimated fair values.



The Company adopted SFAS 123(R) using the modified prospective method, which
requires us to record compensation expense for all awards granted after the date of adoption, and for the unvested portion of previously granted awards that remain outstanding at the date of adoption. Accordingly, prior period amounts presented
herein have not been restated to reflect the adoption of SFAS 123(R). The fair value concepts were not changed significantly in SFAS 123(R); however, in adopting SFAS 123(R), companies must choose among alternative valuation models and amortization
assumptions. After assessing alternative valuation models and amortization assumptions, the Company will continue using the Black-Scholes option-pricing formula. The Company recognizes compensation cost on a straight-line basis over the requisite
service period for each separately vesting portion of share-based payment awards as if the award was, in substance, multiple awards. The Company will reconsider use of this model if additional information becomes available in the future that
indicates another model would be more appropriate, or if grants issued in future periods have characteristics that cannot be reasonably estimated using this model. Under Statement of Financial Accounting Standards No. 123,Accounting
for Stock Based Compensation (SFAS 123), the Company was not required to estimate



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forfeitures in expense calculation for the stock compensation pro forma footnote disclosure. However, SFAS 123(R) requires an estimate of forfeitures and,
upon adoption, the Company changed methodology to include an estimate of forfeitures.



Stock Option Plans.The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model using the following estimates:



|                         |  |                          |   |  |      |   |  |      |  
|------------------------ |  | ------------------------ | - |  | ---- | - |  | ---- | -
|                         |  | Year Ended September 30, |  
|                         |  | 2006                     |   |  | 2005 |   |  | 2004 |  
|Expected life (in years) |  | 3.1                      |   |  | 3.7  |   |  | 3.3  |  
|Expected volatility      |  | 219                      | % |  | 350  | % |  | 345  | %
|Risk-free interest rate  |  | 4.51                     | % |  | 3.63 | % |  | 2.89 | %
|Expected dividend yield  |  |                         |   |  |     |   |  |      |  



Valuation Assumptions



Expected volatility is based on the historical volatility
of the Companys common stock to estimate the future expected volatility. The risk-free interest rates are taken from the Federal Yield Curve Rates as published by the Federal Reserve and represent the yields on actively traded treasury
securities for terms equal or approximately equal to the expected term of the options. The expected term calculation is based on observed historical option exercise behavior of the Companys employees and the options contractual terms.
The dividend yield of zero is based on the fact that the Company has never paid cash dividends and has no present intention to pay cash dividends.



Employee Stock Purchase Plan.The value of rights to purchase shares under the plan was estimated at the date of grant using
the following weighted average assumptions:



|                         |  |                          |  |      |   |  |      |  
|------------------------ |  | ------------------------ |  | ---- | - |  | ---- | -
|                         |  | Year Ended September 30, | 
|                         |  | 2006                     |  | 2005 |   |  | 2004 |  
|Expected life (in years) |  | 0.5 to 2                 |  | 2    |   |  | 2    |  
|Expected volatility      |  | 52%  92%                |  | 217  | % |  | 151  | %
|Risk-free interest rate  |  | 4.18  4.83%             |  | 3.61 | % |  | 2.89 | %
|Expected dividend yield  |  |                         |  |     |   |  |     |  



Valuation Assumptions



Pursuant to the guidance in SFAS 123(R) and Staff
Accounting Bulletin No. 107, the Company uses historical volatility as an estimate of expected volatility for purposes of calculating stock-based compensation expense using the Black-Scholes model. During fiscal year 2006, the Company changed
its assumption of historical volatility from ten years to a range of 6 months to 2 years as a better estimate of expected volatility for the valuation of stock-based compensation related to the Companys ESPP.



Liquidity and Capital Resources



The following sections discuss the effects of changes in our balance sheets,
cash flows and commitments on our liquidity and capital resources. As of September 30, 2006, our principal source of liquidity included cash and cash equivalents in the amount of $27.8 million and a credit facility with a maximum borrowing
capacity of up to $10.0 million from which we had no outstanding borrowings.



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Cash and Cash Equivalents.    The following table sets forth our cash and cash
equivalents as of the fiscal years ended September 30, 2006, 2005 and 2004.



|                          |  |               |        |                                    |   |        |  |      |        |  |      |   |  |    |   
|------------------------- |  | ------------- | ------ | ---------------------------------- | - | ------ |  | ---- | ------ |  | ---- | - |  | -- | --
|                          |  | September 30, |        | Increase (decrease)from prior year |  
|(in thousands)            |  | 2006          |        | 2005                               |   | 2004   |  | 2006 |        |  | 2005 |  
|Cash and cash equivalents |  | $             | 27,761 |                                    | $ | 22,234 |  | $    | 23,973 |  | 25   | % |  | (7 | )%
|                          |  |               |        |                                    |   |        |  |      |        |  |      |   |  |    |   



For the fiscal year
ended September 30, 2006, cash and cash equivalents increased primarily as a result of cash from our operating activities, the sale of an equity investment, and issuance of common stock pursuant to the exercise of stock options and under our
employee stock purchase plan, partially offset by capital equipment purchases. We did not have any off-balance sheet transactions at September 30, 2006, 2005 or 2004.



Operating Activities



During fiscal year 2006, operating activities generated approximately $4.0 million of cash, primarily reflecting our net loss adjusted for non-cash
stock-based compensation expense and amortization of acquisition-related intangible assets. Changes in our operating assets and liabilities used approximately $500,000 reflecting an increase in accounts receivable, partially offset by an increase in
accounts payable and accrued expenses and a decrease in inventory. The changes in our operating assets and liabilities reflected normal fluctuations in the timing of receipts and payments and the timing of inventory purchases.



Investing Activities



Net cash used in investing activities totaled $734,000 in fiscal year 2006, reflecting the purchase of capital and equipment
and the sale of an equity investment. We purchased $1.5 million of capital equipment and software in fiscal year 2006. The sale of an equity investment generated $734,000 in fiscal year 2006.



Financing Activities



Our financing activities provided $2.2 million in fiscal year 2006, proceeds from the exercise of stock options and the
issuance of common stock under the Employee Stock Purchase Plan.



We amended our credit facility agreement with Silicon Valley Bank, effective June 27, 2005. Under the amended credit facility, the credit limit is $10 million, the interest rate is Silicon Valley Banks prime rate, the term or
maturity date is June 27, 2007. The amended credit facility contains financial covenants related to our liquidity and net worth as well as other nonfinancial covenants. Covenants require that we maintain an adjusted quick ratio (described
below) of 1.25 and the credit facility will be subject to formula based credit limits if the adjusted quick ratio falls below 1.50. Covenants included in an amendment effective September 30, 2005, require us to maintain a minimum tangible net
worth of $24 million for September 2006 and thereafter, unless reset. The facility is secured by substantially all of our assets. The adjusted quick ratio is the ratio of (i) Netopias unrestricted cash, cash equivalents and
investments maintained at Silicon Valley Bank plus net receivables to (ii) the Netopias current liabilities plus the outstanding principal amount of any borrowings under the facility less deferred revenues. We may borrow under the
credit facility in order to finance working capital requirements for new products and customers, and otherwise for general corporate purposes in the normal course of business. As of September 30, 2006, we had no outstanding borrowings under the
credit facility and were in compliance with the covenants. We had approximately $851,000 of outstanding letters of credit and $300,000 of cash management reserves that reduced the amount of available credit on the credit facility to $8.8 million.



The credit facility contains events of default that, include
among other things, non-payment of principal, interest or fees, violation of covenants, inaccuracy of representations and warranties, bankruptcy and insolvency events and changes of control. The occurrence of an event of default could result in the
acceleration of any outstanding obligations under the agreement and foreclosure on the collateral securing any outstanding obligation.



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As of September 30, 2006, we had no material commitments for capital expenditures. We believe we
have adequate cash, cash equivalents and borrowing capacity to fund our operating activities for at least the next twelve months.



Commitments



Operating Lease Commitments.    The Company conducts its operations in leased facilities under operating lease agreements expiring at various dates through 2014. The following is a summary
of future minimum rental payments required under these leases that have initial or remaining non-cancelable lease terms in excess of one year:



|                           |  |                          |       |      |   |       |  |      |     |      |   |            |  |       |    |  |   |    |  |   |      
|-------------------------- |  | ------------------------ | ----- | ---- | - | ----- |  | ---- | --- | ---- | - | ---------- |  | ----- | -- |  | - | -- |  | - | -----
|                           |  | Year ended September 30,
|(in thousands)             |  | 2007                     |       | 2008 |   | 2009  |  | 2010 |     | 2011 |   | Thereafter |  | Total
|Property lease obligations |  | $                        | 1,373 |      | $ | 1,078 |  | $    | 467 |      | $ | 337        |  | $     | 34 |  | $ | 82 |  | $ | 3,371
|                           |  |                          |       |      |   |       |  |      |     |      |   |            |  |       |    |  |   |    |  |   |      



Purchase
Commitments with Outsourcing Manufacturers and Suppliers.    The Company has purchase commitments with its outsourcing manufacturers. Our outsourcing manufacturers procure component inventory on our behalf based on our
production orders. The Company is obligated to purchase component inventory that the outsourcing manufacturer procures in accordance with the orders, unless cancellation is given within applicable lead times. These commitments are reflected in our
financial statements as a liability once title for goods has transferred, services have been received, and/or payments related to the obligations become due. At September 30, 2006, purchase commitments totaled $24.4 million.



Results of Operations for Fiscal Years Ended September 30, 2006, 2005 and 2004



This data has been derived from the Consolidated
Financial Statements included elsewhere in this Form 10-K. The operating results for any period should not be considered indicative of results for any future period. This information should be read in conjunction with the Consolidated Financial
Statements and Notes thereto included elsewhere in this Form 10-K.



REVENUES



|                                     |  |                          |         |  |                                    |   |  |      |         |  |      |   |  |      |         |  |     |   |  |    |   |  |     |   
|------------------------------------ |  | ------------------------ | ------- |  | ---------------------------------- | - |  | ---- | ------- |  | ---- | - |  | ---- | ------- |  | --- | - |  | -- | - |  | --- | --
|                                     |  | Year ended September 30, |         |  | Increase (decrease)from prior year |  
|(in thousands & percent of revenues) |  | 2006                     |         |  | 2005                               |   |  | 2004 |         |  | 2006 |   |  | 2005 |        
|REVENUES:                            |  |                          |         |  |                                    |   |  |      |         |  |      |   |  |      |         |  |     |   |  |    |   |  |     |   
|Broadband equipment                  |  | $                        | 98,460  |  | 87                                 | % |  | $    | 94,447  |  | 89   | % |  | $    | 85,702  |  | 85  | % |  | 4  | % |  | 10  | % 
|Broadband software and services      |  |                          | 14,804  |  | 13                                 | % |  |      | 11,370  |  | 11   | % |  |      | 15,633  |  | 15  | % |  | 30 | % |  | (27 | )%
|                                     |  |                          |         |  |                                    |   |  |      |         |  |      |   |  |      |         |  |     |   |  |    |   |  |     |   
|Total revenues                       |  |                          | 113,264 |  | 100                                | % |  |      | 105,817 |  | 100  | % |  |      | 101,335 |  | 100 | % |  | 7  | % |  | 4   | % 
|                                     |  |                          |         |  |                                    |   |  |      |         |  |      |   |  |      |         |  |     |   |  |    |   |  |     |   



2006 Revenues Compared to 2005
Revenues; 2005 Revenues Compared to 2004 Revenues



Total
revenues increased by $7.5 million, or 7%, to $113.3 million in fiscal year 2006 compared with $105.8 million in fiscal year 2005. The increase in fiscal year 2006 reflected an increase in broadband equipment sales of $4.1 million, or 4%, and an
increase in software and services revenue of $3.4 million, or 30%. Total revenues increased for fiscal year 2005 by 4% from fiscal year 2004. The increases for fiscal years 2006 and 2005 reflected increased sales of our broadband equipment in both
fiscal years, as our unit sales increased, partially offset by a declines in average selling prices (ASPs) resulting from downward trends in ASPs from ongoing competitive pressures. The increase in software and services revenue in fiscal
year 2006 reflected our initial sales of our NBBS remote management software for managing CPE. Sales of remote management software for PCs declined in both fiscal year 2005 and 2006.



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Broadband Equipment.    Broadband equipment revenue increased by 4% and 10% in
fiscal years 2006 and 2005, respectively. The growth in broadband equipment revenue in fiscal year 2006 reflected the equipment sales to a new customer in Denmark and increased sales to four of our largest customers. The increase in broadband
equipment sales in fiscal year 2005 was primarily due to increased sales volumes to BellSouth and increased sales of our accessories both in the United States and Europe.



Volumes and ASP, excluding accessories, of our broadband equipment products are summarized in the table below. The decline
in average selling prices resulted from increased sales of lower price residential class products as compared to higher price business class products, as well as competitive market conditions which have resulted in an ongoing downward trend in ASPs.
We expect that average selling prices will continue to decline for the same reasons.



|                       |  |                          |       |                                    |   |       |  |      |     |  |      |    |  |    |   
|---------------------- |  | ------------------------ | ----- | ---------------------------------- | - | ----- |  | ---- | --- |  | ---- | -- |  | -- | --
|                       |  | Year ended September 30, |       | Increase (decrease)from prior year |  
|                       |  | 2006                     |       | 2005                               |   | 2004  |  | 2006 |     |  | 2005 |   
|Product volumes        |  |                          | 1,200 |                                    |   | 1,076 |  |      | 964 |  | 12   | %  |  | 12 | % 
|Average selling prices |  | $                        | 78    |                                    | $ | 81    |  | $    | 89  |  | (4   | )% |  | (9 | )%



Broadband Software
and Services.    Our broadband software and services revenues increased by $3.4 million to $14.8 million in fiscal year 2006, following a decrease by $4.3 million to $11.4 million in fiscal year 2005. The increase in software
and services revenue in fiscal year 2006 reflected our initial sales of our NBBS remote management software for managing CPE. Sales of remote management software for PCs declined in both fiscal year 2005 and 2006.



The decline in current deferred revenue to $1.6 million as of
September 30, 2006, compared with $2.9 million as of September 30, 2005, reflects the recognition of NBBS remote management software license revenue in fiscal year 2006 from BellSouth, which was deferred as of September 30, 2005.



Customer Information



Our largest customers are telecommunication carriers and internet service
providers. The customers that accounted for 10% or more of our revenues in each fiscal year of the three years reported, are shown in the table below:



|                                     |  |                               |        |  |    |  
|------------------------------------ |  | ----------------------------- | ------ |  | -- | -
|(in thousands & percent of revenues) |  | Year ended  September 30 2006 |       
|BellSouth                            |  | $                             | 25,065 |  | 22 | %
|Swisscom                             |  |                               | 22,658 |  | 20 | %
|                                     | 
|(in thousands & percent of revenues) |  | Year ended  September 30 2005 |       
|BellSouth                            |  | $                             | 21,206 |  | 20 | %
|Swisscom                             |  |                               | 18,535 |  | 18 | %
|eircom                               |  |                               | 10,576 |  | 10 | %
|                                     | 
|(in thousands & percent of revenues) |  | Year ended  September 30 2004 |       
|Swisscom                             |  | $                             | 19,031 |  | 19 | %
|AT&T                                 |  |                               | 10,348 |  | 10 | %
|BellSouth                            |  |                               | 10,111 |  | 10 | %



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##### Table of Contents

Geographic Information



The following table summarizes revenues by region:



|                                     |  |                          |         |  |                                    |   |  |      |         |  |      |   |  |      |         |  |     |   |  |     |    |  |     |   
|------------------------------------ |  | ------------------------ | ------- |  | ---------------------------------- | - |  | ---- | ------- |  | ---- | - |  | ---- | ------- |  | --- | - |  | --- | -- |  | --- | --
|                                     |  | Year ended September 30, |         |  | Increase (decrease)from prior year |  
|(in thousands & percent of revenues) |  | 2006                     |         |  | 2005                               |   |  | 2004 |         |  | 2006 |   |  | 2005 |        
|Europe                               |  | $                        | 42,846  |  | 38                                 | % |  | $    | 35,186  |  | 33   | % |  | $    | 36,972  |  | 36  | % |  | 22  | %  |  | (5  | )%
|Other international                  |  |                          | 2,135   |  | 2                                  | % |  |      | 2,809   |  | 3    | % |  |      | 3,121   |  | 3   | % |  | (24 | )% |  | (10 | )%
|                                     |  |                          |         |  |                                    |   |  |      |         |  |      |   |  |      |         |  |     |   |  |     |    |  |     |   
|Total international revenues         |  |                          | 44,981  |  | 40                                 | % |  |      | 37,995  |  | 36   | % |  |      | 40,093  |  | 39  | % |  | 18  | %  |  | (5  | )%
|United States                        |  |                          | 68,283  |  | 60                                 | % |  |      | 67,822  |  | 64   | % |  |      | 61,242  |  | 61  | % |  | 1   | %  |  | 11  | % 
|                                     |  |                          |         |  |                                    |   |  |      |         |  |      |   |  |      |         |  |     |   |  |     |    |  |     |   
|Total revenues                       |  | $                        | 113,264 |  | 100                                | % |  | $    | 105,817 |  | 100  | % |  | $    | 101,335 |  | 100 | % |  | 7   | %  |  | 4   | % 
|                                     |  |                          |         |  |                                    |   |  |      |         |  |      |   |  |      |         |  |     |   |  |     |    |  |     |   



The increase in our
sales to customers in Europe in fiscal year 2006 reflected increased equipment sales to Swisscom and equipment sales to a new customer in Denmark. The increase in our sales to customers in the United States in fiscal year 2005 reflected increased
sales to large telecommunication carriers, particularly sales to BellSouth. The decrease in our sales to customers in Europe in fiscal year 2005 reflected declines in ASPs to our larger carrier customers and generally lower sales to smaller European
service providers.



GROSS MARGIN



|                                    |  |                          |        |  |                                    |   |  |      |        |  |      |   |  |      |        |  |    |   |  |    |   |  |     |   
|----------------------------------- |  | ------------------------ | ------ |  | ---------------------------------- | - |  | ---- | ------ |  | ---- | - |  | ---- | ------ |  | -- | - |  | -- | - |  | --- | --
|                                    |  | Year ended September 30, |        |  | Increase (decrease)from prior year |  
|(in thousands & percent of revenue) |  | 2006                     |        |  | 2005                               |   |  | 2004 |        |  | 2006 |   |  | 2005 |       
|GROSS MARGIN:                       |  |                          |        |  |                                    |   |  |      |        |  |      |   |  |      |        |  |    |   |  |    |   |  |     |   
|Broadband equipment                 |  | $                        | 29,592 |  | 30                                 | % |  | $    | 23,755 |  | 25   | % |  | $    | 21,299 |  | 25 | % |  | 25 | % |  | 12  | % 
|Broadband software and services     |  |                          | 11,661 |  | 79                                 | % |  |      | 9,713  |  | 85   | % |  |      | 14,593 |  | 93 | % |  | 20 | % |  | (33 | )%
|                                    |  |                          |        |  |                                    |   |  |      |        |  |      |   |  |      |        |  |    |   |  |    |   |  |     |   
|                                    |  | $                        | 41,253 |  | 36                                 | % |  | $    | 33,468 |  | 32   | % |  | $    | 35,892 |  | 35 | % |  | 23 | % |  | (7  | )%
|                                    |  |                          |        |  |                                    |   |  |      |        |  |      |   |  |      |        |  |    |   |  |    |   |  |     |   



Our total gross margin
increased to 36% in fiscal year 2006, compared with a total gross margin of 32% and 35% in fiscal years 2005 and 2004, respectively. The gross margin improvement in fiscal year 2006 mostly reflected the improvement in equipment margins to 30% in
fiscal year 2006 from 25% in fiscal year 2005 because we reduced the average unit cost of equipment more than the reduction in ASPs, with a greater amount of manufacturing in China in fiscal year 2006 compared fiscal year 2005. To a lesser degree,
the increase in the fiscal year 2006 gross margin reflected increased higher-margin software and services revenues. The decline in gross margin rate in fiscal year 2005 from 2004 was due primarily to a decrease in higher gross margin software and
service sales. Software and service sales generate higher gross margins than sales of broadband equipment. In fiscal year 2005, we increased our accrual for the estimated cost to provide customer support by approximately $700,000. These estimated
costs are related to our practice of providing ongoing customer support services through our call centers, almost all of which was related to our broadband equipment.



RESEARCH AND DEVELOPMENT



|                                     |  |                          |        |  |                                    |   |  |      |        |  |      |   |  |      |        |  |    |   |  |    |   |  |     |   
|------------------------------------ |  | ------------------------ | ------ |  | ---------------------------------- | - |  | ---- | ------ |  | ---- | - |  | ---- | ------ |  | -- | - |  | -- | - |  | --- | --
|                                     |  | Year ended September 30, |        |  | Increase (decrease)from prior year |  
|(in thousands & percent of revenues) |  | 2006                     |        |  | 2005                               |   |  | 2004 |        |  | 2006 |   |  | 2005 |       
|Research and development             |  | $                        | 17,713 |  | 16                                 | % |  | $    | 13,355 |  | 13   | % |  | $    | 15,828 |  | 16 | % |  | 33 | % |  | (16 | )%
|                                     |  |                          |        |  |                                    |   |  |      |        |  |      |   |  |      |        |  |    |   |  |    |   |  |     |   



Research and
development expenses include employee related expenses, depreciation and amortization, development related expenses such as product prototyping, design and testing, and overhead. Our research and development expenses for fiscal year 2006 increased
by 33%, compared with a 16% decrease in fiscal year 2005.



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Stock-based compensation expense was approximately 55%, or more than half of the 33% increase in fiscal year 2006. The remaining increase in R&D expense
in fiscal year 2006 reflected an increase in the R&D headcount and compensation. The 16% decrease in R&D expense in fiscal year 2005 was primarily due to cost reductions that resulted from the closure of research and development activities
in Germany. We capitalized no development costs in fiscal years 2006 or 2005.



SELLING AND MARKETING



|                                     |  |                          |        |  |                                    |   |  |      |        |  |      |   |  |      |        |  |    |   |  |    |   |  |    |   
|------------------------------------ |  | ------------------------ | ------ |  | ---------------------------------- | - |  | ---- | ------ |  | ---- | - |  | ---- | ------ |  | -- | - |  | -- | - |  | -- | --
|                                     |  | Year ended September 30, |        |  | Increase (decrease)from prior year |  
|(in thousands & percent of revenues) |  | 2006                     |        |  | 2005                               |   |  | 2004 |        |  | 2006 |   |  | 2005 |       
|Selling and marketing                |  | $                        | 21,266 |  | 19                                 | % |  | $    | 18,716 |  | 18   | % |  | $    | 20,528 |  | 20 | % |  | 14 | % |  | (9 | )%
|                                     |  |                          |        |  |                                    |   |  |      |        |  |      |   |  |      |        |  |    |   |  |    |   |  |    |   



Selling and marketing
expenses include salary, stock-based compensation, commission expense for our sales force, bonuses, travel and entertainment, advertising and promotional expenses, product marketing, customer service and support costs. Our selling and marketing
expenses for fiscal year 2006 increased by 14%, compared with a 9% decrease in fiscal year 2005. Stock-based compensation expense represented half of the 14% increase in fiscal year 2006. The remaining increase in selling and marketing expense in
fiscal year 2006 reflected an increase in sales and marketing headcount and compensation, in part from higher commissions on higher sales. The 9% decrease in selling and marketing expense in fiscal year 2005 resulted primarily from an increase in
the allocation of technical support expense to cost of sales, and to a lesser extent from cost containment.



GENERAL AND ADMINISTRATIVE



|                                     |  |                          |       |  |                                    |   |  |      |       |  |      |   |  |      |       |  |   |   |  |    |    |  |    |  
|------------------------------------ |  | ------------------------ | ----- |  | ---------------------------------- | - |  | ---- | ----- |  | ---- | - |  | ---- | ----- |  | - | - |  | -- | -- |  | -- | -
|                                     |  | Year ended September 30, |       |  | Increase (decrease)from prior year |  
|(in thousands & percent of revenues) |  | 2006                     |       |  | 2005                               |   |  | 2004 |       |  | 2006 |   |  | 2005 |      
|General and administrative           |  | $                        | 7,840 |  | 7                                  | % |  | $    | 8,438 |  | 8    | % |  | $    | 7,147 |  | 7 | % |  | (7 | )% |  | 18 | %
|                                     |  |                          |       |  |                                    |   |  |      |       |  |      |   |  |      |       |  |   |   |  |    |    |  |    |  



General and
administrative expenses include employee related expenses, provisions for doubtful accounts and legal, accounting and insurance costs. Our general and administrative expenses for fiscal year 2006 decreased by 7%, compared with an 18% increase in
fiscal year 2005. Excluding stock-based compensation of $2.0 million, classified as general and administrative expense in fiscal year 2006 the expense decrease for the fiscal year 2006 would be a decrease of 31%. This decrease reflects a decline in
legal costs and the cost related to our initial implementation of Section 404 of the Sarbanes-Oxley Act in fiscal year 2005, which required our management to assess the effectiveness of our internal controls over financial reporting. Legal
expenses related to the SEC investigation and private securities litigation were offset by insurance reimbursements in fiscal year 2006, compared with $2.6 million of net legal expenses in fiscal year 2005. The increase in general and administrative
expenses increased in fiscal year 2005 by 18% was due to the cost related to our initial implementation of Section 404 of the Sarbanes-Oxley Act and legal expenses.



RESTRUCTURING COSTS



Restructuring costs included in operating expenses were zero in fiscal year 2006, compared with $40,000 and $534,000 in fiscal years 2005 and 2004,
respectively. In fiscal year 2005, we recorded a net restructuring charge of $40,000, primarily consisting of employee termination costs, wind down costs associated with the closure of a sales office in the Netherlands and additional wind down costs
associated with the prior closure of the Germany office in 2004.



For fiscal year 2004, we implemented plans and took steps to reduce costs. These steps resulted in a restructuring charge of approximately $534,000 primarily related to severance and related benefit charges for the closure of our
German software research and development facility.



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##### Table of Contents

OTHER INCOME, NET



|                          |  |                          |       |      |   |      |  |   |    
|------------------------- |  | ------------------------ | ----- | ---- | - | ---- |  | - | ---
|                          |  | Year ended September 30,
|(in thousands)            |  | 2006                     |       | 2005 |   | 2004
|Other income, net:        |  |                          |       |      |   |      |  |   |    
|Gain on equity investment |  | $                        | 1,079 |      |   |      |  |   |    
|Other income, net         |  |                          | 945   |      |   | 359  |  |   | 224
|                          |  |                          |       |      |   |      |  |   |    
|Other income, net         |  | $                        | 2,024 |      | $ | 359  |  | $ | 224
|                          |  |                          |       |      |   |      |  |   |    



Gain on Equity
Investment.    In fiscal year 2006, we sold our equity investment in MegaPath Inc. in exchange for $734,000 cash and 1.7 million shares of preferred stock of Netifice Communications, Inc. In accordance with the criteria
of Statement of Financial Accounting Standards 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilitiesa replacement of FASB Statement 125, we accounted for the transaction as a transfer of
an asset that qualified as a sale. Accordingly, we removed our investment in MegaPath Inc, and recognized the cash received and investment in Netifice at fair value, which resulted in a gain on equity investment of $1.1 million.



Other Income, Net.    Other income, net includes
interest expense and fees related to our credit facility, interest income and gains or losses on foreign currency transactions. Other income, net increased for fiscal year 2006 when compared to fiscal year 2005 due primarily to increased interest
income and a reduction in foreign currency transaction losses. For fiscal year 2005 compared to 2004, other income, net increased due primarily to increased interest income offset by foreign currency transaction losses.



|ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|-------- | ----------------------------------------------------------



Our exposure to market risk for changes in interest rates relates primarily to our cash equivalents. We place our cash equivalents in instruments that
meet high credit quality standards. We do not expect any material loss with respect to our cash equivalents.



Our exposure to foreign exchange risk relates primarily to sales made to international customers denominated in non-US dollar currencies and our employee
related expenses in European Union countries. We do not use derivative financial instruments for speculative or trading purposes.



In order to reduce our exposure resulting from currency fluctuations, we have entered into currency exchange forward contracts. These contracts guarantee
a predetermined exchange rate at the time the contract is purchased. We do not enter into currency exchange contracts for speculative or trading purposes. All currency exchange contracts have a maturity of less than one year.



Interest Rate Risk



The table below presents the market value and related weighted-average interest rates for our cash equivalents at
September 30, 2006 and 2005. All of our investments mature within 90 days.



|                 |  |                    |        |                 |                    |                       |  |      |           |  |                 |        |                       |   |        |  |      |  
|---------------- |  | ------------------ | ------ | --------------- | ------------------ | --------------------- |  | ---- | --------- |  | --------------- | ------ | --------------------- | - | ------ |  | ---- | -
|                 |  | September 30, 2006 |        |                 | September 30, 2005 |                      
|(in thousands)   |  | Cost Basis         |        | FairMarketValue |                    | Average Interest Rate |  |      | CostBasis |  | FairMarketValue |        | Average Interest Rate |  
|Cash equivalents |  | $                  | 25,177 |                 | $                  | 25,177                |  | 5.15 | %         |  | $               | 20,107 |                       | $ | 20,107 |  | 3.45 | %
|                 |  |                    |        |                 |                    |                       |  |      |           |  |                 |        |                       |   |        |  |      |  



Our market interest
rate risk for our cash equivalents relates primarily to changes in the United States short-term prime interest rate. Our market interest rate risk for borrowings under our credit facility, from which we had no borrowings at September 30, 2006,
relates primarily to the rate we could be charged by Silicon Valley Bank



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##### Table of Contents

for borrowings under our credit facility. The credit facility bears interest at a rate equal to the prime rate (the rate announced by Silicon Valley Bank as
its prime rate). To the extent we borrow heavily against the credit facility and Silicon Valley Bank were to increase its prime rate, it would cost us more to borrow and our interest expense would increase.



Foreign Currency Exchange Risk



Our foreign currency exchange risk relates to changes in the value of the
Euro and the Swiss Franc relative to the United States dollar. We manage this risk by entering into currency exchange forward contracts. These contracts guarantee a predetermined exchange rate at the time the contract is purchased.



The table below presents the carrying value, in United States dollars, of our
accounts receivable denominated in Euros (EUR) and Swiss francs (CHF) at September 30, 2006 and 2005. The accounts receivable at September 30, 2006 and 2005 were valued at the applicable United States/foreign
currency exchange rates as of those respective dates. The carrying value approximated fair value at September 30, 2006 and 2005.



|                                                       |  |                    |       |                    |        |                |   |               |  |      
|------------------------------------------------------ |  | ------------------ | ----- | ------------------ | ------ | -------------- | - | ------------- |  | -----
|(in thousands, except exchange rate)                   |  | September 30, 2006 |       | September 30, 2005
|Principal (notional) amounts in United States dollars: |  | Carrying Amount    |       | ExchangeRate       |        | CarryingAmount |   | Exchange Rate
|Accounts receivable denominated in Euros               |  | $                  | 3,086 |                    | 1.2688 |                | $ | 2,068         |  | 1.205
|Accounts receivable denominated in Swiss francs        |  | $                  | 883   |                    | 0.8001 |                | $ |              |  |     
|                                                       |  |                    |       |                    |        |                |   |               |  |      



The table below
presents the carrying value of our currency exchange forward contracts, in United States dollars, at September 30, 2006 and 2005. The carrying value approximated fair value at September 30, 2006 and 2005.



|                                                      |  |                    |  |                       |  |                   |  |        |  |                       |  |               
|----------------------------------------------------- |  | ------------------ |  | --------------------- |  | ----------------- |  | ------ |  | --------------------- |  | --------------
|(Amount in thousands, except contracted forward rate) |  | September 30, 2006 |  | September 30, 2005   
|Principal (notional) amounts in U.S. dollars          |  | Amount             |  | ContractedForwardRate |  | SettlementDate(s) |  | Amount |  | ContractedForwardRate |  | SettlementDate
|Currency exchange forward contract # 1 - EUR          |  | 464                |  | 1.2678                |  | Oct-06            |  | 2,148  |  | 1.2119                |  | Oct-05        
|Currency exchange forward contract # 2 - EUR          |  | 297                |  | 1.2686                |  | Nov-06            |  |        |  |                       |  |               
|Currency exchange forward contract # 3 - EUR          |  | 1,916              |  | 1.2615                |  | Nov-06            |  |        |  |                       |  |               
|Currency exchange forward contract # 4 - CHF          |  | 174                |  | 0.8155                |  | Oct-06            |  |        |  |                       |  |               
|Currency exchange forward contract # 5 - CHF          |  | 385                |  | 0.8023                |  | Oct-06            |  |        |  |                       |  |               
|Currency exchange forward contract # 6 - CHF          |  | 318                |  | 0.8028                |  | Nov-06            |  |        |  |                       |  |               



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|ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
|------- | -------------------------------------------



Index to Financial Statements



The
following financial statements are filed as part of this Report on Form 10-K:



|                                                                                                                                    |  |     
|----------------------------------------------------------------------------------------------------------------------------------- |  | ----
|                                                                                                                                    |  | Page
|Consolidated Financial Statements:                                                                                                  |  |     
|Report of Independent Registered Public Accounting Firm                                                                             |  | 44  
|Consolidated Balance Sheets at September 30, 2006 and 2005                                                                          |  | 46  
|Consolidated Statements of Operations for the fiscal years ended September 30, 2006, 2005 and 2004                                  |  | 47  
|Consolidated Statements of Stockholders Equity and Comprehensive Loss for the fiscal years ended September 30, 2006, 2005 and 2004 |  | 48  
|Consolidated Statements of Cash Flows for the fiscal years ended September 30, 2006, 2005 and 2004                                  |  | 49  
|Notes to Consolidated Financial Statements                                                                                          |  | 50  



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Report of Independent Registered Public Accounting Firm



To the Board of Directors and Stockholders of Netopia, Inc.



We have audited the accompanying consolidated balance sheets of Netopia, Inc. and Subsidiaries as of September 30,
2006, and 2005 and the related consolidated statements of operations, stockholders equity and comprehensive loss, and cash flows for the years ended September 30, 2006, 2005, and 2004. These financial statements are the responsibility of
the Companys management. Our responsibility is to express an opinion on those consolidated financial statements based on our audits.



We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for
our opinion.



In our opinion, the consolidated financial
statements referred to above present fairly, in all material respects, the financial position of Netopia, Inc and Subsidiaries as of September 30, 2006, and 2005, and the results of their operations and their cash flows for each of the years in
the three year period ended September 30, 2006, in conformity with accounting principles generally accepted in the United States of America.



We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the
Companys internal control over financial reporting as of September 30, 2006, based on the criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission and our report dated December 14, 2006 expressed an unqualified opinion on managements assessment of, and the effective operation of, internal control over financial reporting.



As discussed in Note 2 to the consolidated financial statements, the Company
changed its method of accounting for share-based payment to conform to statement of Financial Accounting Standards No. 123(R), Share-Based Payment, as of October 1, 2005.



/s/ Burr, Pilger & Mayer, LLP



San Francisco, California

December 14, 2006



44



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##### Table of Contents

Report of Independent Registered Public Accounting Firm



To the Board of Directors and Stockholders of Netopia, Inc.:



We have audited managements assessment, included in the
accompanying Managements Report on Internal Control Over Financial Reporting included in Item 9A, that Netopia, Inc. and its subsidiaries (the Company) maintained effective internal control over financial reporting as of
September 30, 2006, based on criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Companys management is responsible for
maintaining effective control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on managements assessment and an opinion on the
effectiveness of the Companys internal control over financial reporting based on our audit.



We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit including obtaining an understanding of internal control over financial
reporting, evaluating managements assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit
provides a reasonable basis for our opinion.



A companys
internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles. A companys internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions
and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that
receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the companys assets that could have a material effect on the financial statements.



Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.



In our opinion, managements assessment that the Company maintained
effective internal control over financial reporting as of September 30, 2006, is fairly stated, in all material respects, based on the COSO criteria. Also, in our opinion, the Company maintained, in all material respects, effective internal
control over financial reporting as of September 30, 2006, based on the COSO criteria.



We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets and the related consolidated statements of operations,
stockholders equity and comprehensive loss, and cash flows of the Company and our report dated December 14, 2006 expressed an unqualified opinion.



/s/ Burr, Pilger & Mayer LLP



San Francisco, California

December 14, 2006



45



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##### Table of Contents

Netopia, Inc.

Consolidated Balance Sheets

(in thousands, except share and per share amounts)



|                                                                                                                                                                   |  |               |          |   |      |   |          |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ------------- | -------- | - | ---- | - | -------- | -
|                                                                                                                                                                   |  | September 30, |         
|                                                                                                                                                                   |  | 2006          |          |   | 2005 |  
|ASSETS                                                                                                                                                             |  |               |          |   |      |   |          |  
|Current assets:                                                                                                                                                    |  |               |          |   |      |   |          |  
|Cash and cash equivalents                                                                                                                                          |  | $             | 27,761   |   |      | $ | 22,234   |  
|Trade accounts receivable, net of allowances for doubtful accounts and sales returns of $142 and $144 at September 30, 2006 and 2005,
respectively                 |  |               | 20,072   |   |      |   | 16,208   |  
|Inventories                                                                                                                                                        |  |               | 6,165    |   |      |   | 8,718    |  
|Prepaid expenses and other current assets                                                                                                                          |  |               | 1,053    |   |      |   | 1,102    |  
|                                                                                                                                                                   |  |               |          |   |      |   |          |  
|Total current assets                                                                                                                                               |  |               | 55,051   |   |      |   | 48,262   |  
|Property and equipment, net                                                                                                                                        |  |               | 2,486    |   |      |   | 2,623    |  
|Acquired technology, net                                                                                                                                           |  |               | 1,026    |   |      |   | 2,369    |  
|Goodwill                                                                                                                                                           |  |               | 1,668    |   |      |   | 1,668    |  
|Equity investment                                                                                                                                                  |  |               | 1,377    |   |      |   | 1,032    |  
|Deposits and other assets                                                                                                                                          |  |               | 244      |   |      |   | 481      |  
|                                                                                                                                                                   |  |               |          |   |      |   |          |  
|TOTAL ASSETS                                                                                                                                                       |  | $             | 61,852   |   |      | $ | 56,435   |  
|                                                                                                                                                                   |  |               |          |   |      |   |          |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                               |  |               |          |   |      |   |          |  
|Current liabilities:                                                                                                                                               |  |               |          |   |      |   |          |  
|Accounts payable                                                                                                                                                   |  | $             | 13,033   |   |      | $ | 12,525   |  
|Accrued compensation                                                                                                                                               |  |               | 3,630    |   |      |   | 1,890    |  
|Accrued liabilities                                                                                                                                                |  |               | 2,273    |   |      |   | 2,772    |  
|Deferred revenues                                                                                                                                                  |  |               | 1,581    |   |      |   | 2,946    |  
|Other current liabilities                                                                                                                                          |  |               | 124      |   |      |   | 75       |  
|                                                                                                                                                                   |  |               |          |   |      |   |          |  
|Total current liabilities                                                                                                                                          |  |               | 20,641   |   |      |   | 20,208   |  
|                                                                                                                                                                   |  |              
|Deferred revenues, long-term                                                                                                                                       |  |               | 586      |   |      |   | 109      |  
|Other long-term liabilities                                                                                                                                        |  |               | 134      |   |      |   | 246      |  
|                                                                                                                                                                   |  |               |          |   |      |   |          |  
|Total liabilities                                                                                                                                                  |  |               | 21,361   |   |      |   | 20,563   |  
|                                                                                                                                                                   |  |               |          |   |      |   |          |  
|Commitments and contingencies (Note 9)                                                                                                                             |  |               |          |   |      |   |          |  
|                                                                                                                                                                   |  |              
|Stockholders equity:                                                                                                                                              |  |               |          |   |      |   |          |  
|Common stock: $0.001 par value, 50,000,000 shares authorized: 26,274,415 and 24,428,412 shares issued and outstanding at September 30,
2006 and 2005, respectively |  |               | 26       |   |      |   | 25       |  
|Additional paid-in capital                                                                                                                                         |  |               | 176,261  |   |      |   | 168,075  |  
|Accumulated comprehensive income                                                                                                                                   |  |               | 68       |   |      |   | 45       |  
|Accumulated deficit                                                                                                                                                |  |               | (135,864 | ) |      |   | (132,273 | )
|                                                                                                                                                                   |  |               |          |   |      |   |          |  
|Total stockholders equity                                                                                                                                         |  |               | 40,491   |   |      |   | 35,872   |  
|                                                                                                                                                                   |  |               |          |   |      |   |          |  
|TOTAL LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                         |  | $             | 61,852   |   |      | $ | 56,435   |  
|                                                                                                                                                                   |  |               |          |   |      |   |          |  



See accompanying notes.



46



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##### Table of Contents

Netopia, Inc.

Consolidated Statements of Operations

(in thousands, except per share amounts)



|                                            |  |                          |         |   |      |   |         |      |  |   |         |  
|------------------------------------------- |  | ------------------------ | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                            |  | Year ended September 30, |        
|                                            |  | 2006                     |         |   | 2005 |   |         | 2004 | 
|REVENUES:                                   |  |                          |         |   |      |   |         |      |  |   |         |  
|Broadband equipment                         |  | $                        | 98,460  |   |      | $ | 94,447  |      |  | $ | 85,702  |  
|Broadband software and services             |  |                          | 14,804  |   |      |   | 11,370  |      |  |   | 15,633  |  
|                                            |  |                          |         |   |      |   |         |      |  |   |         |  
|Total revenues                              |  |                          | 113,264 |   |      |   | 105,817 |      |  |   | 101,335 |  
|                                            |  |                          |         |   |      |   |         |      |  |   |         |  
|COST OF REVENUES:                           |  |                          |         |   |      |   |         |      |  |   |         |  
|Broadband equipment                         |  |                          | 67,715  |   |      |   | 69,540  |      |  |   | 63,251  |  
|Broadband software and services             |  |                          | 3,096   |   |      |   | 1,609   |      |  |   | 992     |  
|Amortization of acquired technology         |  |                          | 1,200   |   |      |   | 1,200   |      |  |   | 1,200   |  
|                                            |  |                          |         |   |      |   |         |      |  |   |         |  
|Total cost of revenues                      |  |                          | 72,011  |   |      |   | 72,349  |      |  |   | 65,443  |  
|                                            |  |                          |         |   |      |   |         |      |  |   |         |  
|GROSS PROFIT                                |  |                          | 41,253  |   |      |   | 33,468  |      |  |   | 35,892  |  
|                                            |  |                          |         |   |      |   |         |      |  |   |         |  
|OPERATING EXPENSES:                         |  |                          |         |   |      |   |         |      |  |   |         |  
|Research and development                    |  |                          | 17,713  |   |      |   | 13,355  |      |  |   | 15,828  |  
|Selling and marketing                       |  |                          | 21,266  |   |      |   | 18,716  |      |  |   | 20,528  |  
|General and administrative                  |  |                          | 7,840   |   |      |   | 8,438   |      |  |   | 7,147   |  
|Amortization of intangible assets           |  |                          |        |   |      |   | 345     |      |  |   | 345     |  
|Impairment of goodwill                      |  |                          |        |   |      |   |        |      |  |   | 465     |  
|Restructuring costs                         |  |                          |        |   |      |   | 40      |      |  |   | 534     |  
|                                            |  |                          |         |   |      |   |         |      |  |   |         |  
|Total operating expenses                    |  |                          | 46,819  |   |      |   | 40,894  |      |  |   | 44,847  |  
|                                            |  |                          |         |   |      |   |         |      |  |   |         |  
|OPERATING LOSS                              |  |                          | (5,566  | ) |      |   | (7,426  | )    |  |   | (8,955  | )
|                                            |  |                          |        
|Other income, net:                          |  |                          |         |   |      |   |         |      |  |   |         |  
|Gain on equity investment                   |  |                          | 1,079   |   |      |   |        |      |  |   |        |  
|Other income, net                           |  |                          | 945     |   |      |   | 359     |      |  |   | 224     |  
|                                            |  |                          |         |   |      |   |         |      |  |   |         |  
|Other income, net                           |  |                          | 2,024   |   |      |   | 359     |      |  |   | 224     |  
|                                            |  |                          |         |   |      |   |         |      |  |   |         |  
|LOSS BEFORE PROVISION FOR INCOME TAXES      |  |                          | (3,542  | ) |      |   | (7,067  | )    |  |   | (8,731  | )
|                                            |  |                          |        
|Provision for income taxes                  |  |                          | 49      |   |      |   | 66      |      |  |   | 78      |  
|                                            |  |                          |         |   |      |   |         |      |  |   |         |  
|NET LOSS                                    |  | $                        | (3,591  | ) |      | $ | (7,133  | )    |  | $ | (8,809  | )
|                                            |  |                          |         |   |      |   |         |      |  |   |         |  
|Basic and diluted net loss per common share |  | $                        | (0.14   | ) |      | $ | (0.28   | )    |  | $ | (0.37   | )
|                                            |  |                          |         |   |      |   |         |      |  |   |         |  
|Shares used in per share calculations       |  |                          | 25,748  |   |      |   | 25,093  |      |  |   | 23,573  |  
|                                            |  |                          |         |   |      |   |         |      |  |   |         |  



See accompanying notes.



47



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##### Table of Contents

Netopia, Inc.

Consolidated Statements of Stockholders Equity and Comprehensive Loss

(in thousands, except share amounts)



|                                                                                                |  |              |  |                           |    |                     |   |         |                                      |   |                           |   |  |   |    |  |   |        |  
|----------------------------------------------------------------------------------------------- |  | ------------ |  | ------------------------- | -- | ------------------- | - | ------- | ------------------------------------ | - | ------------------------- | - |  | - | -- |  | - | ------ | -
|                                                                                                |  | Common Stock |  | AdditionalPaid-in Capital |    | Accumulated Deficit |   |         | AccumulatedOtherComprehensive Income |   | TotalStockholders Equity |  
|                                                                                                |  | Shares       |  | Amount                    |    |                     |   |        
|Balance, September 30, 2003                                                                     |  | 21,631,832   |  | $                         | 22 |                     | $ | 156,132 |                                      | $ | (116,331                  | ) |  | $ |   |  | $ | 39,823 |  
|Exercise of stock options                                                                       |  | 1,784,347    |  |                           | 2  |                     |   | 7,163   |                                      |   |                           |   |  |   |    |  |   | 7,165  |  
|Issuance of common stock under Employee Stock Purchase Plan                                     |  | 1,141,324    |  |                           | 1  |                     |   | 1,702   |                                      |   |                           |   |  |   |    |  |   | 1,703  |  
|Issuance of common stock for acquisitions                                                       |  | 160,000      |  |                           |   |                     |   | 1,248   |                                      |   |                           |   |  |   |    |  |   | 1,248  |  
|Net loss                                                                                        |  |              |  |                           |    |                     |   |         |                                      |   | (8,809                    | ) |  |   |   |  |   | (8,809 | )
|                                                                                                |  |              |  |                           |    |                     |   |         |                                      |   |                           |   |  |   |    |  |   |        |  
|Balance, September 30, 2004                                                                     |  | 24,717,503   |  |                           | 25 |                     |   | 166,245 |                                      |   | (125,140                  | ) |  |   |   |  |   | 41,130 |  
|Exercise of stock options                                                                       |  | 268,277      |  |                           |   |                     |   | 632     |                                      |   |                           |   |  |   |    |  |   | 632    |  
|Issuance of common stock under Employee Stock Purchase Plan                                     |  | 442,632      |  |                           |   |                     |   | 1,198   |                                      |   |                           |   |  |   |    |  |   | 1,198  |  
|Net loss                                                                                        |  |              |  |                           |    |                     |   |         |                                      |   | (7,133                    | ) |  |   |    |  |   | (7,133 | )
|Foreign currency translation adjustments                                                        |  |              |  |                           |    |                     |   |         |                                      |   |                           |   |  |   | 45 |  |   | 45     |  
|Comprehensive loss                                                                              |  |              |  |                           |    |                     |   |         |                                      |   |                           |   |  |   |    |  |   | (7,088 | )
|                                                                                                |  |              |  |                           |    |                     |   |         |                                      |   |                           |   |  |   |    |  |   |        |  
|Balance, September 30, 2005                                                                     |  | 25,428,412   |  |                           | 25 |                     |   | 168,075 |                                      |   | (132,273                  | ) |  |   | 45 |  |   | 35,872 |  
|Exercise of stock options                                                                       |  | 344,310      |  |                           |   |                     |   | 954     |                                      |   |                           |   |  |   |    |  |   | 954    |  
|Issuance of common stock under Employee Stock Purchase Plan                                     |  | 501,693      |  |                           | 1  |                     |   | 1,276   |                                      |   |                           |   |  |   |    |  |   | 1,277  |  
|Stock-based compensation expense related to employee stock options and employee stock purchases |  |              |  |                           |    |                     |   | 5,956   |                                      |   |                           |   |  |   |    |  |   | 5,956  |  
|Net loss                                                                                        |  |              |  |                           |    |                     |   |         |                                      |   | (3,591                    | ) |  |   |    |  |   | (3,591 | )
|Foreign currency translation adjustments                                                        |  |              |  |                           |    |                     |   |         |                                      |   |                           |   |  |   | 23 |  |   | 23     |  
|                                                                                                |  |              |  |                           |    |                     |   |         |                                      |   |                           |   |  |   |    |  |   |        |  
|Comprehensive loss                                                                              |  |              |  |                           |    |                     |   |         |                                      |   |                           |   |  |   |    |  |   | (3,568 | )
|                                                                                                |  |              |  |                           |    |                     |   |         |                                      |   |                           |   |  |   |    |  |   |        |  
|Balance, September 30, 2006                                                                     |  | 26,274,415   |  | $                         | 26 |                     | $ | 176,261 |                                      | $ | (135,864                  | ) |  | $ | 68 |  | $ | 40,491 |  
|                                                                                                |  |              |  |                           |    |                     |   |         |                                      |   |                           |   |  |   |    |  |   |        |  



See accompanying notes.



48



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##### Table of Contents

Netopia, Inc.

Consolidated Statements of Cash Flows

(in thousands)



|                                                                                        |  |                          |        |   |      |   |        |      |  |   |        |  
|--------------------------------------------------------------------------------------- |  | ------------------------ | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                                                                        |  | Year ended September 30, |       
|                                                                                        |  | 2006                     |        |   | 2005 |   |        | 2004 | 
|Cash flows from operating activities:                                                   |  |                          |        |   |      |   |        |      |  |   |        |  
|Net loss                                                                                |  | $                        | (3,591 | ) |      | $ | (7,133 | )    |  | $ | (8,809 | )
|Adjustments to reconcile net loss to cash used in operating activities:                 |  |                          |        |   |      |   |        |      |  |   |        |  
|Depreciation and amortization                                                           |  |                          | 3,140  |   |      |   | 3,717  |      |  |   | 4,168  |  
|(Gain)/loss on disposal of fixed assets                                                 |  |                          | 56     |   |      |   | 8      |      |  |   | (19    | )
|Gain on equity investment                                                               |  |                          | (1,079 | ) |      |   |       |      |  |   |       |  
|Stock-based compensation related to employee stock options and employee stock purchases |  |                          | 5,956  |   |      |   |       |      |  |   |       |  
|Charge for impairment of capitalized software                                           |  |                          |       |   |      |   | 101    |      |  |   |       |  
|Changes in allowance for doubtful accounts and sales returns                            |  |                          | (2     | ) |      |   | (84    | )    |  |   | 38     |  
|Changes in inventory reserves                                                           |  |                          | (1,534 | ) |      |   | (24    | )    |  |   | 761    |  
|Restructure costs and goodwill impairment                                               |  |                          |       |   |      |   | 40     |      |  |   | 999    |  
|Changes in operating assets and liabilities:                                            |  |                          |        |   |      |   |        |      |  |   |        |  
|Trade receivables                                                                       |  |                          | (3,862 | ) |      |   | 1,688  |      |  |   | (1,788 | )
|Inventories                                                                             |  |                          | 4,087  |   |      |   | (2,414 | )    |  |   | (1,303 | )
|Prepaid expenses, deposits and other assets                                             |  |                          | 38     |   |      |   | 124    |      |  |   | (105   | )
|Accounts payable                                                                        |  |                          | 508    |   |      |   | 2,658  |      |  |   | (1,395 | )
|Accrued liabilities and accrued compensation                                            |  |                          | 1,241  |   |      |   | (1,704 | )    |  |   | 485    |  
|Deferred revenues                                                                       |  |                          | (888   | ) |      |   | 1,222  |      |  |   | 13     |  
|Other liabilities                                                                       |  |                          | (63    | ) |      |   | (6     | )    |  |   | 1,707  |  
|                                                                                        |  |                          |        |   |      |   |        |      |  |   |        |  
|Net cash from (used in) operating activities                                            |  |                          | 4,007  |   |      |   | (1,807 | )    |  |   | (5,248 | )
|                                                                                        |  |                          |        |   |      |   |        |      |  |   |        |  
|Cash flows from investing activities:                                                   |  |                          |        |   |      |   |        |      |  |   |        |  
|Purchase of property and equipment                                                      |  |                          | (1,468 | ) |      |   | (1,676 | )    |  |   | (1,335 | )
|Capitalized software costs                                                              |  |                          |       |   |      |   | (27    | )    |  |   |       |  
|Sale of equity investment                                                               |  |                          | 734    |   |      |   |       |      |  |   |       |  
|Acquisition spending                                                                    |  |                          |       |   |      |   |       |      |  |   | (1,518 | )
|                                                                                        |  |                          |        |   |      |   |        |      |  |   |        |  
|Net cash used in investing activities                                                   |  |                          | (734   | ) |      |   | (1,703 | )    |  |   | (2,853 | )
|                                                                                        |  |                          |        |   |      |   |        |      |  |   |        |  
|Cash flows from financing activities:                                                   |  |                          |        |   |      |   |        |      |  |   |        |  
|Principal payments on short-term loan                                                   |  |                          |       |   |      |   | (104   | )    |  |   | (250   | )
|Proceeds from issuance of common stock                                                  |  |                          | 2,231  |   |      |   | 1,830  |      |  |   | 8,868  |  
|Proceeds from issuance of common stock for acquisition of businesses                    |  |                          |       |   |      |   |       |      |  |   | 1,248  |  
|                                                                                        |  |                          |        |   |      |   |        |      |  |   |        |  
|Net cash from financing activities                                                      |  |                          | 2,231  |   |      |   | 1,726  |      |  |   | 9,866  |  
|                                                                                        |  |                          |        |   |      |   |        |      |  |   |        |  
|Effect of changes in foreign exchange rates                                             |  |                          | 23     |   |      |   | 45     |      |  |   |       |  
|Net increase (decrease) in cash and cash equivalents                                    |  |                          | 5,527  |   |      |   | (1,739 | )    |  |   | 1,765  |  
|Cash and cash equivalents at the beginning of period                                    |  |                          | 22,234 |   |      |   | 23,973 |      |  |   | 22,208 |  
|                                                                                        |  |                          |        |   |      |   |        |      |  |   |        |  
|Cash and cash equivalents at the end of the period                                      |  | $                        | 27,761 |   |      | $ | 22,234 |      |  | $ | 23,973 |  
|                                                                                        |  |                          |        |   |      |   |        |      |  |   |        |  
|Supplemental disclosures of cash flow activities:                                       |  |                          |        |   |      |   |        |      |  |   |        |  
|Income taxes paid                                                                       |  | $                        | 42     |   |      | $ |       |      |  | $ | 30     |  
|Interest paid                                                                           |  | $                        | 44     |   |      | $ | 5      |      |  | $ | 8      |  



See accompanying notes.



49



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##### Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|(1) | Nature of Business and Subsequent Event
|--- | ---------------------------------------



Description of Business.    Netopia, Inc. (the Company) develops and markets broadband customer premises networking
equipment and remote management software for the management of broadband services and equipment. The Company also develops and provides value-added services for service providers and remote management software for enterprises technical support,
help-desks and personal computers.



Merger Agreement with Motorola, Inc.



On November 13, 2006, Netopia entered into a
definitive merger agreement with Motorola, Inc. (Motorola), pursuant to which Motorola intends to purchase all of our outstanding shares of common stock for $7.00 per share in cash. The transaction is subject to Hart-Scott-Rodino review,
which is a federal government antitrust law that requires prior notification to federal antitrust agencies of certain acquisitions before the transaction may be closed, regulatory filings with antitrust authorities in certain European countries, the
approval of our shareholders, and other customary closing conditions. Assuming all approvals are obtained and all closing conditions are met, we expect the acquisition to close during the first calendar quarter of 2007. There can be no assurance
that the merger will be consummated in a timely manner, if at all. In addition, we are subject to a number of operational covenants in the merger agreement that restrict in certain ways our ability to operate freely prior to the closing of the
proposed transaction. We have filed a preliminary proxy statement and intend to file a definitive proxy statement and other relevant materials with the Securities and Exchange Commission (SEC), including a detailed description of the
terms of the merger agreement, as well as other important information about the proposed transaction. SHAREHOLDERS OF NETOPIA ARE URGED TO READ THE PROXY STATEMENT AND OTHER RELEVANT MATERIALS BECAUSE THEY CONTAIN IMPORTANT INFORMATION ABOUT THE
PROPOSED TRANSACTION.



Netopia and its executive officers
and directors may be deemed to be participants in the solicitation of proxies from Netopia shareholders in favor of the proposed transaction. Certain of the executive officers and directors of Netopia have interests in the proposed transaction that
may differ from the interests of our shareholders generally, including acceleration of vesting of stock options, payments in connection with a change in control transaction, payments in connection with anticipated employment by Motorola, and
continuation of director and officer insurance and indemnification. These interests are described in the proxy statement.



|(2) | Summary of Significant Accounting Policies
|--- | ------------------------------------------



Fiscal Year.    The Companys fiscal year is the 12-months ended September 30.



Principles of Consolidation.    The Consolidated
Financial Statements include the accounts of Netopia, Inc. and its wholly owned foreign subsidiaries. All significant intercompany balances and transactions have been eliminated.



Cash and Cash Equivalents.Cash and cash equivalents consist of money market funds with
original maturities of 90 days or less from the time of purchase. Cash equivalents are recorded at cost, which approximates fair value. Cash equivalents as of September 30, 2006 and 2005, consisted of the following:



|                   |  |               |        |      |   |       
|------------------ |  | ------------- | ------ | ---- | - | ------
|                   |  | September 30,
|(in thousands)     |  | 2006          |        | 2005
|Money market funds |  | $             | 25,177 |      | $ | 20,107



Revenue
Recognition.    Our broadband equipment products are integrated with software that is essential to the functionality of the equipment. Accordingly, we account for broadband equipment revenues and any related



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professional services in accordance with Statement of Position No. 97-2, Software Revenue Recognition (SOP 97-2),
and all related interpretations. Revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and collectibility is reasonably assured. Determining whether and when some of these
criteria have been satisfied often involve assumptions and judgments that can have significant impact on the timing and amount of revenues we report. At the date of shipment, assuming that the revenue recognition criteria specified above is met, we
provide for an estimate of returns and warranty expense based on historical experience of returns of similar products and warranty costs incurred, respectively.



Sales to our distributors and resellers are generally recognized at the time title to our product passes to the distributor or reseller, provided all
other criteria for revenue recognition are met. This policy is predicated on the Companys ability to estimate sales returns. The Company also must evaluate whether our distributors and resellers have the ability to honor their commitment to
make fixed and determinable payments, regardless of whether they collect cash from their customers. If we were to change any of these assumptions or judgments, it could cause a material increase or decrease in the amount of revenues that we report
in a particular period.



We recognize software license and
related services revenues in accordance with SOP 97-2, as amended by SOP 98-9, and all related interpretations. We have multiple element arrangements that include perpetual software licenses, maintenance and professional services. We allocate and
defer revenue for the undelivered items based on vendor-specific objective evidence, or VSOE, of fair value of the undelivered elements. VSOE of each element is based on the price for which the undelivered element is sold separately. We determine
fair value of the undelivered elements based on historical evidence of our stand-alone sales of these elements to third parties. Software license revenue is recognized when a non-cancelable license agreement has been signed or a properly authorized
firm purchase order is received and the customer acknowledges an unconditional obligation to pay, the software product has been delivered, there are no uncertainties surrounding product acceptance, the fees are fixed and determinable, and collection
is considered probable. Maintenance revenue, including revenue included in multiple element arrangements, is deferred and recognized ratably over the related contract period, generally twelve months.



For contracts where services are performed which do not qualify for separate
accounting treatment as described by SOP 97-2, the Company has applied the principles of contract accounting in accordance with Accounting Research Bulletin No. 45 Long-Term Construction-Type Contractsand the relevant
guidance provided by Statement of Position (SOP) 81-1 Accounting for Performance of Construction Type and Certain Production Type Contracts. Under the guidance of SOP 81-1, the percentage of completion methodology is applied
to software and related professional services where recognized revenue is determined after certain milestones or deliverables have been met (completed) under the terms of the signed contract.



Our enhanced web site service arrangements involve the delivery or
performance of multiple products, services and/or rights to use assets. We apply the provisions of Emerging Issues Task Force (EITF) Issue No. 00-21, Revenue Arrangements with Multiple Deliverables, to determine
whether these arrangements involving multiple deliverables contains more than one unit of accounting and how the consideration of the arrangement should be allocated to those units of accounting. We allocate the revenue from these arrangements to
each element of the arrangement based on the fair value of the elements and apply the revenue recognition rules to each element separately, pursuant to the guidance in SEC Staff Accounting Bulletin No. 101 Revenue Recognition in
Financial Statements(SAB 101), and SEC Staff Accounting Bulletin No. 104, Revenue Recognition. SAB 101 requires that the fair values used for such allocations should be reliable, verifiable and objectively
determinable. We allocate a portion of the arrangement fee to the undelivered element, generally web site hosting, based on the fair value of the undelivered elements, regardless of any separate prices stated within the contract for each element.
Fair value for hosting is based on the price the customer would pay when sold separately. Fair value for the delivered elements, primarily fulfillment services, is based on the residual amount of the total arrangement fees after deducting the fair
value for the undelivered elements. Fulfillment revenue is recognized when a properly authorized firm purchase order is received and the customer acknowledges an



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unconditional obligation to pay, there are no uncertainties surrounding product acceptance, the fees are fixed and determinable, collection is considered
probable and the fulfillment has been completed. Hosting revenue is deferred and recognized ratably over the related service period, generally twelve months.



We have adopted the provisions of EITF 01-09, Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the
Vendors Products), for the accounting treatment of marketing incentive programs that have resulted in the provision of rebates, credits and discounts given to our customers directly or indirectly. We presume such incentive programs
and rebates, credits and discounts to be a reduction of the selling prices of our products and/or services and, therefore, are characterized as a reduction of revenue when recognized in our Consolidated Financial Statements.



Concentrations of Credit Risk and Allowance for Doubtful
Accounts.    Financial instruments that potentially expose the Company to concentrations of credit risk principally consist of cash, cash equivalents and accounts receivable. The Companys accounts receivable are mostly
derived from sales to telecommunication service providers, resellers and distributors in the United States and Europe. The Company performs ongoing credit evaluations of its customers financial condition and limits the amount of credit
extended when deemed necessary, but generally requires no collateral. In addition, allowances are maintained for potential credit losses associated with potential problem accounts receivable. The Company limits the amounts invested in any one type
of investment and maintains most of its cash investments with one financial institution. Although such investments exceed the $0.1 million amount subject to Federal Deposit Insurance, management believes the financial risks associated with such
investments are minimal.



During fiscal year 2006 and 2005, the
Company did not experience significant losses on trade receivables from any particular customer, industry, or geographic region. The allowance for doubtful accounts is based on the Companys assessment of the collectibility of customer
accounts. The Company regularly reviews the allowance by considering factors such as historical experience, credit quality, the age of the accounts receivable balance, and current economic conditions that may affect a customers ability to pay.



Inventories.    Inventories are
recorded at the lower of cost or market (net realizable value). Cost is computed using standard cost, which approximates actual cost, on a first-in, first-out basis. Cost includes material costs, labor and applicable manufacturing overhead. The
Company evaluates ending inventories for estimated excess quantities and obsolescence. This evaluation includes analysis of sales levels by product and projections of future demand within specific time horizons (generally 12 months). Inventories in
excess of future demand are reserved. In addition, the Company considers the impact of changing technology on our inventory-on-hand and writes-off inventories that are considered obsolete. At the point of loss recognition, a new, lower-cost basis
for that inventory is established, and subsequent changes in facts and circumstances do not result in the restoration or increase in the newly established cost basis.



Property and Equipment.    Property and equipment are stated at cost less accumulated
depreciation. Depreciation is computed using the straight-line method over the shorter of estimated useful life or the lease term. Upon retirement or sale, the cost and related accumulated depreciation are removed from the accounts and any related
gain or loss is reflected in operations. Maintenance and repairs are charged to operations as incurred. The following table sets forth the depreciable lives generally used by major class of asset:



|                        |  |                                                                                          
|----------------------- |  | -----------------------------------------------------------------------------------------
|Major class of asset    |  | Depreciable life (in years)                                                              
|Manufacturing tooling   |  | 2                                                                                        
|Computers               |  | 3                                                                                        
|Machinery and equipment |  | 4                                                                                        
|Furniture and fixtures  |  | 7                                                                                        
|Leasehold improvements  |  | Shorter of estimated useful life or remainingterm of lease (generally five years or less)



Research and
Development Costs.    Research and development costs required to be capitalized pursuant to Statement of Financial Accounting Standards No. 86, Accounting for the Costs of Computer Software to Be



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Sold, Leased, or Otherwise Marketed were not material in fiscal years 2006 and 2005. Capitalized research and development costs are reported
within Deposits and other assets in the Consolidated Balance Sheets as of September 30, 2006 and 2005. Capitalized research and development costs are amortized to expense over their estimated useful lives, generally thirty
six months. Software development costs for internal use required to be capitalized pursuant to Statement of Position No. 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use, have not
been material.



Goodwill.Goodwill represents the excess of price and related costs over the value assigned to the net tangible and intangible assets of the business acquired. Goodwill is tested for impairment on an annual
basis and between annual tests if indicators of potential impairment exist, using a fair-value-based approach generally based on projected cash flows. No impairment of goodwill was identified during fiscal years 2006 and 2005.During fiscal
year 2004, the Company concluded that due to the planned closure of its German subsidiary in the first quarter of fiscal 2005, the goodwill associated with that entity of $0.5 million was impaired and was written-off.



Long-Lived Assets, Including Other Intangible
Assets.    We evaluate our long-lived assets, including other intangible assets and test our long-lived assets and other intangible assets for impairment whenever events or changes in circumstances indicate that the carrying
amount of the asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the estimated undiscounted future net cash flows expected to be generated by the asset group
that represents the lowest level for which identifiable cash flows exist. If an asset group is considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount exceeds the fair value of the assets and
is allocated to the long-lived assets of the asset group on a pro rata basis. Fair value is estimated using the discounted cash flow method. Assets to be disposed of are reported at the lower of carrying values or fair values, less costs of
disposal. No impairment of intangible assets was identified during fiscal years 2006, 2005 and 2004. Intangible assets are amortized using the straight-line method over their estimated period of benefit, ranging from 3 to 6 years.



Advertising Costs.    The Company expenses
advertising costs as incurred. Advertising expense was $0.4 million, $0.7 million and $0.7 million for fiscal years 2006, 2005 and 2004, respectively.



Income Taxes.    Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years that those
temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is provided to
the extent such deferred tax assets may not be realized.



Equity Investment.    The Company has a carrying value associated with one investment in a privately held company in the amount of $1.4 million and $1.0 million at September 30, 2006 and 2005, respectively.
The Company monitors the investment for impairment and makes appropriate reductions in carrying values if the Company determines that an impairment charge is required based primarily on the financial condition and near-term prospects of the
privately held company. The Company accounts for its investment under the cost method as defined within Accounting Principles Board Opinion 18 (APB 18) The Equity Method of Accounting for Investments in Common Stock. As such, the
Company evaluates its investments for factors that indicate a decrease in the carrying value of the investment which is other than temporary and should be recognized.



Stock-Based Compensation.On October 1, 2005, the Company adopted Statement of Financial
Accounting Standards No. 123 (revised 2004) Share-Based Payment(SFAS 123R), which requires the measurement and recognition of compensation expense for share-based payment awards made to the Companys
employees and non-employee directors, including stock options and employee stock purchases made pursuant to the Employee Stock Purchase Plan (ESPP), based on estimated fair values.



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The Company adopted SFAS 123(R) using the modified prospective method, which requires us to record
compensation expense for all awards granted after the date of adoption, and for the unvested portion of previously granted awards that remain outstanding at the date of adoption. Accordingly, prior period amounts presented herein have not been
restated to reflect the adoption of SFAS 123(R). The fair value concepts were not changed significantly in SFAS 123(R); however, in adopting SFAS 123(R), companies must choose among alternative valuation models and amortization assumptions. After
assessing alternative valuation models and amortization assumptions, the Company will continue using the Black-Scholes option-pricing formula. The Company recognizes compensation cost on a straight-line basis over the requisite service period for
each separately vesting portion of share-based payment awards as if the award was, in substance, multiple awards. The Company will reconsider use of this model if additional information becomes available in the future that indicates another model
would be more appropriate, or if grants issued in future periods have characteristics that cannot be reasonably estimated using this model. Under SFAS No. 123, Accounting for Stock Based Compensation (SFAS 123),
the Company was not required to estimate forfeitures in expense calculation for the stock compensation pro forma footnote disclosure; however, SFAS 123(R) requires an estimate of forfeitures and upon adoption the Company changed methodology to
include an estimate of forfeitures. The adoption of SFAS 123(R) had no effect on cash flows from operating activities.



Service Accrual.    The Company expenses the costs to provide technical telephone support for certain broadband equipment
software customers at the time that the product is shipped.



Use of Estimates.The preparation of financial statements in conformity with United States generally accepted accounting principles requires management to make estimates and judgments that affect the amounts
reported in the Condensed Consolidated Financial Statements and accompanying notes. Estimates are used for revenue recognition, allowance for doubtful accounts and sales returns, reserves for excess and obsolete inventory, warranty costs,
compensation expense for share-based payment awards, investment impairments, income taxes, service costs, loss contingencies, and intangible assets, among others. The actual results experienced by the Company may differ materially from
managements estimates



Per Share
Calculations.Basic net income (loss) per share is computed using the weighted-average number of common shares outstanding during the period. Diluted net income per share is computed using the weighted-average number of
common shares and dilutive potential common shares outstanding. Diluted net loss per share is computed using the weighted-average number of common shares and excludes dilutive potential common shares outstanding, as their effect is antidilutive.
Dilutive potential common shares consist of employee stock options, which in aggregate were approximately 7.5 million options outstanding at September 30, 2006, and incremental shares under the employee stock purchase plan.



Net Loss per Share



The following table presents the calculation of basic and diluted net loss
per share (in thousands, except per share amounts):



|                                    |  |      |        |   |      |   |        |      |  |   |        |  
|----------------------------------- |  | ---- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|Years Ended September 30,           |  | 2006 |        |   | 2005 |   |        | 2004 | 
|Net Loss                            |  |      | (3,591 | ) |      |   | (7,133 | )    |  |   | (8,809 | )
|Weighted-average shares outstanding |  |      | 25,748 |   |      |   | 25,093 |      |  |   | 23,573 |  
|Net Loss per share:                 |  |      |        |   |      |   |        |      |  |   |        |  
|Basic and Diluted                   |  | $    | (0.14  | ) |      | $ | (0.28  | )    |  | $ | (0.37  | )



Statement of Financial
Accounting Standards No. 128, Earnings per Share, requires that employee stock options and rights to purchase stock under an ESPP be treated as potential common shares outstanding in computing diluted earnings per share.
Diluted shares outstanding include the dilutive effect of in-the-money options, which is calculated based on the average share price for each fiscal period using the treasury stock method. Under the treasury stock method, the amount the employee
must pay for exercising stock options, the



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amount of compensation cost for future service that the Company has not yet recognized, and the amount of tax benefits, if any, that would be recorded in
additional paid-in capital when the award becomes deductible are assumed to be used to repurchase shares.



Business Segments.The Company operates two business segments. The Company develops and markets broadband customer premises
equipment and remote management software for the management of broadband services and equipment. The Company also develops and provides value-added services for service providers and remote management software for enterprises technical
support, help-desks and personal computers. Our organization is structured in a functional manner. The President and Chief Executive Officer was identified as the Companys Chief Operating Decision Maker as defined by Statement of Financial
Accounting Standards No. 131, Disclosure about Segments of an Enterprise and Related Information (SFAS 131). SFAS 131 establishes standards for the reporting by public business enterprises of information about
operating segments, products and services, geographic areas, and major customers. The methodology for determining the information reported is based on the organization of operating segments and the related information that the Chief Operating
Decision Maker uses for operational decisions and assessing financial performance. The Companys Chief Operating Decision Maker manages Netopia based primarily on broad functional categories of: manufacturing costs, sales and marketing, product
development and engineering, and administration. For purposes of making operating decisions and assessing financial performance, the Companys Chief Operating Decision Maker reviews financial information presented on a consolidated basis
accompanied by disaggregated information for revenues and gross margins by product group as well as revenues by geographic region and by major customer. Operating expenses, assets, and cash flows are not segregated by product group for purposes
assessing financial performance.



Foreign Currency
Translation.    Assets and liabilities of the Companys non-U.S. subsidiaries that operate in a local currency environment, where the local currency is the functional currency, are translated to U.S. dollars at exchange
rates in effect at the balance sheet date, with the resulting translation adjustments directly recorded to a separate component of accumulated other comprehensive income. Income and expense accounts are translated at weighted-average exchange rates
during the year. Translation adjustments are recorded in other income (loss), net, when the U.S. dollar is the functional currency.



Derivative InstrumentsForeign Currency Forward Contracts.    The Company has entered into foreign currency forward
contracts to hedge foreign currency receivables. Forward contracts involve agreements to sell foreign currencies at specific rates at future dates. The Company does not hold or issue derivative financial instruments for speculative trading purposes.
These contracts are designed to hedge, or reduce the potential foreign currency losses and gains on foreign currency denominated receivables. The forward contracts are not designated as accounting hedges and the carrying amount of the forward
contracts is the fair value, which is determined by obtaining quoted market prices, and recognized as either assets or liabilities. Changes in fair value of forward contracts are recognized in other income (loss), net at the end of each month.



Reclassifications.    Certain
reclassifications have been made to prior year balances in order to conform to the current years presentation.



Fair Value of Financial Instruments.    The fair value of cash and cash equivalents, accounts receivable and accounts payable
for all periods presented approximates their respective carrying amounts because of the short maturity of these financial instruments.



Recent Accounting Pronouncements



In September 2006, the SEC issued Staff Accounting Bulletin No. 108 (SAB 108), which expresses the views of the SEC regarding the effects
of prior year misstatements when quantifying misstatements in current year financial statements. SAB 108 provides guidance related to the diversity in practice in quantifying financial statement misstatements, including the effect of prior year
errors on current year financial statements. Application of SAB 108 is required for fiscal years ending after November 15, 2006 and as a result, is effective



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for the Company in the first quarter of fiscal 2007. The Company does not believe that the application of SAB 108 will have a material impact on our
Consolidated Financial Statements.



In September 2006, the FASB
issued Statement of Financial Accounting Standards No. 157, Fair Value Measurements(SFAS 157).SFAS 157 establishes a framework for measuring fair value in generally accepted accounting principles (GAAP), and expands
disclosures about fair value measurements. SFAS 157 clarifies the definition of fair value and the methods used to measure fair value. SFAS 157 requires expanded disclosures about fair value measurements. This statement does not require any new fair
value measurements. This statement is effective for fiscal years beginning after November 15, 2007 and as a result, is effective for the Company in the first quarter of fiscal 2009. The Company does not believe that the adoption of SFAS 157
will have a material impact on our Consolidated Financial Statements.



In July 2006, the FASB issued Financial Interpretation No. 48, Accounting for Uncertainty in Income Taxes-an interpretation of FASB Statement No. 109 (FIN 48), which is a change in accounting for
income taxes. FIN 48 specifies how tax benefits for uncertain tax positions are to be recognized, measured, and derecognized in financial statements; requires certain disclosures of uncertain tax matters; specifies how reserves for uncertain tax
positions should be classified on the balance sheet; and provides transition and interim period guidance, among other provisions. FIN 48 is effective for fiscal years beginning after December 15, 2006 and as a result, is effective for the
Company in the first quarter of fiscal 2008. The Company does not believe that the proposed interpretation has had nor will have a material impact on our Consolidated Financial Statements.



In May 2005, the FASB issued Statement of Financial Accounting Standards
No. 154, Accounting Changes and Error Corrections, a replacement of APB No. 20 and FASB Statement No. 3 (SFAS 154). SFAS 154 requires retrospective application to prior periods financial
statements of a voluntary change in accounting principle unless it is impracticable. APB Opinion No. 20 Accounting Changes, previously required that most voluntary changes in accounting principle be recognized by including in net
income of the period of the change the cumulative effect of changing to the new accounting principle. This statement is effective for fiscal years beginning after December 15, 2005 and as a result, is effective for the Company in the first
quarter of fiscal 2007. The Company does not believe that the adoption of SFAS 154 has had nor will have a material impact on our Consolidated Financial Statements.



|(3) | Acquisitions
|--- | ------------



In fiscal year 2004, the Company acquired JadeSail Systems, Inc, as described below. The Company did not complete any acquisitions in fiscal years 2006 or
2005.



In October 2003, the Company acquired JadeSail, a
provider of Internet Protocol services management and network equipment provisioning software. JadeSail survived as a wholly owned subsidiary of Netopia and was later merged into Netopia. Netopia has incorporated the JadeSail technology into its
Netopia Broadband Server remote management software platform.



Under the terms of the merger agreement, the Company issued shares of its common stock in exchange for all the outstanding common stock of JadeSail. The aggregate purchase price was approximately $1.4 million and consisted of
(a) 160,000 shares of the Companys common stock, which were valued using the average of the closing price of the Companys common stock for the 5 day period beginning two days prior to and ending two days after the closing date, and
(b) other transaction related expenses of approximately $0.2 million. The Company accounted for the transaction using the purchase method.



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The allocation of the purchase price was based upon the Companys estimate of the fair value of the
tangible and intangible assets acquired as summarized below:



|                              |  |        |       |  
|----------------------------- |  | ------ | ----- | -
|(in thousands)                |  | Amount |      
|Cash                          |  | $      | 42    |  
|Accounts payable              |  |        | (42   | )
|Identified intangible assets: |  |        |       |  
|Developed product technology  |  |        | 246   |  
|Goodwill                      |  |        | 1,149 |  
|                              |  |        |       |  
|Total purchase price          |  | $      | 1,395 |  
|                              |  |        |       |  



Developed product
technology is being amortized to expense based on an estimated useful life of 5 years.



|(4) | Goodwill and Purchased Intangible Assets
|--- | ----------------------------------------



The Companys goodwill was allocated to the broadband software and services segment. The carrying amount of goodwill was $1,668,000 as of
September 30, 2006, 2005 and 2004.



At September 30,
2006, the Companys purchased intangible assets consisted of developed product technology.



The table below presents details of the Companys purchased intangible assets.



|                            |  |            |        |   |                       |   |      |       |  |   |        |  
|--------------------------- |  | ---------- | ------ | - | --------------------- | - | ---- | ----- |  | - | ------ | -
|(in thousands)              |  | Technology |        |   | CustomerRelationships |   |      | Total | 
|Balance, September 30, 2004 |  | $          | 3,432  |   |                       | $ | 584  |       |  | $ | 4,016  |  
|Amortization                |  |            | (1,200 | ) |                       |   | (447 | )     |  |   | (1,647 | )
|                            |  |            |        |   |                       |   |      |       |  |   |        |  
|Balance, September 30, 2005 |  |            | 2,232  |   |                       |   | 137  |       |  |   | 2,369  |  
|Amortization                |  |            | (1,206 | ) |                       |   | (137 | )     |  |   | (1,343 | )
|                            |  |            |        |   |                       |   |      |       |  |   |        |  
|Balance, September 30, 2006 |  | $          | 1,026  |   |                       | $ |     |       |  | $ | 1,026  |  
|                            |  |            |        |   |                       |   |      |       |  |   |        |  



Amortization expense
related to the Companys purchased intangible assets totaled $1,343,000, $1,647,000 and $1,604,000 for the fiscal years ended September 30, 2006, 2005 and 2004, respectively. The Companys purchased intangible assets are estimated to
be almost fully amortized by the end of fiscal 2007, with estimated future amortization of $977,000 and $49,000, in fiscal years 2007 and 2008, respectively.



|(5) | Inventories
|--- | -----------



At September 30, 2006 and 2005, inventories consisted of the following:



|                |  |               |       |      |   |      
|--------------- |  | ------------- | ----- | ---- | - | -----
|                |  | September 30,
|(in thousands)  |  | 2006          |       | 2005
|Raw materials   |  | $             | 1,327 |      | $ | 1,783
|Work-in-process |  |               | 120   |      |   | 43   
|Finished goods  |  |               | 4,718 |      |   | 6,892
|                |  |               |       |      |   |      
|Balance         |  | $             | 6,165 |      | $ | 8,718
|                |  |               |       |      |   |      



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|(6) | Property and Equipment
|--- | ----------------------



Property and equipment at September 30, 2006 and 2005 is shown in the table below. Depreciation expense totaled $1,518,000, $1,739,000 and $2,400,000
for the fiscal years ended September 30, 2006, 2005 and 2004, respectively.



|                              |  |               |         |   |      |   |         |  
|----------------------------- |  | ------------- | ------- | - | ---- | - | ------- | -
|                              |  | September 30, |        
|(in thousands)                |  | 2006          |         |   | 2005 |  
|Computers                     |  | $             | 7,408   |   |      | $ | 7,064   |  
|Machinery and equipment       |  |               | 3,725   |   |      |   | 3,415   |  
|Furniture and fixtures        |  |               | 1,717   |   |      |   | 1,684   |  
|Manufacturing tooling         |  |               | 1,508   |   |      |   | 1,310   |  
|Leasehold improvements        |  |               | 436     |   |      |   | 376     |  
|                              |  |               |         |   |      |   |         |  
|                              |  |               | 14,794  |   |      |   | 13,849  |  
|Less: accumulated deprecation |  |               | (12,308 | ) |      |   | (11,226 | )
|                              |  |               |         |   |      |   |         |  
|Property and equipment, net   |  | $             | 2,486   |   |      | $ | 2,623   |  
|                              |  |               |         |   |      |   |         |  



|(7) | Warranty Liability
|--- | ------------------



Warranty liability is recorded as a component of accrued liabilities on the Companys Consolidated Balance Sheets. For the Companys broadband
equipment products, the Company generally provides a warranty of one to two years. The Company generally does not offer a warranty on its broadband software and services products. The Company accrues for its estimated product warranty costs at the
time of shipment. Product warranty costs are estimated based upon the Companys historical experience.



The following table summarizes the activity related to the product warranty liability (in thousands):



|                              |  |   |      |  
|----------------------------- |  | - | ---- | -
|Balance, September 30, 2004   |  | $ | 136  |  
|Utilized                      |  |   | (323 | )
|Charges to costs and expenses |  |   | 497  |  
|                              |  |   |      |  
|Balance, September 30, 2005   |  |   | 310  |  
|Utilized                      |  |   | (262 | )
|Charges to cost and expenses  |  |   | 214  |  
|                              |  |   |      |  
|Balance, September 30, 2006   |  | $ | 262  |  
|                              |  |   |      |  



|(8) | Income Taxes
|--- | ------------



For financial reporting purposes, the Companys net loss prior to the provision for income taxes included the following:



|               |  |                          |        |   |      |   |        |      |  |   |        |  
|-------------- |  | ------------------------ | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|               |  | Year ended September 30, |       
|(in thousands) |  | 2006                     |        |   | 2005 |   |        | 2004 | 
|United States  |  | $                        | (3,672 | ) |      | $ | (7,209 | )    |  | $ | (8,931 | )
|Foreign        |  |                          | 130    |   |      |   | 142    |      |  |   | 200    |  
|               |  |                          |        |   |      |   |        |      |  |   |        |  
|Total          |  | $                        | (3,542 | ) |      | $ | (7,067 | )    |  | $ | (8,731 | )
|               |  |                          |        |   |      |   |        |      |  |   |        |  



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Income tax expense related to continuing operations consisted of the following:



|               |  |                          |    |      |   |      |  |   |   
|-------------- |  | ------------------------ | -- | ---- | - | ---- |  | - | --
|               |  | Year ended September 30,
|(in thousands) |  | 2006                     |    | 2005 |   | 2004
|Current:       |  |                          |    |      |   |      |  |   |   
|Federal        |  | $                        |   |      | $ |     |  | $ |  
|State          |  |                          |   |      |   |     |  |   |  
|Foreign        |  |                          | 49 |      |   | 66   |  |   | 78
|               |  |                          |    |      |   |      |  |   |   
|               |  | $                        | 49 |      | $ | 66   |  | $ | 78
|               |  |                          |    |      |   |      |  |   |   
|Deferred:      |  |                          |    |      |   |      |  |   |   
|Federal        |  | $                        |   |      | $ |     |  | $ |  
|State          |  |                          |   |      |   |     |  |   |  
|Foreign        |  |                          |   |      |   |     |  |   |  
|               |  |                          |    |      |   |      |  |   |   
|               |  | $                        |   |      | $ |     |  | $ |  
|               |  |                          |    |      |   |      |  |   |   



Income tax expense
(benefit) related to continuing operations differs from the amounts computed by applying the statutory income tax rate of 34% for 2006, 2005 and 2004 to pretax loss as a result of the following:



|                                          |  |                          |        |   |      |   |        |      |  |   |        |  
|----------------------------------------- |  | ------------------------ | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                          |  | Year ended September 30, |       
|(in thousands)                            |  | 2006                     |        |   | 2005 |   |        | 2004 | 
|Computed expected benefit of 34%        |  | $                        | (1,204 | ) |      | $ | (2,403 | )    |  | $ | (2,969 | )
|Losses not benefited                      |  |                          |       |   |      |   | 2,399  |      |  |   | 2,978  |  
|Share-based compensation not benefited    |  |                          | 1,786  |   |      |   |       |      |  |   |       |  
|Other, change in valuation allowance      |  |                          | (533   | ) |      |   | 70     |      |  |   | 69     |  
|                                          |  |                          |        |   |      |   |        |      |  |   |        |  
|Provision for (benefit from) income taxes |  | $                        | 49     |   |      | $ | 66     |      |  | $ | 78     |  
|                                          |  |                          |        |   |      |   |        |      |  |   |        |  



The tax effects of
temporary differences that gave rise to significant portions of the deferred tax assets and liabilities were as follows:



|                               |  |                          |         |   |      |   |         |      |  |   |         |  
|------------------------------ |  | ------------------------ | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                               |  | Year ended September 30, |        
|(in thousands)                 |  | 2006                     |         |   | 2005 |   |         | 2004 | 
|Reserves and accruals          |  | $                        | 999     |   |      | $ | 1,832   |      |  | $ | 1,805   |  
|Research and other credits     |  |                          | 7,887   |   |      |   | 6,932   |      |  |   | 6,859   |  
|Tangible and intangible assets |  |                          | 9,644   |   |      |   | 8,646   |      |  |   | 10,513  |  
|Net operating losses (NOLs)    |  |                          | 42,453  |   |      |   | 41,736  |      |  |   | 39,135  |  
|                               |  |                          |         |   |      |   |         |      |  |   |         |  
|                               |  |                          | 60,983  |   |      |   | 59,146  |      |  |   | 58,312  |  
|Less: valuation allowance      |  |                          | (60,983 | ) |      |   | (59,146 | )    |  |   | (58,312 | )
|                               |  |                          |         |   |      |   |         |      |  |   |         |  
|Deferred tax assets, net       |  | $                        |        |   |      | $ |        |      |  | $ |        |  
|                               |  |                          |         |   |      |   |         |      |  |   |         |  



The net change in the
total valuation allowance for the years ended September 30, 2006 and 2005 was an increase of $1.8 million and $0.8 million, respectively.



At September 30, 2006, the Company believed that based upon available evidence, there was sufficient uncertainty regarding the ability to realize its
deferred tax assets to warrant a full valuation allowance. The factors considered included the relative shorter life cycles in the high technology industry and the uncertainty of longer-term taxable income estimates.



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At September 30, 2006, the Company had net operating loss carry-forwards of approximately $117.5
million for federal tax purposes and $50.6 million for state tax purposes. If not earlier utilized, the federal net operating loss carry-forwards will expire in various years from 2018 through 2025 and the state net operating loss carry-forwards
will expire in various years from 2018 through 2026.



At
September 30, 2006, the Company also had research credit carry-forwards of approximately $4.9 million for federal tax purposes and $4.1 million for state tax purposes. If not earlier utilized, the federal research credit carry-forwards will
expire in various years beginning 2006 through 2026. The state research credit carries forward indefinitely until utilized. The Company has California manufacturing credit carry-forwards of approximately $0.2 million, which expire in various years
beginning 2006 through 2012.



At September 30, 2006, the
Company also had minimum tax credit carry-forwards of approximately $0.1 million for federal tax purposes and $0.2 million for state tax purposes. These credits carry forward until utilized.



Federal and California tax laws impose substantial restrictions on the
utilization of net operating loss carry-forwards in the event of an ownership change for tax purposes, as defined in section 382 of the Internal Revenue Code. The Company has not yet determined if an ownership change has occurred. If
such ownership change has occurred, utilization of the net operating losses could be subject to annual limitation in future years.



|(9) | Stockholders Equity and Stock Option Plans
|--- | -------------------------------------------



Common Stock.The holders of common stock are entitled to one vote per share on all matters to be voted upon by the
stockholders. Subject to preferences that may be applicable to any outstanding preferred stock, the holders of common stock are entitled to receive ratably such dividends, if any, as may be declared from time to time by the Board of Directors out of
funds legally available. In the event of a liquidation, dissolution or winding up of the Company, the holders of common stock are entitled to share ratably in all assets remaining after payment of liabilities, subject to prior distribution rights of
preferred stock, if any, then outstanding. The common stock has no preemptive or conversion rights or other subscription rights.



Stock Option Plans



The Company has three share-based plans under which non-qualified and incentive stock options have been granted to employees, non-employees and board
members. Options granted under any of the three share-based plans have a maximum contractual term of 10 years. Stock options generally vest over service periods that range from 2 to 4 years. The Company also has an employee stock purchase plan for
all eligible employees.



1996 Stock Option
Plan.    In April 1996, the Company adopted the 1996 Stock Option Plan (the 1996 Plan) providing for the issuance of incentive or non-statutory options to directors, employees, and non-employee consultants. Options are
granted at the discretion of the Board of Directors or the Compensation Committee of the Board of Directors. Incentive stock options may be granted at not less than 100% of the fair market value per share and non-statutory stock options may be
granted at not less than 85% of the fair market value per share at the date of grant as determined by the Board of Directors or the Compensation Committee, except for options granted to a person owning greater than 10% of the total combined voting
power of all classes of stock of the Company, for which the exercise price of the options must be not less than 110% of the fair market value. Included in the 1996 Plan is a provision for the automatic grant of non-statutory options to non-employee
directors of the Company. The current provisions relating to the automatic grant of options to directors are described below. The 1996 Plan has expired, and as of September 30, 2006, no additional shares are available for grant under the 1996
Plan.



2000 Stock Incentive
Plan.    In October 2000, the Company adopted the 2000 Stock Incentive Plan (the 2000 Plan) providing for issuance of non-statutory options and restricted stock to employees, officers, directors, consultants, independent
contractors and advisors of the Company or any subsidiary of the Company. Options and restricted stock awards granted under the 2000 Plan are granted at the discretion of the Board of Directors or



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the Compensation Committee of the Board of Directors. The 2000 Plan is not a stockholder approved stock option plan and is intended to comply with the
exception for broadly based option plans in which a majority of the participants are rank and file employees not officers or directors, and a majority of the grants are made to such employees. Only nonqualified stock options that do not qualify as
incentive stock options within the meaning of Section 422(b) of the Internal Revenue Code may be granted under this Plan. The Board of Directors or the Compensation Committee will determine the exercise price of an option when the option is
granted and may be not less than the par value of the shares on the date of grant. Officers and directors will not receive any additional awards under the 2000 Plan. A restricted stock award is an offer by the Company to sell to an eligible person
shares that are subject to restrictions. The purchase price of shares sold pursuant to a restricted stock award will be determined by the Compensation Committee on the date the restricted stock award is granted and may be not less than the par value
of the shares on the date of grant. Restricted stock awards shall be subject to such restrictions as the Board of Directors or the Compensation Committee may impose. As of September 30, 2006, there were no restricted stock awards granted under
the 2000 Plan. As of September 30, 2006, there are 881,252 shares authorized but unissued and 321,293 shares available for grant under the 2000 Plan.



2002 Equity Incentive Plan.    In December 2001, the Company adopted the 2002 Equity Incentive Plan (the 2002 Plan) providing
for the issuance of incentive or non-statutory options, stock awards and other equity awards to directors, employees, and non-employee consultants. The Companys stockholders approved the 2002 Plan at the Annual Stockholder Meeting in January
2002. The 2002 Plan is a successor to the 1996 Plan. Options and other awards are granted at the discretion of the Board of Directors or the Compensation Committee of the Board of Directors. Incentive stock options may be granted at not less than
100% of the fair market value per share and non-statutory stock options may be granted at not less than 85% of the fair market value per share at the date of grant as determined by the Board of Directors or the Compensation Committee. Included in
the 2002 Plan is a provision for the automatic grant of non-statutory options to non-employee directors of the Company. The current provisions relating to the automatic grant of options to directors are described below. The automatic grant
provisions of the 2002 Plan take effect only at such time as there are not sufficient shares available under the existing automatic grant program in the 1996 Plan.



The initial number of shares of common stock available for issuance under the 2002 Plan was 750,000 shares. The number of
shares of common stock available for issuance under the 2002 Plan automatically increases on the first trading day of each calendar year beginning 2003 by an amount equal to four and three-quarter percent (4.75%) of the shares of common stock
outstanding on December 31 of the immediately preceding calendar year, provided, however, that no such automatic annual increase may exceed 1,000,000 shares. 1,000,000, additional shares of common stock became available on January 3,
2006, January 3, 2005, and January 2, 2004, for issuance under the 2002 Plan. As of September 30, 2006, there are approximately 4.1 million shares authorized but unissued and 401,057 shares available for grant under the 2002
Plan.



Amendments to Automatic Option Grant Programs in
Stock Option Plans.    Amendments to the Companys Automatic Option Grant Programs that are included in the 1996 Stock Option Plan and 2002 Equity Incentive Plan to increase the number of options granted to non-employee
directors of the Company were approved at the Companys Annual Meeting of Stockholders in January 2003. As amended, the Automatic Option Grant Programs provide that each non-employee director who is first elected or appointed on or after the
date of the 2003 Annual Meeting of Stockholders will receive the grant of an option to purchase 50,000 shares of common stock. The Automatic Option Grant Programs also provide for the grant on the date of each annual stockholder meeting beginning
with the 2003 Annual Meeting of Stockholders of (a) an option to purchase 15,000 shares of common stock to each non-employee director, and (b) an additional option to purchase 5,000 shares of common stock to each non-employee director who
is a member of the Audit Committee of the Companys Board of Directors.



Accounting for Stock-Based Compensation



On
October 1, 2005, the Company adopted SFAS 123(R), which requires the measurement and recognition of compensation expense for share-based payment awards made to the Companys employees and non-employee



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directors, including employee stock options and employee stock purchases related to the Employee Stock Purchase Plan. Accordingly, stock-based compensation
cost is measured at grant date, based on the estimated fair value of the award, and is recognized as expense over the employee requisite service period. The Companys stock compensation is accounted for as an expense and an addition to equity.
The Company previously applied Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations and provided the required pro forma disclosures of SFAS 123, Accounting
for Stock-Based Compensation.



Prior to the adoption of SFAS
123(R)



Prior to the adoption of SFAS 123(R), the Company provided the
disclosures required under SFAS 123 as amended by SFAS 148, Accounting for Stock-Based CompensationTransition and Disclosures.No employee stock-based compensation was reflected in net loss for the years ended
September 30, 2005 and 2004, because all options granted under those plans had an exercise price equal to the fair market value of the underlying common stock on the date of grant.



Impact of adoption of SFAS 123(R)



The Company elected to adopt the modified prospective application method as provided by SFAS 123(R). Accordingly, during the year ended September 30,
2006, the Company recorded stock-based compensation cost totaling the amount that would have been recognized had the fair value method been applied since the effective date of SFAS 123. Previously reported amounts have not been restated. The
following table summarizes the classification of stock-based compensation expense related to employee stock options and employee stock purchases under SFAS 123(R) for the year ended September 30, 2006, which was allocated as follows:



|                                                                |  |                             |      
|--------------------------------------------------------------- |  | --------------------------- | -----
|(in thousands)                                                  |  | Year EndedSeptember 30,2006
|Stock-based compensation expense was included in:               |  |                             |      
|Cost of revenuesbroadband equipment                            |  | $                           | 215  
|                                                                |  |                             |      
|Research and development                                        |  |                             | 2,375
|Selling and marketing                                           |  |                             | 1,375
|General and administrative                                      |  |                             | 1,988
|                                                                |  |                             |      
|Stock-based compensation expense included in operating expenses |  |                             | 5,738
|                                                                |  |                             |      
|Stock-based compensation expense included in net income (loss)  |  | $                           | 5,953
|                                                                |  |                             |      



The table below
reflects basic and diluted net income (loss) per share for the year ended September 30, 2006 compared with the pro forma information for years ended September 30, 2005 and 2004:



|                                                                                                |  |                          |        |   |      |   |         |      |  |   |         |  
|----------------------------------------------------------------------------------------------- |  | ------------------------ | ------ | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                                                                |  | Year Ended September 30, |       
|(in thousands except per share amounts)                                                         |  | 2006                     |        |   | 2005 |   |         | 2004 | 
|Net lossas reported for the prior period                                                       |  |                          | N/A    |   |      | $ | (7,133  | )    |  | $ | (8,809  | )
|Stock-based compensation expense related to employee stock options and employee stock purchases |  | $                        | (5,953 | ) |      | $ | (4,949  | )    |  | $ | (6,618  | )
|                                                                                                |  |                          |        |   |      |   |         |      |  |   |         |  
|Net lossincluding the effect of stock-based compensation expense                               |  | $                        | (3,591 | ) |      | $ | (12,082 | )    |  | $ | (15,427 | )
|                                                                                                |  |                          |        |   |      |   |         |      |  |   |         |  
|Basic and diluted loss per shareas reported for the prior period                               |  |                          | N/A    |   |      | $ | (0.28   | )    |  | $ | (0.37   | )
|                                                                                                |  |                          |        |   |      |   |         |      |  |   |         |  
|Basic and diluted loss per shareincluding the effect of stock-based compensation               |  | $                        | (0.14  | ) |      | $ | (0.48   | )    |  | $ | (0.65   | )
|                                                                                                |  |                          |        |   |      |   |         |      |  |   |         |  
|Shares Used in per share calculation                                                            |  |                          | 25,748 |   |      |   | 25,093  |      |  |   | 23,573  |  
|                                                                                                |  |                          |        |   |      |   |         |      |  |   |         |  



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As of October 1, 2006, the Company had an unrecorded deferred stock-based compensation balance
related to share-based payment awards of $6.8 million before estimated forfeitures. In the Companys pro forma disclosure prior to the adoption of SFAS 123(R), the Company accounted for forfeitures upon occurrence. SFAS 123(R) requires
forfeitures to be estimated at the time of grant and revised if necessary in subsequent periods if actual forfeitures differ from those estimates. Accordingly, as of October 1, 2006, the Company estimated that the stock based compensation
awards not expected to vest was $1.0 million, and therefore, the unrecorded deferred stock-based compensation balance related to share-based payment awards was adjusted to $5.8 million after forfeitures.



During the year ended September 30, 2006, the Company granted 2,494,250
stock options with an estimated total grant-date fair value of $7.2 million. Of this amount, the Company estimated that the stock-based compensation for awards not expected to vest was $1.7 million.



As of September 30, 2006, the amount of stock based compensation
capitalized as inventory was $3,000. The Company elected not to capitalize any stock-based compensation to inventory at October 1, 2005 when the provisions of SFAS 123(R) were initially adopted.



Stock Option Plans



The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model using the following estimates:



|                         |  |                          |   |  |      |   |  |      |  
|------------------------ |  | ------------------------ | - |  | ---- | - |  | ---- | -
|                         |  | Year Ended September 30, |  
|                         |  | 2006                     |   |  | 2005 |   |  | 2004 |  
|Expected life (in years) |  | 3.1                      |   |  | 3.7  |   |  | 3.3  |  
|Expected volatility      |  | 219                      | % |  | 350  | % |  | 345  | %
|Risk-free interest rate  |  | 4.51                     | % |  | 3.63 | % |  | 2.89 | %
|Expected dividend yield  |  |                         |   |  |     |   |  |      |  



Valuation Assumptions



Expected volatility is based on the historical volatility
of the Companys common stock to estimate the future expected volatility. The risk-free interest rates are taken from the Federal Yield Curve Rates as published by the Federal Reserve and represent the yields on actively traded treasury
securities for terms equal or approximately equal to the expected term of the options. The expected term calculation is based on observed historical option exercise behavior of the Companys employees and the options contractual terms.
The dividend yield of zero is based on the fact that the Company has never paid cash dividends and has no present intention to pay cash dividends.



As of September 30, 2006, the weighted-average remaining contractual terms of options outstanding and currently exercisable are 7.04 and 5.90 years,
respectively.



The fair value, based upon the Black-Scholes
option valuation model, of the options granted during fiscal years 2006, 2005 and 2004 were $2.91, $3.15 and $6.73, respectively.



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The following table summarizes activity under the Companys stock option plans:



|                                     |  |                    |   |  |                                        |      
|------------------------------------ |  | ------------------ | - |  | -------------------------------------- | -----
|Stock options                        |  | Shares underoption |   |  | Weightedaverageexercise priceper share
|Outstanding as of September 30, 2003 |  | 7,633,740          |   |  |                                        | 4.24 
|Options granted                      |  | 577,500            |   |  |                                        | 7.34 
|Options exercised                    |  | (1,784,347         | ) |  |                                        | 4.02 
|Options cancelled                    |  | (455,783           | ) |  |                                        | 11.95
|                                     |  |                    |   |  |                                        |      
|Outstanding as of September 30, 2004 |  | 5,971,110          |   |  |                                        | 4.59 
|Options granted                      |  | 1,359,000          |   |  |                                        | 3.15 
|Options exercised                    |  | (268,277           | ) |  |                                        | 2.36 
|Options cancelled                    |  | (1,351,977         | ) |  |                                        | 4.68 
|                                     |  |                    |   |  |                                        |      
|Outstanding as of September 30, 2005 |  | 5,709,856          |   |  |                                        | 4.33 
|Options granted                      |  | 2,495,625          |   |  |                                        | 3.50 
|Options exercised                    |  | (344,310           | ) |  |                                        | 2.77 
|Options cancelled                    |  | (347,429           | ) |  |                                        | 3.80 
|                                     |  |                    |   |  |                                        |      
|Outstanding as of September 30, 2006 |  | 7,513,742          |   |  | $                                      | 4.15 
|                                     |  |                    |   |  |                                        |      
|Exercisable                          |  | 4,754,974          |   |  | $                                      | 4.46 
|                                     |  |                    |   |  |                                        |      



As of
September 30, 2006, the aggregate intrinsic value of stock options outstanding, and exercisable was $13.3 million and $7.7 million, respectively. For years ended September 30, 2006, 2005 and 2004, the intrinsic value of options exercised
was $0.5 million, $0.3 million, and $17.8 million, respectively.



The following table summarizes information with respect to the Companys stock options outstanding at September 30, 2006:



|                         |  |                                         |  |                                                  |  |                               |  |                                         |  |                               |       |  |           |  |   |      
|------------------------ |  | --------------------------------------- |  | ------------------------------------------------ |  | ----------------------------- |  | --------------------------------------- |  | ----------------------------- | ----- |  | --------- |  | - | -----
|                         |  | Options outstanding                     |  | Options exercisable                             
|Range of exercise prices |  | Numberoutstandingas ofSeptember 30,2006 |  | Weighted-averageremainingcontractuallife (years) |  | Weighted-averageexerciseprice |  | Numberexercisableas ofSeptember 30,2006 |  | Weighted-averageexerciseprice
|$  1.20                  |  |                                        |  | $  2.65                                          |  | 991,926                       |  | 7.67                                    |  | $                             | 2.12  |  | 651,782   |  | $ | 1.87 
|2.75                     |  |                                        |  | 3.27                                             |  | 500,624                       |  | 8.37                                    |  |                               | 2.97  |  | 236,265   |  |   | 3.05 
|3.30                     |  |                                        |  | 3.30                                             |  | 1,311,091                     |  | 9.33                                    |  |                               | 3.30  |  | 304,594   |  |   | 3.30 
|3.33                     |  |                                        |  | 3.60                                             |  | 883,988                       |  | 7.34                                    |  |                               | 3.52  |  | 552,749   |  |   | 3.52 
|3.61                     |  |                                        |  | 3.70                                             |  | 278,458                       |  | 5.35                                    |  |                               | 3.70  |  | 278,458   |  |   | 3.70 
|3.80                     |  |                                        |  | 3.80                                             |  | 775,000                       |  | 6.68                                    |  |                               | 3.80  |  | 629,689   |  |   | 3.80 
|3.84                     |  |                                        |  | 4.38                                             |  | 772,062                       |  | 5.31                                    |  |                               | 4.16  |  | 658,562   |  |   | 4.14 
|4.50                     |  |                                        |  | 5.55                                             |  | 1,249,688                     |  | 6.57                                    |  |                               | 5.12  |  | 758,754   |  |   | 5.40 
|5.62                     |  |                                        |  | 44.25                                            |  | 738,505                       |  | 4.55                                    |  |                               | 8.07  |  | 671,721   |  |   | 8.16 
|48.00                    |  |                                        |  | 48.00                                            |  | 12,400                        |  | 3.34                                    |  |                               | 48.00 |  | 12,400    |  |   | 48.00
|                         |  |                                         |  |                                                  |  |                               |  |                                         |  |                               |       |  |           |  |   |      
|$  1.20                  |  |                                         |  | $48.00                                           |  | 7,513,742                     |  | 7.04                                    |  | $                             | 4.15  |  | 4,754,974 |  | $ | 4.46 
|                         |  |                                         |  |                                                  |  |                               |  |                                         |  |                               |       |  |           |  |   |      



Employee Stock Purchase Plans



1996 Employee Stock
Purchase Plan.    In April 1996, the Board of Directors adopted the 1996 Employee Stock Purchase Plan (the 1996 Purchase Plan). A total of 3,500,000 shares of common stock were approved for issuance under the 1996 Purchase
Plan, and a total of 3,499,920 shares of common stock were issued under the



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1996 Purchase Plan as of the final purchase date in March 2005. Employees purchased shares of common stock at a price per share that is 85% of the lesser of
the fair market value as of the beginning or the end of the semi-annual option period.



No shares were issued under the 1996 plan in fiscal 2006. Shares issued under the 1996 Purchase Plan totaled 261,651 in fiscal year 2005, and 1,141,324 in fiscal year 2004.



2005 Employee Stock Purchase Plan.    The Board of
Directors adopted the 2005 Employee Stock Purchase Plan (the 2005 Purchase Plan) effective as of January 2005. The Companys stockholders approved the 2005 Purchase Plan at the annual stockholder meeting in March 2005. The 2005 Purchase Plan
supersedes and replaces the 1996 Purchase Plan. A total of 1,225,000 shares of common stock have been approved for issuance under the 2005 Purchase Plan. Employees may purchase shares of common stock at a price per share that is 85% of the lesser of
the fair market value as of the beginning or the end of the semi-annual option period. Shares issued under the 2005 Purchase Plan totaled 501,693 and 180,981 in fiscal year 2006 and 2005, respectively. As of September 30, 2006, 542,326 shares
were reserved for issuance under the 2005 Purchase Plan.



In
the fourth fiscal quarter ended September 30, 2006, the Company recorded stock-based compensation expense related to the 2005 Purchase Plan over multiple requisite service periods ranging from six months to two years. In the first nine months
of the fiscal year ended September 30, 2006, the Company recorded stock-based compensation expense related to the 2005 Purchase Plan on a straight-line basis over a two year requisite service period. In changing to requisite service periods
ranging from six months to two years in the fourth fiscal quarter, the Company recorded addition stock-based compensation expense of $276,000, associated with earlier quarters of the fiscal year. See note 16 for further information on the quarterly
impact of stock based compensation.



The weighted average
estimated fair value of shares issued under the employee stock purchase plan was $2.55 per share during fiscal 2006, $3.32 per share during fiscal 2005 and $2.36 per share during fiscal 2004.



The value of rights to purchase shares under the plan was estimated at the
date of grant using the following weighted average assumptions:



|                         |  |                          |  |       |  |      
|------------------------ |  | ------------------------ |  | ----- |  | -----
|                         |  | Year Ended September 30,
|                         |  | 2006                     |  | 2005  |  | 2004 
|Expected life (in years) |  | 0.5 to 2                 |  | 2     |  | 2    
|Expected volatility      |  | 52%  92%                |  | 217%  |  | 151% 
|Risk-free interest rate  |  | 4.18  4.83%             |  | 3.61% |  | 2.89%
|Expected dividend yield  |  |                         |  |      |  |     



Valuation Assumptions



Pursuant to the guidance in SFAS 123(R) and Staff
Accounting Bulletin No. 107, the Company uses historical volatility as an estimate of expected volatility for purposes of calculating stock-based compensation expense using the Black-Scholes model. During fiscal year 2006, the Company changed
its assumption of historical volatility from 10 years to a range of 6 months to 2 years as a better estimate of expected volatility for the valuation of stock-based compensation related to the Companys ESPP.



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|(10) | Commitments and Contingencies
|---- | -----------------------------



Operating Lease Commitments.The Company conducts its operations in leased facilities under operating lease agreements
expiring at various dates through 2014. The following is a summary of future minimum rental payments required under these leases that have initial or remaining non-cancelable lease terms in excess of one year:



|                           |  |                          |       |      |   |       |  |      |     |      |   |            |  |       |    |  |   |    |  |   |      
|-------------------------- |  | ------------------------ | ----- | ---- | - | ----- |  | ---- | --- | ---- | - | ---------- |  | ----- | -- |  | - | -- |  | - | -----
|                           |  | Year ended September 30,
|(in thousands)             |  | 2007                     |       | 2008 |   | 2009  |  | 2010 |     | 2011 |   | Thereafter |  | Total
|Property lease obligations |  | $                        | 1,373 |      | $ | 1,078 |  | $    | 467 |      | $ | 337        |  | $     | 34 |  | $ | 82 |  | $ | 3,371
|                           |  |                          |       |      |   |       |  |      |     |      |   |            |  |       |    |  |   |    |  |   |      



Total rental expense
for all operating leases amounted to $1.4 million, $1.2 million and $1.4 million for fiscal years 2006, 2005 and 2004, respectively.



Purchase Commitments with Outsourcing Manufacturers and Suppliers.    The Company has purchase commitments with its outsourcing
manufacturers. Our outsourcing manufacturers procure component inventory on our behalf based on our production orders. The Company is obligated to purchase component inventory that the outsourcing manufacturer procures in accordance with the orders,
unless cancellation is given within applicable lead times. These commitments are reflected in our financial statements as a liability once goods or services have been received or payments related to the obligations become due. At September 30,
2006, purchase commitments totaled $24.4 million.



Litigation.    On December 3, 2004, the United States District Court for the Northern District of California issued an order consolidating previously filed class action cases under the name In re Netopia,
Inc. Securities Litigation, and appointing lead plaintiffs and plaintiffs counsel. On June 29, 2005, the lead plaintiffs filed their consolidated amended complaint. On June 19, 2006, the Court granted plaintiffs motion to
certify the class of shareholders who purchased our stock between November 6, 2003 through August 16, 2004. The consolidated amended complaint alleges violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as
amended (the Exchange Act), based on allegations that during the class period, we made false and misleading statements or failed to disclose material facts, and that the market price of our common stock was artificially inflated as a
result of such alleged conduct. We believe that we have strong defenses to the claims asserted in the consolidated amended complaint. In December 2006, we reached a proposed settlement in principle of this litigation contingent upon a number of
factors, including the closing of the acquisition by Motorola and the entering into of a binding agreement regarding the settlement. There can be no assurance that the settlement in principle will become a binding agreement and that all other
contingencies to the settlement will be satisfied.



In August
2004, the first of five purported derivative actions, Freeport Partners, LLC, Derivatively on Behalf of Nominal Defendant Netopia, Inc., v. Alan B. Lefkof, William D. Baker, Reese M. Jones, Harold S. Wills, Robert Lee and Netopia, Inc., was filed in
the United States District Court for the Northern District of California. Two purported derivative actions are pending in the United States District Court for the Northern District of California, and two related purported derivative actions are
pending in the Superior Court of California for the County of Alameda. These actions make claims against our officers and directors arising out of the alleged misstatements described above in connection with the purported class action described
above. In November 2004, the derivative plaintiffs agreed to coordinate the four derivative actions. The parties have agreed to a stay of the federal derivative actions, which was ordered by the court in January 2005. The state actions have been
consolidated under the name In re Netopia, Inc. Derivative Litigation. We have reached a settlement of this action, subject to court approval. The terms of the settlement do not require a material payment by us to the derivative plaintiffs.



On October 29, 2004, we were advised by the United States
Securities and Exchange Commission (SEC) that an informal inquiry previously commenced by the SEC had become the subject of a formal order of



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investigation. This investigation was to determine whether the federal securities laws have been violated. We cooperated fully with the informal inquiry, and
we have been cooperating fully with the formal investigation. On March 29, 2006, we entered into a consent decree with the SEC resolving the investigation into our disclosures and accounting practices, primarily related to our restatement of
financial statements for the fiscal years ended September 30, 2003 and 2002. Without admitting or denying any wrongdoing, we consented to the entry of an order with respect to violations of Sections 13(a) and 13(b)(2)(A)-(B) of the
Exchange Act, and Rules 12b-20, 13a-1, 13a-11 and 13a-13 promulgated thereunder.



On March 29, 2006, Alan B. Lefkof, our President and Chief Executive Officer, without admitting or denying any wrongdoing, settled with the SEC and consented to the entry of an order with respect to violations of
Sections 17(a)(2)-(3) of the Securities Act of 1933, as amended, and Rule 13b2-1 promulgated under the Exchange Act, and aiding and abetting our violations of Sections 13(a) and 13(b)(2)(A)-(B) of the Exchange Act, and Rules 12b-20 and
13a-11 promulgated thereunder, in connection with a Report on Form 8-K and exhibit furnished to the SEC on July 6, 2004.



In April 2005, we learned that the United States Attorney for the Northern District of California has opened an investigation following a referral by the
SEC. We do not know the scope or focus of the investigation.



In January 2005, we were notified by the Occupational Health and Safety Administration (OSHA) that we were named in an administrative complaint filed by two former employees alleging violations of Section 806 of the
Corporate and Criminal Fraud Accountability Act of 2002, 18 U.S.C. § 1514A, also known as the Sarbanes-Oxley Act. The former employees alleged that we terminated them in retaliation for their participation in the internal accounting review
conducted by the audit committee in 2004. On May 11, 2005, following its investigation, OSHA advised us that the complaint was determined to have no merit. On August 31, 2005, the two former employees refiled these claims in the United
States District Court for the Northern District of Texas in an action entitled Frankl v. Netopia et al. The complaint names the Company and certain current and former officers and directors as defendants. The individual defendants have filed
a motion to dismiss based on lack of personal jurisdiction. We believe that our defenses to this action are strong and intend to defend it vigorously. We currently cannot estimate the extent of the potential damages in this dispute.



Defending against the government investigations, the private securities
class action, the derivative actions and other litigation matters described above has required significant attention and resources of management and, regardless of the outcome, has and may further result in significant legal expense. If our defenses
ultimately are unsuccessful, or if the settlements reached do not become effective, we could be liable for large damage awards that could seriously harm our business and results of operation. While we have provided notice of the government
investigations and the litigation matters described above to our directors and officers liability insurance carriers, the insurance carriers have raised certain coverage issues and to date have not reimbursed us for all legal expenses incurred, and
may not agree that they are responsible to pay any damages that ultimately could be awarded to the plaintiffs. Furthermore, we have only a limited amount of insurance, and even if our insurers agree to make payments under the policies, the legal
expenses and damage awards or settlements may be greater than the amount of insurance, and we would in all cases be liable for any amounts in excess of our insurance policy limits.



In addition to the lawsuits described above, from time to time we are involved in other litigation or disputes that are
incidental to the conduct of our business. We are not party to any such other incidental litigation or dispute that in our opinion is likely to seriously harm our business.



Legal fees are expensed as incurred.



|(11) | Segment, Geographic and Major Customer Information
|---- | --------------------------------------------------



The Company develops and markets broadband customer premises equipment and remote management software for the management of broadband services and
equipment. The Company also develops and provides



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value-added services for service providers and remote management software for enterprises technical support, help-desks and personal computers. Our
organization is structured in a functional manner. The President and Chief Executive Officer was identified as the Companys Chief Operating Decision Maker as defined by Statement of Financial Accounting Standards No. 131, Disclosure
about Segments of an Enterprise and Related Information(SFAS 131). SFAS 131 establishes standards for the reporting by public business enterprises of information about operating segments, products and services, geographic areas, and
major customers. The methodology for determining the information reported is based on the organization of operating segments and the related information that the Chief Operating Decision Maker uses for operational decisions and assessing financial
performance. The Companys Chief Operating Decision Maker manages Netopia based primarily on broad functional categories of manufacturing costs, sales and marketing, product development and engineering, administrative. For purposes of making
operating decisions and assessing financial performance, the Companys Chief Operating Decision Maker reviews financial information presented on a consolidated basis accompanied by disaggregated information for revenues and gross margins by
product group as well as revenues by geographic region and by major customer. Operating expenses, assets, and cash flows are not segregated by product group for purposes assessing financial performance.



The Company generates revenues from two primary groups, (i) broadband
equipment and (ii) broadband software and services. Financial information regarding the operating segments was as follows:



|                               |  |                          |        |   |                              |   |        |       |  |   |                    |   |  |                              |        |   |       |   |        |                    |  |   |                              |   |  |       |        |   |  |   |        |   |  |   |         |  
|------------------------------ |  | ------------------------ | ------ | - | ---------------------------- | - | ------ | ----- |  | - | ------------------ | - |  | ---------------------------- | ------ | - | ----- | - | ------ | ------------------ |  | - | ---------------------------- | - |  | ----- | ------ | - |  | - | ------ | - |  | - | ------- | -
|                               |  | Year ended September 30, |       
|                               |  | 2006                     |        |   | 2005                         |   |        | 2004  | 
|(in thousands)                 |  | BroadbandEquipment       |        |   | BroadbandSoftwareandServices |   |        | Total |  |   | BroadbandEquipment |   |  | BroadbandSoftwareandServices |        |   | Total |   |        | BroadbandEquipment |  |   | BroadbandSoftwareandServices |   |  | Total |       
|Revenues                       |  | $                        | 98,460 |   |                              | $ | 14,804 |       |  | $ | 113,264            |   |  | $                            | 94,447 |   |       | $ | 11,370 |                    |  | $ | 105,817                      |   |  | $     | 85,702 |   |  | $ | 15,633 |   |  | $ | 101,335 |  
|Cost of revenues               |  |                          | 68,868 |   |                              |   | 3,143  |       |  |   | 72,011             |   |  |                              | 70,692 |   |       |   | 1,657  |                    |  |   | 72,349                       |   |  |       | 64,403 |   |  |   | 1,040  |   |  |   | 65,443  |  
|                               |  |                          |        |   |                              |   |        |       |  |   |                    |   |  |                              |        |   |       |   |        |                    |  |   |                              |   |  |       |        |   |  |   |        |   |  |   |         |  
|Gross profit                   |  | $                        | 29,592 |   |                              | $ | 11,661 |       |  |   | 41,253             |   |  | $                            | 23,755 |   |       | $ | 9,713  |                    |  |   | 33,468                       |   |  | $     | 21,299 |   |  | $ | 14,593 |   |  |   | 35,892  |  
|Gross margin %                 |  |                          | 30     | % |                              |   | 79     | %     |  |   | 36                 | % |  |                              | 25     | % |       |   | 85     | %                  |  |   | 32                           | % |  |       | 25     | % |  |   | 93     | % |  |   | 35      | %
|Unallocated operating expenses |  |                          |        |   |                              |   |        |       |  |   | 46,819             |   |  |                              |        |   |       |   |        |                    |  |   | 40,894                       |   |  |       |        |   |  |   |        |   |  |   | 44,847  |  
|                               |  |                          |        |   |                              |   |        |       |  |   |                    |   |  |                              |        |   |       |   |        |                    |  |   |                              |   |  |       |        |   |  |   |        |   |  |   |         |  
|Operating loss                 |  |                          |        |   |                              |   |        |       |  | $ | (5,566             | ) |  |                              |        |   |       |   |        |                    |  | $ | (7,426                       | ) |  |       |        |   |  |   |        |   |  | $ | (8,955  | )
|                               |  |                          |        |   |                              |   |        |       |  |   |                    |   |  |                              |        |   |       |   |        |                    |  |   |                              |   |  |       |        |   |  |   |        |   |  |   |         |  



Geographic
Information.



The Company sells most of its products
through its field sales organization, with a small portion of sales through distributors and resellers. Most of the Companys sales are to telecommunications carriers and service providers in the United States and Europe through our field sales
force. Our field sales force is geographically disbursed within the United States and Europe and we have a sales office in Paris, France. Most of our sales in Europe are to customers in Switzerland and Ireland. In the fourth quarter of fiscal year
2006, we opened a sales office in Singapore.



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Sales outside of the United States are primarily export sales denominated in United States dollars, Euros
and Swiss francs. Information regarding the Companys revenues by geographic region follows:



|                             |  |                          |         |  |                                    |   |  |      |         |  |      |   |  |      |         |  |     |   |  |     |    |  |     |   
|---------------------------- |  | ------------------------ | ------- |  | ---------------------------------- | - |  | ---- | ------- |  | ---- | - |  | ---- | ------- |  | --- | - |  | --- | -- |  | --- | --
|                             |  | Year ended September 30, |         |  | Increase (decrease)from prior year |  
|(in thousands)               |  | 2006                     |         |  | 2005                               |   |  | 2004 |         |  | 2006 |   |  | 2005 |        
|Europe                       |  | $                        | 42,846  |  | 38                                 | % |  | $    | 35,186  |  | 33   | % |  | $    | 36,972  |  | 36  | % |  | 22  | %  |  | (5  | )%
|Other international          |  |                          | 2,135   |  | 2                                  | % |  |      | 2,809   |  | 3    | % |  |      | 3,121   |  | 3   | % |  | (24 | )% |  | (10 | )%
|                             |  |                          |         |  |                                    |   |  |      |         |  |      |   |  |      |         |  |     |   |  |     |    |  |     |   
|Total international revenues |  |                          | 44,981  |  | 40                                 | % |  |      | 37,995  |  | 36   | % |  |      | 40,093  |  | 39  | % |  | 18  | %  |  | (5  | )%
|United States                |  |                          | 68,283  |  | 60                                 | % |  |      | 67,822  |  | 64   | % |  |      | 61,242  |  | 61  | % |  | 1   | %  |  | 11  | % 
|                             |  |                          |         |  |                                    |   |  |      |         |  |      |   |  |      |         |  |     |   |  |     |    |  |     |   
|Total revenues               |  | $                        | 113,264 |  | 100                                | % |  | $    | 105,817 |  | 100  | % |  | $    | 101,335 |  | 100 | % |  | 7   | %  |  | 4   | % 
|                             |  |                          |         |  |                                    |   |  |      |         |  |      |   |  |      |         |  |     |   |  |     |    |  |     |   



The Company has no
material operating assets outside the United States.



Customer Information.



Our largest customers
are telecommunication carriers and internet service providers. The customers that accounted for 10% or more of our revenues in each fiscal year of the three years reported, are shown in the table below:



|                                     |  |                              |        |  |    |  
|------------------------------------ |  | ---------------------------- | ------ |  | -- | -
|(in thousands & percent of revenues) |  | Year endedSeptember 30, 2006 |       
|BellSouth                            |  | $                            | 25,065 |  | 22 | %
|Swisscom                             |  |                              | 22,658 |  | 20 | %
|                                     | 
|(in thousands & percent of revenues) |  | Year endedSeptember 30, 2005 |       
|BellSouth                            |  | $                            | 21,206 |  | 20 | %
|Swisscom                             |  |                              | 18,535 |  | 18 | %
|eircom                               |  |                              | 10,576 |  | 10 | %
|                                     | 
|(in thousands & percent of revenues) |  | Year endedSeptember 30, 2004 |       
|Swisscom                             |  | $                            | 19,031 |  | 19 | %
|AT&T                                 |  |                              | 10,348 |  | 10 | %
|BellSouth                            |  |                              | 10,111 |  | 10 | %



The following tables
sets forth 2006 and 2005 customer balances accounting for 10% or more of accounts receivable along with such data expressed as a percentage of total accounts receivable:



|               |  |                    |       |  |    |  
|-------------- |  | ------------------ | ----- |  | -- | -
|(in thousands) |  | September 30, 2006 |      
|Swisscom       |  | $                  | 5,777 |  | 29 | %
|BellSouth      |  |                    | 3,668 |  | 18 | %
|AT&T           |  |                    | 2,239 |  | 11 | %
|               | 
|(in thousands) |  | September 30, 2005 |      
|Swisscom       |  | $                  | 3,326 |  | 21 | %
|BellSouth      |  |                    | 2,612 |  | 16 | %
|eircom         |  |                    | 1,682 |  | 10 | %



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|(12) | Long-term Investments and Gain on Equity Investment
|---- | ---------------------------------------------------



In fiscal year 2006, Netifice Communications, Inc. (Netifice) purchased MegaPath, Inc, with a combination of cash and preferred stock. Netopia had an
equity investment in MegaPath. Netopia received $734,000 cash and 1.7 million shares of Netifice preferred stock with a fair value of $1.4 million in exchange for its investment in MegaPath, and recognized a $1.1 million gain on the exchange.
In recording the gain on the exchange, Netopia treated the exchange as a sale in accordance with Statement of Financial Accounting Standards 140 Accounting for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilitiesa replacement of FASB Statement 125.



As of September 30, 2006, the Company continued to hold the Netifice preferred stock with a carry value of $1.4 million. Following the purchase, Netifice changed its name to MegaPath, Inc., and the combined company markets IP managed
data, voice and security services to business enterprises.



Netopias sales to the combined companies (Netifice and MegaPath) were $2.6 million, $1.2 million, and $2.6 million, in fiscal years 2006, 2005, and 2004, respectively.



|(13) | Restructuring Costs
|---- | -------------------



During the year ended September 30, 2005, the Company recorded a restructuring charge of $40,000, primarily consisting of employee termination costs,
wind down costs associated with the closure of a sales office in the Netherlands and additional wind down costs associated with the closure of the software research and development facility in Germany in the quarter ended September 30, 2004.



During the year ended September 30, 2004, the Company
recorded a restructuring charge of approximately $500,000, primarily consisting of employee termination costs and wind down costs associated with the closure of the German facility.



The restructuring accrual activity is summarized below:



|                                          |  |                             |      |   |            |   |     |                     |  |   |        |   |  |   |      |  
|----------------------------------------- |  | --------------------------- | ---- | - | ---------- | - | --- | ------------------- |  | - | ------ | - |  | - | ---- | -
|(in thousands)                            |  | Severanceand RelatedCharges |      |   | Facilities |   |     | FixedAssetWrite-off |  |   | Totals |  
|Accrued liabilities at September 30, 2003 |  | $                           | 15   |   |            |   |     |                     |  | $ |       |   |  | $ | 15   |  
|Restructuring charges                     |  |                             | 458  |   |            |   | 27  |                     |  |   | 49     |   |  |   | 534  |  
|Amount paid                               |  |                             |     |   |            |   |    |                     |  |   |       |   |  |   |     |  
|Non-cash charges                          |  |                             |     |   |            |   |    |                     |  |   | (49    | ) |  |   | (49  | )
|                                          |  |                             |      |   |            |   |     |                     |  |   |        |   |  |   |      |  
|Accrued liabilities at September 30, 2004 |  |                             | 473  |   |            |   | 27  |                     |  |   |       |   |  |   | 500  |  
|Restructuring charges                     |  |                             | 40   |   |            |   |    |                     |  |   |       |   |  |   | 40   |  
|Amount paid                               |  |                             | (513 | ) |            |   | (27 | )                   |  |   |       |   |  |   | (540 | )
|Non-cash charges                          |  |                             |     |   |            |   |    |                     |  |   |       |   |  |   |     |  
|                                          |  |                             |      |   |            |   |     |                     |  |   |        |   |  |   |      |  
|Accrued liabilities at September 30, 2005 |  | $                           |     |   |            | $ |    |                     |  | $ |       |   |  | $ |     |  
|                                          |  |                             |      |   |            |   |     |                     |  |   |        |   |  |   |      |  



|(14) | Credit Facility
|---- | ---------------



Under the Companys amended credit facility agreement with Silicon Valley Bank, the credit limit is $10 million, the interest rate is Silicon Valley
Banks prime rate, and the term or maturity date is June 27, 2007. The amended credit facility contains financial covenants related to liquidity and net worth as well as other nonfinancial covenants. Covenants require that the Company
maintain an adjusted quick ratio (described below) of 1.25 and the credit facility will be subject to formula based credit limits if the adjusted quick ratio falls below 1.50. Covenants in an amendment effective September 30, 2005 required the
Company to maintain a minimum tangible net worth of $24 million at September 30, 2006 and thereafter, unless reset. The facility is secured by



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substantially all of the assets of the Company. The adjusted quick ratio is the ratio of (i) the Companys unrestricted cash, cash
equivalents and investments maintained at Silicon Valley Bank plus net receivables to (ii) the Companys current liabilities plus the outstanding principal amount of any borrowings under the facility less deferred revenues. The
Company may borrow under the credit facility in order to finance working capital requirements for new products and customers, and otherwise for general corporate purposes in the normal course of business. As of September 30, 2006, the Company
was in compliance with the covenants, had access to approximately $8.8 million of the credit facility and had no outstanding borrowings. The Company has approximately $851,000 of outstanding letters of credit and $300,000 of cash management reserves
that reduce the amount of available credit on the credit facility to $8.8 million.



During the quarter ended June 30, 2006, the Company entered into a contractual agreement with a wireless telecommunications service provider in Germany for delivery and implementation of an NBBS solution for the
remote management of customer premise equipment with a contractual period from 2006 through 2010. This agreement includes network equipment and services. Under the terms of the agreement, the Company was required to deliver a performance bond as a
guarantee that the Company will fulfill its contractual obligations in accordance with the terms of the agreement. During the quarter ended June 30, 2006, the Company issued a performance bond in the form of an irrevocable standby letter of
credit for the fulfillment of contractual obligations. This letter of credit will expire on June 29, 2007 (expiration date). This letter of credit shall be automatically extended without amendment for a period of one year from the expiration
date or any automatically extended expiration date not to be extended beyond June 30, 2012. This outstanding letter of credit is included within the $851,000 of outstanding letters of credit that reduced the available amount of credit on the
Companys credit facility as of September 30, 2006.



|(15) | Other Income (Loss), Net
|---- | ------------------------



Other income (loss), net consists of interest income the Company earns on its cash, cash equivalents and short-term investments, interest expense related
to the Companys borrowing under its credit facility, and realized and unrealized gains and losses on foreign currency transactions. The following table summarizes the Companys other income (loss), net:



|                               |  |                          |     |   |      |   |      |      |  |   |     |  
|------------------------------ |  | ------------------------ | --- | - | ---- | - | ---- | ---- |  | - | --- | -
|                               |  | Year ended September 30, |    
|(in thousands)                 |  | 2006                     |     |   | 2005 |   |      | 2004 | 
|Interest income                |  | $                        | 982 |   |      | $ | 519  |      |  | $ | 199 |  
|Interest expense               |  |                          | (48 | ) |      |   | (25  | )    |  |   | (34 | )
|Other income (expense)         |  |                          | 11  |   |      |   | (135 | )    |  |   | 59  |  
|                               |  |                          |     |   |      |   |      |      |  |   |     |  
|Total other income (loss), net |  | $                        | 945 |   |      | $ | 359  |      |  | $ | 224 |  
|                               |  |                          |     |   |      |   |      |      |  |   |     |  



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|(16) | Quarterly Financial Information
|---- | -------------------------------



The following table sets forth certain unaudited quarterly results of operations data for the twelve quarters ended September 30, 2006. This data has
been derived from our unaudited interim Consolidated Financial Statements, as previously reported and that, in our opinion, include all adjustments necessary for a fair presentation of such information. When reading this information, you also should
read Item 7, Managements Discussion and Analysis of Financial Condition and Results of Operations, and the Consolidated Financial Statements and related Notes thereto included elsewhere in this Form 10-K.



|                                                                             |  |                           |        |   |         |   |        |         |  |   |         |   |  |       |        |   |  |   |         |  
|---------------------------------------------------------------------------- |  | ------------------------- | ------ | - | ------- | - | ------ | ------- |  | - | ------- | - |  | ----- | ------ | - |  | - | ------- | -
|                                                                             |  | (Unaudited) Quarter Ended |       
|(in thousands, except per share amounts; amounts are as previously reported) |  | Sept. 30                  |        |   | June 30 |   |        | Mar. 31 |  |   | Dec. 31 |   |  | Total |       
|Fiscal year 2006                                                             |  |                           |        |   |         |   |        |         |  |   |         |   |  |       |        |   |  |   |         |  
|Revenues                                                                     |  | $                         | 31,003 |   |         | $ | 30,487 |         |  | $ | 27,876  |   |  | $     | 23,898 |   |  | $ | 113,264 |  
|Gross profit                                                                 |  |                           | 10,377 |   |         |   | 10,708 |         |  |   | 11,609  |   |  |       | 8,559  |   |  |   | 41,253  |  
|Net Income (Loss)(a)                                                         |  |                           | (1,537 | ) |         |   | (156   | )       |  |   | 594     |   |  |       | (2,492 | ) |  |   | (3,591  | )
|Basic and diluted net income (loss) per common share                         |  |                           | (0.06  | ) |         |   | (0.01  | )       |  |   | 0.02    |   |  |       | (0.10  | ) |  |   | (0.14   | )
|                                                                             |  |                           |        |   |        
|Fiscal year 2005                                                             |  |                           |        |   |         |   |        |         |  |   |         |   |  |       |        |   |  |   |         |  
|Revenues                                                                     |  | $                         | 23,447 |   |         | $ | 27,829 |         |  | $ | 25,223  |   |  | $     | 29,318 |   |  | $ | 105,817 |  
|Gross profit                                                                 |  |                           | 8,044  |   |         |   | 8,385  |         |  |   | 8,232   |   |  |       | 8,807  |   |  |   | 33,468  |  
|Business restructuring                                                       |  |                           | (58    | ) |         |   |       |         |  |   | 98      |   |  |       |       |   |  |   | 40      |  
|Net loss                                                                     |  |                           | (1,348 | ) |         |   | (2,312 | )       |  |   | (1,832  | ) |  |       | (1,641 | ) |  |   | (7,133  | )
|Basic and diluted net loss per common share                                  |  |                           | (0.05  | ) |         |   | (0.09  | )       |  |   | (0.07   | ) |  |       | (0.07  | ) |  |   | (0.28   | )
|                                                                             |  |                           |        |   |        
|Fiscal year 2004                                                             |  |                           |        |   |         |   |        |         |  |   |         |   |  |       |        |   |  |   |         |  
|Revenues                                                                     |  | $                         | 25,835 |   |         | $ | 25,434 |         |  | $ | 21,757  |   |  | $     | 28,309 |   |  | $ | 101,335 |  
|Gross profit                                                                 |  |                           | 7,778  |   |         |   | 8,110  |         |  |   | 8,653   |   |  |       | 11,351 |   |  |   | 35,892  |  
|Business restructuring                                                       |  |                           | 534    |   |         |   |       |         |  |   |        |   |  |       |       |   |  |   | 534     |  
|Goodwill impairment                                                          |  |                           | 465    |   |         |   |       |         |  |   |        |   |  |       |       |   |  |   | 465     |  
|Net loss                                                                     |  |                           | (6,085 | ) |         |   | (2,276 | )       |  |   | (1,612  | ) |  |       | 1,164  |   |  |   | (8,809  | )
|Basic net income (loss) per common share                                     |  |                           | (0.25  | ) |         |   | (0.09  | )       |  |   | (0.07   | ) |  |       | 0.05   |   |  |   | (0.37   | )
|Diluted net income (loss) per common share                                   |  |                           | (0.25  | ) |         |   | (0.09  | )       |  |   | (0.07   | ) |  |       | 0.04   |   |  |   | (0.37   | )

---

|(a) | Net income (loss) for fiscal year 2006 includes stock-based compensation expense under Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based
Payment, (SFAS 123(R)) of approximately $6 million related to employee stock options and employee stock purchases. There was no stock-based compensation expense related to employee stock options and employee stock purchases under
Statement of Financial Accounting Standards No, 123, Accounting for Stock-Based Compensation (SFAS 123), prior to fiscal year 2006 because the Company did not adopt the recognition provisions of SFAS 123. The following table
summarizes the stock-based compensation expense related to employee stock options and employee stock purchases under SFAS 123(R) for the quarters and year ended September 30, 2006:
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|                                                               |  |                           |  |         |  |         |  |         |  |      
|-------------------------------------------------------------- |  | ------------------------- |  | ------- |  | ------- |  | ------- |  | -----
|                                                               |  | (Unaudited) Quarter Ended
|(in thousands; amounts are as previously reported)             |  | Sept. 30                  |  | June 30 |  | Mar. 31 |  | Dec. 31 |  | Total
|Fiscal year 2006                                               |  |                           |  |         |  |         |  |         |  |      
|Stock-based compensation expense included in net income (loss) |  | 1,968                     |  | 1,443   |  | 1,328   |  | 1,214   |  | 5,953



In the fourth fiscal
quarter 2006, the Company recorded additional stock-based compensation expense of $276,000, which related to earlier quarters as follows: $46,000, $86,000, and $144,000 to the third, second and first quarter of the fiscal year ended
September 30, 2006, respectively. See note 9 to the Consolidated Financial Statements.



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|(17) | ScheduleValuation and Qualifying Accounts
|---- | ------------------------------------------



|                            |  |                  |      |   |         |   |      |  
|--------------------------- |  | ---------------- | ---- | - | ------- | - | ---- | -
|                            |  | Allowance for    |     
|(in thousands)              |  | DoubtfulAccounts |      |   | Returns |  
|Balance, September 30, 2003 |  | $                | 124  |   |         | $ | 66   |  
|Charges to expense          |  |                  | 111  |   |         |   | 336  |  
|Deductions                  |  |                  | (151 | ) |         |   | (258 | )
|                            |  |                  |      |   |         |   |      |  
|Balance, September 30, 2004 |  |                  | 84   |   |         |   | 144  |  
|Charges to expense          |  |                  | 72   |   |         |   | 308  |  
|Deductions                  |  |                  | (87  | ) |         |   | (377 | )
|                            |  |                  |      |   |         |   |      |  
|Balance, September 30, 2005 |  |                  | 69   |   |         |   | 75   |  
|Charges to expense          |  |                  | 2    |   |         |   | 374  |  
|Deductions                  |  |                  | (31  | ) |         |   | (347 | )
|                            |  |                  |      |   |         |   |      |  
|Balance, September 30, 2006 |  | $                | 40   |   |         | $ | 102  |  
|                            |  |                  |      |   |         |   |      |  



|                            |  |                                        |        |  
|--------------------------- |  | -------------------------------------- | ------ | -
|(in thousands)              |  | Reserve forExcess andObsoleteInventory |       
|Balance, September 30, 2003 |  | $                                      | 1,031  |  
|Charges to expense          |  |                                        | 1,008  |  
|Deductions                  |  |                                        | (247   | )
|                            |  |                                        |        |  
|Balance, September 30, 2004 |  |                                        | 1,792  |  
|Charges to expense          |  |                                        | 275    |  
|Deductions                  |  |                                        | (299   | )
|                            |  |                                        |        |  
|Balance, September 30, 2005 |  |                                        | 1,768  |  
|Charges to expense          |  |                                        | 163    |  
|Deductions                  |  |                                        | (1,697 | )
|                            |  |                                        |        |  
|Balance, September 30, 2006 |  | $                                      | 234    |  
|                            |  |                                        |        |  



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|ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
|------- | ------------------------------------------------------------------------------------



None



|ITEM 9A. | CONTROLS AND PROCEDURES
|-------- | -----------------------



Evaluation of Disclosure Controls and Procedures



We carried out an evaluation, under the supervision and with the participation of our management, including our President and Chief Executive Officer and
Vice President and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based upon this evaluation, our President and Chief Executive
Officer and our Vice President and Chief Financial Officer concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in reports it files under the Securities Exchange Act
of 1934, as amended, and regulations promulgated thereunder, is recorded, processed, summarized and reported within the time periods specified in the SECs rules and forms.



Managements Report on Internal Control Over Financial Reporting



Our management, including our President and Chief Executive Officer and Vice President and Chief Financial Officer, is
responsible for establishing and maintaining adequate internal control over our financial reporting. Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted
an evaluation of the effectiveness of our internal control over financial reporting as of September 30, 2006 based on the guidelines established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO). Our internal control over financial reporting includes policies and procedures that provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for
external reporting purposes in accordance with U.S. generally accepted accounting principles. Based on its assessment using those criteria, our management concluded that, as of September 30, 2006, our internal control over financial reporting
is effective.



Managements assessment of the
effectiveness of our internal control over financial reporting as of September 30, 2006 has been audited by Burr, Pilger & Mayer LLP, an independent registered public accounting firm, as stated in their report that appears under
Item 8. Financial Statements and Supplementary Data.



Changes in
Internal Controls over Financial Reporting



There have
been no significant changes in our internal control over financial reporting during the quarter ended September 30, 2006 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.



Inherent Limitations on Effectiveness of Controls



There are inherent limitations in the effectiveness of any system of
internal control, including the possibility of human error and the circumvention or overriding of controls. Accordingly, even effective internal controls can provide only reasonable assurances with respect to financial statement preparation.
Further, because of changes in conditions, the effectiveness of internal controls may vary over time.



|ITEM 9B. | OTHER INFORMATION
|-------- | -----------------



None.



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PART III



|ITEM 10. | DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
|-------- | --------------------------------------------------



Directors and Executive Officers



See the information set forth in Part I, Item 4A with respect to our executive officers. Our directors, and their ages as of December 14, 2006
are as follows:



|                   |  |     |  |                        |  |                                                       
|------------------ |  | --- |  | ---------------------- |  | ------------------------------------------------------
|Name               |  | Age |  | First became aDirector |  | Positions and Offices Held with the Company           
|Alan B. Lefkof     |  | 53  |  | August 1991            |  | Director, President and Chief Executive Officer (1)(2)
|Harold S. Wills    |  | 64  |  | April 2001             |  | Chairman of the Board of Directors (3)(4)(5)          
|J. Francois Crepin |  | 60  |  | November 2005          |  | Director (2)(5)                                       
|Reese M. Jones     |  | 47  |  | March 1987             |  | Director (2)                                          
|Robert Lee         |  | 58  |  | November 2001          |  | Director (3)(4)                                       
|Howard T. Slayen   |  | 59  |  | April 2003             |  | Director (3)                                          

---

|(1) | Member of the Stock Option Committee
|--- | ------------------------------------

|(2) | Member of the Technology Strategy Committee
|--- | -------------------------------------------

|(3) | Member of the Audit Committee
|--- | -----------------------------

|(4) | Member of the Nominating Committee
|--- | ----------------------------------

|(5) | Member of the Compensation Committee
|--- | ------------------------------------



Alan B. Lefkof.    Mr. Lefkof has served as a director of Netopia since August 1991, when he joined Netopia as President.
He has been Chief Executive Officer since November 1994. Prior to joining Netopia, Mr. Lefkof served as President of GRiD Systems, and as a Management Consultant at McKinsey & Company. Mr. Lefkof received a B.S. in computer
science from the Massachusetts Institute of Technology in 1975 and a M.B.A. from Harvard Business School in 1977.



Harold S. Wills.    Mr. Wills has been a director of Netopia since April 2001, and was elected Chairman of the Board in
October 2004. Mr. Wills is an independent business consultant. From November 2001 through July 2005, he served in various executive capacities at InPhonic, Inc., an online provider of wireless services and devices, most recently as president of
its international operations. From April 1996 through October 2000, Mr. Wills served in various executive capacities at PSINet, Inc., most recently as Director, President and Chief Operating Officer. Mr. Wills has also held senior
management positions with Granada Group PLC, Xerox and IBM. Mr. Wills received a Master of Science in Business from Columbia University in 1974.



J. Francois Crepin.    Mr. Crepin has been a director of Netopia since November 2005. Mr. Crepin is President and
CEO, and Co-Founder of Akros Silicon Inc. Founded in January 2005, Akros Silicon Inc. is a venture capital-backed fabless semiconductor company located in Folsom, California. From March 1999 through October 2004, Mr. Crepin served as President,
Chief Operating Officer and Director of Metalink Ltd. Mr. Crepin previously held executive positions at Level One Communications Inc., as well as positions at LSI Logic and National Semiconductor. Mr. Crepin received a B.Sc. in Mathematics
from Grenoble University in 1968 and a M.B.A. from the University of Paris in 1974.



Reese M. Jones.    Mr. Jones, founder of Netopia, served as Chief Executive Officer from March 1987 through October 1994, and Chairman of the Board of Directors from March 1987 through
October 2004. Mr. Jones is a private venture investor and business advisor who currently serves on the Board of Directors of a number of privately held entities. Mr. Jones was appointed as Fellow for Entrepreneurship & Innovation
by the Lester Center at the Haas Business School of the University of California at Berkeley in 1999. Mr. Jones received a B.A. in biophysics from the University of California at Berkeley in 1982.



Robert Lee.    Mr. Lee has been a director of
Netopia since November 2001. Having retired after a 26 year career at Pacific Bell, now part of AT&T Inc., Mr. Lee is a private investor and business consultant who currently



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serves on the Board of Directors of Blue Shield of California, BroadVision, Inc. and Web.com, Inc. as well as a number of privately held companies and
non-profit organizations. From 1972 to 1998, Mr. Lee served in various executive capacities at Pacific Bell, most recently as a corporate Executive Vice President and President of Business Communications. Mr. Lee received a B.S. in
electrical engineering from University of Southern California in 1970 and a M.B.A. from University of California at Berkeley in 1972.



Howard T. Slayen.    Mr. Slayen has been a director of Netopia since April 2003. Mr. Slayen served as a corporate
finance partner in the San Francisco and San Jose, California offices of PricewaterhouseCoopers until his retirement in 1999. During his career at PricewaterhouseCoopers, Mr. Slayen also served as partner in charge of the Financial Advisory
Services practice for the Western United States and as tax partner in charge for the San Francisco, San Jose, and Houston, Texas offices of the legacy firm of Coopers & Lybrand. A private investor and business consultant after his
retirement, Mr. Slayen currently serves on the Board of Directors of Lantronix, Inc., and a number of privately held companies. Mr. Slayen received a B.A. in economics and accounting from Claremont McKenna College in 1968 and a J.D. from
Boalt Hall School of Law, University of California at Berkeley, in 1971.



Board Meetings



During the fiscal year ended
September 30, 2006, the Board held seven meetings and acted by written consent in lieu of a meeting on one occasion. No director listed above who served on the Board in fiscal year 2006 attended fewer than 75% of the meetings of the Board and
any committee on which he served. The Board has determined that with the exception of Mr. Lefkof, each of the current directors is independent as defined in the applicable Nasdaq Capital Market listing standards. The Board has an
Audit Committee, Compensation Committee, Nominating Committee, Stock Option Committee, and Technology Advisory Committee.



Audit Committee



During the fiscal year ended September 30, 2006, the Audit Committee of the Board of Directors (the Audit Committee) held eight meetings
and did not act by written consent in lieu of a meeting on any occasion. The Audit Committee reviews, acts on and reports to the Board of Directors with respect to various auditing and accounting matters, including the selection of the
Companys independent auditors, the scope of the independent auditors service and annual audit fees to be paid to the Companys independent auditors, the performance of the Companys independent auditors and the accounting
practices of the Company. The chair of the Audit Committee is Mr. Slayen, and the other members of the Audit Committee are Messrs. Lee and Wills. The Board of Directors has determined that each member of the Audit Committee is independent as
described in applicable Nasdaq listing standards. The Board of Directors has also determined that Mr. Slayen is an audit committee financial expert as described in applicable rules and regulations of the Securities and Exchange
Commission. A copy of the Audit Committees charter is publicly available on the Corporate Governance section of the Companys website at http://www.netopia.com.



Compensation Committee



During the fiscal year ended September 30, 2006, the Compensation Committee acted by written consent seven times. The Compensation Committee sets
salaries and other compensation arrangements for officers and other key employees of the Company, administers the Companys stock option, stock purchase and stock bonus plans, and advises the Board on general aspects of the Companys
compensation and benefit policies. For additional information concerning the Compensation Committee, see Report of the Compensation Committee on Executive Compensation, Executive Compensation and Other Matters and
Compensation Committee Interlocks and Insider Participation. The members of the Compensation Committee during the 2006 fiscal year were Messrs. Crepin and Wills.



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Stock Option Committee



During the fiscal year ended September 30, 2006, the Stock Option Committee acted by written consent six times. The Board has delegated to the
Stock Option Committee the authority to approve the grant to non-officer employees and other individuals of stock options in amounts less than 10,000 shares. The sole member of the Stock Option Committee during the 2006 fiscal year was
Mr. Lefkof.



Nominating Committee and Stockholder Director Nominations



During the fiscal year ended September 30, 2006, the
Nominating Committee of the Board of Directors (the Nominating Committee) did not meet or act by written consent on any occasion. The Nominating Committee recommends nominees for the Board. The Nominating Committee will consider nominees
recommended by stockholders for election as directors, but has not adopted formal procedures to be followed by stockholders in submitting such recommendations. The members of the Nominating Committee during the 2006 fiscal year were Messrs. Lee and
Wills.



The Nominating Committee operates pursuant to a written
charter and has the exclusive right to recommend candidates for election as directors to the Board. The Nominating Committee will consider nominees recommended by stockholders for election as directors, but has not adopted formal procedures to be
followed by stockholders in submitting such recommendations. The nominating committee believes that candidates for director should have certain minimum qualifications, including being able to read and understand basic financial statements, being
over 21 years of age, having business experience, and having high moral character. The committees process for identifying and evaluating nominees is as follows: In the case of incumbent directors whose terms of office are set to expire, the
Nominating Committee reviews such directors overall service to the Company during their term, including the number of meetings attended, level of participation, quality of performance, and any transactions of such directors with the Company
during their term. In the case of new director candidates, the committee first determines whether the nominee must be independent for Nasdaq purposes, which determination is based upon the Companys Certificate of Incorporation and Bylaws,
applicable securities laws, the rules and regulations of the SEC, the rules of the National Association of Securities Dealers, and the advice of counsel, if necessary. The committee then uses its network of contacts to compile a list of potential
candidates, but may also engage, if it deems appropriate, a professional search firm. The committee then meets to discuss and consider such candidates qualifications and then chooses candidate(s) for recommendation to the Board of Directors.
Stockholders wishing to recommend candidates for consideration by the Nominating Committee may do so by writing to the Secretary of the Company and providing the candidates name, biographical data and qualifications. The Nominating Committee
does not intend to alter the manner in which it evaluates candidates, including the minimum criteria set forth above, based on whether the candidate was recommended by a stockholder.



Technology Strategy Committee



During the fiscal year ended September 30, 2006, the Technology Strategy Committee met one time. The Technology Strategy Committee evaluates the
prospective applicability and market opportunities of new technologies related to Netopias business. Mr. Jones serves as Chairman of the Technology Strategy Committee, and Messrs. Crepin and Lefkof also serve on this committee.



Compensation of Directors



Until January 1, 2005, except for grants of stock options, members of
the Companys Board of Directors did not receive compensation for their services as directors, other than reimbursement of any actual travel and living expenses incurred in connection with attending meetings of the Board of Directors and
meetings of the Audit Committee. Effective January 1, 2005, non-employee directors receive an annual retainer as follows: Chairman of the Board, $25,000; Chairman of the Audit Committee, $20,000; other Directors, $15,000. The retainer is paid



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in four equal installments payable at the end of each calendar quarter. Directors also are reimbursed for any actual travel and living expenses incurred in
connection with attending meetings of the Board of Directors and its committees.



Directors of the Company are eligible to receive options under the Companys 2002 Equity Incentive Plan. The Automatic Option Grant Program that is part of the 2002 Equity Incentive Plan provides for the grant of
an option to purchase 50,000 shares of Common Stock upon a non-employee directors initial election or appointment to the Board. The Automatic Option Grant Program also provides for the grant on the date of each Annual Stockholder Meeting of
(a) an option to purchase 15,000 shares of Common Stock to each non-employee director and (b) an additional option to purchase 5,000 shares of Common Stock to each non-employee director who is a member of the Audit Committee. All grants
under the Automatic Option Grant Program have exercise prices equal to the fair market value of the underlying stock on the date of grant.



During the fiscal year ended September 30, 2006, Messrs. Jones and Crepin each received options to purchase 15,000 shares of Common Stock under the
Automatic Option Grant Program of the 2002 Equity Incentive Plan on January 31, 2006, the date of the 2006 Annual Stockholder Meeting. As members of the Audit Committee, Messrs. Lee, Slayen and Wills each received options to purchase 20,000
shares of Common Stock under the Automatic Option Grant Program of the 2002 Equity Incentive Plan on January 31, 2006, the date of the 2006 annual stockholder meeting. Mr. Crepin received options to purchase 50,000 shares of Common Stock
under the Automatic Option Grant Program of the 1996 Stock Option Plan on November 15, 2005, the date Mr. Crepin was appointed to the Board.



Section 16(a) Beneficial Ownership Reporting Compliance



Section 16(a) of the Securities Exchange Act of 1934 requires the Companys executive officers, directors and persons who beneficially own more
than 10% of the Companys Common Stock to file initial reports of ownership and reports of changes in ownership with SEC. Such persons are required by SEC regulations to furnish the Company with copies of all Section 16(a) forms filed by
such persons. Based solely on the Companys review of such forms furnished to the Company and written representations from certain reporting persons, the Company believes that all filing requirements applicable to the Companys executive
officers, directors and more than 10% stockholders were complied with during fiscal 2006.



Code of Ethics



The
Board of Directors adopted on July 15, 2003 the Netopia, Inc. Code of Business Conduct and Ethics. The Code of Business Conduct and Ethics applies to all directors, officers and employees, and certain additional portions of the policy apply to
all executive and senior financial officers. A copy of the Companys Code of Business Conduct and Ethics has been filed as Exhibit 14.1 to the Companys annual report on Form 10-K for the fiscal year ended September 30, 2003. In
addition, the Companys Code of Business Conduct and Ethics is publicly available on the Companys website at http://media.corporate-ir.net/media_files/nsd/ntpa/corpgov/codeofethics0703.pdf.



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|ITEM 11. | EXECUTIVE COMPENSATION
|-------- | ----------------------



The following Summary Compensation Table sets forth the compensation earned for fiscal years 2006, 2005 and 2004 for services rendered in all capacities
to the Company and its subsidiaries by the Companys Chief Executive Officer and the four other most highly compensated officers who were serving as executive officers as of September 30, 2006 (collectively, the Named
Officers).



Summary Compensation Table



|                                                                     |  |              |               |                         |     |          |                             |           |                                 |              
|-------------------------------------------------------------------- |  | ------------ | ------------- | ----------------------- | --- | -------- | --------------------------- | --------- | ------------------------------- | -------------
|                                                                     |  | Fiscal Year  |               | Annual Compensation (1) |     |          | Long-TermCompensationAwards
|Name and Principal Position(2)                                       |  |              | Salary($) (1) |                         |     | Bonus($) |                             |           | Securities UnderlyingOptions(#)
|Alan B. Lefkof President and Chief Executive Officer                 |  | 200620052004 |               | 350,000340,000332,350   |     |          | 213,17700                   | (2)       |                                 | 300,00000    
|                                                                     |  |              |               |                        
|Charles Constanti Vice President and Chief Financial Officer         |  | 20062005     |               | 230,000105,417          | (3) |          | 73,08920,000                | (2)(2)    |                                 | 20,000200,000
|                                                                     |  |              |               |                        
|Brooke A. Hauch Senior Vice President, Professional Services         |  | 200620052004 |               | 220,255205,500201,625   |     |          | 73,08920,0000               | (2)(2)    |                                 | 60,00000     
|                                                                     |  |              |               |                        
|David A. Kadish Senior Vice President, General Counsel and Secretary |  | 200620052004 |               | 238,125225,000218,150   | (4) |          | 73,08900                    | (2)       |                                 | 10,00000     
|                                                                     |  |              |               |                        
|Raymond J. Smets Senior Vice President, Sales and Marketing          |  | 2006         |               | 179,000                 | (5) |          | 159,657                     | (2)(5)(6) |                                 | 250,000      

---

|(1) | Includes amounts deferred under the Companys 401(k) Plan. For certain Named Officers, excludes car allowances and amounts paid for tax services and disability insurance, which
in the aggregate for each Named Officer were less than 10% of salary plus bonus.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Bonus payment was paid in the subsequent fiscal year.
|--- | -----------------------------------------------------

|(3) | Mr. Constantis employment commenced on April 18, 2005.
|--- | -------------------------------------------------------

|(4) | Does not include salary earned in the total amount of 18,583 for services beginning February 16, 2006 as co-gerant of Netopia SARL, a wholly owned subsidiary of the
Company.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) | Mr. Smets employment commenced on January 3, 2006.
|--- | ---------------------------------------------------

|(6) | Includes commissions earned in the amount of $86,568 for fiscal year 2006.
|--- | --------------------------------------------------------------------------



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Option Grants in Last Fiscal Year



The following table contains information concerning the stock option grants made to each of the Named Officers in the fiscal
year ended September 30, 2006. In accordance with the rules of the United States Securities and Exchange Commission, the table sets forth the hypothetical gains or option spreads that would exist for such option grant at the end of
their respective ten-year terms. Except for such stock option grant, no stock options or stock appreciation rights were granted to any of the Named Officers during the fiscal year ended September 30, 2006.



|                  |  |                                             |                                                             |  |                   |                            |                                                                                                    |                 |      |  |          |  |   |         |  |   |          
|----------------- |  | ------------------------------------------- | ----------------------------------------------------------- |  | ----------------- | -------------------------- | -------------------------------------------------------------------------------------------------- | --------------- | ---- |  | -------- |  | - | ------- |  | - | ---------
|                  |  | Number ofsecuritiesunderlyingoptionsgranted |                                                             |  | Individual grants |                            | Potential realizable value at assumed annual
rates of stock price appreciation for option term (3)
|                  |  |                                             | % of
totaloptionsgranted toemployeesin fiscal year 2006 (1) |  |                   | Exercisepriceper share (2) |                                                                                                    | Expiration Date |     
|                  |  |                                             |                                                             |  |                  
|                  |  |                                             |                                                             |  |                  
|Name              |  |                                             |                                                             |  |                   | 5%                         |                                                                                                    | 10%            
|Alan B. Lefkof    |  | 300,000                                     | (4)                                                         |  | 12.03             | %                          |                                                                                                    | $               | 2.65 |  | 12/09/15 |  | $ | 499,971 |  | $ | 1,267,025
|Charles Constanti |  | 20,000                                      | (5)                                                         |  | 0.8               | %                          |                                                                                                    | $               | 3.30 |  | 1/31/16  |  | $ | 41,507  |  | $ | 105,187  
|Brooke A. Hauch   |  | 60,000                                      | (5)                                                         |  | 2.41              | %                          |                                                                                                    | $               | 3.30 |  | 1/31/16  |  | $ | 124,521 |  | $ | 315,561  
|David A. Kadish   |  | 10,000                                      | (5)                                                         |  | 0.4               | %                          |                                                                                                    | $               | 3.30 |  | 1/31/16  |  | $ | 20,754  |  | $ | 52,594   
|Raymond J. Smets  |  | 250,000                                     | (6)                                                         |  | 10.02             | %                          |                                                                                                    | $               | 3.30 |  | 1/31/16  |  | $ | 518,838 |  | $ | 1,314,838

---

|(1) | Based on options to acquire an aggregate of 2,494,250 shares of Common Stock granted in the fiscal year ended September 30, 2006.
|--- | ---------------------------------------------------------------------------------------------------------------------------------

|(2) | Stock options are granted with an exercise price equal to the fair market value of the Common Stock on the date of grant. The exercise price may be paid in cash or in shares of
Common Stock valued at fair market value on the exercise date.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | The potential realizable value is calculated based on the term of the option at its date of grant. It is calculated assuming that the stock price on the date of grant appreciates at
the indicated annual rates, compounded annually for the entire term of the option, and that the option is exercised and sold on the last day of its term for the appreciated stock price. The 5% and 10% assumed annual rates of compounded stock price
appreciation are mandated by rules of the United States Securities and Exchange Commission. Actual gains, if any, on option exercises are dependent on the future performance of the Common Stock and overall market conditions. There can be no
assurance provided to any executive officer or any other holder of the Companys securities that the actual stock price appreciation over the 10-year option term will be at the assumed 5% and 10% levels or at any other defined level. Unless the
market price of the Common Stock appreciates over the option term, no value will be realized from option grants made to the executive officers.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | 8.33% of these options became exercisable on December 31, 2006, and the remaining options become exercisable in monthly installments on the last day of the next thirty three
months.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) | These options become exercisable in quarterly installments over four years, beginning from the date of grant, provided that an additional 25% of the options shall become exercisable
on the first anniversary of the date of grant in the event that the Company achieves specified target financial results. In such circumstance, the remaining 50% of the options shall become exercisable in quarterly installments over the next two
years.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(6) | These options become exercisable in quarterly installments over four years, beginning from January 3, 2006.
|--- | -----------------------------------------------------------------------------------------------------------



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Aggregate Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values



The following table sets forth information concerning option holdings as of
September 30, 2006 with respect to each of the Named Officers. No options were exercised by the Named Officers during the fiscal year ended September 30, 2006. No stock appreciation rights were outstanding as of September 30, 2006.



|                  |  |                                                                        |  |                                                                   |  |             |           |               |   |        
|----------------- |  | ---------------------------------------------------------------------- |  | ----------------------------------------------------------------- |  | ----------- | --------- | ------------- | - | -------
|                  |  | Number ofSecurities UnderlyingUnexercised Options atSeptember 30, 2006 |  | Value of UnexercisedIn-the-Money Options atSeptember 30, 2006 (1)
|Name              |  | Exercisable                                                            |  | Unexercisable                                                     |  | Exercisable |           | Unexercisable
|Alan B. Lefkof    |  | 826,133                                                                |  | 246,867                                                           |  | $           | 1,040,800 |               | $ | 676,820
|Charles Constanti |  | 67,501                                                                 |  | 152,499                                                           |  | $           | 143,427   |               | $ | 324,773
|Brooke A. Hauch   |  | 254,351                                                                |  | 63,748                                                            |  | $           | 349,954   |               | $ | 137,883
|David A. Kadish   |  | 381,150                                                                |  | 45,000                                                            |  | $           | 457,802   |               | $ | 85,200 
|Raymond J. Smets  |  | 62,500                                                                 |  | 187,500                                                           |  | $           | 144,375   |               | $ | 433,125

---

|(1) | Based on $5.61 per share, which was the fair market value per share of the Companys Common Stock at September 30, 2006, less the exercise price payable for such shares.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Employment Contracts, Termination of Employment and Change in
Control Arrangements



The Compensation Committee, as plan
administrator of all of our existing equity compensation plans as of September 30, 2006, has the authority to provide for accelerated vesting of the shares of Common Stock subject to outstanding options held by the Named Officers and any other
executive officer in connection with certain changes in control of the Company or the subsequent termination of the officers employment following the change in control event.



On December 9, 2005, the Company and Alan B. Lefkof entered into an Employment Agreement (the Employment
Agreement). The Board of Directors approved the Employment Agreement on December 8, 2005 following the recommendation of the Compensation Committee of the Board of Directors. Set forth below is a brief description of the material terms
and conditions of the Employment Agreement.



Under the terms of
the Employment Agreement, the Company has agreed to continue to employ Mr. Lefkof as its President and Chief Executive Officer. Mr. Lefkof also will continue to serve as a member of the Companys Board of Directors. The initial term
of the Employment Agreement is for a three-year period that commenced as of October 1, 2005, which was the first day of the Companys current fiscal year ending September 30, 2006. Thereafter, the Employment Agreement shall renew
automatically for successive renewal terms of one year each unless either party provides written notice of non-renewal no later than ninety days prior to the end of the initial or then current renewal term. The Employment Agreement provides that
Mr. Lefkof will receive a base salary in the amount of $350,000 during the first year of the term, and that the Compensation Committee of the Board may adjust the base salary in the second and third years of the initial term and during any
renewal terms. In addition, Mr. Lefkof will be eligible to earn an annual bonus in accordance with the Companys then current bonus program for senior executives. The target amount of the annual bonus will not be less than 50% of
Mr. Lefkofs then current base salary. The actual award of any bonus and the timing of payment shall be determined by the Compensation Committee. Mr. Lefkof will be entitled to participate in specified employee health and benefit
programs. The Employment Agreement provides that the Company will ensure that Mr. Lefkof continues to receive all health related benefits through September 30, 2015 unless he receives comparable benefits from a subsequent employer.



Pursuant to the terms of the Employment Agreement, on
December 9, 2005, Mr. Lefkof was awarded options to purchase 300,000 shares of the Companys Common Stock. 1/12thof the option shares became exercisable on December 31, 2005, and the remainder vest 1/36thper month on the last day of each month thereafter through September 30, 2008. The exercise price of the options is $2.65 per share, the closing price of the Companys Common Stock on December 9, 2005.



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In the event that Mr. Lefkofs employment is terminated for cause, he will receive payment of
his salary through the date of termination. In the event Mr. Lefkofs employment is terminated without cause or for good reason, as defined in the Employment Agreement, death or disability, and such termination occurs on or before
September 30, 2007, Mr. Lefkof will continue to receive employment benefits (base salary, vesting of options and other benefits) through the end of the initial term. If such termination occurs after September 30, 2007, Mr. Lefkof
will continue to receive employment benefits (base salary, vesting of options and other benefits) for a period of twelve months after termination. In either case, Mr. Lefkof shall also receive a bonus payment equal to the greater of
(a) $100,000 and (b) the target amount of the annual bonus for the fiscal year in which the termination occurs, pro rated through the date of termination. The Employment Agreement provides that in the event that any payment to
Mr. Lefkof is determined to be subject to the parachute or excise taxes imposed pursuant to Section 280G of the Internal Revenue Code, or any interest or penalties are incurred by Mr. Lefkof with respect to any such parachute or 280G
excise taxes, Mr. Lefkof shall receive an additional gross up payment in an amount such that after payment by Mr. Lefkof of all income and excise taxes, including interest or penalties, imposed on the gross up
payment, Mr. Lefkof will retain an amount of the gross up payment equal to the excise tax, including interest or penalties, imposed on the payment.



None of the other Named Officers has an employment agreement with the Company, and their employment may be terminated at any
time. However, the Company has entered into agreements with Messrs. Constanti, Kadish and Smets and with Ms. Hauch that provide for severance payments and acceleration of vesting of stock options in the event that the officers
employment terminates following certain changes in control of the Company. Messrs. Constanti and Kadish would be eligible to receive continued payment of base monthly salary and other benefits for a period of twelve months and the full target bonus
for the fiscal year in which employment is terminated, prorated to the effective date of termination; Mr. Smets and Ms. Hauch would be eligible to receive continued payment of base monthly salary and other benefits for a period of six
months and the full target bonus for the fiscal year in which employment is terminated, prorated to the effective date of termination. Any stock options held by the officer at the time of termination would vest and become exercisable by an
additional twelve months of vesting as of the effective date of termination.



Compensation Committee Interlocks and Insider Participation



The Compensation Committee of the Companys Board of Directors, as of September 30, 2006, consisted of Messrs. Crepin and Wills. Neither Mr. Crepin nor Mr. Wills was at any time during the
fiscal year ended September 30, 2006, or at any other time, an officer or employee of the Company. No member of the Compensation Committee serves as a member of the board of directors or compensation committee of any entity that has one or more
executive officers serving as a member of the Companys Board of Directors or Compensation Committee.



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Report of the Compensation Committee on Executive Compensation



This Report of the Compensation Committee (the Committee) shall
not be deemed to be incorporated by reference by any general statement incorporating by reference into any filing under the Securities Act of 1933, as amended, or under the Securities Exchange Act of 1934, as amended, except to the extent that the
Company specifically incorporates this information by reference, and shall not otherwise be deemed soliciting material or filed under such acts.



The Committee is comprised of non-employee directors and acts periodically to evaluate the effectiveness of the compensation program in linking Company
performance and executive pay. In addition, the Compensation Committee is consulted to approve the compensation package of a newly hired executive or of an executive whose scope of responsibility has changed significantly. The Committee has the
authority to establish the level of base salary payable to the Chief Executive Officer (CEO) and to administer the Companys various stock incentive plans. In addition, the Committee has the responsibility for approving the
individual bonus program to be in effect for the CEO. The CEO has the authority to establish the level of base salary payable to all other employees of the Company, including all executive officers, subject to the approval of the Committee. In
addition, the CEO has the responsibility for approving the bonus programs to be in effect for all other executive officers and other key employees each fiscal year, subject to the approval of the Committee.



GENERAL COMPENSATION POLICY.    The objective of
the Companys executive compensation program is to align executive compensation with the Companys long-term and short-term business objectives and performance. We rely upon judgment and not upon rigid guidelines or formulas in determining
the amount and mix of compensation elements for each executive officer. Key factors affecting our judgments include the nature and scope of the executive officers responsibilities and their effectiveness in leading our initiatives to achieve
corporate goals. Among the factors considered by the CEO were informal surveys conducted by Company personnel among local companies. The CEOs fundamental policy is to offer the Companys executive officers competitive compensation
opportunities based upon overall Company performance, their individual contribution to the financial success of the Company and their personal performance. It is the CEOs objective to have a substantial portion of each officers
compensation contingent upon the Companys performance, as well as upon his or her own level of performance. Accordingly, each executive officers compensation package consists of (i) base salary, (ii) cash bonus awards and
(iii) long-term stock-based incentive awards.



In
preparing the stock performance graph for this Item 11, the Company has selected the Nasdaq Stock Market (U.S.) Index and the Nasdaq Telecommunications Index (the Indices). To the extent that the Company compares its compensation
practices against other companies, through informal compensation surveys or otherwise, the constituent companies are not necessarily those included in the Indices, because the latter may not be competitive with the Company for executive talent or
because compensation information is not available to the Company.



BASE SALARY.    The base salary for each executive officer is set at the time of hire based on individual negotiation, and any subsequent increases are awarded pursuant to annual merit raises on the basis of
personal performance. For the two Named Officers who have been employed by the Company for more than five years, their base salaries were increased approximately 10% for the fiscal year ended September 30, 2005. Neither individual had received
a base salary increase during the fiscal year ended September 30, 2004. The Companys CFO, who was employed for less than a year at the start of the 2006 fiscal year, did not receive any increase in base salary.



ANNUAL CASH BONUSES.    The Company implemented a
formal bonus program for the fiscal year ended September 30, 2006. The CEOs bonus target was defined in the Employment Agreement described below. Each other executive officer was given a specific bonus target which generally was in the
range of 25%  30% of such officers base salary. To be eligible to receive a bonus, each participant in the bonus program must be employed in good standing at the end of the fiscal year and the Companys financial results must have
met a specific



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threshold. The bonus program was not otherwise based on personal performance. Once the Companys financial results met the minimum threshold, the level
of each participants actual bonus was determined arithmetically. Because the Company exceeded its financial performance target for the fiscal year, Companys CEO and the Companys executive officers were awarded Company
performance-related bonuses in an amount equal to approximately 122% of each officers bonus target amount.



LONG-TERM INCENTIVE COMPENSATION.    Generally, a significant stock option grant is made in the year that an officer commences
employment and grants typically of lesser amounts are made periodically. Generally, the size of each grant is set at a level that the Committee deems appropriate, to create a meaningful opportunity for stock ownership based upon the
individuals position with the Company, the individuals potential for future responsibility and promotion, the individuals performance in the recent period and the number of unvested options held by the individual at the time of the
new grant. The relative weight given to each of these factors will vary from individual to individual at the Committees discretion based on the recommendation made by the CEO to the Committee. In fiscal year 2006, the CEO received an option
grant pursuant to the Employment Agreement described below. In addition, in fiscal year 2006, one option grant was made in connection with the employment of the Companys new Senior Vice President of Sales and Marketing. The option grant to the
CEO vested 1/12thon December 31, 2005, and the remaining shares vest monthly over the following thirty-three
months. Additional option grants at lesser levels were made to the Companys other executive offices after consideration of the factors described above on an individual basis. The option grants to the other executive officers vest quarterly
over a four year period from the date of grant, contingent upon the executive officers continued employment with the Company. However, in the event that the Company achieves its targeted financial results for fiscal year 2006, an additional
25% of the options shall vest on the first anniversary of the date of grant, and the remaining 50% of the options shall vest quarterly over the next two years. Accordingly, these options will provide a return to the executive officers only if such
officer remains an employee of the Company, and then only if the market price of the Common Stock appreciates over the option term.



CEO COMPENSATION.    Mr. Lefkof, the Companys President and CEO, received an increase in base salary of
approximately 3% effective as of the beginning of fiscal year 2006, as provided in the Employment Agreement described below. In addition, also as provided in the Employment Agreement, the CEOs bonus target was set at 50% of his base salary.
Because the CEOs bonus target was set at a higher level than had been the case in previous years in order to provide a greater incentive for the Companys CEO to achieve financial performance targets, the Committee concluded that it was
not necessary to increase the CEOs base salary in a greater amount. As noted above, because the Company exceeded its financial performance targets, the Companys CEO, along with all other participant in the Companys bonus program,
received a bonus in an amount equal to approximately 122% of his bonus target amount. As described above, the CEO also received an option grant in fiscal year 2006.



CEO EMPLOYMENT AGREEMENT.    Following the end of fiscal year 2005, on December 9, 2005, the
Company and Alan B. Lefkof entered into an Employment Agreement (the Agreement). The Agreement was approved by the Board of Directors on December 8, 2005 following the recommendation of the Compensation Committee. Set forth
elsewhere in this Item 11 is a brief description of the material terms and conditions of the Agreement. Before entering into the Agreement, the Committee conducted research into the compensation of the chief executive officers of other public
companies comparable in size to the Company, in the same markets as the Company, or in the same geographic area as the Company. The Committee used this peer data in its negotiations with Mr. Lefkof with respect to the Agreement, and determined
that the compensation and severance provisions in the Agreement were consistent with the peer data. The Company did not retain any outside compensation consultants in connection with its research and subsequent negotiation of the Agreement. The
Committee recommended that the Agreement be approved by the Board of Directors in order to demonstrate the Committees recognition of Mr. Lefkofs continued leadership of the Company and to provide assurance regarding commitment and
stability at the CEO level.



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TAX LIMITATION.    Under applicable Federal tax law, the Company will not be
allowed a Federal income tax deduction for compensation paid to certain executive officers to the extent that compensation exceeds $1 million per officer in any year. This limitation has been in effect for all fiscal years of the Company ending
after the Companys initial public offering. The stockholders approved the Companys 1996 Stock Option Plan and 2002 Equity Incentive Plan, which include provisions that limit the maximum number of shares of Common Stock for which any one
participant may be granted stock options over a three-year period and two-year period respectively. Accordingly, any compensation deemed paid to an executive officer when he exercises an option under the 1996 Stock Option Plan and 2002 Equity
Incentive Plan with an exercise price equal to the fair market value of the option shares on the grant date will generally qualify as performance-based compensation that will not be subject to the $1 million limitation. However, options granted
under the 2000 Stock Incentive Plan do not qualify as performance-based compensation and will be subject to the $1 million limitation. Since it is not expected that the cash compensation to be paid to the Companys executive officers for
fiscal year 2006 will exceed the $1 million limit per officer, the Committee will defer any decision on whether to limit the dollar amount of the cash compensation payable to the Companys executive officers to the $1 million cap.



Submitted by the Compensation Committee of the Netopia Board of Directors:J. Francois CrepinHarold S. Wills




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STOCK PERFORMANCE GRAPH



The graph set forth below compares the cumulative total stockholder return on the Companys Common Stock for the five
year period commencing on September 30, 2001 and ending on September 30, 2006, with the cumulative total return of (i) the Nasdaq Stock Market (U.S.) Index and (ii) the Nasdaq Telecommunications Index, over the same period. This
graph assumes the investment of $100.00 on September 30, 1999 in the Common Stock, the Nasdaq Stock Market (U.S.) Index and the Nasdaq Telecommunications Index, and assumes the reinvestment of dividends, if any.



The comparisons shown in the graph below are based upon historical data. The
Company cautions that the stock price performance shown in the graph below is not necessarily indicative of, nor is it intended to forecast, the potential future performance of the Common Stock. Information used in the graph was obtained from
Research Data Group, Inc., a source believed to be reliable, but the Company is not responsible for any errors or omissions in such information.



LOGO



|                          |  |        |  |       |  |        |  |        |  |        |  |       
|------------------------- |  | ------ |  | ----- |  | ------ |  | ------ |  | ------ |  | ------
|                          |  | 9/01   |  | 9/02  |  | 9/03   |  | 9/04   |  | 9/05   |  | 9/06  
|NETOPIA, INC.             |  | 100.00 |  | 38.07 |  | 173.35 |  | 54.31  |  | 71.07  |  | 142.39
|NASDAQ COMPOSITE          |  | 100.00 |  | 80.94 |  | 120.79 |  | 131.00 |  | 150.23 |  | 159.87
|NASDAQ TELECOMMUNICATIONS |  | 100.00 |  | 68.41 |  | 130.45 |  | 146.07 |  | 154.35 |  | 170.86



Notwithstanding
anything to the contrary set forth in any of the Companys previous or future filings under the Securities Act or the Exchange Act that might incorporate this annual report or future filings made by the Company under those statutes, the
Compensation Committee Report and Stock Performance Graph shall not be deemed filed with the Securities and Exchange Commission and shall not be deemed incorporated by reference into any of those prior filings or into any future filings made by the
Company under those statutes.



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|ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
|-------- | ----------------------------------------------------------------------------------------------



The following table sets forth, as of December 8, 2006, certain information with respect to shares beneficially owned
by (i) each person who is known by the Company to be the beneficial owner of more than five percent (5%) of the Companys outstanding shares of Common Stock, (ii) the Chief Executive Officer and the four other executive officers
of the Company named in the Executive Compensation and Other MattersSummary Compensation Table, (iii) all directors and nominees, and (iv) all current directors and executive officers of the Company as a group.



Beneficial ownership has been determined in accordance with
Rule 13d-3 under the Exchange Act. Under this rule, certain shares may be deemed to be beneficially owned by more than one person (if, for example, persons share the power to vote or the power to dispose of the shares). In addition, shares are
deemed to be beneficially owned by a person if the person has the right to acquire shares (for example, upon exercise of an option or warrant) within sixty (60) days of the date as of which the information is provided. In computing the
percentage ownership of any person, the number of shares is deemed to include the number of shares beneficially owned by such person (and only such person) by reason of such acquisition rights. As a result, the percentage of outstanding shares of
any person as shown in the following table does not necessarily reflect the persons actual voting power at any particular date.



To our knowledge, except as indicated in the footnotes to this table and pursuant to applicable community property laws, the persons named in the table
have sole voting and investment power with respect to all shares of Common Stock shown as beneficially owned by them.



|                                                                         |  |                                                      |  |                     |  
|------------------------------------------------------------------------ |  | ---------------------------------------------------- |  | ------------------- | -
|                                                                         |  | Shares Beneficially Owned as of December 8, 2006
(1) | 
|Beneficial Owner*                                                        |  | Number of Shares                                     |  | Percentage of Class |  
|Glazer Capital, LLC (2)                                                  |  | 2,307,289                                            |  | 8.69                | %
|Cannell Capital LLC (3)                                                  |  | 1,425,000                                            |  | 5.37                | %
|Alan B. Lefkof (4)                                                       |  | 873,663                                              |  | 3.19                | %
|Charles Constanti (5)                                                    |  | 105,002                                              |  | **                  |  
|Brooke A. Hauch (6)                                                      |  | 290,648                                              |  | 1.08                | %
|David A. Kadish (7)                                                      |  | 438,894                                              |  | 1.63                | %
|Raymond J. Smets (8)                                                     |  | 98,750                                               |  | **                  |  
|J. Francois Crepin (9)                                                   |  | 12,500                                               |  | **                  |  
|Reese M. Jones (10)                                                      |  | 997,778                                              |  | 3.75                | %
|Robert Lee (11)                                                          |  | 90,000                                               |  | **                  |  
|Howard T. Slayen (12)                                                    |  | 80,500                                               |  | **                  |  
|Harold S. Wills (13)                                                     |  | 72,500                                               |  | **                  |  
|All current directors and executive officers as a group (10 people) (14) |  | 3,060,235                                            |  | 10.72               | %

---

|* | Unless otherwise indicated, these beneficial owners can be reached at Netopia, Inc., 6001 Shellmound Street, 4thFloor, Emeryville, California 94608.
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------

|** | Less than 1% of the outstanding shares of Common Stock.
|-- | -------------------------------------------------------

|(1) | The number of shares of Common Stock deemed owned by each officer and director includes shares issuable pursuant to stock options that may be exercised within 60 days after
December 8, 2006.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | The number of shares beneficially owned by Glazer Capital, LLC was reported in a Schedule 13G filed on December 8, 2006 with the United States Securities and
Exchange Commission (the Glazer Schedule 13G). According to the Glazer Schedule 13G, the number of shares includes 2,307,289 shares of Common Stock beneficially owned by Mr. Paul J. Glazer as (i) the managing member
of Paul J. Glazer, LLC, which in turn serves as the general partner of Glazer Capital Management, L.P., and (ii) the managing member of Glazer Capital, LLC, which in turn serves as the investment manager of Glazer Offshore Fund, Ltd. and
manages on a
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| | discretionary basis separate accounts for three unrelated entities that own shares of Common Stock. In addition, Glazer Capital, LLC beneficially owns the
2,110,281 shares held by Glazer Offshore Fund, Ltd. and the separate accounts. Mr. Glazer reports sole voting and dispositive power with respect to 197,008 of the shares, and Mr. Glazer and Glazer Capital, LLC report shared voting and
dispositive power with respect to 2,110,281 of the shares. The address of Glazer Capital, LLC is reported as 237 Park Avenue, New York, New York 10017.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | The number of shares beneficially owned by Cannell Capital LLC was reported in a Schedule 13G/Amendment No. 1 filed on February 13, 2006 with the United States Securities
and Exchange Commission. The address of Cannell Capital LLC is reported as 150 California Street, San Francisco, California 94111.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | Includes 812,757 shares issuable upon the exercise of stock options held by Alan B. Lefkof and 60,906 shares held by the Lefkof Family Trust over which Alan B. Lefkof has shared
voting and investment authority.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) | Includes 95,002 shares issuable upon the exercise of stock options held by Charles Constanti.
|--- | ---------------------------------------------------------------------------------------------

|(6) | Includes 268,101 shares issuable upon the exercise of stock options held by Brooke A. Hauch.
|--- | --------------------------------------------------------------------------------------------

|(7) | Includes 394,901 shares issuable upon the exercise of stock options held by David A. Kadish.
|--- | --------------------------------------------------------------------------------------------

|(8) | Includes 93,750 shares issuable upon the exercise of stock options held by Raymond J. Smets.
|--- | --------------------------------------------------------------------------------------------

|(9) | Includes 12,500 shares issuable upon the exercise of stock options held by J. Francois Crepin.
|--- | ----------------------------------------------------------------------------------------------

|(10) | Includes 75,500 shares issuable upon the exercise of stock options held by Reese M. Jones.
|---- | ------------------------------------------------------------------------------------------

|(11) | Includes 90,000 shares issuable upon the exercise of stock options held by Robert Lee.
|---- | --------------------------------------------------------------------------------------

|(12) | Includes 500 shares held in a retirement account and 2,500 shares held by a family partnership over which Howard T. Slayen has voting and investment authority, and 77,500 shares
issuable upon the exercise of stock options held by Howard T. Slayen.
|---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(13) | Includes 72,500 shares issuable upon the exercise of stock options held by Harold S. Wills.
|---- | -------------------------------------------------------------------------------------------

|(14) | Includes 1,992,511 shares issuable upon the exercise of stock options held by all current executive officers and directors.
|---- | ---------------------------------------------------------------------------------------------------------------------------



Equity Compensation Plan Information



The following table provides information about our Common Stock that may be
issued upon the exercise of options, warrants and rights under all of our existing equity compensation plans as of September 30, 2006, including the Farallon Computing, Inc. 1987 Restated Stock Option Plan, the Netopia, Inc. 1996 Stock Option
Plan, the Netopia, Inc. 2000 Stock Incentive Plan, and the Netopia, Inc. 2002 Equity Incentive Plan (collectively, the Option Plans), but except as noted below excluding the Netopia, Inc. 2005 Employee Stock Purchase Plan.



|                                                           |  |                                                                                       |     |  |                                                                       |      |                                                                                                                                       |           |    
|---------------------------------------------------------- |  | ------------------------------------------------------------------------------------- | --- |  | --------------------------------------------------------------------- | ---- | ------------------------------------------------------------------------------------------------------------------------------------- | --------- | ---
|                                                           |  | (a)                                                                                   |     |  | (b)                                                                   |      | (c)                                                                                                                                   |          
|Plan category                                              |  | Number ofsecurities tobe issuedupon exerciseof outstandingoptions,warrants,
andrights |     |  | Weighted-averageexerciseprice ofoutstandingoptions,warrantsand rights |      | Number of securitiesremaining available forfuture issuance underequity compensationplans
(excludingsecurities reflected incolumn (a)) |          
|Equity compensation plans approved by security holders     |  | 6,953,733                                                                             | (1) |  | $                                                                     | 4.20 |                                                                                                                                       | 943,383   | (2)
|Equity compensation plans not approved by security holders |  | 559,959                                                                               | (3) |  |                                                                       | 3.49 |                                                                                                                                       | 321,293   |    
|                                                           |  |                                                                                       |     |  |                                                                       |      |                                                                                                                                       |           |    
|                                                           |  | 7,513,692                                                                             |     |  |                                                                       | 4.15 |                                                                                                                                       | 1,264,676 | (4)
|                                                           |  |                                                                                       |     |  |                                                                       |      |                                                                                                                                       |           |    

---

|(1) | Includes 3,210,031 options granted under the 1996 Stock Option Plan, and 3,743,702 options granted under the 2002 Equity incentive Plan.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------

|(2) | Includes 401,057 shares of Common Stock available for issuance under the 2002 Equity Incentive Plan, and 542,326 shares of Common Stock available for issuance under
the Employee Stock Purchase Plan. The 1996 Stock Option Plan expired in fiscal year 2006, and no shares remain available for issuance except for shares issuable upon exercise of options outstanding on the expiration date. The number of shares of
Common Stock remaining available for issuance under the 2002 Equity Incentive Plan automatically increases on the
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| | first trading day of each calendar year by an amount equal to four and three-quarter percent (4.75%) of the shares of Common Stock outstanding on
December 31 of the immediately preceding calendar year, up to a maximum annual increase of 1,000,000 shares.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Granted under the 2000 Stock Incentive Plan.
|--- | --------------------------------------------

|(4) | Excluding the 542,326 shares of Common Stock available for issuance under the 2005 Employee Stock Purchase Plan, a total of 722,350 shares of Common Stock are available for grant
under the Option Plans as of September 30, 2005.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



On October 18, 2000, the Board of Directors approved the 2000 Stock Incentive Plan, pursuant to which non-qualified stock options may be granted to our employees, officers and directors. The purpose of the 2000 Stock Incentive Plan is
to promote our success by linking the personal interests of our employees, officers and directors to those of our shareholders and by providing participants with an incentive for outstanding performance. As initially approved, awards granted to
officers may not exceed in the aggregate forty percent (40%) of all shares that are reserved for grant under the 2000 Stock Incentive Plan. Officers and directors are no longer eligible to receive any additional awards under the 2000 Stock
Incentive Plan. All options granted under the 2000 Stock Incentive Plan have exercise prices equal to the fair market value of the underlying stock on the date of grant. As of September 30, 2006, the Company had reserved 1,900,000 shares of
Common Stock for issuance under the 2000 Stock Incentive Plan, and 321,293 shares remained available for future grants. Options currently outstanding under the 2000 Stock Incentive Plan vest ratably over two or four-year periods beginning at the
grant date and expire ten years from the date of grant. The 2000 Stock Incentive Plan is not required to be and has not been approved by the Companys stockholders. The Companys officers and directors hold an aggregate of 64,900 options
outstanding under the 2000 Stock Incentive Plan.



|ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
|-------- | ----------------------------------------------



The Companys Amended and Restated Certificate of Incorporation limits the liability of the Companys directors for monetary damages arising
from a breach of their fiduciary duty as directors, except to the extent otherwise required by the Delaware General Corporation Law. Such limitation of liability does not affect the availability of equitable remedies such as injunctive relief or
rescission.



The Companys bylaws provide that the Company
shall indemnify its directors and officers to the fullest extent permitted by Delaware law, including in circumstances in which indemnification is otherwise discretionary under Delaware law. The Company has entered into indemnification agreements
with its executive officers and directors containing provisions that may require the Company, among other things, to indemnify such officers and directors against certain liabilities that may arise by reason of their status or service as directors
or officers and to advance their expenses incurred as a result of any proceeding against them as to which they could be indemnified. Pursuant to these agreements, the Company has been paying the legal fees and expenses of certain officers and
directors that have been incurred in connection with the federal securities class action and derivative actions described in Item 3, subject to undertakings by each individual to reimburse such amounts in the event it is ultimately determined
that such individual is not entitled to indemnification under such provisions and agreements.



During the fiscal year ended September 30, 2006, there were no transactions, or series of similar transactions, or any proposed transactions, or series of similar transactions, to which the Company or any of its
subsidiaries was or is to be a party, in which the amount involved exceeds $60,000, and in which any of the following persons had, or will have, a direct or indirect material interest: (1) any of our directors or executive officers,
(2) any nominee for election as one of our directors, (3) any security holder we known to own of record or beneficially more than five percent of our voting securities, and (4) any member of the immediate family of any of the
foregoing persons.



|ITEM 14. | PRINCIPAL ACCOUNTANT FEES AND SERVICES
|-------- | --------------------------------------



On September 30, 2004, the Audit Committee of the board of directors of the Company engaged Burr, Pilger & Mayer LLP (BPM) as the Companys independent registered public accounting firm.
BPM has



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audited the Companys consolidated financial statements for the fiscal years ended September 30, 2006, 2005 and 2004, and the Companys
restated consolidated financial statements for the fiscal years ended September 30, 2003 and 2002.



The following table sets forth the aggregate fees billed by BPM for the fiscal years ended September 30, 2006 and 2005 for audit and non-audit
services, as well as all out of pocket costs incurred in connection with these services, and are categorized as Audit Fees, Audit-Related Fees, Tax Fees and All other Fees.



|                   |  |                 |         |                 |   |        
|------------------ |  | --------------- | ------- | --------------- | - | -------
|                   |  | FiscalYear 2006 |         | FiscalYear 2005
|Audit fees (1)     |  | $               | 530,217 |                 | $ | 659,400
|Audit-Related Fees |  |                 | 0       |                 |   | 0      
|Tax fees           |  |                 | 0       |                 |   | 0      
|All other fees (2) |  | $               | 4,900   |                 | $ | 4,450  
|                   |  |                 |         |                 |   |        
|Total fees         |  | $               | 535,117 |                 | $ | 663,850
|                   |  |                 |         |                 |   |        

---

|(1) | This amount represents the aggregate fees billed for professional services rendered by BPM for the audit of the Companys annual financial statements, quarterly reviews of the
Companys interim financial statements reported on Form 10-Q and services normally provided in connection with statutory and regulatory filings related to the last two fiscal years. For fiscal years 2006 and 2005, the audit fees include fees
for both the audit of the Companys financial statements and the audit of managements assessment of the effectiveness of the Companys internal control over financial reporting.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | This amount represents the aggregate fees billed for products and services provided by BPM, which were not audit, audit-related or tax fees. For fiscal year 2006, this amount
primarily represented services related to potential merger and acquisition due diligence. For fiscal year 2005, this amount primarily represents consulting fees regarding cost allocation and revenue on certain agreements and work related to a
consent to incorporation of an audit opinion in a Form S-8. BPM did not perform any services or bill any fees for financial information systems and design implementation for the fiscal years ended September 30, 2006 and 2005.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The non-audit services provided by BPM are
permissible non-audit services within the meaning of Section 10A(g) of the Securities Exchange Act of 1934.



Section 10A(i)(1) of the Exchange Act requires that all audit and non-audit services to be performed by our principal accountants be approved in the
advance by the Audit Committee of the Board of Directors, subject to certain exceptions relating to non-audit services accounting for less than five percent of the total fees paid to its principal accountants which are subsequently ratified by the
Audit Committee (the De Minimis Exception). Pursuant to Section 10A(i)(1) of the Exchange Act, the Audit Committee has established procedures by which it pre-approves such services at a regularly scheduled meeting. In addition,
pursuant to Section 10A(i)(3) of the Exchange Act, the Audit Committee has established procedures by which the Chairman of the Audit Committee may pre-approve such services provided the Chairman reports the details of the services to the full
Audit Committee at its next regularly scheduled meeting. None of the non-audit services described above were performed pursuant to the De Minimis Exception during the periods in which the pre-approval requirement has been in effect.



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PART IV



|ITEM 15. | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
|-------- | ------------------------------------------



|(a) | See Item 8 in Part II of this Annual Report on Form 10-K, Financial Statements and Supplementary Data, for an index to the consolidated financial statements and supplementary
financial information filed on this Form 10-K.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(b) | During the three months ended September 30, 2006, we filed the following reports on Form 8-K:
|--- | ---------------------------------------------------------------------------------------------



| |  |  | On July 25, 2006, we filed a Current Report on Form 8-K, reporting Items 2 and 9.01, reporting our financial results for the third fiscal quarter ended June 30, 2006, as
well as certain other information.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | On August 10,2006, we filed a Current Report on Form 8-K, reporting Item 8.01, reporting our announcement that The NASDAQ Stock Market had approved our common stock for
trading on The Nasdaq Capital Market beginning August 11, 2006.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(c) | Exhibits have been filed separately with the United States Securities and Exchange Commission in connection with the Annual Report on Form 10-K or have been incorporated into the
report by reference. You may obtain copies of such exhibits directly from us upon request.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|               |  |                                                                                                                                                                                                                                                                           
|-------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Number |  | Description                                                                                                                                                                                                                                                               
|               | 
|2.1(a)         |  | Agreement and Plan of Merger, dated as of November 13, 2006, among Netopia, Inc., Motorola, Inc., and Motorola GTG Subsidiary IV Corp.                                                                                                                                    
|               | 
|3.1(b)         |  | Restated and Amended Certificate of Incorporation                                                                                                                                                                                                                         
|               | 
|3.2(b)         |  | Restated and Amended Bylaws of the Registrant                                                                                                                                                                                                                             
|               | 
|3.3(c)         |  | Certificate of Ownership and Merger (Corporate Name Change)                                                                                                                                                                                                               
|               | 
|4.1            |  | Reference is made to Exhibits 3.1, 3.2 and 3.3                                                                                                                                                                                                                            
|               | 
|4.2(b)         |  | Amended and Restated Investor Rights Agreement, dated March 27, 1992, among the Registrant and the Investors and Founders named therein, as amended                                                                                                                       
|               | 
|10.1(b)        |  | Form of Indemnification Agreement entered into between the Registrant and it Directors and Officers                                                                                                                                                                       
|               | 
|10.2(b)        |  | 1996 Stock Option Plan and forms of agreements thereunder                                                                                                                                                                                                                 
|               | 
|10.3(c)        |  | 1996 Employee Stock Purchase Plan                                                                                                                                                                                                                                         
|               | 
|10.4(d)        |  | Office Lease Agreement between the Company and WHLW Real Estate Limited Partnership, dated May 1, 1997                                                                                                                                                                    
|               | 
|10.5(d)        |  | Real Property Lease Extension Agreement between the Company and Bobwhite Meadow, L.P., dated March 1, 1996                                                                                                                                                                
|               | 
|10.6(e)        |  | 2000 Stock Incentive Plan and forms of agreements thereunder                                                                                                                                                                                                              
|               | 
|10.7(f)        |  | Agreement and Plan of Merger and Reorganization among Netopia, Inc., Amazon Merger Corporation, Cayman Systems, Inc., Certain Holders of Convertible Subordinated Promissory Notes and Richard
Burnes, as Security Holders Representative, dated as of September 19, 2001
|               | 
|10.8(g)        |  | Netopia, Inc. 2002 Equity Incentive Plan; as adopted by the Netopia Board of Directors on December 13, 2001 and approved by the Netopia shareholders on January 30, 2002, and forms of
agreements thereunder                                                              
|               | 
|10.9(h)        |  | Silicon Valley Bank Loan and Security Agreement entered into on June 27, 2002                                                                                                                                                                                             



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|               |  |                                                                                                                                         
|-------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Number |  | Description                                                                                                                             
|10.10(i)       |  | Office Lease Agreement dated December 9, 2002 between the Company and Christie Avenue PartnersJS                                       
|               | 
|10.11(j)       |  | Limited Waiver and Amendment to Loan Documents entered into between Silicon Valley Bank and Netopia, Inc. on June 12, 2003              
|               | 
|10.12(k)       |  | Amendment to Loan Documents entered into between Silicon Valley Bank and Netopia, Inc. on November 26, 2003                             
|               | 
|10.13(l)       |  | Amendment to Loan Documents entered into between Silicon Valley Bank and Netopia, Inc. on December 29, 2004                             
|               | 
|10.14(m)       |  | 2005 Employee Stock Purchase Plan                                                                                                       
|               | 
|10.15(n)       |  | Amendment to Loan Documents entered into between Silicon Valley Bank and Netopia, Inc. on June 27, 2005                                 
|               | 
|10.16(n)       |  | Amended and Restated Schedule to Loan and Security Agreement entered into between Silicon Valley Bank and Netopia, Inc. on June 27, 2005
|               | 
|10.17(o)       |  | Amendment to Loan Documents entered into between Silicon Valley Bank and Netopia, Inc. on September 30, 2005                            
|               | 
|11.1           |  | Reference is made to Note 1 of Notes to Consolidated Financial Statements                                                               
|               | 
|14.1(p)        |  | Code of Business Conduct and Ethics                                                                                                     
|               | 
|23.1           |  | Consent of Burr Pilger & Mayer LLP, Independent Registered Public Accounting Firm                                                       
|               | 
|24.1           |  | Power of Attorney (see Signature page)                                                                                                  
|               | 
|31.1           |  | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                      
|               | 
|31.2           |  | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                      
|               | 
|32.1           |  | Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                      
|               | 
|32.2           |  | Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                      

---

|(a) | Incorporated by reference to our Form 8-K/A as filed on December 12, 2006.
|--- | --------------------------------------------------------------------------

|(b) | Incorporated by reference to our Registration Statement on Form S-1 (No. 333-3868).
|--- | -----------------------------------------------------------------------------------

|(c) | Incorporated by reference to our Form S-8 as filed on February 25, 2004.
|--- | ------------------------------------------------------------------------

|(d) | Incorporated by reference to our Form 10-K for the fiscal year ended September 30, 1997.
|--- | ----------------------------------------------------------------------------------------

|(e) | Incorporated by reference to our Form S-8 as filed on December 8, 2000.
|--- | -----------------------------------------------------------------------

|(f) | Incorporated by reference to our Form 8-K as filed on October 17, 2001.
|--- | -----------------------------------------------------------------------

|(g) | Incorporated by reference to our Form S-8 as filed on May 2, 2003.
|--- | ------------------------------------------------------------------

|(h) | Incorporated by reference to our Form 10-Q as filed on August 14, 2002.
|--- | -----------------------------------------------------------------------

|(i) | Incorporated by reference to our Form 10-K for the fiscal year ended September 30, 2002.
|--- | ----------------------------------------------------------------------------------------

|(j) | Incorporated by reference to our Form 10-Q as filed on August 1, 2003.
|--- | ----------------------------------------------------------------------

|(k) | Incorporated by reference to our Form 10-Q as filed on February 17, 2004.
|--- | -------------------------------------------------------------------------

|(l) | Incorporated by reference to our Form 10-Q as filed on February 9, 2005.
|--- | ------------------------------------------------------------------------

|(m) | Incorporated by reference to our Form S-8 as filed on March 18, 2005.
|--- | ---------------------------------------------------------------------

|(n) | Incorporated by reference to our Form 10-Q as filed on August 9, 2005.
|--- | ----------------------------------------------------------------------

|(o) | Incorporated by reference to our Form 10-K for the fiscal year ended September 30, 2005.
|--- | ----------------------------------------------------------------------------------------

|(p) | Incorporated by reference to our Form 10-K for the fiscal year ended September 30, 2003.
|--- | ----------------------------------------------------------------------------------------



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SIGNATURES



Pursuant to the
requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated, in the City of Emeryville, State of California
on this 14th day of December 2006.



By:

/s/ Alan B. LefkofAlan B. Lefkof President and Chief Executive
OfficerBy:

/s/ Charles ConstantiCharles Constanti Vice President and Chief Financial
Officer (Principal Accounting Officer)




Dated: December 14, 2006



POWER OF ATTORNEY



By signing this Form 10-K below, I hereby appoint each of Alan B. Lefkof and
Charles Constanti as my attorney-in-fact to sign all amendments to this Form 10-K on my behalf, and to file this Form 10-K (including all exhibits and other documents related to the form 10-K) with the United States Securities and Exchange
Commission. I authorize each of my attorneys-in-fact to (1) appoint a substitute attorney-in-fact for himself and (2) perform any actions that he believes are necessary or appropriate to carry out the intention and purpose of this Power of
Attorney. I ratify and confirm all lawful actions taken directly or indirectly by my attorneys-in-fact and by any properly appointed substitute attorneys-in-fact.



Pursuant to the requirements of the Securities Exchange Act of 1934, the following persons on behalf of the Registrant and
in the capacities and on the dates indicated have signed this report.



|                                          |  |                                    |  |                  
|----------------------------------------- |  | ---------------------------------- |  | -----------------
|Signature                                 |  | Title                              |  | Date             
|                                          |  |                                   
|/s/ Harold S. Wills Harold S. Wills       |  | Chairman of the Board of Directors |  | December 14, 2006
|                                          |  |                                   
|/s/ J. Francois Crepin J. Francois Crepin |  | Director                           |  | December 14, 2006
|                                          |  |                                   
|/s/ Reese M. Jones Reese M. Jones         |  | Director                           |  | December 14, 2006
|                                          |  |                                   
|/s/ Howard T. Slayen Howard T. Slayen     |  | Director                           |  | December 14, 2005
|                                          |  |                                   
|/s/ Robert Lee Robert Lee                 |  | Director                           |  | December 14, 2005



93