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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-K/A



(Amendment No. 1)



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



| |  | For the fiscal year ended September 30, 2002
| |  | --------------------------------------------



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 0-28450



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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)



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Indicate by check ü 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 ü 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 this Form 10-K or any amendment to this Form 10-K.  þ



As of December 13, 2002 there were 18,906,973 shares of the Registrants
common stock outstanding. The aggregate market value of the common stock held by non-affiliates of the registrant, based on the closing price of the common stock as reported on The Nasdaq National Market on December 13, 2002 was approximately
$24,701,662.



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NETOPIA, INC.

FORM 10-K/A

Table of Contents





|                  |  |                                                                                       |  | Page
|----------------- |  | ------------------------------------------------------------------------------------- |  | ----
|                  | 
|PART I.           |  |                                                                                      
|                  |  |                                                                                      
|Item 1.           |  | Description of Business                                                               |  | 2   
|                  | 
|PART II.          |  |                                                                                      
|                  |  |                                                                                      
|Item 6.           |  | Selected Financial Data                                                               |  | 11  
|                  |  |                                                                                      
|Item 7.           |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 14  
|                  |  |                                                                                      
|Item 8.           |  | Financial Statements and Supplementary Data                                           |  | 36  
|                  | 
|PART III.         |  |                                                                                      
|                  |  |                                                                                      
|Item 13.          |  | Certain Relationships and Related Transactions                                        |  | 66  
|                  |  |                                                                                      
|Item 14.          |  | Controls and Procedures                                                               |  | 66  
|                  | 
|PART IV.          |  |                                                                                      
|                  |  |                                                                                      
|Item 15.          |  | Exhibits, Financial Schedules and Reports on Form 8-K                                 |  | 67  
|                  | 
|Index to Exhibits |  | 67                                                                                   
|                  | 
|Signatures        |  | 69                                                                                   
|                  | 
|Certifications    |  | 70                                                                                   





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EXPLANATORY NOTE



This Annual Report on Form 10-K/A amends the following Items of our previously-filed Annual Report on Form 10-K for the year ended September 30, 2002: Part I, Item 1;
Part II, Items 6, 7 and 8; Part III, Items 13 and 14; and Part IV, Item 15.



PART I.



|ITEM  1. |  | DESCRIPTION OF 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 trading
price of our common stock could decline.



Company Background



We develop, market and support broadband equipment, software and services
that enable our carrier and broadband service provider customers to simplify and enhance the delivery of broadband services to their residential and small and medium size business customers. Our product and service offerings enable carriers and
broadband service providers to (i) deliver to their customers feature-rich modems, routers and gateways, (ii) utilize software that allows remote management of equipment located at their customers premises, and (iii)
provide value added services to enhance revenue generation. Our broadband modems, routers and gateways are installed by customers of carriers and broadband service providers in order to obtain faster access to the Internet than is possible with
dial-up connections. These bundled service offerings often include digital subscriber line (DSL) or broadband cable equipment bundled with backup, bonding, virtual private networking or VPN that allows more secure communications over the Internet,
firewall protection, parental controls, Web content filtering, combined voice and data services, hosting of web sites that we call eSites, and hosting of web stores that we call eStores. Our netOctopus suite of server software products enable remote
support and centralized management of installed broadband gateways, allowing carriers and broadband service providers to provide support to their customers on a remote basis. We also offer Timbuktu and eCare software products for help desk
customers. These products allow business help desks to provide support on a remote basis when computer users experience problems with their desktop or laptop computers.



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 from Farallon Communications, Inc. to Netopia, Inc. We initially focused on the development of networking products for AppleTalk local area networks or LANs. In 1993, we revised our business
strategy to concentrate on the Internet and Intranet markets thru the utilization of our transmission control protocol/Internet protocol and routing expertise. In 1998, we introduced our family of DSL broadband Internet equipment and in 2002; we
expanded and enhanced our broadband product and service offerings, primarily as a result of the technology acquired in connection with our acquisitions of Cayman Systems, Inc. (Cayman) and DoBox, Inc. (DoBox). Our principal offices are located at
6001 Shellmound Street, 4thFloor, Emeryville, California 94608, and our telephone number is be (510) 420-7400.



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Products and Services



Broadband Equipment. We have developed a comprehensive line of broadband Internet gateways, which allow the transport of high-speed data over the local, copper
loop and enable telecommunications carriers to provide cost-effective and high-speed services over existing copper infrastructure. Our products support many types of high-speed wide area network (WAN) interfaces, including connectivity for
asynchronous DSL (ADSL), Symmetric High bit-rate Digital Subscriber Loop (SHDSL), symmetric DSL (SDSL), integrated services digital network DSL (IDSL), Ethernet, Cable, T1, Fractional T1, 56K digital dataphone service (DDS), Dual Analog, integrated
services digital network (ISDN), and wireless networks. Our broadband Internet gateway family includes routers and modems for data services and integrated access devices (IADs) for combined voice and data services, all of which are designed to
deliver high performance, excellent reliability and scalability, all the while maintaining affordability for the customer. We believe a key to our success is comprehensive interoperability with leading central office equipment and a common firmware
platform across all WAN connections. The substantial majority of our revenues are derived from sales of our broadband Internet gateways, in particular our DSL routers and modems. During each of fiscal years 2002, 2001 and 2000, revenue from the sale
of our broadband Internet gateways have accounted for more than 70% of our total revenues. When reading our statement of operations, revenues and cost of revenues related to the sale of our broadband Internet equipment are classified as
Internet equipment.



Digital subscriber line technology uses
complex modulation methods to enable high-speed services over copper phone lines. DSL technology allows the simultaneous transmission of data at speeds from 1 Megabit per second (Mbps) to 8Mbps, or 17 times to 140 times faster than standard 56
Kilobits per second (Kbps) modem service, while also providing standard analog telephone service over a single pair of copper wires at distances of up to 18,000 feet. With DSL technology, a user can talk and have high-speed data transmissions at the
same time over a regular phone line. DSL products enable telecommunication carriers to provide interactive multimedia services over copper wire while simultaneously carrying traditional telephone services, thus mitigating the need for the
telecommunication carriers to install second lines to support these services. Our products support many DSL WAN interfaces such as: ADSL which refers to DSL technology that provides bi-directional transmission capacity at varying speeds; and SDSL,
SHDSL and IDSL, each of which refers to DSL technology that provides bi-direction transmission capacity at the same speeds.



The DSL connection or link is comprised of a DSL Access Multiplexer (DSLAM) and a DSL router. The DSLAM is a piece of equipment that typically resides in the telephone
companies central offices and aggregates, or multiplexes, multiple DSL access lines into a telecommunication carriers high-speed line back to its core or central network. The DSL router is a piece of equipment, which resides at the users
location and is typically referred to as customer premise equipment (CPE). The CPE is generally a small device enabling DSL services at the users premises that sits on a desktop next to a personal computer (PC). As telecommunication carriers
deploy DSL based services, the need for DSL line concentration at the central offices and the need for CPE at the users location increases.



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The following table sets forth our broadband equipment product lines and their applications:



|Product Line                                  |  | WAN Interface                                               |  | Description                                                                                                                                                                                                                                              |  | Applications                                                                                                                                                                                                                                                                                                               
|--------------------------------------------- |  | ----------------------------------------------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Cayman 3000 Series Modems and Gateways        |  | ADSL Ethernet                                               |  | ADSL CPE that connects to a corresponding ADSL device in the service providers central office. Our recently released smart class of self-installable and remotely
manageable and configurable smart modems and gateways.                              |  | For the single or multi-PC home and small business: include self install features; LAN interface options of USB, 4-port 10/100 Ethernet switch, 802.11b wireless or home phone
networking (HPNA); firewall protection and security monitoring features; can support line speeds of 8.2Mbps downstream and 1.0Mbps upstream.
|                                             
|Netopia 4500 Series Broadband Gateways        |  | ADSL SHDSL T1                                               |  | Business class CPE that connects to the service providers central office. Provides robust routing, security, and management features optimized for the business
user.                                                                                   |  | For small and medium size businesses: LAN interface options of 10/BaseT 4-port Ethernet hub or 10/100BaseT Ethernet port.                                                                                                                                                                                                  
|                                             
|Netopia 4600 Series Broadband Gateways        |  | SDSL IDSL T1                                                |  | Business class CPE that connects to the service providers central office. Provides robust routing, security, and management features optimized for enterprise
applications.                                                                             |  | For small, medium and distributed enterprises. LAN interface of 4 or 8-port 10/100 auto-sensing 10/100BaseT Ethernet switch; hardware based VPN acceleration; dial-backup; and
firewall protection.                                                                                                                        
|                                             
|Netopia 4700 Series Integrated Access Devices |  | ADSL SDSL SHDSL                                             |  | Business class CPE that connects to the service providers central office. Provides multiple voice connections and high-speed Internet access over a single DSL line.                                                                                    |  | For small and medium size businesses: LAN interface of 10/100BaseT Ethernet port; telephony interface plain old telephone system (POTS) or ISDN; built-in firewall and filtering; can
support line speeds of 192Kbps to 8.2Mbps.                                                                                           
|                                             
|Netopia R-Series Broadband Gateways           |  | SDSL IDSL ADSL Leased line (T1, DDS and Serial) ISDN Analog |  | Business class CPE that connects to the service providers central office. Provides robust routing, security, and management features optimized for the business user. Modular
architecture allowing for cost-effective WAN interface hardware upgrades. |  | For small and medium size businesses: LAN interface of 4 or 8-port 10BaseT Ethernet hub; VPN features and firewall protection; dial-backup.                                                                                                                                                                                
|                                             



Broadband Services. Our service
delivery platform includes the netOctopus suite of broadband gateway, PC management and customer support software solutions, Web eCommerce server software and Timbuktu software solutions. netOctopus server software products enable remote support and
centralized management of installed broadband gateways. netOctopus Desktop Support and eCare software enable broadband service providers and traditional enterprises to support their customers by remotely viewing and operating the customers
desktop computer. The Netopia Web eCommerce server solution provides no assembly required Web sites and online stores that we call eSites and eStores, with a wide variety of vertical market content packages to suit many needs, from
franchisees to sole proprietors. Timbuktu software solutions include systems management tools such as remote control, remote computer configuration and file transfer. We presently have one United States patent issued that relates to our Timbuktu and
eCare remote control software. The term of this patent is through August 2010. During each of fiscal years 2002, 2001 and 2000, revenue from the sale of our broadband services have accounted for approximately 24% to 29% of our total revenues. When
reading our statement of operations, revenues and cost of revenues related to the sale of our broadband services are classified as Web platform licenses and services.



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|Product Line              |  | Description                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|------------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|netOctopus EdgeManager    |  | netOctopus EdgeManager is designed to enable the network operation centers (NOCs) of broadband service providers to proactively manage the broadband gateways installed on their
network, thereby reducing help desk call loads and support costs. Using gateway discovery mechanisms, configuration comparisons, automatic delivery of configuration updates directly to the gateway and post updated diagnostics, netOctopus EdgeManager
enables the service provider to easily and cost-effectively support its installed gateways, improves the quality of customer support, and increases the level of customer satisfaction.
|                         
|netOctopus GatewaySupport |  | netOctopus GatewaySupport enables broadband service providers to reduce the length of their support calls by enabling technical support and customer service agents to diagnose
gateway problemsremotely, perform routing operations on the gateway and effect configuration and firmware changes to keep customers up and running.                                                                                                                                                                                                                                                                                               
|                         
|netOctopus DesktopSupport |  | netOctopus DesktopSupport utilizes a Web architecture requiring a small size PC-component to provide live desktop assistance remotely. Technical support and customer service
agents can communicate with their customers while remotely sharing and operating their desktops, sharing files, chatting as well as diagnosing and troubleshooting desktop problems in real time.                                                                                                                                                                                                                                                   
|                         
|eCare                     |  | eCare is support interaction software optimized for call centers and help desks to assist computer users in resolving technical support issues by providing bi-directional remote
desktop assistance, online support request queues, the ability to observe the users desktop, text chat, send files, log and report on call statistics and integrate into the customers customer relation management (CRM) system.                                                                                                                                                                                                               
|                         
|eCommerce                 |  | Includes the eSite and eStore hosting solutions which offer no assembly required Web sites (eSites) and e-commerce enabled Web sites (eStores) for small and medium
size businesses.                                                                                                                                                                                                                                                                                                                                                                                                                                            
|                         
|Systems Management        |  | Includes Timbuktu and netOctopus systems management tools for the multi-platform enterprise, which include remote computer configuration, computer asset management, software
distribution, remote control and file transfer.                                                                                                                                                                                                                                                                                                                                                                                                     
|                         



Customers



We sell our products both domestically, in the United States, and internationally, primarily
in Europe. We primarily sell our broadband equipment and broadband services to:



| |  |  | Telecommunication carriers, including incumbent local exchange carriers (ILECs), such as SBC Communications Inc. (SBC), BellSouth Corporation (BellSouth) and Verizon Communications
Inc. (Verizon); competitive local exchange carriers (CLECs), including Covad Communications Company (Covad), McLeodUSA Incorporated (McLeod) and NextGenTel; Internet service providers (ISPs), including Business Telecommunications, Inc. (BTI) and
Integra Telecom, Inc. (Integra Telecom); and Internet Exchange Carriers (IXCs) including AT&T Corp. (AT&T), Sprint Corporation (Sprint) and WorldCom, Inc. (WorldCom);
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Distributors, including Ingram Micro Inc. (Ingram Micro), Groupe Softway (Softway) and Tech Data Corporation (Tech Data);
| | - |  | -------------------------------------------------------------------------------------------------------------------------



| |  |  | Cable companies, including Comcast Corporation (Comcast); and
| | - |  | -------------------------------------------------------------



| |  |  | Directly to end-users.
| | - |  | ----------------------



Historically, we have depended upon the ability of our customers to successfully offer broadband services, in particular DSL services. In the past, our largest customers have been CLECs. Many CLECs have incurred
operating losses and negative cash flows as they attempted to establish their networks and operations, and many have filed for protection under the Bankruptcy Act or ceased operations. Most notably, Covad, which currently is our largest CLEC
customer, emerged from bankruptcy in December 2001 and has announced that it has adequate cash to allow it to become cash flow positive by the latter half of 2003.



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As a result of the financial and operational difficulties encountered by many of our CLEC customers, who had primarily
served the business market for DSL services, we have recently acted aggressively to expand our customer base and markets served. As a result of our acquisition of Cayman in October 2001, we have expanded our customer base to include two ILEC
customers, BellSouth and SBC, to which we previously had not sold our broadband equipment, and have developed new products designed for the residential market for DSL services. We expect that our continued operations will become substantially
dependent upon our ability to develop and enhance products to meet the needs of the residential market for DSL services and requirements of our ILEC customers. The ILECs and our other customers are significantly larger than we are, and are able to
exert a high degree of influence over our business. As a result, our larger customers may be able to reschedule or cancel orders without significant penalty and force our products to undergo lengthy approval and purchase processes.



Distribution, Sales and Marketing



We sell our products through a domestic field sales organization and through selected
distributors. We market our products domestically within the United States, as well as in Canada, Europe and the Asia Pacific region. Our broadband equipment products are generally sold directly to our telecommunication carrier customers or in some
cases to distributors who then resell our products. Our broadband service products are generally sold directly to our customers.



The sales process for both our broadband equipment and broadband services can be lengthy. At the first stage of the process, our telecommunication carrier customers
invite us, and many competitors, to respond to lengthy and detailed requests for proposal. Even if our products are selected for further consideration as a result of our written response to a request for proposal, prior to selling our broadband
equipment to telecommunication carriers, the products must undergo lengthy approval and purchase processes. Evaluation can take as little as a few months to over a year or more for products based on new technologies. Although the telecommunication
carrier approval processes varies to some extent depending on the customer and the product being evaluated, they generally are conducted as follows:



| |  |  | Laboratory Evaluation. The products function and performance are tested against all relevant industry standards and customer requirements.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Technical Trial. A number of telephone lines are equipped with the product for simulated operation in a field trial. The field trial is used to evaluate performance, assess ease of
installation and establish troubleshooting procedures.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Marketing Trial. Emerging products and services, such as DSL, are tested for market acceptance. Marketing trials usually involve a greater number of systems than technical trials
because systems are deployed at several locations in the telecommunication carriers network. This stage gives the carrier an opportunity to establish procedures, train employees to install and maintain the new product and to obtain more feedback on
the product from a wider range of operations personnel.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Commercial Deployment. Commercial deployment usually involves substantially greater numbers of systems and locations than the marketing trial stage. In the first phase of commercial
deployment, a telecommunication carrier initially installs the equipment in select locations for select applications. This phase is followed by general deployment involving greater numbers of systems and locations. Commercial deployment does not
usually mean that one suppliers product is purchased for all of the carriers needs throughout the system as telecommunication carriers often rely upon multiple suppliers to ensure that their needs can be met. Subsequent orders, if any, are
generally placed under supply agreements that, regardless of term, are generally not subject to minimum volume commitments.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Although our business generally is not seasonal in nature, we have experienced a seasonal reduction in our revenues in the three months ended September 30, our fiscal
fourth quarter, primarily due to lower sales in Europe during such periods because of vacation schedules. For example, revenues from Europe declined 22% and 30%, respectively in the quarters ended September 30, 2002 and 2000 from revenues in the
prior quarter ended June 30, 2002 and 2000. Although revenues from Europe increased 58% in the quarter ended September 30, 2001 from revenues in the prior quarter ended June 30, 2001, we believe this increase was a result of unusually low revenues
in



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such prior quarter. We anticipate that this seasonal trend will continue to result in lower revenues from Europe during
our fiscal fourth quarters.



Research and Development



We believe that our future business and operating results depend in part on our ability
to continue to develop new products in a timely manner, enhance existing products and develop strategic product development relationships. We continuously evaluate the needs of our telecommunication carrier customers, distribution channel partners,
end users and end markets to provide them with new broadband Internet equipment and services incorporating new technologies, standards and functionality. We continue to devote a significant amount of our resources to research and development.
Research and development expenses were $17.5 million, $13.8 million and $13.3 million for fiscal years 2002, 2001 and 2000, respectively. We expect to continue to devote substantial resources to product and technological development.



Our research and development personnel are organized into development teams focused either on
the development of our broadband equipment, our eCare and eCommerce products or our netOctopus broadband service offerings. Each product development team is generally responsible for conceiving new products in cooperation with other functions within
our company, adapting standard products or technology to meet new customer needs and sustaining engineering activities related to our existing products. In particular, our hardware development team is charged with implementing the engineering
strategy of reducing product costs and enhancing performance for each succeeding generation of broadband equipment product in an effort to be a highly valued, superior quality provider, without compromising functionality or serviceability. We
believe the key to this strategy is developing an initial architecture for each product that enables engineering innovations to result in performance enhancements and future cost reductions.



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 may not be able to successfully develop, introduce, enhance or market 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.



Product and Customer
Support



We believe that effective product and customer support is a key
criterion used by our customers in selecting our broadband Internet equipment and service offerings. Telecommunication carriers, ISPs, independent distributors and dealers, value-added resellers (VARs), end users, network managers and
administrators, consultants and other experienced technical experts utilize our toll-free telephone support lines, fax and online support services to access our support personnel and internal technical databases. Additionally, support personnel are
trained to satisfy the needs of customers and end users who are not technical experts and do not have access to sophisticated technical support. We believe that our support programs have been successful in creating brand loyalty through our focused
support of the specialized needs of these customers and end users, and through the easy-to-use, plug-and-play design of our broadband Internet equipment and services.



With different service programs, including Up and Running, Guaranteed! and VPN set-up services, we can remotely configure our
Internet gateways and assist users in setting up Internet service with the users telecommunication carrier and ISP. Our expertise in solving technical problems enables us to commit our resources to analyze any problem a customer or end user
may have, even if it involves a product from another company. The effect of these activities is to build customer loyalty to us as the single source for broadband Internet equipment and services.



Manufacturing



We utilize a combination of third-party contract manufacturers and limited internal manufacturing capabilities to meet our customer
requirements and product demand. Our third-party contract manufacturers are located in Asia,



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Mexico and the United States. They produce substantially all of the circuit boards for our broadband Internet equipment
and in certain circumstances assemble, package and ship our products directly to our customers. Reliance on third-party subcontractors involves several risks, including the potential absence of adequate capacity and reduced control over product
quality, delivery schedules, manufacturing yields and costs.



Competition



The markets for our broadband Internet equipment
and broadband services are intensely competitive, highly fragmented and characterized by rapidly changing technology, evolving industry standards, price competition and frequent new product introductions. A number of companies offer products that
compete with one or more of our products. 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 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. Our current and prospective competitors include original equipment manufacturers (OEMs), product manufacturers of broadband Internet
equipment, developers of Web site and e-commerce software, developers of remote control and collaboration software, and developers of Web based help desk applications. In the market for broadband Internet equipment, we primarily compete with Thomson
Corporation (Thomson), Cisco Systems, Inc. (Cisco), Siemens Aktiengesellschaft (Siemens) (through its Efficient Networks subsidiary), Linksys Group Inc. (Linksys), 2Wire, Inc. (2Wire), Westell Technologies, Inc. (Westell), and ZyXEL Communications
Co. (ZyXEL). In the market for our Web platforms products, we primarily compete with Computer Associates International, Inc. (Computer Associates), Microsoft Corporation (Microsoft), Vector Networks, Inc. (Vector Networks), Stac Software, Symantec
Corporation (Symantec), and Tivoli Software (a wholly-owned subsidiary of International Business Machines Corporation) (IBM). We anticipate intense competition from some of these companies because they provide their products to consumers at no cost.
For example, Microsoft has available at no cost a communications and collaboration software product that could limit the market for Timbuktu.



Many of our current and potential competitors in each product area have longer operating histories, 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 product area for various reasons, including lower prices and other incentives not matched by us. Current and potential competitors also 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.



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



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



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



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



| |  |  | Ease of use;
| | - |  | ------------



| |  |  | Timeliness of new product introductions;
| | - |  | ----------------------------------------



| |  |  | Size and scope of distribution channels;
| | - |  | ----------------------------------------



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



| |  |  | Size and loyalty of customer base;
| | - |  | ----------------------------------



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



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



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We cannot assure you that we will be able to compete successfully in the future. Our inability to successfully compete
would seriously harm our business.



Government Regulations



The telecommunications industry, including most of our customers, is subject to
regulation from federal and state agencies, including the Federal Communications Commission (FCC) and various state public utility and service commissions. While such regulation does not affect us directly, the effects of such regulations on our
customers may, in turn, adversely impact our business and results of operations. For example, FCC regulatory policies affecting the availability of telephone and communications services and other terms on which service providers conduct their
business may impede our penetration of certain markets. The Telecommunications Act lifted certain restrictions on the carriers ability to provide interactive multimedia services including video on demand. Under the Telecommunications Act, new
regulations have been established whereby carriers may provide various types of services beyond traditional voice offerings. Additionally, the Telecommunications Act permits the carriers to engage in manufacturing activities after the FCC authorizes
a carrier to provide long distance services within its service territory. A carrier must first meet specific statutory and regulatory tests demonstrating that its monopoly market for local exchange services is open to competition before it will be
permitted to enter the long distance market. When these tests are met, a carrier will be permitted to engage in manufacturing activities, and the carriers, which are our largest customers, may become our competitors as well.



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 have one United States patent issued that relates to our
Timbuktu and eCare remote control software. The term of this patent is through August 2010. 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 that the safeguards that we employ will protect our intellectual property and
other 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, such as the Peoples Republic
of China, 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 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 or we 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, which could seriously harm our business.



Employees



As of December 13, 2002, we employed 316 persons, including 81 in sales and marketing, 111 in research and development, 63 in customer
service and support, 31 in manufacturing operations, and 30 in general and administrative functions. We also contract with consultants who provide us short and long-term services in various areas of our business. Since March 2001, we have
significantly reduced our workforce to align expenses better with



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revenue levels. 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 good.



Our future performance depends on the continued service of our senior management, product development and sales personnel, particularly Alan Lefkof, our President and Chief Executive Officer. None of our employees are bound by an employment
agreement, and 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.
Although we believe that our personnel turnover rate is consistent with industry norms, our future success depends on our continuing ability to attract, hire, train and retain a substantial number of 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.



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PART II.



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



In the tables below, we provide our selected consolidated financial data. We have prepared this information using our audited consolidated financial statements for the
five fiscal years ended September 30, 2002. It is important that when reading this information you also read Item 7, Managements Discussion and Analysis of Financial Condition and Results of Operations, the annual audited consolidated
financial statements and related notes thereto included elsewhere in this Form 10-K.



|Fiscal years ended September 30,                  |  | 2002                                         |         |   | 2001 |   |         | 2000 |  |   | 1999    |   |  | 1998 |       
|------------------------------------------------- |  | -------------------------------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | - |  | ---- | ------
|                                                  |  | (in thousands, except for per share amounts) |        
|Statements of operations data:                    |  |                                              |         |   |      |   |         |      |  |   |         |   |  |      |       
|Total revenues                                    |  | $                                            | 64,064  |   |      | $ | 77,318  |      |  | $ | 90,206  |   |  | $    | 44,151
|Gross profit                                      |  |                                              | 31,102  |   |      |   | 37,358  |      |  |   | 42,927  |   |  |      | 27,908
|Operating loss(a)                                 |  |                                              | (31,644 | ) |      |   | (43,222 | )    |  |   | (21,197 | ) |  |      | (9,926
|Loss from continuing operations(a)                |  |                                              | (34,267 | ) |      |   | (41,712 | )    |  |   | (17,618 | ) |  |      | (7,860
|Net loss(a, b, c)                                 |  |                                              | (34,267 | ) |      |   | (43,111 | )    |  |   | (15,137 | ) |  |      | (7,860
|Per share data, continuing operations:            |  |                                              |         |   |      |   |         |      |  |   |         |   |  |      |       
|Basic and diluted loss per share                  |  | $                                            | (1.86   | ) |      | $ | (2.33   | )    |  | $ | (1.05   | ) |  | $    | (0.60 
|                                                  |  |                                              |         |   |      |   |         |      |  |   |         |   |  |      |       
|Shares used in the per share calculations(d)      |  |                                              | 18,455  |   |      |   | 17,902  |      |  |   | 16,830  |   |  |      | 13,092
|                                                  |  |                                              |         |   |      |   |         |      |  |   |         |   |  |      |       
|Per share data, net loss:                         |  |                                              |         |   |      |   |         |      |  |   |         |   |  |      |       
|Basic and diluted loss per share                  |  | $                                            | (1.86   | ) |      | $ | (2.41   | )    |  | $ | (0.90   | ) |  | $    | (0.60 
|                                                  |  |                                              |         |   |      |   |         |      |  |   |         |   |  |      |       
|Shares used in the per share calculations(d)      |  |                                              | 18,455  |   |      |   | 17,902  |      |  |   | 16,830  |   |  |      | 13,092
|                                                  |  |                                              |         |   |      |   |         |      |  |   |         |   |  |      |       
|                                                  |  |                                              |         |   |     
|As of September 30,                               |  | 2002                                         |         |   | 2001 |   |         | 2000 |  |   | 1999    |   |  | 1998 |       
|                                                  |  | (in thousands)                               |        
|Balance sheet data:                               |  |                                              |         |   |      |   |         |      |  |   |         |   |  |      |       
|Cash, cash equivalents and short-term investments |  | $                                            | 25,022  |   |      | $ | 48,996  |      |  | $ | 59,777  |   |  | $    | 69,483
|Working capital                                   |  |                                              | 28,628  |   |      |   | 56,593  |      |  |   | 72,292  |   |  |      | 75,394
|Total assets                                      |  |                                              | 58,995  |   |      |   | 82,712  |      |  |   | 128,373 |   |  |      | 95,969
|Long-term liabilities(e)                          |  |                                              | 4,614   |   |      |   | 256     |      |  |   | 328     |   |  |      | 544   
|Total stockholders equity(f)                     |  |                                              | 40,047  |   |      |   | 71,713  |      |  |   | 112,289 |   |  |      | 85,079

---

|(a) |  | Included in our operating loss, loss from continuing operations and net loss are charges for in-process research and development and amortization of goodwill and other intangible
assets related to our acquisitions. Included in fiscal year(s): 2002, 2000 and 1999, are amounts allocated to in-process research and development; 2001, 2000 and 1999, are amounts related to the amortization of goodwill and other intangible assets;
2002 are amounts related to the amortization of other intangible assets; and 2002 and 2001 are amounts related to the impairments and write-downs of amounts allocated to goodwill and other intangible assets. (See Item 7, Managements Discussion
and Analysis of Financial Condition and Results of Operations and Notes 2 and 3 of Notes to Consolidated Financial Statements.)
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(b) |  | Included in our net loss for fiscal year 2001, is a charge we recorded upon the adoption of Staff Accounting Bulletin (SAB) 101, Revenue Recognition in Financial Statements,
which changed our accounting related to Web platforms license sales that provided for nonrefundable upfront payments. (See Item 7, Managements Discussion and Analysis of Financial Condition and Results of Operations and Note 1, Revenue
Recognition, of Notes to Consolidated Financial Statements.)
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(c) |  | Included in our net loss for fiscal years 2001, 2000 and 1998 are amounts recorded in connection with our disposition of the LAN Division. (See Item 7, Managements Discussion
and Analysis of Financial Condition and Results of Operations and Note 4 of Notes to Consolidated Financial Statements.)
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(d) |  | See Note 1, Per Share Calculations, of Notes to Consolidated Financial Statements for information on shares used in the per share calculations.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------



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|(e) |  | Included in fiscal year 2002 is $4.4 million of long-term debt from borrowings under our credit facility the balance of which for fiscal year 2002 and for fiscal years 2001, 2000,
1999 and 1998 primarily represent long-term portions of deferred revenue. (See Item 7, Managements Discussion and Analysis of Financial Condition and Results of Operations and Note 15 of Notes to Consolidated Financial Statements.)
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(f) |  | Historically, we have neither paid nor declared cash dividends on our common equity securities. We expect this trend to continue.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------



The following table sets forth certain unaudited quarterly results of operations data for the
eight quarters ended September 30, 2002. This data has been derived from our unaudited condensed consolidated financial statements that, in our opinion, include all adjustments (consisting only of normal recurring adjustments) necessary for a fair
presentation of such information. It is important that when reading this information you also read Item 7, Managements Discussion and Analysis of Financial Condition and Results of Operations, the annual audited consolidated financial
statements and related notes thereto included elsewhere in this Form 10-K.



|                                                                                                                                    |  | Fiscal year 2002                         |         |   | Fiscal year 2001 |  
|----------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------------------------- | ------- | - | ---------------- | -
|Three months ended,                                                                                                                 |  | Sep. 30, 2002                            |         |   | Jun. 30, 2002    |  
|                                                                                                                                    |  | (in thousands, except per share amounts) |        
|REVENUES:                                                                                                                           |  |                                          |         |   |                  |  
|Internet equipment                                                                                                                  |  | $                                        | 12,405  |   |                  | $
|Web platform licenses and services                                                                                                  |  |                                          | 4,501   |   |                  |  
|                                                                                                                                    |  |                                          |         |   |                  |  
|Total revenues                                                                                                                      |  |                                          | 16,906  |   |                  |  
|                                                                                                                                    |  |                                          |         |   |                  |  
|COST OF REVENUES:                                                                                                                   |  |                                          |         |   |                  |  
|Internet equipment                                                                                                                  |  |                                          | 9,272   |   |                  |  
|Web platform licenses and services                                                                                                  |  |                                          | 175     |   |                  |  
|                                                                                                                                    |  |                                          |         |   |                  |  
|Total cost of revenues                                                                                                              |  |                                          | 9,447   |   |                  |  
|                                                                                                                                    |  |                                          |         |   |                  |  
|GROSS PROFIT                                                                                                                        |  |                                          | 7,459   |   |                  |  
|OPERATING EXPENSES:                                                                                                                 |  |                                          |         |   |                  |  
|Research and development                                                                                                            |  |                                          | 4,481   |   |                  |  
|Selling and marketing                                                                                                               |  |                                          | 6,028   |   |                  |  
|General and administrative(a)                                                                                                       |  |                                          | 1,690   |   |                  |  
|Acquired in-process research and development(b)                                                                                     |  |                                          |        |   |                  |  
|Amortization of goodwill and other intangible assets(c)                                                                             |  |                                          | 374     |   |                  |  
|Impairment of goodwill and other intangible assets(d)                                                                               |  |                                          | 9,146   |   |                  |  
|Restructuring costs(e)                                                                                                              |  |                                          |        |   |                  |  
|Integration costs                                                                                                                   |  |                                          |        |   |                  |  
|Terminated merger costs(f)                                                                                                          |  |                                          |        |   |                  |  
|                                                                                                                                    |  |                                          |         |   |                  |  
|Total operating expenses                                                                                                            |  |                                          | 21,719  |   |                  |  
|                                                                                                                                    |  |                                          |         |   |                  |  
|OPERATING LOSS                                                                                                                      |  |                                          | (14,260 | ) |                  |  
|Other income (loss), net                                                                                                            |  |                                          |         |   |                  |  
|Loss on impaired securities(g)                                                                                                      |  |                                          | (1,543  | ) |                  |  
|Other income, net                                                                                                                   |  |                                          | 29      |   |                  |  
|                                                                                                                                    |  |                                          |         |   |                  |  
|Other income (loss), net                                                                                                            |  |                                          | (1,514  | ) |                  |  
|                                                                                                                                    |  |                                          |         |   |                  |  
|Loss from continuing operations before cumulative effect from adoption of SAB 101 and before gain on sale of discontinued
operation |  |                                          | (15,774 | ) |                  |  
|Cumulative effect from adoption of SAB 101(h)                                                                                       |  |                                          |        |   |                  |  
|Discontinued operations, net of taxes                                                                                               |  |                                          |        |   |                  |  
|                                                                                                                                    |  |                                          |         |   |                  |  
|NET LOSS                                                                                                                            |  | $                                        | (15,774 | ) |                  | $
|                                                                                                                                    |  |                                          |         |   |                  |  
|Per share data, continuing operations:                                                                                              |  |                                          |         |   |                  |  
|Basic and diluted loss per share                                                                                                    |  | $                                        | (0.84   | ) |                  | $
|                                                                                                                                    |  |                                          |         |   |                  |  
|Shares used in the per share calculations(i)                                                                                        |  |                                          | 18,822  |   |                  |  
|                                                                                                                                    |  |                                          |         |   |                  |  
|Per share data, net loss:                                                                                                           |  |                                          |         |   |                  |  
|Basic and diluted loss per share                                                                                                    |  | $                                        | (0.84   | ) |                  | $
|                                                                                                                                    |  |                                          |         |   |                  |  
|Shares used in the per share calculations(i)                                                                                        |  |                                          | 18,822  |   |                  |  
|                                                                                                                                    |  |                                          |         |   |                  |  



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|(a) |  | In addition to standard provisions for doubtful accounts, general and administrative expense includes incremental provisions for doubtful accounts primarily for outstanding accounts
receivable owed by customers that filed voluntary petitions under the Bankruptcy Act. (See Item 7, Managements Discussion and Analysis of Financial Condition and Results of Operations and Note 1, Concentrations of Credit Risk, of Notes
to Consolidated Financial Statements.) The following table sets forth these incremental amounts for the periods indicated.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|Three months ended,                          |  | Sep. 30, 2002 |       | Jun. 30, 2002 |   | Mar. 31, 2002 |  | Dec. 31, 2001 |       | Sep. 30, 2001 |   | Jun. 30, 2001 |  | Mar. 31, 2001 |       | Dec. 31, 2000
|-------------------------------------------- |  | ------------- | ----- | ------------- | - | ------------- |  | ------------- | ----- | ------------- | - | ------------- |  | ------------- | ----- | -------------
|Incremental provisions for doubtful accounts |  | $             | 264   |               | $ | 307           |  | $             |      |               | $ |              |  | $             |      |              
|General and administrative                   |  |               | 1,426 |               |   | 1,159         |  |               | 1,267 |               |   | 973           |  |               | 1,015 |              
|                                             |  |               |       |               |   |               |  |               |       |               |   |               |  |               |       |              
|Total general and administrative             |  | $             | 1,690 |               | $ | 1,466         |  | $             | 1,267 |               | $ | 973           |  | $             | 1,015 |              
|                                             |  |               |       |               |   |               |  |               |       |               |   |               |  |               |       |              



|(b) |  | For the three months ended March 31, 2002 and December 31, 2001, these amounts represent the amount of purchase price allocated to in-process research and development in connection
with the acquisitions of Cayman and DoBox. (See Item 7, Managements Discussion and Analysis of Financial Condition and Results of Operations and Note 2 of Notes to Consolidated Financial Statements.)
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(c) |  | For fiscal year 2002, this amount represents the amortization of the amount allocated to other intangible assets related to the acquisition of Cayman. We early adopted Statement of
Financial Accounting Standards (SFAS) No. 142 pursuant to which we ceased amortization of amounts allocated to goodwill. For fiscal year 2001, this amount represent amortization of the amounts allocated to goodwill and other intangible assets
related to the acquisitions of WebOrder, StarNet, Serus LLC (Serus) and netOctopus. (See Item 7, Managements Discussion and Analysis of Financial Condition and Results of Operations and Notes 2 and 3 of Notes to Consolidated Financial
Statements.)
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(d) |  | For the three months ended September 30, 2002, this amount represents full impairment of the remaining goodwill acquired in connection with the acquisitions of Cayman and StarNet.
For the three months ended September 30, 2001, this amount represents the impairment and write-down of the amounts allocated to goodwill and other intangible assets related to our acquisitions of WebOrder, StarNet and Serus. (See Item 7,
Managements Discussion and Analysis of Financial Condition and Results of Operations and Notes 2 and 3 of Notes to Consolidated Financial Statements.)
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(e) |  | Represents charges recorded in connection with workforce reductions and costs to exit certain business activities. (See Item 7, Managements Discussion and Analysis of
Financial Condition and Results of Operations and Note 12 of Notes to Consolidated Financial Statements.)
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(f) |  | Represents the charge recorded in connection with the terminated merger with Proxim, Inc. (Proxim). (See Item 7, Managements Discussion and Analysis of Financial Condition and
Results of Operations and Note 14 of Notes to Consolidated Financial Statements.)
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(g) |  | For the three months ended September 30 and March 31, 2002, these amounts represent losses on impaired securities related to our long-term investments in Everdream Corporation
(Everdream) and MegaPath Networks, Inc. (MegaPath), respectively. For fiscal year 2001, these amounts represent the loss on impaired securities related to our long-term investment in NorthPoint. (See Item 7, Managements Discussion and Analysis
of Financial Condition and Results of Operations and Note 11 of Notes to Consolidated Financial Statements.)
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(h) |  | Represents the adoption of SAB 101 for Web platform marketing agreements that provided for nonrefundable upfront payments. (See Item 7, Managements Discussion and Analysis of
Financial Condition and Results of Operations and Note 1, Revenue Recognition, of Notes to Consolidated Financial Statements.)
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(i) |  | See Note 1, Per Share Calculations, of Notes to Consolidated Financial Statements for information on shares used in the per share calculations.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

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



Overview



We develop, market and support broadband equipment, software and services that enable our carrier and broadband service provider customers to simplify and enhance the
delivery of broadband services to their residential and small and medium size business customers.



Broadband Equipment. Our comprehensive line of broadband Internet gateways allow the transport of high-speed data over the local copper loop and enable telecommunications carriers to provide cost-effective and
high-speed services over existing infrastructure. The substantial majority of our revenues are derived from sales of our broadband Internet gateways, in particular our DSL routers and modems. During each of fiscal years 2002, 2001 and 2000, revenue
from the sale of our broadband Internet gateways have accounted for more than 70% of our total revenues. When reading our statement of operations, revenues and cost of revenues related to the sale of our broadband Internet equipment are classified
as Internet equipment.



Broadband Services. Our service
delivery platform includes the netOctopus suite of broadband gateway, PC management and customer support software solutions, Web eCommerce server software, eCare and Timbuktu software solutions. During each of fiscal years 2002, 2001 and 2000,
revenue from the sale of our broadband services have accounted for approximately 24% to 29% of our total revenues. When reading our statement of operations, revenues and cost of revenues related to the sale of our broadband services are classified
as Web platform licenses and services.



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 accounts receivable, inventories, investments, and intangible assets. 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 and by the Audit Committee at the end of each quarter prior to the public release of our financial results. We
believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our condensed consolidated financial statements.



Revenue Recognition. We recognize revenue from the sale of broadband Internet equipment at the time of shipment to an unrelated third
party customer when (a) the price to the customer is substantially fixed or determinable; (b) the customer is obligated to pay the seller and the obligation is not contingent on resale of the product; (c) the customers obligation to us would
not be changed in the event of theft or physical destruction or damage of the product; and (d) we do not have significant obligations for future performance to directly bring about resale of the product by the customer. At the date of shipment,
assuming that the revenue recognition criteria specified above are 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 revenue in accordance with Statement of Position (SOP) 97-2,
Software Revenue Recognition, as amended. We generally have multiple element arrangements for our software revenue including software licenses and maintenance. We allocate the arrangement fee to each of the elements based on the residual method
utilizing vendor specific objective evidence (VSOE) for the undelivered elements, regardless of any separate prices stated within the contract for each element. VSOE for maintenance is generally based on the price the customer would be required to
pay when it is sold separately. Fair value for the delivered elements, primarily software licenses and upgrades, is based on the residual amount of the total arrangement fees after deducting the



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VSOE for the undelivered elements. Software license revenue is recognized when a non-cancelable license agreement has
been signed 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 revenues, including revenues included in multiple element arrangements, are deferred and recognized ratably over the related contract period, generally twelve months. We record unearned revenue for software arrangements when
cash has been received from the customer and the arrangement does not qualify for revenue recognition under our revenue recognition policy. We record accounts receivable for software arrangements when the arrangement qualifies for revenue
recognition and cash or other consideration has not been received from the customer. We recognize revenue from long-term software development contracts using the percentage of completion method in accordance with SOP 81-1, Accounting for
Performance of Construction-Type and Certain Production-Type Contracts. Under the percentage of completion method, we recognize revenue as work on the contract progresses.



Goodwill and Other Identifiable Intangible Assets. On October 1, 2001, we early adopted SFAS No. 142, which provides that goodwill
should not be amortized but instead be tested for impairment annually at the reporting unit level. The impairment testing is performed in two steps: (i) the determination of impairment, based upon the fair value of a reporting unit as compared to
its carrying value, and (ii) if there is an indication of impairment, this step measures the amount of impairment loss by comparing the implied fair value of goodwill with the carrying amount of that goodwill. In accordance with SFAS No. 142, we
completed the transitional impairment test of intangible assets during the three months ended March 31, 2002. That effort, and preliminary assessments of our identifiable intangible assets, indicated no adjustment was required upon adoption of the
pronouncement. We performed the annual impairment test required by SFAS No. 142 on August 31, 2002 for our two reporting units. At August 31, 2002, the implied fair value of the Internet equipment reporting unit was found to be less than its
carrying amount and as a result, we recorded a $9.1 million charge to our Consolidated Statement of Operations for the fiscal year ended September 30, 2002. This charge represents full impairment of the remaining goodwill acquired in connection with
the acquisitions of Cayman and StarNet. As of September 30, 2002, the remaining carrying value of our goodwill and other intangible assets was $7.7 million. We will continue to perform our annual impairment test, as required by SFAS No. 142, in our
fiscal fourth quarter.



Impairment of Long-Lived Assets, Including
Identifiable Intangibles. We elected to early adopt the provisions of SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, on October 1, 2001. SFAS No. 144 serves to clarify and further define the provisions of
SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of. We evaluate our long-lived assets, including identifiable intangible assets in accordance with SFAS No. 144 and test our long-lived
assets and identifiable intangibles 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. If such assets are 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. 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. At September 30, 2002, our
identifiable intangible assets consisted of developed product technology, core technology and sales channel relationships related to the acquisition of Cayman as well as a certain marketing license. As a result of the downturn in the economy and the
impairment charge recorded in connection with the SFAS No. 142 analysis, we tested our identifiable intangible assets in accordance with SFAS No. 144 and found no impairment.



Allowance for Doubtful Accounts. We maintain allowances for doubtful accounts for estimated losses resulting from the inability of
our customers to make required payments. 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, and sales returns when evaluating the adequacy of the allowance for doubtful accounts and sales returns in any accounting period. 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.



Non-Marketable Securities. We periodically make strategic investments in companies whose stock is not currently traded on a stock exchange and for which no quoted price exists. The cost method of accounting is used to account for
these investments, as we do not exert significant influence over these investments. We review these investments



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for impairment when events or changes in circumstances indicate that the carrying amount of the assets might not be
recoverable. Examples of events or changes in circumstances that may indicate to management that an impairment exists may be a significant decrease in the market value of the company, poor or deteriorating market conditions in the public and private
equity capital markets, significant adverse changes in legal factors or within the business climate the company operates, and current period operating or cash flow losses combined with a history of operating or cash flow losses or projections and
forecasts that demonstrate continuing losses associated with the companys future business plans. Impairment indicators identified during the reporting period could result in a significant write down in the carrying value of the investment if
we believe an investment has experienced a decline in value that is other than temporary. These investments had a total carrying value of $1.5 million as of September 30, 2002, and have been permanently written down a total of $2.5 million from
original cost. Also, future adverse changes in market conditions or poor operating results of underlying investments could result in significant additional impairment charges in the future.



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 (first-in, first-out method) or market. Cost includes material costs and applicable manufacturing overheads. 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.



Provision for Income
Taxes. We did not record an income tax benefit for the fiscal years 2002, 2001 and 2000 primarily due to continued substantial uncertainty regarding our ability to realize our deferred tax assets. Based upon available objective evidence, there
has been sufficient uncertainty regarding the realizability of our deferred tax assets to warrant a full valuation allowance in our financial statements. The factors considered included prior losses, inconsistent profits, and lack of carryback
potential to realize our deferred tax assets. Based on our estimates for fiscal year 2003 and beyond, we believe the uncertainty regarding the realizability of our deferred tax assets may diminish to the point where it is more likely than not that
our deferred tax assets will be realized. At such point, we would also reverse all or a portion of our valuation allowance which will result in an income tax benefit.



Available-for-Sale Securities. We classify certain of our cash equivalents and all our investments as available-for-sale. The
securities are carried at cost, which approximates fair value. The amortized cost of available-for-sale debt securities is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization is included in other income,
net. Realized gains and losses, and declines in value judged to be other than temporary on available-for-sale securities are included in other income, net. The cost of securities sold is based on the specific identification method. Interest and
dividends on securities classified as available-for-sale are included in other income, net.



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, 2002, our principal source of liquidity included cash, cash equivalents and short-term
investments of $25.0 million and a $15.0 million credit facility from which we had outstanding borrowings of $4.4 million and $0.8 million available. As of November 30, 2002, we had repaid the borrowings outstanding as of September 30, 2002.



Cash, Cash Equivalents and Short-Term Investments. The following table
sets forth our cash, cash equivalents and short-term investments as of the fiscal years ended September 30, 2002, 2001 and 2000.



|                                                  |  |                |        |      |   |        |  | Increase/(decrease)from prior year |       
|------------------------------------------------- |  | -------------- | ------ | ---- | - | ------ |  | ---------------------------------- | ------
|Fiscal years ended September 30,                  |  | 2002           |        | 2001 |   | 2000   |  | 2002                               |       
|                                                  |  | (in thousands) |        |      |   |        |  |                                   
|Cash, cash equivalents and short-term investments |  | $              | 25,022 |      | $ | 48,996 |  | $                                  | 59,777



For the fiscal year ended September
30, 2002, cash, cash equivalents and short-term investments decreased primarily due to the use of cash to acquire Cayman, cash used by our operating activities, and purchases of capital



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##### Table of Contents

equipment. We used approximately $17.7 million of cash in connection with our acquisitions of Cayman and DoBox, our
operating activities, excluding the changes in operating assets and liabilities, used $11.3 million primarily as a result of a decline in our revenues and associated gross profit, and we purchased $4.2 million of capital equipment, primarily
computer equipment used for a new website hosting location and equipment used in the research and development process. This use of cash was partially offset by cash provided from borrowings under our credit facility, which at September 30, 2002,
totaled $4.4 million, changes in operating assets and liabilities of $4.0 million, primarily related to the decrease of inventory and increase of accounts payable and other liabilities, and $1.1 million primarily provided from common stock sold to
employees under our Employee Stock Purchase Program.



For the fiscal year ended
September 30, 2001, cash, cash equivalents and short-term investments decreased primarily due to the use of $13.0 million, excluding the changes in operating assets and liabilities, to support our operating activities as a result of a decline in our
revenues and associated gross profit, paying the expenses related to our terminated merger with Proxim and paying severance benefits in connection with the restructuring charge we recorded in our fiscal second quarter of 2001, $3.8 million for
capital expenditures primarily for computer equipment used in the research and development process, $2.0 million for our long-term equity investment in MegaPath, and $1.1 million of capitalized software development costs incurred subsequent to the
delivery of a working model, under a development agreement with third parties. This use of cash was partially offset by cash provided from changes in operating assets and liabilities of $7.2 million related to our increased collections of accounts
receivable and decrease of inventory, partially offset by increased accounts payable, and $2.0 million provided from common stock sold to employees under our Employee Stock Purchase Program and the exercise of stock options by employees.



We expect to continue to use our credit facility along with our existing cash, cash
equivalent and short-term investments to support our working capital needs in both the short and long-term. Additionally, our cash, cash equivalents and short-term investments at December 31, 2002 will be less than the balances at September 30, 2002
as we repaid the outstanding borrowings from under our credit facility as of September 30, 2002 and that we will need to use our existing cash and cash equivalents to support our continuing operations. As of September 30, 2002, we did not have any
material commitments for capital expenditures. We do not utilize any off-balance sheet financing arrangements. As a result of our net losses and use of cash, the continuing operations of our business may require additional capital. We believe we
have adequate cash, cash equivalents and borrowing capacity to meet our anticipated capital needs for at least the next twelve months. If we issue additional stock to raise capital, our existing stockholders percentage ownership in Netopia of would
be reduced.



Trade Accounts Receivable, Net. The following table sets
forth our trade accounts receivables, net as of the fiscal years ended September 30, 2002, 2001 and 2000.



|                                 |  |                |         |      |   |         |  | Increase/(decrease)from prior year |        
|-------------------------------- |  | -------------- | ------- | ---- | - | ------- |  | ---------------------------------- | -------
|Fiscal years ended September 30, |  | 2002           |         | 2001 |   | 2000    |  | 2002                               |        
|                                 |  | (in thousands) |         |      |   |         |  |                                   
|Trade accounts receivable, net   |  | $              | 9,950   |      | $ | 9,550   |  | $                                  | 15,646 
|Days sales outstanding (DSO)     |  |                | 54 days |      |   | 51 days |  |                                    | 60 days



Changes in our trade accounts
receivable, net balances and days sales outstanding are primarily due to the lack of linearity of sales, particularly with respect to licenses of our Web platforms software products, and collections performance. Our targeted range for DSO is 50 to
60 days.



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##### Table of Contents

Inventories, Net. The following table sets forth our inventories, net as of the fiscal years ended September 30,
2002, 2001 and 2000.



|                                 |  |      |           |                |   |           |  | Increase/(decrease) fromprior year |          
|-------------------------------- |  | ---- | --------- | -------------- | - | --------- |  | ---------------------------------- | ---------
|Fiscal years ended September 30, |  | 2002 |           | 2001           |   | 2000      |  | 2002                               |          
|                                 |  |      |           | (in thousands) |   |           |  |                                    |          
|Inventories, net                 |  | $    | 6,259     |                | $ | 7,156     |  | $                                  | 10,284   
|Inventory turns                  |  |      | 5.8 turns |                |   | 3.9 turns |  |                                    | 5.4 turns



Inventories consist primarily of raw
materials; work in process, and finished goods. Inventories, net have decreased and inventory turns have improved primarily as a result of increased inventory management efforts. Inventory turns decreased in 2001 from 2000 primarily due to our
implementation of inventory management processes to balance inventory levels with actual and expected sales results. Inventory levels may increase in the near future if we cannot correctly forecast expected customer demand or as a result of customer
purchase deferrals or delays. We may have to further borrow against our credit facility to finance expected inventory increases. Inventory management remains an area of focus as we balance the need to maintain adequate inventory levels to ensure
competitive lead times against the risk of inventory obsolescence because of rapidly changing technology and customer requirements.



Borrowings Under Credit Facility. The following table sets forth the outstanding borrowings under our credit facility as of the fiscal years ended September 30,
2002. As of November 30, 2002, we had repaid the borrowings outstanding as of September 30, 2002.



|                                 |  |      |       |                |     |      |     | Increase/decrease)from prioryear
|-------------------------------- |  | ---- | ----- | -------------- | --- | ---- | --- | --------------------------------
|Fiscal years ended September 30, |  | 2002 |       | 2001           |     | 2000 |     | 2002                            
|                                 |  |      |       | (in thousands) |     |      |     |                                 
|Borrowings under credit facility |  | $    | 4,428 |                | n/a |      | n/a |                                 



On June 27, 2002, we entered into a
Loan and Security Agreement with Silicon Valley Bank (the Credit Facility). Pursuant to the Credit Facility, we may borrow up to $15.0 million from time to time from Silicon Valley Bank. . The actual amount that can be borrowed at any
time is determined using a formula relating to the amount of eligible accounts receivable and inventory at the borrowing date. The term of the Credit Facility is two years. We must maintain an adjusted quick ratio, as defined as the ratio of
(i) our unrestricted cash maintained at Silicon Valley Bank plus cash equivalents maintained at Silicon Valley Bank plus receivables and investments made on our behalf through Silicon Valley Banks Investment Product Services Division
(ISP Division) to (ii) our current liabilities plus the outstanding principal amount of any obligations less deferred revenues, of not less than 1.25 to 1 from June 2002 through December 31, 2002 and 1.5 to 1 from January 1, 2003
to the end of the term. For the first year of the Credit Facility, we must maintain a tangible net worth of not less than $32.0 million; the minimum tangible net worth covenant will be reset for the second year of the Credit Facility. On December 9,
2002, Silicon Valley Bank waived our default of the tangible net worth covenant for the first year as set forth in the Credit Facility agreement. There is no assurance that Silicon Valley Bank will waive any future default of this or any other
covenant contained in the Credit Facility agreement. The Credit Facility bears interest at a rate equal to the prime rate (the rate announced by Silicon Valley Bank as its prime rate) plus 0.75% per annum. 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. We believe that the terms of the credit facility, including the ceiling on
borrowing amounts, provide adequate access to borrowings to meet and exceed our current capital needs. However, we believe that even without access to borrowings from Silicon Valley Bank, we have sufficient cash and cash equivalents to meet ongoing
operating expenses and capital requirements.



Commitments



As of September 30, 2002, we had commitments that consisted of facilities
and equipment under operating lease agreements expiring at various dates through 2005. These commitments and obligations are reflected in our financial statements once goods or services have been received or payments related to the obligations
become due. The following is a schedule of our future minimum rental payments required under these operating lease agreements that have initial or remaining non-cancelable lease terms in excess of one year (in thousands):



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##### Table of Contents

|Fiscal years ended September 30,         |  | 2003 |       | 2004 |   | 2005 |  | Total
|---------------------------------------- |  | ---- | ----- | ---- | - | ---- |  | -----
|Facility and operating lease commitments |  | $    | 1,535 |      | $ | 926  |  | $    



Subsequent to September 30, 2002, we
entered into a lease for a new headquarters facility located in Emeryville, California. The future minimum rental payments related to this new lease are not included in the table above. The following is a schedule of the future minimum rental
payments required under this new lease agreement (in thousands):



|Fiscal years ended September 30,         |  | 2003 |     | 2004 |   | 2005 |  | 2006 |     | 2007 |   | 2008 |  | Total
|---------------------------------------- |  | ---- | --- | ---- | - | ---- |  | ---- | --- | ---- | - | ---- |  | -----
|Facility and operating lease commitments |  | $    | 101 |      | $ | 624  |  | $    | 642 |      | $ | 663  |  | $    



Results of Operations for Fiscal
Years Ended September 30, 2002, 2001 and 2000



The following table sets
forth for the periods indicated certain statement of operations data. Each item of data is also shown as a percentage of total revenues, with the percentage change from the prior year also provided for each item.



|                                                                                                                                                   |  |      |         |   |      |     |    |                  |   |         |      |  |     |      |  |   |         |   |  | Increase (decrease) fromprior year |   
|-------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ------- | - | ---- | --- | -- | ---------------- | - | ------- | ---- |  | --- | ---- |  | - | ------- | - |  | ---------------------------------- | --
|Fiscal years ended September 30,                                                                                                                   |  | 2002 |         |   | 2001 |     |    | 2000             |   |         | 2002 |  |     | 2001 | 
|                                                                                                                                                   |  |      |         |   |      |     |    | ($ in thousands) |   |         |      |  |     |      |  |   |         |   |  |                                    |   
|REVENUES:                                                                                                                                          |  |      |         |   |      |     |    |                  |   |         |      |  |     |      |  |   |         |   |  |                                    |   
|Internet equipment                                                                                                                                 |  | $    | 45,551  |   |      | 71  | %  |                  | $ | 58,861  |      |  | 76  | %    |  | $ | 65,546  |   |  | 73                                 | % 
|Web platform licenses and services                                                                                                                 |  |      | 18,513  |   |      | 29  | %  |                  |   | 18,457  |      |  | 24  | %    |  |   | 24,660  |   |  | 27                                 | % 
|                                                                                                                                                   |  |      |         |   |      |     |    |                  |   |         |      |  |     |      |  |   |         |   |  |                                    |   
|Total revenues                                                                                                                                     |  |      | 64,064  |   |      | 100 | %  |                  |   | 77,318  |      |  | 100 | %    |  |   | 90,206  |   |  | 100                                | % 
|                                                                                                                                                   |  |      |         |   |      |     |    |                  |   |         |      |  |     |      |  |   |         |   |  |                                    |   
|COST OF REVENUES:                                                                                                                                  |  |      |         |   |      |     |    |                  |   |         |      |  |     |      |  |   |         |   |  |                                    |   
|Internet equipment                                                                                                                                 |  |      | 32,323  |   |      | 50  | %  |                  |   | 39,165  |      |  | 51  | %    |  |   | 46,582  |   |  | 52                                 | % 
|Web platform licenses and services                                                                                                                 |  |      | 639     |   |      | 1   | %  |                  |   | 795     |      |  | 1   | %    |  |   | 697     |   |  | 1                                  | % 
|                                                                                                                                                   |  |      |         |   |      |     |    |                  |   |         |      |  |     |      |  |   |         |   |  |                                    |   
|Total cost of revenues                                                                                                                             |  |      | 32,962  |   |      | 51  | %  |                  |   | 39,960  |      |  | 52  | %    |  |   | 47,279  |   |  | 53                                 | % 
|                                                                                                                                                   |  |      |         |   |      |     |    |                  |   |         |      |  |     |      |  |   |         |   |  |                                    |   
|GROSS PROFIT                                                                                                                                       |  |      | 31,102  |   |      | 49  | %  |                  |   | 37,358  |      |  | 48  | %    |  |   | 42,927  |   |  | 47                                 | % 
|OPERATING EXPENSES:                                                                                                                                |  |      |         |   |      |     |    |                  |   |         |      |  |     |      |  |   |         |   |  |                                    |   
|Research and development                                                                                                                           |  |      | 17,522  |   |      | 27  | %  |                  |   | 13,836  |      |  | 18  | %    |  |   | 13,324  |   |  | 15                                 | % 
|Selling and marketing                                                                                                                              |  |      | 24,334  |   |      | 38  | %  |                  |   | 27,144  |      |  | 35  | %    |  |   | 25,842  |   |  | 28                                 | % 
|General and administrative                                                                                                                         |  |      | 5,398   |   |      | 9   | %  |                  |   | 7,528   |      |  | 10  | %    |  |   | 6,554   |   |  | 7                                  | % 
|Acquired in-process research and development                                                                                                       |  |      | 4,058   |   |      | 6   | %  |                  |   |        |      |  |    | %    |  |   | 8,658   |   |  | 10                                 | % 
|Amortization of goodwill and other intangible assets                                                                                               |  |      | 1,497   |   |      | 2   | %  |                  |   | 11,984  |      |  | 15  | %    |  |   | 9,746   |   |  | 11                                 | % 
|Impairment of goodwill and other intangible assets                                                                                                 |  |      | 9,146   |   |      | 14  | %  |                  |   | 16,375  |      |  | 21  | %    |  |   |        |   |  |                                   | % 
|Restructuring costs                                                                                                                                |  |      | 482     |   |      | 1   | %  |                  |   | 1,073   |      |  | 1   | %    |  |   |        |   |  |                                   | % 
|Integration costs                                                                                                                                  |  |      | 309     |   |      | 1   | %  |                  |   |        |      |  |    | %    |  |   |        |   |  |                                   | % 
|Terminated merger costs                                                                                                                            |  |      |        |   |      |    | %  |                  |   | 2,640   |      |  | 4   | %    |  |   |        |   |  |                                   | % 
|                                                                                                                                                   |  |      |         |   |      |     |    |                  |   |         |      |  |     |      |  |   |         |   |  |                                    |   
|Total operating expenses                                                                                                                           |  |      | 62,746  |   |      | 98  | %  |                  |   | 80,580  |      |  | 104 | %    |  |   | 64,124  |   |  | 71                                 | % 
|                                                                                                                                                   |  |      |         |   |      |     |    |                  |   |         |      |  |     |      |  |   |         |   |  |                                    |   
|OPERATING LOSS                                                                                                                                     |  |      | (31,644 | ) |      | (49 | %) |                  |   | (43,222 | )    |  | (56 | %)   |  |   | (21,197 | ) |  | (24                                | %)
|Other income (loss), net                                                                                                                           |  |      |         |   |      |     |    |                  |   |         |      |  |     |      |  |   |         |   |  |                                    |   
|Loss on impaired securities                                                                                                                        |  |      | (2,943  | ) |      | (5  | %) |                  |   | (1,000  | )    |  | (1  | %)   |  |   |        |   |  |                                   | % 
|Other income, net                                                                                                                                  |  |      | 320     |   |      | 1   | %  |                  |   | 2,510   |      |  | 3   | %    |  |   | 3,579   |   |  | 4                                  | % 
|                                                                                                                                                   |  |      |         |   |      |     |    |                  |   |         |      |  |     |      |  |   |         |   |  |                                    |   
|Total other income (loss), net                                                                                                                     |  |      | (2,623  | ) |      | (4  | %) |                  |   | 1,510   |      |  | 2   | %    |  |   | 3,579   |   |  | 4                                  | % 
|                                                                                                                                                   |  |      |         |   |      |     |    |                  |   |         |      |  |     |      |  |   |         |   |  |                                    |   
|Loss from continuing operations before cumulative effect from adoption of SAB 101 and before gain on sale of discontinued
operations, net of taxes |  |      | (34,267 | ) |      | (53 | %) |                  |   | (41,712 | )    |  | (54 | %)   |  |   | (17,618 | ) |  | (20                                | %)
|Cumulative effect from adoption of SAB 101                                                                                                         |  |      |        |   |      |    | %  |                  |   | (1,555  | )    |  | (2  | %)   |  |   |        |   |  |                                   | % 
|Discontinued operations, net of taxes                                                                                                              |  |      |        |   |      |    | %  |                  |   | 156     |      |  | 0   | %    |  |   | 2,481   |   |  | 3                                  | % 
|                                                                                                                                                   |  |      |         |   |      |     |    |                  |   |         |      |  |     |      |  |   |         |   |  |                                    |   
|NET LOSS                                                                                                                                           |  | $    | (34,267 | ) |      | (53 | %) |                  | $ | (43,111 | )    |  | (56 | %)   |  | $ | (15,137 | ) |  | (17                                | %)
|                                                                                                                                                   |  |      |         |   |      |     |    |                  |   |         |      |  |     |      |  |   |         |   |  |                                    |   



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##### Table of Contents

REVENUES



Total revenues for fiscal year 2002 decreased from fiscal year 2001 primarily due to decreased revenues from the sale of our broadband
Internet equipment products.



Internet Equipment Revenues. Broadband
Internet equipment revenues decreased for fiscal year 2002 from fiscal year 2001 primarily due to declining sales to the CLEC market and declining average selling prices partially offset by increased sales volumes as set forth in the Product Volume
and Average Selling Price section below. Sales volumes increased primarily as a result of the customers we acquired in connection with our acquisition of Cayman and new customers in Europe. Sales to the CLEC market, as illustrated in the customer
table below, have declined as a result of the operational and financial difficulties encountered by customers such as Covad, Rhythms NetConnections, Inc. (Rhythms) and NorthPoint as they attempted to build out DSL networks. (Rhythms and NorthPoint
have subsequently ceased operations.) Average selling prices are declining primarily as a result of the mix of products sold, price competition from foreign and domestic competitors and customer driven demands. The mix of broadband Internet
equipment sales is changing as we begin entering the residential ADSL market. Historically, residential-class products, and ADSL products generally, have carried a lower average selling price than similar business-class products. We expect that we
will continue to experience declining average selling prices, primarily as a result of the changing mix of products we sell and price competition from both foreign and domestic suppliers. We believe that increased sales volumes to the customers
acquired in connection with our acquisition of Cayman and to our new European customers will offset these declines. For example, we shipped approximately 43,000 Internet routers, or approximately $7.2 million of revenue in fiscal year 2002 to
customers acquired in connection with our acquisition of Cayman, primarily SBC and BellSouth, to which we previously had not sold our broadband Internet equipment.



Web Platform License and Services. Web platforms revenues increased slightly for fiscal year 2002 from fiscal year 2001. Recurring
revenue from the hosting of our eSite and eStore products increased to $8.2 million for fiscal year 2002 from $6.6 million for fiscal year 2001 but was almost equally offset by reduced license sales of our eSite and eStore products and reduced sales
of Timbuktu, our system management software. Licensing of our eSite and eStore products decreased to $10.3 million for fiscal year 2002 from $11.8 million for fiscal year 2001 primarily as a result of fewer licensing opportunities available to the
dot com-type customers to whom we licensed our eSite and eStore products.



Total revenues for fiscal year 2001 decreased from fiscal year 2000 primarily due to decreased revenues from our broadband Internet equipment and Web platforms products.



Internet Equipment Revenues. Broadband Internet equipment revenue decreased primarily due to declining average selling prices of our
broadband Internet equipment, particularly our DSL routers, worldwide as a result of price competition and pricing strategies as we entered new markets and channels, decreased sales of our broadband Internet equipment products, particularly our DSL
routers in the United States, primarily as a result of the financial and operational difficulties encountered by our CLEC customers such as Covad, NorthPoint and Rhythms, and decreased sales of our ISDN routers in Europe primarily as a result of
growing demand for DSL Internet services that began to replace the use of ISDN Internet services in the European markets in which we distribute our broadband Internet equipment products. These decreases were partially offset by increased sales of
our DSL routers in Europe.



Web Platform License and Services. Web
platforms revenues decreased primarily due to reduced license sales of our eSite and eStore products, and reduced sales of software products for corporate help desks, including Timbuktu and eCare. License sales decreased to $11.8 million for fiscal
year 2001 from $19.3 million for fiscal year 2002 primarily due to companies reducing their IT spending and fewer licensing opportunities available to the dot com-type customers to whom we licensed our eSite and eStore products. This
decrease was partially offset by increased recurring revenue from the hosting of our eSite and eStore products, which increased to $6.6 million for fiscal year 2001 from $5.4 million for fiscal year 2000. Total revenues of the help desk products
represented 55% of total Web platform revenues.



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##### Table of Contents

We licensed our eSite and eStore products to dot com type business customers largely in fiscal years 2000 and
2001. Since that time, we have focused our efforts on supporting other licensees that continue to market eSites and eStores using our software, for which we receive on-going recurring revenues. We have introduced a number of new software products
using the underlying technology in the eSite and eStore products, and these new products are intended to be licensed to large corporate accounts.



Product Volume and Average Selling Price Information



The following tables sets forth for the periods indicated, volumes and average selling prices, excluding accessories, of our Internet equipment products.



|                                |  |      |         |      |   |         |  | Increase (decrease) fromprior year |        
|------------------------------- |  | ---- | ------- | ---- | - | ------- |  | ---------------------------------- | -------
|Fiscal year ended September 30, |  | 2002 |         | 2001 |   | 2000    |  | 2002                               |        
|Product volumes                 |  |      | 177,467 |      |   | 163,088 |  |                                    | 173,300
|Average selling prices          |  | $    | 247     |      | $ | 351     |  | $                                  | 375    



Customer Information



Historically, we have sold our products primarily to CLECs, distributors, ILECs, ISPs and
directly to end-users. The following table sets forth for the periods indicated, our customers who have represented greater than 10% of our revenues in such period, along with such data expressed as a percentage of total revenues as well as the
change from the prior year. No other customers for fiscal years 2002, 2001 and 2000 accounted for 10% or more of total revenues.



|                                |  |      |       |  |      |   |                  |      |        |  |      |   |  |      |        |  | Increase (decrease) fromprior year |  
|------------------------------- |  | ---- | ----- |  | ---- | - | ---------------- | ---- | ------ |  | ---- | - |  | ---- | ------ |  | ---------------------------------- | -
|Fiscal year ended September 30, |  | 2002 |       |  | 2001 |   |                  | 2000 |        |  | 2002 |   |  | 2001 |       
|                                |  |      |       |  |      |   | ($ in thousands) |      |        |  |      |   |  |      |        |  |                                    |  
|Covad (a)                       |  | $    | 8,481 |  | 13   | % |                  | $    | 12,565 |  | 16   | % |  | $    | 14,812 |  | 16                                 | %
|Ingram Micro                    |  |      | 7,970 |  | 12   | % |                  |      | 8,380  |  | 11   | % |  |      | 6,162  |  | 7                                  | %
|Rhythms (b)                     |  |      |      |  |      |   |                  |      | 8,204  |  | 11   | % |  |      | 5,181  |  | 6                                  | %
|NorthPoint (c)                  |  |      |      |  |      |   |                  |      | 2,415  |  | 3    | % |  |      | 10,608 |  | 12                                 | %

---

|(a) |  | Covad filed a voluntary petition under the Bankruptcy Act in August 2001 as part of a capital restructuring plan. Covad emerged from bankruptcy in December 2001 and has announced
that it has adequate cash to allow it to become cash flow positive by the latter half of 2003.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(b) |  | Rhythms received Bankruptcy Court approval and completed the sale of a substantial portion of its assets to WorldCom in December 2001.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------

|(c) |  | NorthPoint ceased operations during March 2001.
|--- |  | -----------------------------------------------



Including the greater than 10% customers in the table above, the following table sets forth the number of customers who each individually represented at least 5% of our
revenues for the fiscal years ended September 30, 2002, 2001 and 2000.



|Fiscal years ended September 30, |  | 2002 |   |  | 2001 |   |  | 2000 |  
|-------------------------------- |  | ---- | - |  | ---- | - |  | ---- | -
|Number of customers              |  | 4    |   |  | 3    |   |  | 5    |  
|Percent of total revenue         |  | 36   | % |  | 38   | % |  | 46   | %



Geographic Information



The following table sets forth for the periods indicated, revenues by region in such period
along with such data expressed as a percentage of total revenues as well as the change from the prior year:



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##### Table of Contents

|                                |  |      |        |  |      |   |                  |      |        |  |      |   |  |      |        |  | Increase (decrease) fromprior year |  
|------------------------------- |  | ---- | ------ |  | ---- | - | ---------------- | ---- | ------ |  | ---- | - |  | ---- | ------ |  | ---------------------------------- | -
|Fiscal year ended September 30, |  | 2002 |        |  | 2001 |   |                  | 2000 |        |  | 2002 |   |  | 2001 |       
|                                |  |      |        |  |      |   | ($ in thousands) |      |        |  |      |   |  |      |        |  |                                    |  
|Europe                          |  | $    | 10,544 |  | 16   | % |                  | $    | 9,378  |  | 12   | % |  | $    | 13,558 |  | 15                                 | %
|Canada                          |  |      | 1,046  |  | 2    | % |                  |      | 1,168  |  | 2    | % |  |      | 1,689  |  | 2                                  | %
|Asia Pacific and other          |  |      | 1,602  |  | 3    | % |                  |      | 1,030  |  | 1    | % |  |      | 1,215  |  | 1                                  | %
|                                |  |      |        |  |      |   |                  |      |        |  |      |   |  |      |        |  |                                    |  
|Subtotal international revenue  |  |      | 13,192 |  | 21   | % |                  |      | 11,576 |  | 15   | % |  |      | 16,462 |  | 18                                 | %
|United States                   |  |      | 50,872 |  | 79   | % |                  |      | 65,742 |  | 85   | % |  |      | 73,744 |  | 82                                 | %
|                                |  |      |        |  |      |   |                  |      |        |  |      |   |  |      |        |  |                                    |  
|Total revenues                  |  | $    | 64,064 |  | 100  | % |                  | $    | 77,318 |  | 100  | % |  | $    | 90,206 |  | 100                                | %
|                                |  |      |        |  |      |   |                  |      |        |  |      |   |  |      |        |  |                                    |  



International revenues increased for
fiscal year 2002 from fiscal year 2001 primarily due to increased sales of our ADSL routers into the European residential market through our new European customers partially offset by decreased sales of our ISDN routers as a result of the growing
demand for DSL Internet services as well as decreased sales of our Web platforms products. Revenues from the United States decreased for fiscal 2002 from 2001 primarily due to declining sales to the CLEC market and declining average selling prices
partially offset by increased sales to customers we acquired in connection with our acquisition of Cayman as discussed above.



International revenues decreased for fiscal year 2001 from fiscal year 2000 primarily due to decreased sales of our ISDN routers in Europe as a result of growing demand
for DSL Internet services that are replacing the use of ISDN Internet services in the European markets in which we distribute our broadband Internet equipment products as well as decreased sales of our Web platforms products. These decreases were
partially offset by increased sales of our DSL routers in Europe. Revenues from the United States decreased for fiscal 2001 from 2000 primarily due to declining average selling prices of our broadband Internet equipment, particularly our DSL
routers, as a result of price competition and pricing strategies from entering new markets and channels, and decreased sales of our broadband Internet equipment products, particularly our DSL routers in the United States, as a result of the
financial and operational difficulties encountered by our CLEC customers as discussed above.



COST OF REVENUES



Cost of revenues consist primarily of material costs related to our contract manufacturing operations and manufacturing variances. Although our sales volumes increased
for fiscal year 2002 from fiscal year 2001, total cost of revenues decreased primarily due to declining material costs for our broadband Internet equipment as a result of product redesigns and the introduction of new ADSL products that have a lower
average cost than our other broadband Internet equipment, the increased use of contract manufacturing operations in Asia where our products can be manufactured less expensively than in the United States and declining component costs. Total cost of
revenues decreased for fiscal year 2001 from fiscal year 2000 primarily as a result of reduced sales volumes of our broadband Internet equipment products, reduced manufacturing variances as well as our ability to obtain cost reductions from our
contract manufacturers.



Gross Margin



Our total gross margin increased to 49% for fiscal year 2002 from 48% for
fiscal year 2001 primarily due to the increased proportion of revenues from our higher margin Web platforms products partially offset by the decline of average selling prices of our broadband Internet equipment.



Internet Equipment. Broadband Internet equipment gross margin decreased to 29% for
fiscal year 2002 from 33% for fiscal year 2001 primarily due to declining average selling prices as a result of price competition and pricing strategies as we enter new markets, introduce new products and expand our customer base, increased sales of
lower margin ADSL products, reduced sales of dedicated router products which carry a higher gross margin than our DSL products as well than slower than planned product transitions to lower cost, higher margin products. This decrease was partially
offset by declining product costs as discussed in the above cost of revenue discussion.



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Web Platform License and Services. Web platforms gross margin increased to 97% for fiscal year 2002 from 96% for
fiscal year 2001 primarily due to our ability to reduce our costs related to supporting and provisioning our eSite and eStore products.



Our total gross margin increased to 48% for fiscal year 2001 from 47% for fiscal year 2000 primarily due to the increase in broadband equipment gross margins partially
offset by the decreased proportion of revenues from our higher margin Web platforms products.



Internet Equipment. Broadband Internet equipment gross margin increased to 33% for fiscal year 2001 from 29% for fiscal year 2000. Broadband Internet equipment gross margins were adversely affected in fiscal
year 2000 due to a $1.1 million inventory charge we recorded in fiscal year 2000 related to the discontinuation of certain non-DSL products. Excluding the charge we recorded in fiscal year 2000, broadband Internet equipment gross margins increased
to 33% for fiscal year 2001 from 31% for fiscal year 2000 primarily due to our ability to obtain cost reductions from our contract manufacturers who build our products. This improvement in broadband Internet equipment gross margin was partially
offset by declining average selling prices of our broadband Internet equipment worldwide as a result of price competition and pricing strategies as we enter new markets and channels.



Web Platform License and Services. Web platforms gross margin decreased to 96% for fiscal year 2001 from 97% for fiscal year 2000
primarily due to reduced volume license sales of our Web platforms products and increased costs related to supporting our hosting of eSite and eStore products.



Our Internet equipment products have a lower average gross margin than our Web platforms products. Accordingly, to the extent we sell more Internet equipment than Web
platforms products, our gross margins would be lower. In the past, our gross margin has varied significantly and will likely vary significantly in the future. Our gross margins depend primarily on:



| |  |  | The mix of Internet equipment and Web platforms products sold;
| | - |  | --------------------------------------------------------------



| |  |  | Pricing strategies;
| | - |  | -------------------



| |  |  | Increased sales of our residential-class broadband Internet equipment which historically have had a lower average selling price than our business-class broadband Internet equipment;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Standard cost changes;
| | - |  | ----------------------



| |  |  | New versions of existing products; and
| | - |  | --------------------------------------



| |  |  | External market factors, including, but not limited to, price competition.
| | - |  | --------------------------------------------------------------------------



RESEARCH AND DEVELOPMENT



Research and development expenses consist primarily of employee related expenses, depreciation and amortization, development related expenses such as product prototyping,
design and testing, and overhead allocations. Research and development expenses increased for fiscal year 2002 from fiscal year 2001 primarily due to:



| |  |  | Increased research and development staff by approximately 20 people and increased employee related expenses of approximately $2.7 million primarily as a result of our acquisitions
of Cayman in October 2001 and DoBox in March 2002; and
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Increased facility and depreciation expenses of approximately $0.5 million as a result of the acquisitions of Cayman and DoBox and their leased facilities and development assets.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



These increases were partially offset by reduced product
prototyping and design expenses. Additionally, the use of third party contractors was reduced for fiscal year 2002 from fiscal year 2001.



Research and development expenses increased for fiscal year 2001 from fiscal year 2000 primarily due to:



| |  |  | Increased employee related expenses and use of third party contractors. Such increase totaled approximately $0.3 million; and
| | - |  | -----------------------------------------------------------------------------------------------------------------------------



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| |  |  | Increased development expenses related new product design and prototyping. Such increase totaled approximately $0.2 million.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------



We expect to continue to devote substantial resources to product and technological
development. We expect research and development costs may increase in absolute dollars in fiscal year 2003 as we continue to expand the breadth and depth of our product offerings. We believe our process for developing software is essentially
completed concurrently with the establishment of technological feasibility, and we have not capitalized any internal software development costs to date. However, during fiscal year 2001, we capitalized $1.1 million and during fiscal year 2000, we
capitalized $0.7 million of product development costs incurred subsequent to delivery of a working model, under a development agreement with a third party.



SELLING AND MARKETING



Selling and marketing expenses consist primarily of salary and commission expense for our sales force, travel and entertainment, advertising and promotional expenses,
product marketing, customer service and support costs. Selling and marketing expenses decreased for fiscal year 2002 from fiscal year 2001 primarily due to:



| |  |  | The reduction of sales and marketing headcount by approximately 28 people and the corresponding decrease of employee related expenses of approximately $1.8 million as well as
decreased travel and entertainment expenses of approximately $0.5 million as a result of our restructuring in October 2001; and
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Decreased marketing programs and activities of approximately $0.7 million.
| | - |  | --------------------------------------------------------------------------



These decreases were partially offset by increased depreciation and equipment maintenance expense related to capital purchases for equipment used in our technical support
and service functions.



Selling and marketing expenses increased for fiscal
year 2001 from 2000 primarily due to an increase in headcount of approximately 28 people and the corresponding increase of employee related expenses of approximately $2.0 million which was a a result of our efforts to expand the number of channels
through which we sell our products. These increases were partially offset by reduced advertising and promotional expenses of approximately $1.1 million.



We expect selling and marketing expenses may decrease in absolute dollars in fiscal 2003 as a result of our restructuring and termination of certain employees and
increased expense control efforts.



GENERAL
AND ADMINISTRATIVE



General and administrative expenses consist primarily of
employee related expenses, provisions for doubtful accounts and legal, accounting and insurance costs. General and administrative expenses decreased for fiscal year 2002 from fiscal year 2001 primarily due to reduced incremental provisions for
doubtful accounts for outstanding accounts receivable owed by customers that filed voluntary petitions under the Bankruptcy Act and many of which ceased operations. Included in general and administrative expense for fiscal year 2002 is $0.6 million
of incremental provisions for doubtful accounts. For fiscal year 2001, general and administrative expense includes $2.9 million of incremental provisions for doubtful accounts of which $1.7 million was related to the outstanding accounts receivable
of NorthPoint. During December 2001, in a private transaction whereby we sold our claim in the NorthPoint bankruptcy proceedings, we recovered approximately $0.2 million of the $1.7 million NorthPoint receivable for which we had recorded a provision
for doubtful accounts in fiscal year 2000.



General and administrative expenses
increased for fiscal year 2001 from fiscal year 2000 primarily due to increased incremental provisions for doubtful accounts for outstanding accounts receivable owed by our CLEC customers who filed voluntary petitions under the Bankruptcy Act and
many of which ceased operations during our fiscal year 2001 as well as increased employee related expenses and insurance costs. For fiscal year 2001, general and administrative expense includes $2.9 million of incremental provisions for doubtful
accounts as discussed above and for fiscal year 2000, includes $1.9 million of incremental provisions for doubtful accounts related to the outstanding accounts receivable of Jato.



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We expect general and administrative expenses may decrease in absolute dollars in fiscal 2003 as a result of our
restructuring and termination of certain employees, relocation to a new, smaller headquarters facility, and increased expense control efforts.



ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT



Acquired in process research and development represents research and development assets acquired in connection with our acquisitions of Cayman and DoBox in fiscal year
2002, and WebOrder and StarNet in fiscal year 2000, that were not technologically feasible at the time of acquisition and had no alternative future use, and as such were expensed at the time of the transaction.



For fiscal year 2002, we allocated approximately $2.2 million of the purchase price of Cayman
and approximately $1.9 million, or 100%, of the purchase price of DoBox to acquired in-process research and development. For fiscal year 2000, we allocated a charge of approximately $3.0 million of the purchase price of WebOrder and approximately
$5.7 million of the purchase price of StarNet to acquired in-process research and development. (See Note 2 of Notes to Consolidated Financial Statements.)



AMORTIZATION OF GOODWILL AND OTHER INTANGIBLE ASSETS



For fiscal year 2002, this amount represents the amortization of intangible assets with identifiable lives related to our acquisition of Cayman. For fiscal years 2001 and
2000, amortization of goodwill and other intangible assets represents the amortization of both goodwill and other intangible assets related to our acquisitions of WebOrder, StarNet, Serus and netOctopus. (See Notes 2 and 3 of Notes to Consolidated
Financial Statements.)



We elected to early adopt the provisions of SFAS No.
142 on October 1, 2001, the beginning of fiscal year 2002. SFAS No. 142 requires that goodwill resulting from a business combination no longer be amortized to earnings, but instead be reviewed for impairment on at least an annual basis and be
expensed against earnings when the implied fair value of a reporting unit is less than its carrying amount. For goodwill resulting from business combinations prior to July 1, 2001, amortization of such goodwill continued through the fiscal year
ended September 30, 2001, but ceased on October 1, 2001.



IMPAIRMENT OF
GOODWILL AND OTHER INTANGIBLE ASSETS



For fiscal year 2002, this amount
represents the full impairment of the remaining goodwill acquired in connection with the acquisitions of Cayman and StarNet. In accordance with SFAS No. 142, we completed our annual goodwill impairment test on August 31, 2002 for the Internet
equipment and Web platform reporting units. The impairment testing is performed in two steps: (i) the determination of impairment, based upon the fair value of a reporting unit as compared to its carrying value, and (ii) if there is an impairment,
this step measures the amount of impairment loss by comparing the implied fair value of goodwill with the carrying amount of that goodwill. At August 31, 2002, the implied fair value of our Internet equipment reporting unit was found to be less than
its carrying amount and as a result, we recorded a charge to our Consolidated Statement of Operations in the fiscal year ended September 30, 2002 of $9.1 million. (See Notes 2 and 3 of Notes to Consolidated Financial Statements.)



For fiscal year 2001, this amount represents the impairment of goodwill and other intangible
assets related to our acquisitions of WebOrder, StarNet and Serus. As provided under SFAS No. 121, given the slower than anticipated growth in the market for IAD products (the technology for which we acquired from StarNet) and the rapid and sharp
decline in the dot com market to which we marketed and licensed certain of our Web platforms products (including technology which we acquired from WebOrder and Serus) in addition to the slower than anticipated revenue growth in the
market for such products, we determined the net carrying value of the goodwill and other intangible assets related to these acquisitions will not be fully recovered. Accordingly, we recorded a charge of $16.4 million based on the difference of the
carrying value and the estimated discounted future operating cash flows of the goodwill and other intangible assets related to these acquisitions. (See Note 2 of Notes to Consolidated Financial Statements.)



RESTRUCTURING COSTS



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For fiscal year 2002, restructuring costs consist primarily of employee severance benefits recorded in connection with a
reduction in the Companys workforce of approximately 24 people whose positions were determined to be redundant subsequent to the closing of the Cayman acquisition. For fiscal year 2001, restructuring costs consist primarily of employee
severance benefits and the costs to exit certain of our business activities and closure of a facility. We expect to pay the remaining restructuring costs accrued during the fiscal year ended September 30, 2003. (See Note 12 of Notes to Consolidated
Financial Statements.)



INTEGRATION COSTS



Integration costs consist of expenses incurred in connection with the acquisition of Cayman
and integrating Caymans customers, systems and operations. We expect to pay the remaining integration costs accrued during the fiscal year ended September 30, 2003. (See Note 13 of Notes to Consolidated Financial Statements.)



TERMINATED MERGER COSTS



This amount represents the costs incurred in connection with the terminated merger between our company and Proxim. The charge consists
primarily of expenses for accounting and legal advisory services, initiation of joint marketing and research and development programs in anticipation of the merger that we had undertaken at the direction of Proxim, certain shared merger costs, and
other related costs. We expect to pay the remaining terminated merger costs accrued during the fiscal year ended September 30, 2003. (See Note 14 of Notes to Consolidated Financial Statements.)



OTHER INCOME (LOSS), NET



Other income (loss), net consists of interest income we earn on our cash, cash equivalents and short-term investments, interest expense,
realized and unrealized gains and losses on foreign currency transactions as well as losses on impaired securities that we deem other than temporary.



Loss on Impaired Securities. For fiscal year 2002, loss on impaired securities represents a $1.4 million and a $1.5 million charge for impaired securities related
to our investments in MegaPath and Everdream, respectively. These impairment charges were recorded in connection with the valuation of MegaPath and Everdream based upon their most recent rounds of financing. For fiscal year 2001, loss on impaired
securities represents the entire loss of our investment in NorthPoint. (See Note 11 of Notes to Consolidated Financial Statements.)



Other Income, Net. Other income, net has decreased for fiscal years 2002 and 2001 primarily due to our reduced cash, cash equivalents and short-term investments
combined with reductions in interest rates.



CUMULATIVE EFFECT FROM ADOPTION OF
SAB 101



This amount represents the charge we recorded upon adoption of SAB
101. We expect to recognize the remaining amounts of deferred revenue related to the adoption of SAB 101 during the fiscal year ended September 30, 2003. (See Note 1, Revenue Recognition, of Notes to Consolidated Financial Statements.)



DISCONTINUED OPERATIONS



Represents the gain on sale of our sale of the Farallon LAN Division (the LAN Division),
which we sold in August 1998. (See Note 4 of Notes to Consolidated Financial Statements.)



Recent Accounting Pronouncements



In
June 2001, the Financial Accounting Standards Board (FASB) approved for issuance SFAS No. 143, Accounting for Asset Retirement Obligations. SFAS No. 143 addresses financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset retirement costs. This Statement amends FASB Statement No. 19, Financial Accounting and Reporting by Oil and Gas Producing Companies. SFAS No. 143 requires that the fair value
of a liability for an asset retirement obligation be recognized in the period



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in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are
capitalized as part of the carrying amount of the long-lived asset. The provisions of SFAS No. 143 are effective for financial statements issued for fiscal years beginning after June 15, 2002. The Company is currently evaluating the impact of the
adoption of the provisions of the pronouncement.



In May 2002, the FASB
approved for issuance SFAS No. 145, Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections. SFAS No. 145 requires gains and losses from extinguishment of debt to be classified as an
extraordinary item only if the criteria in APB No. 30 have been met. Further, lease modifications with economic effects similar to sale-leaseback transactions must be accounted for in the same manner as sale-leaseback transactions. While the
technical corrections to existing pronouncements are not substantive in nature, in some instances they may change accounting practice. The Company has adopted the provisions of SFAS No. 145 required for financial statements issued on or after May
15, 2002. This adoption had no impact on the Companys consolidated financial statements. The Company is currently evaluating the impact of the remaining provisions of the pronouncement.



In June 2002, the FASB approved for issuance SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities. SFAS No. 146 addresses accounting and reporting for costs associated with exit and disposal activities and supersedes Emerging Issues Task Force No. 94-3 (EITF 94-3), Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the
liability is incurred, as defined by the Statement. Under EITF 94-3, an exit cost was recognized at the date an entity committed to an exit plan. Additionally, SFAS No. 146 provides that exit and disposal costs should be measured at fair value and
that the associated liability will be adjusted for changes in estimated cash flows. The provisions of SFAS No. 146 are effective for exit and disposal activities that are initiated after December 31, 2002.



Risk Factors



In addition to other information in this Form 10-K, the following risk factors 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 the risk factors set forth below and elsewhere in this Form 10-K, and the risks discussed in our other filings with the
United States Securities Exchange Commission, actual results could differ materially from those projected in any forward-looking statements.



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



As a result of continuing capital expenditure requirements and operating
expenses in all areas of our business, our failure to increase our revenues or sufficiently reduce our operating expenses will result in continuing losses and negative cash flow, which could significantly harm our business. We incurred losses from
continuing operations of $34.3 million for the fiscal year ended September 30, 2002 and have incurred losses from continuing operations of $41.7 million and $17.6 million for fiscal years 2001 and 2000, respectively. Our operations used $7.3 million
and $5.8 million of cash for the fiscal years ended September 30, 2002 and 2001 and provided $0.1 million of cash for fiscal year 2000. Our cash, cash equivalents and short-term investments have decreased to $25.0 million as of September 30, 2002
from $49.0 million as of September 30, 2001, which decreased from $59.8 million as of September 30, 2000. Even if we reach profitability and maintain positive cash flow, we may not be able to sustain or increase profitability or cash flow on a
quarterly or annual basis.



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 of 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 of our net losses and use of cash, the continuing operations of our business may require additional capital. 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



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borrowings or the sale of debt or equity securities, sale of non-strategic assets, or some combination thereof, to
provide funding for our operations. We believe we have adequate cash, cash equivalents and borrowing capacity to meet our anticipated capital needs for at least 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 adversely affected and we would not be able to operate our business.



Substantial sales of our broadband Internet equipment will not occur unless telecommunications carriers continue substantial deployment
of DSL services, and this could reduce our revenues and significantly harm our business.



The success of our broadband Internet equipment depends upon the extent to which telecommunications carriers deploy DSL and other broadband technologies. Factors that have impacted such deployment include:



| |  |  | A prolonged approval process by service providers, including laboratory tests, technical trials, marketing trials, initial commercial deployment and full commercial deployment;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The development of improved business models for DSL and other broadband services, including the capability to market, sell, install and maintain DSL and other broadband services on
a profitable basis;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The ability of CLECs to obtain required capital resources;
| | - |  | ----------------------------------------------------------



| |  |  | Cost constraints, such as installation costs and space and power requirements at the telecommunications service providers central office;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------



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



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



| |  |  | Government regulation.
| | - |  | ----------------------



Demand for DSL services has exceeded the ability of certain telecommunications carriers and ISPs to deploy services in a timely manner and to provide satisfactory customer service. We offer to carriers and service
provider customers 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 higher recurring revenues from end users. These
features and services include dial backup, VPNs, remote management and configuration, and eSite or eStore hosting. We can offer no assurance that our strategy of enabling bundled service offerings will be widely accepted. If telecommunications
carriers do not continue to initiate or expand their deployment of DSL and other broadband services, our revenues could decline and our business could be significantly harmed.



We expect our revenues to become increasingly dependent on our ability to sell our broadband Internet equipment to 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, focusing primarily on residential services. Prior to our acquisition of Cayman, we had not sold meaningful quantities of our broadband Internet equipment to ILECs
in the United States. As a result of our acquisition of Cayman, we have expanded our customer base to include two ILEC customers, SBC and BellSouth, to which we previously had not sold our broadband Internet equipment. We have committed resources
that are focused on expanding our presence in the ILEC channel both domestically and internationally in response to changing market conditions. There continue to be barriers associated with such sales including, but not limited to, lengthy product
evaluation cycles, the ability to dislodge competitors whose products are currently being utilized, long-term product deployment cycles and intense price pressures. ILECs currently obtain equipment from our competitors, such as Thomson, Siemens
(through its Efficient Networks subsidiary), Westell, ZyXEL, Linksys and 2Wire, who have proven to be strong competitors. If we fail to penetrate further the ILEC market for our products and services, our business may be materially and adversely
affected.



We expect our revenues to become increasingly dependent on our
ability to develop broadband Internet equipment for and successfully enter the residential broadband gateway market.



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Prior to our acquisition of Cayman in October 2001, we developed, marketed and sold broadband Internet equipment products
primarily to CLECs and ISPs serving the small business market. As a result of our acquisitions of Cayman in October 2001 and DoBox in March 2002 and our internal development initiatives, we believe that we now have products and technology that will
enable us to market and deliver broadband Internet equipment products and services more effectively to ILECs serving the residential market. There are numerous risks associated with our entrance into the residential broadband gateway market such as:



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



| |  |  | The ability to successfully market these products to ILECs currently serving this market; and
| | - |  | ---------------------------------------------------------------------------------------------



| |  |  | The ability to dislodge competitors that are currently supplying residential class broadband gateways to ILECs.
| | - |  | ---------------------------------------------------------------------------------------------------------------



If we are unable to overcome these challenges or if the ILECs are unsuccessful deploying DSL
services more extensively into the residential market, our business will be materially and adversely affected.



The CLEC and ISP customers to which we historically have sold our DSL products have experienced significant business difficulties that have negatively affected our business and operating results.



Prior to our acquisition of Cayman in October 2001, our most significant customers were CLECs
and ISPs. Since the middle of calendar year 2000, CLECs have experienced significant business difficulties due to an inability to obtain financing to continue to build out their networks. The difficulties of these customers have materially and
adversely affected our operating results, causing a significant decline in the price of our common stock. During the last two years, three of our CLEC customers, Covad, Rhythms, and NorthPoint have all sought protection under the Bankruptcy Act.
Thereafter, Rhythms sold its network to WorldCom, Inc., which itself is currently operating under Bankruptcy Act protection. NorthPoint ceased operations entirely. Covad emerged from bankruptcy in December 2001 and remains our largest customer,
although it continues to incur losses. The difficulties of these customers have materially and adversely affected our operating results, causing a significant decline in the price of our common stock.



Like the CLECs, ISPs also have struggled since mid-2000. Most ISPs have had significant
difficulties in differentiating their services from the services provided by their competitors. As a result, ISPs have experienced significant erosion in the prices charged to their customers, resulting in ongoing losses. Many of our ISP customers
have experienced business difficulties and some have filed for bankruptcy or ceased operations. As a result, sales of our products to ISPs remain difficult. The financing market for CLECs and ISPs has been effectively closed since calendar year
2001, resulting in significantly decreased sales to CLECs and ISPs and write-offs of outstanding accounts receivable.



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 to our business.



We rely on a small number of customers for a large portion of our
revenues. For the fiscal year ended September 30, 2002, there were four customers that each individually represented at least 5% of our revenues and in the aggregate accounted for 36% of our total revenues. 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.



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 with the September 30, 2002 quarter, our revenues have ranged from $15.6 million to $20.9 million, and our net quarterly loss has ranged from $4.9 million to $21.1
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.



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It is likely that in some future quarter, quarters or year our operating results will be below the expectations of
securities analysts or investors. In such event, 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:



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



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



| |  |  | Our ability to license, and the timing of licenses, of our Web platforms products;
| | - |  | ----------------------------------------------------------------------------------



| |  |  | 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 Internet
equipment as a percentage of our total revenues and increased sales of lower margin ADSL products within our family of broadband Internet equipment products;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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



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 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 Internet equipment, we primarily compete with Thomson, Cisco, Siemens (through its Efficient Networks subsidiary), Linksys, 2Wire, Westell, and ZyXEL.



In the market for our Web platforms products, we primarily compete with Computer Associates, Microsoft, Vector Networks, Stac Software,
Symantec, and Tivoli Software (a wholly-owned subsidiary of IBM). We anticipate intense competition from some of these companies because some of these competitors provide their products to consumers at no cost. For example, Microsoft has available
at no cost a communications and collaboration software product that could limit the market for our Timbuktu product.



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 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 all product areas for various reasons, including lower prices and other incentives not matched by us. In addition, current and potential competitors 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.



The market for integrated voice and data products and combined services may not grow as anticipated.



We have released a line of IADs designed to allow for voice and data services over a single DSL line. To date, service providers have not deployed such combined services
broadly and the market has grown more slowly than anticipated. Unless such products and services are deployed more broadly, our integrated voice and data products and combined services may not have a meaningful commercial impact, and our business
may be harmed.



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



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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 advantages over DSL technology, then the
demand for our DSL products and services and our revenues and gross margins will decrease. There is no guarantee we will be able to develop and introduce products for these competing technologies.



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



All of our broadband Internet 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. If we are unable to timely obtain a sufficient quantity of these semiconductor chips for any reason, sales of our broadband Internet products could be delayed or halted. Further,
we could also be forced to redesign our broadband Internet 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 Internet 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 Internet equipment relies on
components that are supplied by independent contractors and specialized suppliers. Furthermore, substantially all of our broadband Internet 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 Internet equipment also depends on our ability to accurately forecast our future requirements. If we are unable to timely obtain a sufficient quantity of components from independent contractors
or specialized suppliers for any reason, sales of our broadband Internet equipment could be delayed or halted. Similarly, if supplies of circuit boards of 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 Internet equipment and qualify new suppliers of
components. The resulting stoppage or delay in selling our products and the expense of redesigning our broadband Internet 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 DSL products.



We have recently developed and introduced a broadband services platform that 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 this service delivery platform can assist us in differentiating our products and services from those of our
competitors. However, this platform and the underlying technology are relatively new, and we cannot provide any assurance that, when deployed in mass scale, the platform will perform as expected, there are no hidden bugs or defects, or it will be
widely adopted by the customers to whom we are marketing the platform.



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We may not be able to successfully develop, introduce, enhance or market 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 Internet 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 relatively new, rapidly evolving and intensely competitive market. For example, we may not correctly anticipate market
requirements, including requirements for performance, price, features and compatibility with other DSL equipment. We may not be able to introduce rapidly innovative new products that meet these market requirements. Failure to continue to develop amd
market competitive products would harm our competitive position and operating results.



Our revenues will not grow and we may incur greater losses if we cannot successfully sell our Web platforms products. We derive a substantial portion of the recurring revenues from our Web platforms products from a small number of large
customers.



The majority of our Web platforms revenues are derived from the
sale of software products for corporate help desks, including Timbuktu and eCare. For the fiscal year ended September 30, 2002, revenues from these help desk applications were 55% of total revenues for our Web platform products. We anticipate that
the market for Timbuktu will grow more slowly than the market for our other Web platforms products and services. In addition, we rely on a small number of licensees of our Web platforms to promote the use of our Web platforms for building eSites and
eStores. As a result, we derive the majority of the recurring revenues from our Web platforms products from fewer than five customers. The extent and nature of the promotions by licensees of our Web platforms are outside of our control. If licensees
of our eSite and eStore Web platforms do not successfully promote eSites and eStores to their customers, we will not generate continued recurring revenues. If these customers were to choose a competitive platform, this could lead to reduced revenues
and adversely impact our results.



If hosting services for our Web
platforms 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. 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 lead to interruption or deterioration of our 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 eSite and eStore hosting services. In such a circumstance, our hosting revenue may decline. In addition, if our 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.



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



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



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, mostly in Europe. For the fiscal year ended September 30, 2002, our international sales represented 21% of total sales. We expect
sales to international customers to continue to comprise a significant portion of our revenues. For the past two fiscal years, sales of broadband Internet equipment products to our European customers who are members of the European Union have been
denominated in the Euro. For our international sales that continue to be denominated in United States



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dollars, fluctuations in currency exchange rates could cause our products and services to become relatively more
expensive to our foreign customers, which could lead to decreased sales of our products and services. In addition, changes in the value of the Euro relative to the United States dollar could adversely affect our operating results to the extent we do
not adequately hedge sales denominated in the Euro.



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



Our international operations are subject to a number of difficulties and special costs, including:



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



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



| |  |  | Dependence on local vendors;
| | - |  | ----------------------------



| |  |  | Uncertain regulation of electronic commerce;
| | - |  | --------------------------------------------



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



| |  |  | Longer sales cycles;
| | - |  | --------------------



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



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



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



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



| |  |  | Political and economic instability.
| | - |  | -----------------------------------



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



We typically experience a seasonal
reduction in revenues from Europe in the three months ended September 30.



In the past, we have experienced a seasonal reduction in our revenues in the three months ended September 30, our fiscal fourth quarter, primarily due to lower sales in Europe during such periods because of vacation schedules. For example,
revenues from Europe declined 22% in the quarter ended September 30, 2002 from revenues in the prior quarter ended June 30, 2002. Similarly, revenues from Europe declined 30% in the quarter ended September 30, 2000 from revenues in the prior quarter
ended June 30, 2000. Although revenues from Europe increased 58% in the quarter ended September 30, 2001 from revenues in the prior quarter ended June 30, 2001, we believe this increase was a result of unusually low revenues in such prior quarter.
We anticipate that this seasonal trend will continue to result in lower revenues from Europe during our fiscal fourth quarters.



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, particularly Alan Lefkof, our President and
Chief Executive Officer. None of our employees are bound by an employment agreement, and 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. Although we believe that our personnel turnover rate is consistent with industry norms, our future success depends on our continuing ability to attract, hire, train and retain a
substantial number of 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.



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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 have one United States patent issued that relates to our Timbuktu and eCare remote control software. The term of this patent is
through August 2010. 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 or we 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 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.



Substantial sales of our common stock by our large stockholders could cause our stock price to fall.



We have a limited number of stockholders that hold a large portion of our common stock. To the extent one or more of our large stockholders
decides to sell substantial amounts of our common stock in the public market over a short period of time, based on historic trading volumes, we expect that the market price of our common stock could fall.



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 Internet equipment, and companies in the telecommunications industry must comply with numerous regulations. If our industry or
industries on which we depend become subject 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.



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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, 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:



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



| |  |  | 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 particular the DSL market.
| | - |  | ------------------------------------------------------------------------------------------



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.



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.



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



Index to Consolidated Financial Statements



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



|                                                                                                                          |  | Page
|------------------------------------------------------------------------------------------------------------------------- |  | ----
|Consolidated Financial Statements:                                                                                        |  |     
|                                                                                                                          | 
|Independent Auditors Report                                                                                              |  | 37  
|                                                                                                                          | 
|Consolidated Balance Sheets at September 30, 2002 and 2001                                                                |  | 38  
|                                                                                                                          | 
|Consolidated Statements of Operations and Comprehensive Loss for the fiscal years ended September 30, 2002, 2001 and
2000 |  | 39  
|                                                                                                                          | 
|Consolidated Statements of Stockholders Equity for the fiscal years ended September 30, 2002, 2001 and 2000              |  | 40  
|                                                                                                                          | 
|Consolidated Statements of Cash Flows for the fiscal years ended September 30, 2002, 2001 and 2000                        |  | 41  
|                                                                                                                          | 
|Notes to Consolidated Financial Statements                                                                                |  | 42  
|                                                                                                                          | 
|Financial Statement Schedule:                                                                                             |  |     
|                                                                                                                          | 
|Valuation and Qualifying Accounts                                                                                         |  | 66  



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Independent Auditors Report



The Board of Directors and Shareholders

Netopia, Inc.:



We have audited the consolidated financial statements of Netopia, Inc. and subsidiaries as listed in the preceding index. In connection with our audits of the
consolidated financial statements, we have also audited the financial statement schedule as listed in the preceding index. These consolidated financial statements and financial statement schedule are the responsibility of the Companys
management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.



We conducted our audits in accordance with auditing standards generally accepted in the United States of America. 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, 2002 and 2001 and the results of their operations and their cash flows for each of the years in the three-year period ended September 30, 2002 in
conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth herein.



As discussed in Note 1 to the consolidated financial statements, effective October 1, 2001, the Company changed its method of accounting for goodwill in accordance with SFAS No. 142 Goodwill and Other Intangible Assets.



KPMG LLP



San Francisco, California

November 5, 2002





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Netopia, Inc. and Subsidiaries

Consolidated Balance Sheets



|September 30,                                                                                                                                                      |  | 2002           |          |   | 2001 |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | -------------- | -------- | - | ---- | -
|                                                                                                                                                                   |  | (in thousands) |         
|ASSETS                                                                                                                                                             |  |                |          |   |      |  
|Current assets:                                                                                                                                                    |  |                |          |   |      |  
|Cash and cash equivalents                                                                                                                                          |  | $              | 25,022   |   |      | $
|Short-term investments                                                                                                                                             |  |                |         |   |      |  
|Trade accounts receivable less allowance for doubtful accounts and returns of $567 and $641 at September 30, 2002 and 2001,
respectively                           |  |                | 9,950    |   |      |  
|Inventories, net                                                                                                                                                   |  |                | 6,259    |   |      |  
|Prepaid expenses and other current assets                                                                                                                          |  |                | 1,731    |   |      |  
|                                                                                                                                                                   |  |                |          |   |      |  
|Total current assets                                                                                                                                               |  |                | 42,962   |   |      |  
|Furniture, fixtures and equipment, net                                                                                                                             |  |                | 5,507    |   |      |  
|Acquired technology, net                                                                                                                                           |  |                | 5,538    |   |      |  
|Other intangible assets and goodwill, net                                                                                                                          |  |                | 2,157    |   |      |  
|Long-term investments                                                                                                                                              |  |                | 1,463    |   |      |  
|Deposits and other assets                                                                                                                                          |  |                | 1,368    |   |      |  
|                                                                                                                                                                   |  |                |          |   |      |  
|TOTAL ASSETS                                                                                                                                                       |  | $              | 58,995   |   |      | $
|                                                                                                                                                                   |  |                |          |   |      |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                               |  |                |          |   |      |  
|Current liabilities:                                                                                                                                               |  |                |          |   |      |  
|Accounts payable                                                                                                                                                   |  | $              | 7,088    |   |      | $
|Accrued compensation                                                                                                                                               |  |                | 2,736    |   |      |  
|Accrued liabilities                                                                                                                                                |  |                | 2,245    |   |      |  
|Deferred revenue                                                                                                                                                   |  |                | 2,223    |   |      |  
|Other current liabilities                                                                                                                                          |  |                | 42       |   |      |  
|                                                                                                                                                                   |  |                |          |   |      |  
|Total current liabilities                                                                                                                                          |  |                | 14,334   |   |      |  
|Long-term liabilities:                                                                                                                                             |  |                |          |   |      |  
|Borrowings under credit facility                                                                                                                                   |  |                | 4,428    |   |      |  
|Other long-term liabilities                                                                                                                                        |  |                | 186      |   |      |  
|                                                                                                                                                                   |  |                |          |   |      |  
|Total liabilities                                                                                                                                                  |  |                | 18,948   |   |      |  
|                                                                                                                                                                   |  |                |          |   |      |  
|Commitments and contingencies                                                                                                                                      |  |                |          |   |      |  
|Stockholders equity:                                                                                                                                              |  |                |          |   |      |  
|Common stock: $0.001 par value, 50,000,000 shares authorized; 18,905,223 and 18,076,812
shares issued and outstanding at September 30, 2002 and 2001, respectively |  |                | 19       |   |      |  
|Additional paid-in capital                                                                                                                                         |  |                | 147,485  |   |      |  
|Accumulated deficit                                                                                                                                                |  |                | (107,457 | ) |      |  
|                                                                                                                                                                   |  |                |          |   |      |  
|Total stockholders equity                                                                                                                                         |  |                | 40,047   |   |      |  
|                                                                                                                                                                   |  |                |          |   |      |  
|TOTAL LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                         |  | $              | 58,995   |   |      | $
|                                                                                                                                                                   |  |                |          |   |      |  



See accompanying
notes to consolidated financial statements.





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Netopia, Inc. and Subsidiaries

Consolidated Statements of Operations and Comprehensive Loss



|Fiscal years ended September 30,                                                                                                                                               |  | 2002                                         |         |   | 2001 |   |         | 2000 | 
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | -------------------------------------------- | ------- | - | ---- | - | ------- | ---- | 
|                                                                                                                                                                               |  | (in thousands, except for per share amounts) |        
|REVENUES:                                                                                                                                                                      |  |                                              |         |   |      |   |         |      | 
|Internet equipment                                                                                                                                                             |  | $                                            | 45,551  |   |      | $ | 58,861  |      | 
|Web platform licenses and service                                                                                                                                              |  |                                              | 18,513  |   |      |   | 18,457  |      | 
|                                                                                                                                                                               |  |                                              |         |   |      |   |         |      | 
|Total revenues                                                                                                                                                                 |  |                                              | 64,064  |   |      |   | 77,318  |      | 
|                                                                                                                                                                               |  |                                              |         |   |      |   |         |      | 
|COST OF REVENUES:                                                                                                                                                              |  |                                              |         |   |      |   |         |      | 
|Internet equipment                                                                                                                                                             |  |                                              | 32,323  |   |      |   | 39,165  |      | 
|Web platform licenses and services                                                                                                                                             |  |                                              | 639     |   |      |   | 795     |      | 
|                                                                                                                                                                               |  |                                              |         |   |      |   |         |      | 
|Total cost of revenues                                                                                                                                                         |  |                                              | 32,962  |   |      |   | 39,960  |      | 
|                                                                                                                                                                               |  |                                              |         |   |      |   |         |      | 
|GROSS PROFIT                                                                                                                                                                   |  |                                              | 31,102  |   |      |   | 37,358  |      | 
|OPERATING EXPENSES:                                                                                                                                                            |  |                                              |         |   |      |   |         |      | 
|Research and development                                                                                                                                                       |  |                                              | 17,522  |   |      |   | 13,836  |      | 
|Selling and marketing                                                                                                                                                          |  |                                              | 24,334  |   |      |   | 27,144  |      | 
|General and administrative                                                                                                                                                     |  |                                              | 5,398   |   |      |   | 7,528   |      | 
|Acquired in-process research and development                                                                                                                                   |  |                                              | 4,058   |   |      |   |        |      | 
|Amortization of goodwill and other intangible assets                                                                                                                           |  |                                              | 1,497   |   |      |   | 11,984  |      | 
|Impairment of goodwill and other intangible assets                                                                                                                             |  |                                              | 9,146   |   |      |   | 16,375  |      | 
|Restructuring costs                                                                                                                                                            |  |                                              | 482     |   |      |   | 1,073   |      | 
|Integration costs                                                                                                                                                              |  |                                              | 309     |   |      |   |        |      | 
|Terminated merger costs                                                                                                                                                        |  |                                              |        |   |      |   | 2,640   |      | 
|                                                                                                                                                                               |  |                                              |         |   |      |   |         |      | 
|Total operating expenses                                                                                                                                                       |  |                                              | 62,746  |   |      |   | 80,580  |      | 
|                                                                                                                                                                               |  |                                              |         |   |      |   |         |      | 
|OPERATING LOSS                                                                                                                                                                 |  |                                              | (31,644 | ) |      |   | (43,222 | )    | 
|Other income (loss), net                                                                                                                                                       |  |                                              |         |   |      |   |         |      | 
|Loss on impaired securities                                                                                                                                                    |  |                                              | (2,943  | ) |      |   | (1,000  | )    | 
|Other income, net                                                                                                                                                              |  |                                              | 320     |   |      |   | 2,510   |      | 
|                                                                                                                                                                               |  |                                              |         |   |      |   |         |      | 
|Total other income (loss), net                                                                                                                                                 |  |                                              | (2,623  | ) |      |   | 1,510   |      | 
|                                                                                                                                                                               |  |                                              |         |   |      |   |         |      | 
|Loss from continuing operations before cumulative effect from adoption of Staff Accounting Bulletin (SAB) 101 and before gain on
sale of discontinued operations, net of taxes |  |                                              | (34,267 | ) |      |   | (41,712 | )    | 
|Cumulative effect from adoption of SAB 101                                                                                                                                     |  |                                              |        |   |      |   | (1,555  | )    | 
|Gain on sale of discontinued operations, net of taxes                                                                                                                          |  |                                              |        |   |      |   | 156     |      | 
|                                                                                                                                                                               |  |                                              |         |   |      |   |         |      | 
|NET LOSS                                                                                                                                                                       |  | $                                            | (34,267 | ) |      | $ | (43,111 | )    | 
|                                                                                                                                                                               |  |                                              |         |   |      |   |         |      | 
|Comprehensive loss:                                                                                                                                                            |  |                                              |         |   |      |   |         |      | 
|Net loss                                                                                                                                                                       |  | $                                            | (34,267 | ) |      | $ | (43,111 | )    | 
|Other comprehensive income (loss)                                                                                                                                              |  |                                              |        |   |      |   | 506     |      | 
|                                                                                                                                                                               |  |                                              |         |   |      |   |         |      | 
|Total comprehensive loss                                                                                                                                                       |  | $                                            | (34,267 | ) |      | $ | (42,605 | )    | 
|                                                                                                                                                                               |  |                                              |         |   |      |   |         |      | 
|Per share data, continuing operations:                                                                                                                                         |  |                                              |         |   |      |   |         |      | 
|Basic and diluted loss per share                                                                                                                                               |  | $                                            | (1.86   | ) |      | $ | (2.33   | )    | 
|                                                                                                                                                                               |  |                                              |         |   |      |   |         |      | 
|Common shares used in the per share calculations                                                                                                                               |  |                                              | 18,455  |   |      |   | 17,902  |      | 
|                                                                                                                                                                               |  |                                              |         |   |      |   |         |      | 
|Per share data, net loss:                                                                                                                                                      |  |                                              |         |   |      |   |         |      | 
|Basic and diluted net loss per share                                                                                                                                           |  | $                                            | (1.86   | ) |      | $ | (2.41   | )    | 
|                                                                                                                                                                               |  |                                              |         |   |      |   |         |      | 
|Common shares used in the per share calculations                                                                                                                               |  |                                              | 18,455  |   |      |   | 17,902  |      | 
|                                                                                                                                                                               |  |                                              |         |   |      |   |         |      | 



See accompanying
notes to consolidated financial statements.



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Netopia, Inc. and Subsidiaries

Consolidated Statements of Stockholders Equity



|                                                                   |  | Common stock                         |  | Additionalpaid-incapital |    |  | Accumulateddeficit |         |   | Accumulatedothercomprehensiveincome (loss) |   |          | Totalstockholdersequity | 
|------------------------------------------------------------------ |  | ------------------------------------ |  | ------------------------ | -- |  | ------------------ | ------- | - | ------------------------------------------ | - | -------- | ------------------------ | 
|                                                                   |  | Shares                               |  | Amount                   |    |  |                    |        
|                                                                   |  | (in thousands, except share amounts) | 
|BALANCES, SEPTEMBER 30, 1999                                       |  | 15,519,198                           |  | $                        | 15 |  | $                  | 99,978  |   |                                            | $ | (14,942  | )                        | 
|Exercise of stock options                                          |  | 1,203,369                            |  |                          | 1  |  |                    | 5,794   |   |                                            |   |         |                          | 
|Issuance of common stock under Employee Stock Purchase Plan        |  | 130,306                              |  |                          |   |  |                    | 1,738   |   |                                            |   |         |                          | 
|Issuance of common stock for acquisitions                          |  | 677,848                              |  |                          | 1  |  |                    | 35,386  |   |                                            |   |         |                          | 
|Exercise of stock warrant                                          |  | 56,875                               |  |                          |   |  |                    |        |   |                                            |   |         |                          | 
|Costs related to issuance of common stock under secondary offering |  |                                     |  |                          |   |  |                    | (39     | ) |                                            |   |         |                          | 
|Net unrealized investment loss                                     |  |                                     |  |                          |   |  |                    |        |   |                                            |   |         |                          | 
|Net loss                                                           |  |                                     |  |                          |   |  |                    |        |   |                                            |   | (15,137  | )                        | 
|                                                                   |  |                                      |  |                          |    |  |                    |         |   |                                            |   |          |                          | 
|BALANCES, SEPTEMBER 30, 2000                                       |  | 17,587,615                           |  |                          | 17 |  |                    | 142,857 |   |                                            |   | (30,079  | )                        | 
|Exercise of stock options                                          |  | 239,042                              |  |                          |   |  |                    | 785     |   |                                            |   |         |                          | 
|Issuance of common stock under Employee Stock Purchase Plan        |  | 250,155                              |  |                          |   |  |                    | 1,231   |   |                                            |   |         |                          | 
|Issuance of common stock warrants                                  |  |                                     |  |                          |   |  |                    | 16      |   |                                            |   |         |                          | 
|Costs related to issuance of common stock under secondary offering |  |                                     |  |                          |   |  |                    | (3      | ) |                                            |   |         |                          | 
|Net unrealized investment income                                   |  |                                     |  |                          |   |  |                    |        |   |                                            |   |         |                          | 
|Net loss                                                           |  |                                     |  |                          |   |  |                    |        |   |                                            |   | (43,111  | )                        | 
|                                                                   |  |                                      |  |                          |    |  |                    |         |   |                                            |   |          |                          | 
|BALANCES, SEPTEMBER 30, 2001                                       |  | 18,076,812                           |  |                          | 17 |  |                    | 144,886 |   |                                            |   | (73,190  | )                        | 
|Exercise of stock options                                          |  | 99,231                               |  |                          |   |  |                    | 299     |   |                                            |   |         |                          | 
|Issuance of common stock under Employee Stock Purchase Plan        |  | 429,180                              |  |                          | 1  |  |                    | 809     |   |                                            |   |         |                          | 
|Issuance of common stock for acquisitions                          |  | 300,000                              |  |                          | 1  |  |                    | 1,485   |   |                                            |   |         |                          | 
|Stock options granted to non-employees                             |  |                                     |  |                          |   |  |                    | 6       |   |                                            |   |         |                          | 
|Net loss                                                           |  |                                     |  |                          |   |  |                    |        |   |                                            |   | (34,267  | )                        | 
|                                                                   |  |                                      |  |                          |    |  |                    |         |   |                                            |   |          |                          | 
|BALANCES, SEPTEMBER 30, 2002                                       |  | 18,905,223                           |  | $                        | 19 |  | $                  | 147,485 |   |                                            | $ | (107,457 | )                        | 
|                                                                   |  |                                      |  |                          |    |  |                    |         |   |                                            |   |          |                          | 



See accompanying
notes to consolidated financial statements.



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Netopia, Inc. and Subsidiaries

Consolidated Statements of Cash Flows



|Fiscal years ended September 30,                                                          |  | 2002 |         |   | 2001           |   |         | 2000 | 
|----------------------------------------------------------------------------------------- |  | ---- | ------- | - | -------------- | - | ------- | ---- | 
|                                                                                          |  |      |         |   | (in thousands) |   |         |      | 
|Cash flows from operating activities:                                                     |  |      |         |   |                |   |         |      | 
|Net loss                                                                                  |  | $    | (34,267 | ) |                | $ | (43,111 | )    | 
|Adjustments to reconcile net loss to net cash provided by (used in) operating activities: |  |      |         |   |                |   |         |      | 
|Depreciation and amortization                                                             |  |      | 6,809   |   |                |   | 15,352  |      | 
|Non-cash compensation for services                                                        |  |      | 6       |   |                |   |        |      | 
|Unrealized loss on impaired securities                                                    |  |      | 2,943   |   |                |   | 1,000   |      | 
|Charge for in-process research and development                                            |  |      | 4,058   |   |                |   |        |      | 
|Charge for impairment of goodwill and other intangible assets                             |  |      | 9,146   |   |                |   | 16,375  |      | 
|Charge for impairment of capitalized software development costs                           |  |      | 80      |   |                |   |        |      | 
|Changes in allowance for doubtful accounts and returns on accounts receivable             |  |      | (74     | ) |                |   | (2,617  | )    | 
|Changes in operating assets and liabilities, net of effects of acquisition:               |  |      |         |   |                |   |         |      | 
|Trade accounts receivable                                                                 |  |      | (326    | ) |                |   | 8,713   |      | 
|Inventories                                                                               |  |      | 897     |   |                |   | 3,128   |      | 
|Prepaid expenses and other current assets                                                 |  |      | (96     | ) |                |   | 357     |      | 
|Deposits and other assets                                                                 |  |      | 47      |   |                |   | (7      | )    | 
|Accounts payable and accrued liabilities                                                  |  |      | 2,946   |   |                |   | (4,658  | )    | 
|Deferred revenue                                                                          |  |      | (413    | ) |                |   | 394     |      | 
|Other liabilities                                                                         |  |      | 988     |   |                |   | (757    | )    | 
|                                                                                          |  |      |         |   |                |   |         |      | 
|Net cash provided by (used in) operating activities                                       |  |      | (7,256  | ) |                |   | (5,831  | )    | 
|                                                                                          |  |      |         |   |                |   |         |      | 
|Cash flows from investing activities:                                                     |  |      |         |   |                |   |         |      | 
|Purchase of short-term investments                                                        |  |      | (4,793  | ) |                |   | (50,799 | )    | 
|Proceeds from the sale of short-term investments                                          |  |      | 18,085  |   |                |   | 59,445  |      | 
|Purchase of furniture, fixtures and equipment                                             |  |      | (4,190  | ) |                |   | (3,750  | )    | 
|Acquisition of long term investment                                                       |  |      | (406    | ) |                |   | (2,000  | )    | 
|Capitalization of software development costs                                              |  |      |        |   |                |   | (1,130  | )    | 
|Acquisition of businesses                                                                 |  |      | (17,659 | ) |                |   | (100    | )    | 
|                                                                                          |  |      |         |   |                |   |         |      | 
|Net cash provided by (used in) investing activities                                       |  |      | (8,963  | ) |                |   | 1,666   |      | 
|                                                                                          |  |      |         |   |                |   |         |      | 
|Cash flows from financing activities:                                                     |  |      |         |   |                |   |         |      | 
|Borrowings under credit facility                                                          |  |      | 4,428   |   |                |   |        |      | 
|Proceeds from the issuance of common stock, net                                           |  |      | 1,110   |   |                |   | 2,029   |      | 
|                                                                                          |  |      |         |   |                |   |         |      | 
|Net cash provided by financing activities                                                 |  |      | 5,538   |   |                |   | 2,029   |      | 
|                                                                                          |  |      |         |   |                |   |         |      | 
|Net increase (decrease) in cash and cash equivalents                                      |  |      | (10,681 | ) |                |   | (2,136  | )    | 
|Cash and cash equivalents, beginning of year                                              |  |      | 35,703  |   |                |   | 37,839  |      | 
|                                                                                          |  |      |         |   |                |   |         |      | 
|Cash and cash equivalents, end of year                                                    |  | $    | 25,022  |   |                | $ | 35,703  |      | 
|                                                                                          |  |      |         |   |                |   |         |      | 
|Supplemental disclosures of cash flow activities:                                         |  |      |         |   |                |   |         |      | 
|Income taxes paid                                                                         |  | $    | 5       |   |                | $ | 6       |      | 
|                                                                                          |  |      |         |   |                |   |         |      | 
|Supplemental disclosures of non-cash investing and financing activities:                  |  |      |         |   |                |   |         |      | 
|Issuance of common stock for acquisition of businesses                                    |  | $    | 1,485   |   |                | $ |        |      | 
|                                                                                          |  |      |         |   |                |   |         |      | 
|Issuance of common stock equivalents for consulting services                              |  | $    |        |   |                | $ | 16      |      | 
|                                                                                          |  |      |         |   |                |   |         |      | 



See accompanying
notes to consolidated financial statements.





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(1) Nature of Business and Summary of Significant Accounting Policies



Nature of Business. Netopia, Inc. (the Company) develops, markets and
supports hardware, software and services that enhance the delivery of broadband Internet services by carriers and broadband service providers to residential and business-class customers.



Principles of Consolidation. The accompanying consolidated financial statements include the accounts of the Company and its wholly
owned subsidiaries located in France, Germany, Australia, and the Netherlands. All significant intercompany balances and transactions have been eliminated in consolidation.



Cash Equivalents and Short-Term Investments. Cash equivalents consist of instruments with original maturities of 90 days or less.
Certain cash equivalents and all of the Companys investments are classified as available-for-sale. The securities are carried at cost, which approximates fair value.



The amortized cost of available-for-sale debt securities is adjusted for amortization of premiums and accretion of discounts to maturity.
Such amortization is included in other income, net. Realized gains and losses, and declines in value judged to be other than temporary on available-for-sale securities are included in other income, net. The cost of securities sold is based on the
specific identification method. Interest and dividends on securities classified as available-for-sale are included in other income, net.



Cash equivalents and short-term investments classified as available-for-sale as of September 30, 2002 and 2001, consisted of the following:



|September 30,      |  | 2002           |        | 2001
|------------------ |  | -------------- | ------ | ----
|                   |  | (in thousands)
|Money market funds |  | $              | 17,615 |     
|Corporate debt     |  |                |       |     
|Commercial paper   |  |                |       |     
|                   |  |                |        |     
|                   |  | $              | 17,615 |     
|                   |  |                |        |     



The available-for-sale securities as
of September 30, 2002 and 2001 were all due in one year or less. Expected maturities may differ from contractual maturities because issuers of the securities may have the right to prepay obligations without penalties.



Revenue Recognition. The Company recognizes revenue from the sale of broadband
Internet equipment at the time of shipment to an unrelated third party customer when (a) the price to the customer is substantially fixed or determinable; (b) the customer is obligated to pay the seller and the obligation is not contingent on resale
of the product; (c) the customers obligation to the Company would not be changed in the event of theft or physical destruction or damage of the product; and (d) the Company does not have significant obligations for future performance to
directly bring about resale of the product by the customer.



At the date of
shipment, assuming that the revenue recognition criteria specified above are met, the Company provides for an estimate of returns and warranty expense based on historical experience of returns of similar products and warranty costs incurred,
respectively.



The Company recognizes software revenue in accordance with
Statement of Position (SOP) 97-2, Software Revenue Recognition, as amended. The Company generally has multiple element arrangements for its software revenue including software licenses and maintenance. The Company allocates the arrangement
fee to each of the elements based on the residual method utilizing vendor specific objective evidence (VSOE) for the undelivered elements, regardless of any separate prices stated within the contract for each element. VSOE for maintenance is
generally based on the price the customer would be required to pay when it is sold separately. Fair value for the delivered elements, primarily software licenses and upgrades, is based on the residual amount of the total arrangement fees after
deducting the VSOE for the undelivered elements. 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



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been delivered, there are no uncertainties surrounding product acceptance, the fees are fixed and determinable, and
collection is considered probable. Maintenance revenues, including revenues included in multiple element arrangements, are deferred and recognized ratably over the related contract period, generally twelve months.



The Company recognizes revenue from a long-term software development contract using the
percentage of completion method in accordance with SOP 81-1, Accounting for Performance of Construction-Type and Certain Production-Type Contracts. Revenue is recognized based on the Companys achievement, and customers acceptance,
of certain milestones agreed upon by both parties with consideration given to the number of hours expended as compared to hours budgeted. On a quarterly basis, the Company reviews its costs incurred to date along with its estimate to complete and
compares the sum of such amounts against the revenue expected from the arrangement to determine the need for an accrual for loss contracts. The Company will consider the development contract to be complete upon final customer acceptance.



The Company records unearned revenue for software arrangements when cash has been received
from the customer and the arrangement does not qualify for revenue recognition under the Companys revenue recognition policy. The Company records accounts receivable for software arrangements when the arrangement qualifies for revenue
recognition and cash or other consideration has not been received from the customer.



In December 1999, the SEC issued Staff Accounting Bulletin (SAB) 101, Revenue Recognition in Financial Statements. SAB 101 provides guidance on applying generally accepted accounting principles to revenue recognition issues in
financial statements. The Company adopted SAB 101 in its fiscal first quarter of 2001 resulting in a change in the accounting for certain revenue contracts that include nonrefundable upfront payments from customers. As a result of the adoption of
SAB 101, the Company recorded a $1.6 million charge to its statement of operations and a $1.6 million increase in deferred revenue to its consolidated balance sheet.



|                                                      |  | SAB 101DeferredRevenue |              
|----------------------------------------------------- |  | ---------------------- | -------------
|                                                      |  |                        | (in thousands
|Charge for SAB 101 deferred revenue                   |  | $                      | 1,555        
|Less amounts recognized:                              |  |                        |              
|Fiscal year ended September 30, 2001                  |  |                        | 898          
|Fiscal year ended September 30, 2002                  |  |                        | 557          
|                                                      |  |                        |              
|Subtotal                                              |  |                        | 1,455        
|                                                      |  |                        |              
|Net SAB 101 deferred revenue as of September 30, 2002 |  | $                      | 100          
|                                                      |  |                        |              



Concentrations of Credit Risk.
Financial instruments that potentially expose the Company to concentrations of credit risk principally consist of cash, cash equivalents, short-term investments and accounts receivable.



The Company limits the amounts invested in any one type of investment and maintains its cash investments with one financial institution.
Management believes the financial risks associated with such deposits are minimal.



The Company sells its products primarily through distributors and resellers. Sales are generally not collateralized, credit evaluations are performed, and allowances are provided for estimated credit losses. Prior to fiscal year 2000, the
Company had not experienced significant losses on trade receivables from any particular customer, industry, or geographic region. However, during fiscal years 2002, 2001 and 2000, the Company fully reserved $0.6 million, $2.9 million and $1.9
million, respectively, of outstanding accounts receivable primarily owed by certain telecommunication carrier customers.



Inventories. Inventories are stated at the lower of cost or market. Cost is determined by the first-in, first-out (FIFO) method.



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Furniture, Fixtures, and Equipment. Furniture, fixtures, and equipment are stated at cost, net of accumulated
depreciation. Depreciation is computed using the straight-line method over the shorter of estimated useful lives or related lease terms. The following table sets forth the depreciable lives by major class of asset:



|Major class of asset   |  | Depreciable life (years)                               
|---------------------- |  | -------------------------------------------------------
|Office equipment       |  | 1                                                      
|Furniture and fixtures |  | 7                                                      
|Computers              |  | 3                                                      
|Leasehold improvements |  | Shorter ofestimateduseful lifeor remainingterm of lease



Goodwill and Other Intangible
Assets. The Company elected to early adopt the provisions of Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets, on October 1, 2001. SFAS No. 142 requires that goodwill resulting from a
business combination no longer be amortized to earnings, but instead be reviewed for impairment on at least an annual basis and be expensed against earnings when the implied fair value of a reporting unit is less than its carrying amount. For
goodwill resulting from business combinations prior to July 1, 2001, amortization of such goodwill continued through September 30, 2001, but ceased on October 1, 2001. For business combinations occurring on or after July 1, 2001, the associated
goodwill will not be amortized. The Company completed its tests for goodwill impairment upon adoption and found that no impairment existed as of October 1, 2001.



The Company performed the annual impairment test required by SFAS No. 142 on August 31, 2002 for its two reporting units. At August 31,
2002, the implied fair value of the Companys Internet equipment reporting unit was found to be less than its carrying amount and as a result, the Company recorded a charge to its Consolidated Statement of Operations in the fiscal year ended
September 30, 2002 of $9.1 million. This charge represents full impairment of the remaining goodwill acquired in connection with the acquisitions of Cayman Systems, Inc. (Cayman) and StarNet.



Impairment of Long-Lived Assets, Including Identifiable Intangibles. The Company
elected to early adopt the provisions of SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets on October 1, 2001. SFAS No. 144 serves to clarify and further define the provisions of SFAS No. 121 Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of. The Company evaluates long-lived assets, including identifiable intangible assets in accordance with SFAS No. 144 and tests its long-lived assets and identifiable
intangibles 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. If such assets are 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. 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.



At September 30, 2002, the Companys identifiable intangible assets consisted of developed product technology, core technology and
sales channel relationships related to the Companys acquisition of Cayman as well as a certain marketing license. As a result of the downturn in the economy and the impairment charge recorded in connection with the Companys SFAS No. 142
analysis, the Company tested its identifiable intangible assets in accordance with SFAS No. 144 and found no impairment.



In fiscal year 2001, the Company tested its intangible assets for impairment as provided under SFAS No. 121. Given the slower than anticipated growth in the market for
integrated access device (IAD) products (the technology for which the Company acquired from StarNet) and the sharp decline in the dot com market to which the Company marketed and licensed certain of its Web platforms products (including
technology which the Company acquired from WebOrder and Serus), the Company determined the net carrying value of the



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goodwill and other intangible assets related to these acquisitions would not be fully recovered. Accordingly, the Company
recorded a charge of $16.4 million based on the difference of the carrying value and the estimated discounted future operating cash flows of the goodwill and other intangible assets related to these acquisitions.



Research and Development and Software Development Costs. Research and development
costs include costs related to the development of software products that are expensed as incurred until the technological feasibility of the product has been established. The Company has defined technological feasibility as completion of a working
model. After technological feasibility is established, any additional software development costs are capitalized in accordance with SFAS No. 86, Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed. Product
development costs capitalized are amortized over a future period.



Amortization
of capitalized product development costs begins when the products are available for general release to customers, and is computed on a product-by-product basis as the greater of: (i) the ratio of current gross revenue for a product to the total of
current and estimated future gross revenues for the product; or (ii) the straight-line method over the remaining estimated economic life of the product, which is generally two years. All other research and development expenditures are charged to
research and development expense in the period incurred. During fiscal year 2002, the Company did not capitalize any software development costs. During fiscal years 2001 and 2000, the Company capitalized $1.1 million and $0.7 million, respectively,
of product development costs incurred subsequent to delivery of a working model, under a development agreement with a third party.



Advertising Costs. The Company expenses advertising costs as incurred. Advertising expense was $0.7 million, $1.0 million and $0.7 million for fiscal years 2002,
2001 and 2000, 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.



Long-Term Investments. The Company holds equity securities in two privately held companies in which the Company does not exert significant influence. These
investments are carried at cost. It is the policy of the Company to regularly review the assumptions underlying the operating performance and cash flow forecasts in assessing the carrying values of these securities. The Company identifies and
records impairment losses on investments when events and circumstances indicate that such decline in fair value is other than temporary.



During fiscal year 2002, the Company recorded losses on these investments of $2.9 million. These impairment charges were recorded in connection with recent valuations of
the underlying companies.



Stock-Based Compensation. The Company has
elected to continue to use the intrinsic value-based method as allowed under Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, to account for all of its stock-based employee compensation plans.
Pursuant to SFAS No. 123, Accounting for Stock-Based Compensation, the Company is required to disclose the pro forma effects on operating results as if the Company had elected to use the fair value approach to account for all its stock-based
employee compensation plans.



In accordance with SFAS No. 123, the Company
recognizes as an expense, the fair value of options and other equity instruments granted to non-employees. The Company uses the Black-Scholes option valuation model to determine the fair value of any options or other equity instruments granted to
non-employees.



Use of Estimates. The preparation of the consolidated
financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of
contingent assets and



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liabilities at the date of the consolidated financial statements and the recorded amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.



Per
Share Calculations. Basic net loss per share is based on the weighted average number of shares of common stock outstanding during the period. Diluted net loss per share is based on the weighted average number of shares of common stock
outstanding during the period plus potential dilutive shares from options and warrants outstanding using the treasury stock method.



All potential dilutive common shares have been excluded from the computation of the diluted loss per share for fiscal years 2002, 2001 and 2000, as their effect on the
loss per share was anti-dilutive. Potential dilutive common shares which were excluded from the computation of diluted loss per share consisted of options to purchase common stock totaling 7,199,088 shares in fiscal year 2002; 3,268,128 shares in
fiscal year 2001; 4,019,480 shares in fiscal year 2000; and warrants to purchase common stock totaling 5,000 shares in fiscal year 2001.



Comprehensive Income (Loss). Comprehensive loss is comprised of the Companys net loss, unrealized gains and losses on certain of its investment securities
and foreign currency translation.



Foreign Currency Translation.Assets
and liabilities of the Companys foreign entities where the local currency is the functional currency are translated to U.S. dollars at exchange rates in effect at the balance sheet date. Income and expense accounts are translated at the
weighted average exchange rates during the period being reported. Translation gains and losses have not been significant to date and have been recorded in accumulated other comprehensive income (loss) within stockholders equity.



Foreign Currency Transactions. The Company has entered into foreign currency forward
contracts to reduce risks associated with foreign currency receivables and payables. Forward contracts involve agreements to purchase or 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 offset the losses and gains on the foreign currency denominated receivables and payables for which the Company has risks. The carrying amount of the forward
contracts is the fair value, which is determined by obtaining quoted market prices. Gains and losses on forward contracts are recognized in the statement of operations at the end of each month. Similarly, the change in the foreign currency value is
recognized at the end of the month for the foreign currency denominated payables and receivables. These gains and losses are classified as a component of Other Income (Loss), Net on the Companys Consolidated Statement of Operations.



Recent Accounting Pronouncements. In June 2001, the FASB approved for
issuance SFAS No. 143, Accounting for Asset Retirement Obligations. SFAS No. 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement
costs. This Statement amends FASB Statement No. 19, Financial Accounting and Reporting by Oil and Gas Producing Companies. SFAS No. 143 requires that the fair value of a liability for an asset retirement obligation be recognized in the period
in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. The provisions of SFAS No. 143 are effective for financial
statements issued for fiscal years beginning after June 15, 2002. The Company is currently evaluating the impact of the adoption of the provisions of the pronouncement.



In May 2002, the Financial Accounting Standards Board (FASB) approved for issuance SFAS No. 145, Rescission of FASB Statements No. 4, 44
and 64, Amendment of FASB Statement No. 13, and Technical Corrections. SFAS No. 145 requires gains and losses from extinguishment of debt to be classified as an extraordinary item only if the criteria in APB No. 30 have been met. Further, lease
modifications with economic effects similar to sale-leaseback transactions must be accounted for in the same manner as sale-leaseback transactions. While the technical corrections to existing pronouncements are not substantive in nature, in some
instances they may change accounting practice. The Company has adopted the provisions of SFAS No. 145 required for financial statements issued on or after May 15, 2002. This adoption had no impact on the



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Companys consolidated financial statements. The Company is currently evaluating the impact of the remaining
provisions of the pronouncement.



In June 2002, the FASB approved for issuance
SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. SFAS No. 146 addresses accounting and reporting for costs associated with exit and disposal activities and supersedes Emerging Issues Task Force No. 94-3 (EITF
94-3), Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). SFAS No. 146 requires that a liability for a cost associated with an exit or
disposal activity be recognized when the liability is incurred, as defined by the Statement. Under EITF 94-3, an exit cost was recognized at the date an entity committed to an exit plan. Additionally, SFAS No. 146 provides that exit and disposal
costs should be measured at fair value and that the associated liability will be adjusted for changes in estimated cash flows. The provisions of SFAS No. 146 are effective for exit and disposal activities that are initiated after December 31, 2002.
The Company is currently evaluating the impact of the adoption of the provisions of the pronouncement.



(2) Acquisitions



DoBox, Inc.
(DoBox). In March 2002, the Company closed a transaction to purchase substantially all of the assets and assume certain liabilities of DoBox, a developer of broadband gateway parental control, content filtering and family firewall software. The
Company accounted for the acquisition as a purchase of net assets. The aggregate purchase price of the transaction was $1.9 million, based upon consideration paid at closing.



The aggregate purchase price included:



| |  |  | 300,000 shares of the Companys common stock which were valued using the average of the closing price of the Companys common stock on the first business day after the
closing date of the acquisition agreement;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | $0.1 million in cash in severance benefits to DoBox employees that were not retained; and
| | - |  | -----------------------------------------------------------------------------------------



| |  |  | $0.1 million in cash for the Companys transaction costs including legal, accounting and other professional services.
| | - |  | ---------------------------------------------------------------------------------------------------------------------



The Company also assumed certain other liabilities of DoBox.



The transaction did not meet the criteria of a business combination as outlined by EITF 98-3,
Determining Whether a Non-Monetary Transaction Involves Receipt of Productive Assets or of a Business, because upon acquisition, the net asset acquired did not have any significant outputs. Accordingly, the excess purchase price over the net
tangible assets received was attributed to in-process research and development and was expensed in the accompanying consolidated statement of operations.



Cayman. In October 2001, the Company and Cayman, a Massachusetts corporation, consummated a merger (the Merger) whereby Amazon Merger Corporation, a Delaware
corporation and a wholly-owned subsidiary of Netopia (Merger Sub), was merged with and into Cayman pursuant to an Agreement and Plan of Merger and Reorganization (the Merger Agreement) dated as of September 19, 2001, as amended. Cayman, a developer
and supplier of business class broadband gateways, has survived the Merger as a wholly owned subsidiary of Netopia. The Company purchased Cayman primarily for its technology, product and customer base.



The Company accounted for the transaction under the purchase method. The aggregate purchase
price of the transaction was $14.9 million, based on the consideration paid at closing. The aggregate purchase price included:



| |  |  | $6.0 million in cash in exchange for all of Caymans outstanding equity, including in-the-money stock options;
| | - |  | --------------------------------------------------------------------------------------------------------------



| |  |  | $4.2 million in cash in exchange for all of Caymans outstanding convertible debt;
| | - |  | ----------------------------------------------------------------------------------



| |  |  | $2.4 million in cash to satisfy an outstanding credit line of Cayman;
| | - |  | ---------------------------------------------------------------------



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| |  |  | $0.9 million in cash in fees to Caymans investment bankers, attorneys and accountants;
| | - |  | ---------------------------------------------------------------------------------------



| |  |  | $0.7 million in cash for the Companys transaction costs including legal, accounting and other professional services; and
| | - |  | -------------------------------------------------------------------------------------------------------------------------



| |  |  | $0.7 million cash in severance benefits to Cayman employees that were not retained.
| | - |  | -----------------------------------------------------------------------------------



The Company also assumed certain other liabilities of Cayman.



Approximately $1.7 million is being held in escrow to satisfy Caymans indemnification obligations under the Merger Agreement. Upon the
satisfaction of Caymans indemnification obligations, certain amounts are to be released from escrow on the one-year anniversary date of the close of the transaction and any remaining amounts are to be released from escrow on the two-year
anniversary date of the close of the transaction.



The allocation of the
purchase price is based upon the Companys estimates of the fair value of the tangible and intangible assets acquired and is as follows:



|                                             |  | Amount         |        |   | Annual amortization |   | Useful life
|-------------------------------------------- |  | -------------- | ------ | - | ------------------- | - | -----------
|                                             |  | (in thousands) |        |  
|Current assets                               |  | $              | 4,455  |   |                     |   | n/a        
|Long-term assets                             |  |                | 895    |   |                     |   | n/a        
|Current liabilities                          |  |                | (8,021 | ) |                     |   | n/a        
|Identified intangible assets:                |  |                |        |   |                     |   |            
|Developed product technology                 |  |                | 1,120  |   |                     | $ | 224        
|Core technology leveraged                    |  |                | 5,570  |   |                     |   | 928        
|Sales channel relationships                  |  |                | 1,380  |   |                     |   | 345        
|Goodwill                                     |  |                | 7,325  |   |                     |   | n/a        
|Acquired in-process research and development |  |                | 2,150  |   |                     |   | n/a        
|                                             |  |                |        |   |                     |   |            
|Total purchase price                         |  | $              | 14,874 |   |                     | $ | 1,497      
|                                             |  |                |        |   |                     |   |            



The Company allocated the total
purchase price of Cayman to its individual assets and assumed liabilities, based upon the Companys estimate of the fair value thereof. In addition to the current assets and liabilities that were acquired, certain intangible assets were
identified and a portion of the purchase price was allocated to acquired in-process research and development projects. These identified intangible assets are as follows:



| |  |  | Developed product technology, which represents the value of Caymans proprietary know-how that is technologically feasible as of the acquisition date;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Core technology leveraged, which represents the value of Caymans research and development projects in process that are leveraged off of Caymans previously developed
products and technology;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Sales channel relationships, which represents the value of Caymans established relationships with its incumbent local exchange carrier (ILEC) and cable company customers to
whom Netopia expects to continue to sell products; and
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Goodwill, which represents the excess of the Cayman purchase price over the fair value of the underlying net identifiable assets, was attributed to the Companys Internet
equipment reporting unit. In connection with the Companys annual impairment test as required by SFAS No. 142, the Company determined that this amount was fully impaired at August 31, 2002. As a result, the Company recorded a charge of $7.3
million to its Consolidated Statement of Operations in the fiscal year ended September 30, 2002 representing the full impairment of the goodwill acquired in connection with the Cayman acquisition.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The estimated useful lives of developed product technology, core technology leveraged and
sales channel relationships are 5, 6 and 4 years, respectively. The Company is amortizing the value of these identified intangible assets on a straight-line basis over their estimated useful lives.



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Cayman was developing new products that qualified as in-process research and development. In-process research and
development is defined as acquired research and developments assets that are not currently technologically feasible. In accordance with SFAS No. 86, Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed, the
costs of internally developed products are expensed until the product has established technological feasibility. Technological feasibility is determined when a product reaches the working model stage, which is generally when the product
has reached the beta version release. Beta products are operative versions of the products that perform all of the major functions planned for the product, and are ready for initial customer testing. The Company believed that each of the in-process
research and development projects acquired were subject to significant further development before they would be available for release to our customers. Developing these products is time consuming, costly and complex and there is a risk that these
developments will be late, fail to meet customer or market requirements and may not be competitive with other products using similar or alternative technologies that offer comparable functionality.



The value that was assigned to acquired in-process research and development was determined by
estimating the costs to develop the in-process research and development projects into commercially viable products, estimating the resulting net cash flows from the projects when completed and discounting the net cash flows to their present value.
The revenue estimates used to value the in-process research and development projects were based upon estimates of relevant market sizes and growth factors, expected trends in technology and the nature and expected timing of new product introductions
by Cayman and its competitors.



The rate utilized to discount the net cash
flows to their present value was 28%, which the Company believes adequately reflects the nature of the investment and the risk of the underlying cash flows. This discount rate is a weighted average cost of capital based upon a peer group of
companies.



The following summary, prepared on an unaudited pro forma basis,
reflects the condensed consolidated statements of operations of the Company for the fiscal year ended September 30, 2001, giving effect to the Cayman acquisition and assuming that Cayman had been acquired as of the beginning of fiscal year ended
September 30, 2001:



|Fiscal years ended September 30,                                     |  | 2001                                   |        
|-------------------------------------------------------------------- |  | -------------------------------------- | -------
|                                                                     |  | (In thousands,except per shareamounts) |        
|Revenueas reported                                                  |  | $                                      | 77,318 
|Add: Cayman revenue                                                  |  |                                        | 17,906 
|                                                                     |  |                                        |        
|Revenuepro forma                                                    |  | $                                      | 95,224 
|                                                                     |  |                                        |        
|Net lossas reported                                                 |  | $                                      | (43,111
|Add: Cayman net loss                                                 |  |                                        | (15,866
|Add: amortization of intangible assets related to Cayman acquisition |  |                                        | 1,497  
|                                                                     |  |                                        |        
|Net losspro forma                                                   |  | $                                      | (60,474
|                                                                     |  |                                        |        
|Basic and diluted net loss per shareas reported                     |  | $                                      | (2.41  
|                                                                     |  |                                        |        
|Basic and diluted net loss per sharepro forma                       |  | $                                      | (3.38  
|                                                                     |  |                                        |        
|Shares used in the per share calculationsas reported                |  |                                        | 17,902 
|                                                                     |  |                                        |        
|Shares used in the per share calculationspro forma                  |  |                                        | 17,902 
|                                                                     |  |                                        |        



These pro forma results are not
necessarily indicative of what would have occurred if the Cayman acquisition had been in effect for the periods presented. In addition, they are not intended to be a projection of future results and do not reflect any synergies that might have been
achieved from the combined operations during the periods presented. As of October 1, 2001, Caymans operations are included in our results of operations for the fiscal year ended September 30, 2002.



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WebOrder. In March 2000, the Company acquired all the outstanding common and preferred stock of WebOrder, a
California corporation, in a merger transaction in which WebOrder merged into WO Merger Corporation, a wholly owned subsidiary formed in connection with the transaction. WebOrder was a developer of eCommerce infrastructure for small and medium size
businesses that offered eCommerce solutions to on-line businesses including the ability to manage order processing, and the ability to maintain records of customer transactions flowing through a merchants on-line store.



The Company accounted for the transaction under the purchase method. The aggregate purchase
price of the transaction was approximately $20.7 million, based on the consideration paid at closing. The aggregate purchase price included:



| |  |  | $1.6 million in cash paid on the closing date of the transaction;
| | - |  | -----------------------------------------------------------------



| |  |  | 233,119 shares of the Companys common stock issued on the closing date;
| | - |  | ------------------------------------------------------------------------



| |  |  | A series of potential earnout payments paid in cash and common stock after the closing date if certain revenue milestones are achieved. At September 30, 2002, no milestones had been
achieved, and no additional consideration will be payable;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The substitution of stock options to purchase the Companys common stock in replacement of the WebOrder options held by WebOrders former employees, who joined Netopia
after the closing, valued at approximately $2.1 million. The Company used the Black-Scholes method to value the options issued using the following assumptions: volatility of 101%, expected life of 5 years, interest rate of 5.7%, and no dividends;
and
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Transaction costs of approximately $1.0 million that included legal fees, accounting fees, and fees for other related professional services.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------



All of WebOrders former full time employees became employees of Netopia.
WebOrders founder and one other key stockholder/employee entered into non-competition agreements in connection with the acquisition.



Approximately 15,695 shares of the Companys common stock were held in escrow for one year after the closing to satisfy WebOrders indemnification obligations
under the definitive acquisition agreements. During fiscal year 2001, WebOrders indemnification obligations were satisfied and all shares were released from escrow to WebOrders former stockholders.



The Company allocated the total purchase price of WebOrder to its individual assets and
assumed liabilities, based upon the Companys estimate of the fair value thereof. The excess purchase price over the net book value of the assets acquired was approximately $20.1 million of which, based upon the Companys estimates, the
Company allocated approximately $17.1 million to goodwill and other intangible assets, which was being amortized over four and three years, respectively, and recorded a charge for acquired in-process research and development of approximately $3.0
million. Both cost and income approaches were used to appraise the value of the business and projects acquired. Such methods take into consideration replacement costs of assets acquired, the stage of completion of the projects and estimates related
to expected future revenues, expenses and cash flows which are then discounted back to present day amounts. Based upon these estimates, material net cash flows from the acquired business were expected to occur during the Companys fiscal first
quarter of 2001. These cash flows were discounted using a weighted average discount rate of 42%. Based upon the expenses incurred and the development time invested in the products prior to the acquisition and the estimated expenses and development
time to complete the products, the Company determined the products purchased in aggregate, including products under development and completed products, to be approximately 82% complete at the time of acquisition. The Company completed the in-process
research and development during the fiscal fourth quarter of 2000.



During the
fiscal year ended September 30, 2001, the Company recorded a charge of $9.6 million for impairment of goodwill and other intangible assets related to its acquisition of WebOrder. This charge was based on the difference of the carrying value and the
estimated discounted future operating cash flows of the goodwill and other intangible assets related to this acquisition. Given the uncertainties in the dot com-type market to which the Company marketed and licensed certain of its Web
platforms products, including



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technology which the Company acquired from WebOrder, in addition to the slower than anticipated revenue growth in the
market for such products, the Company determined the net carrying value of the goodwill and other intangible assets related to the WebOrder acquisition would not be fully recovered.



StarNet. In October 1999, the Company acquired StarNet, a California corporation, in a merger transaction in which StarNet merged
into a wholly owned subsidiary. StarNet had been developing a voice channel technology architecture that allows the transmission of voice lines over a digital subscriber line along with the simultaneous transmission of standard data packets.



The Company accounted for the transaction under the purchase method. The
aggregate purchase price of the transaction was approximately $27.5 million, based upon the consideration paid at closing. The final purchase price was dependent upon potential earnout payments that could aggregate to an additional $4.9 million. The
aggregate consideration included:



| |  |  | $8.4 million in cash paid on the closing date of the transaction;
| | - |  | -----------------------------------------------------------------



| |  |  | 447,852 shares of the Companys common stock issued on the closing date;
| | - |  | ------------------------------------------------------------------------



| |  |  | A series of potential cash earnout payments aggregating up to approximately $5.9 million at various times after the closing date if certain technical and revenue milestones are
achieved. At the acquisition date, we had deemed probable and recorded approximately $1.0 million in earnout payments. During the fiscal third quarter of 2000, the Company determined that the milestones for the $1.0 million potential earnout payment
would not be met and accordingly, reduced the purchase price and amortization of goodwill relating to the purchase of StarNet by such amount. As of September 30, 2002, no earnouts have been achieved, and no additional consideration will be paid.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The substitution of stock options to purchase the Companys common stock in replacement of the StarNet options held by StarNets former employee, who joined Netopia after
the closing, valued at approximately $1.4 million. The Company used the Black-Scholes method to value the options issued using the following assumptions: volatility of 101%, expected life of 4 years, interest rate of 4.9%; and no dividends; and
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Transaction costs of approximately $0.8 million that included legal fees, accounting fees, fees paid for an independent fairness opinion, and fees for other services.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------



All of StarNets former full time employees became
employees of Netopia. Each of StarNets founders, and certain other key employees, entered into non-competition agreements in connection with the acquisition.



Approximately 30,673 shares of common stock were held in escrow for a period of time after the closing to satisfy StarNets
indemnification obligations under the definitive acquisition agreements. During the fiscal third quarter of 2000, a portion of these shares were released from the escrow to Netopia to satisfy Netopias indemnification claims, and the remaining
shares were released from escrow to StarNets former stockholders.



The
Company allocated the total purchase price of StarNet to its individual assets and assumed liabilities, based upon the Companys estimate of the fair value thereof. The excess purchase price over the net book value of the assets acquired was
approximately $28.1 million of which, based upon the Companys estimates, the Company allocated approximately $22.4 million to goodwill and other intangible assets, which was being amortized over four and three years, respectively, and recorded
a charge for acquired in-process research and development of $5.7 million. The Company used the income approach to appraise the value of the business and projects acquired. Such method takes into consideration the stage of completion of the projects
and estimates related to expected future revenues, expenses and cash flows then are discounted back to present day amounts. Based upon these estimates, material net cash flows from the acquired business were expected to occur during the fiscal
fourth quarter of 2000. These cash flows were discounted using a weighted average discount rate of 20%. Based upon the expenses incurred and the development time invested in the products prior to the acquisition and the estimated expenses and
development time to complete the products, the Company determined the products purchased in aggregate, including products under development and completed products, to be approximately 73% complete at the time of acquisition. The Company completed
the in-process research and development in the fiscal third quarter of 2001.



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During the fiscal year ended September 30, 2001, the Company recorded a charge of $6.1 million for impairment of goodwill
and other intangible assets related to its acquisition of StarNet. This charge was based on the difference of the carrying value and the estimated discounted future operating cash flows of the goodwill and other intangible assets related to this
acquisition. Given the slower than anticipated growth in the market for IAD products, the technology for which the Company acquired from StarNet, the Company determined the net carrying value of the goodwill and other intangible assets related to
the StarNet acquisition would not be fully recovered.



The Company performed
the annual impairment test as required by SFAS No. 142 on August 31, 2002 for the remaining goodwill acquired in connection with the StarNet acquisition, and determined that this goodwill was fully impaired. For this reason, the Company recorded a
charge of $1.8 million to its Consolidated Statement of Operations in the fiscal year ended September 30, 2002 representing the full impairment of the remaining goodwill acquired in connection with the StarNet acquisition.



(3) Intangible Assets



The Companys intangible assets at September 30, 2002 consist primarily of identifiable intangible assets acquired in connection with
the Cayman acquisition, which the Company is amortizing on a straight-line basis over their estimated useful lives, and goodwill acquired in connection with the acquisitions of WebOrder and netOctopus which the Company is not amortizing.



On July 1, 2001, the Company adopted SFAS No. 141, Business Combinations, and on
October 1, 2001, the Company early adopted SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires that the purchase method of accounting be used for all business combinations and that certain acquired intangible assets be
recognized as assets apart from goodwill. SFAS No. 142 provides that goodwill should not be amortized but instead be tested for impairment annually at the reporting unit level.



In accordance with SFAS No. 142, the Company completed the transitional impairment test of its goodwill during the three months ended March
31, 2002. That effort, and preliminary assessments of the Companys goodwill, indicated no adjustment was required upon adoption of this pronouncement. The impairment testing is performed in two steps: (i) the determination of impairment, based
upon the fair value of a reporting unit as compared to its carrying value, and (ii) if there is an indication of impairment, this step measures the amount of impairment loss by comparing the implied fair value of goodwill with the carrying amount of
that goodwill. The Company performed the annual impairment test required by SFAS No. 142 on August 31, 2002 for its two reporting units. To complete the first step of the analysis, the Company discounted the cash flows generated by its Internet
equipment and Web platforms reporting units 5 year plans and applied the Gordon Growth factor to determine the residual value. To complete the second step of the analysis, the Company used an independent third party valuation consultant to
determine the value of the intangible assets of the Internet equipment reporting unit as compared to the excess of fair value over the net book value of the assets of the Internet equipment reporting unit. At August 31, 2002, the implied fair value
of the Companys Internet equipment reporting unit was found to be less than its carrying amount and as a result, the Company recorded a charge to its Consolidated Statement of Operations in the fiscal year ended September 30, 2002 of $9.1
million, representing full impairment of the remaining goodwill acquired in connection with the acquisitions of Cayman and StarNet.



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Detail of the Companys identifiable intangible assets, by reporting unit, as of September 30, 2002 is as follows:



|                            |  | Acquisition date |  | Balance atSeptember 30,2001 |     | Identifiable intangibleassetsacquiredduring theperiod |   | Accumulatedamortization |  | Balance at September 30,2002
|--------------------------- |  | ---------------- |  | --------------------------- | --- | ----------------------------------------------------- | - | ----------------------- |  | ----------------------------
|                            |  | (in thousands)  
|Internet equipment:         |  |                  |  |                             |     |                                                       |   |                         |  |                             
|Acquired technology         |  | October 2001     |  | $                           |    |                                                       | $ | 6,690                   |  | $                           
|Sales channel relationships |  | October 2001     |  |                             |    |                                                       |   | 1,380                   |  |                             
|                            |  |                  |  |                             |     |                                                       |   |                         |  |                             
|Subtotal                    |  |                  |  |                             |    |                                                       |   | 8,070                   |  |                             
|Web platforms:              |  |                  |  |                             |     |                                                       |   |                         |  |                             
|Marketing license           |  | July 1999        |  |                             | 688 |                                                       |   |                        |  |                             
|                            |  |                  |  |                             |     |                                                       |   |                         |  |                             
|Total                       |  |                  |  | $                           | 688 |                                                       | $ | 8,070                   |  | $                           
|                            |  |                  |  |                             |     |                                                       |   |                         |  |                             



Estimated amortization expense for the
next five years related to the Companys identifiable intangible assets as of September 30, 2002 is as follows:



|Fiscal years ended September 30, |  | 2003           |       | 2004 |   | 2005  |  | 2006 |       | 2007
|-------------------------------- |  | -------------- | ----- | ---- | - | ----- |  | ---- | ----- | ----
|                                 |  | (in thousands)
|Internet equipment:              |  |                |       |      |   |       |  |      |       |     
|Acquired technology              |  | $              | 1,152 |      | $ | 1,152 |  | $    | 1,152 |     
|Sales channel relationships      |  |                | 345   |      |   | 345   |  |      | 345   |     
|                                 |  |                |       |      |   |       |  |      |       |     
|Subtotal                         |  |                | 1,497 |      |   | 1,497 |  |      | 1,497 |     
|Web platforms:                   |  |                |       |      |   |       |  |      |       |     
|Marketing license                |  |                | 138   |      |   |      |  |      |      |     
|                                 |  |                |       |      |   |       |  |      |       |     
|Total                            |  | $              | 1,635 |      | $ | 1,497 |  | $    | 1,497 |     
|                                 |  |                |       |      |   |       |  |      |       |     



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Detail of the Companys goodwill, by reporting unit, as of September 30, 2002 is as follows:



|                     |  | Acquisitiondate |  | Balance atSeptember 30,2001 |       | Goodwill acquiredduringtheperiod |   |       | Goodwill impairment charges |  | Balance at September 30,2002
|-------------------- |  | --------------- |  | --------------------------- | ----- | -------------------------------- | - | ----- | --------------------------- |  | ----------------------------
|                     |  | (in thousands) 
|Internet equipment:  |  |                 |  |                             |       |                                  |   |       |                             |  |                             
|Cayman               |  | October 2001    |  | $                           |      |                                  | $ | 7,325 |                             |  | $                           
|StarNet Technologies |  | October 1999    |  |                             | 1,821 |                                  |   |      |                             |  |                             
|                     |  |                 |  |                             |       |                                  |   |       |                             |  |                             
|                     |  |                 |  | $                           | 1,821 |                                  | $ | 7,325 |                             |  | $                           
|                     |  |                 |  |                             |       |                                  |   |       |                             |  |                             
|Web platforms:       |  |                 |  |                             |       |                                  |   |       |                             |  |                             
|WebOrder             |  | March 2000      |  | $                           | 572   |                                  | $ | (53   | )                           |  | $                           
|netOctopus           |  | December 1998   |  |                             | 365   |                                  |   | 100   |                             |  |                             
|                     |  |                 |  |                             |       |                                  |   |       |                             |  |                             
|                     |  |                 |  | $                           | 937   |                                  | $ | 47    |                             |  | $                           
|                     |  |                 |  |                             |       |                                  |   |       |                             |  |                             
|Total goodwill       |  |                 |  | $                           | 2,758 |                                  | $ | 7,372 |                             |  | $                           
|                     |  |                 |  |                             |       |                                  |   |       |                             |  |                             



The following table reflects the
consolidated results adjusted as though the adoption of SFAS No. 142 occurred at the beginning of the fiscal year ended September 30, 2000:



|Fiscal year ended September 30,               |  | 2002 |         |   | 2001 |   |         | 2000 | 
|--------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | ---- | 
|Net loss:                                     |  |      |         |   |      |   |         |      | 
|As reported                                   |  | $    | (34,267 | ) |      | $ | (43,111 | )    | 
|Less: amortization of goodwill                |  |      |        |   |      |   | 5,049   |      | 
|                                              |  |      |         |   |      |   |         |      | 
|Adjusted net loss                             |  | $    | (34,267 | ) |      | $ | (38,062 | )    | 
|                                              |  |      |         |   |      |   |         |      | 
|Basic and diluted net loss per share:         |  |      |         |   |      |   |         |      | 
|As reported                                   |  | $    | (1.86   | ) |      | $ | (2.41   | )    | 
|Less: amortization of goodwill                |  |      |        |   |      |   | 0.28    |      | 
|                                              |  |      |         |   |      |   |         |      | 
|Adjusted basic and diluted net loss per share |  | $    | (1.86   | ) |      | $ | (2.13   | )    | 
|                                              |  |      |         |   |      |   |         |      | 



(4) Discontinued Operations



In August 1998, the Company sold its local area network (LAN) Division
including the LAN Divisions products, accounts receivable, inventory, property and equipment, intellectual property and other related assets to Farallon Communications, Inc. (Farallon), formerly known as Farallon Networking Corporation, a
Delaware corporation and an affiliate of Gores Technology Group. The consideration the Company received for the sale of the LAN Division consisted of the following (in thousands):



|Cash                 |  | $ | 2,000
|-------------------- |  | - | -----
|Note receivable      |  |   | 888  
|Royalties receivable |  |   | 1,782
|Warrants             |  |   | 189  
|                     |  |   |      
|                     |  | $ | 4,859
|                     |  |   |      



The note receivable was for $1.0
million which was payable on July 31, 2000, bearing interest at 8% per annum. Farallon paid the note and accrued interest in its entirety on May 9, 2000.



The royalties receivable were based upon Farallons total annual revenues over each of the next five fiscal years ending on July 31, 2003. If total annual revenues
of at least $15.0 million were reached, the royalty rate applies to total revenues, including the first $15.0 million. The value of the royalties accrued at the close of the transaction was based upon the present value of the Companys
assumptions as to the projected future revenue of the LAN Division. In accordance with the agreement, royalties accrued were not recorded to the extent that total consideration on the transaction exceeded the net asset value of the LAN Division
assets being sold.



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Additionally, the Company received and valued a warrant to purchase up to 5% of the equity of Farallon as of the closing
of the transaction. Subsequently, the Company entered into an agreement with the buyer to reduce the warrant entitlement to 3% of the equity of Farallon.



During fiscal year 2000, Farallon bought out its royalty obligation in its entirety for an amount in excess of the receivable on the Companys balance sheet. In
addition, the Company exercised its warrant in Farallon and sold the shares received upon exercise of the warrant. These transactions resulted in income of $1.3 million, net of taxes, and are included in the gain on sale from discontinued operations
for fiscal year 2000. The gain on sale from discontinued operations also represented the reversal of a liability recorded for the excess space created at the Companys Alameda, California headquarters that the Company believed could not be
subleased to third parties at the time of sale. During fiscal year 2000, the Company found alternative uses for this excess space.



For fiscal year 2001, the gain on sale of discontinued operation was primarily related to accounts receivable that were collected above amounts agreed upon in the sale
transaction.



(5) Inventories



Inventories, net consisted of the following:



|September 30,   |  | 2002           |       | 2001
|--------------- |  | -------------- | ----- | ----
|                |  | (in thousands)
|Raw materials   |  | $              | 3,646 |     
|Work in process |  |                | 85    |     
|Finished goods  |  |                | 2,528 |     
|                |  |                |       |     
|                |  | $              | 6,259 |     
|                |  |                |       |     



(6) Furniture, Fixtures, and
Equipment



Furniture, fixtures, and equipment consisted of the following:



|September 30,                             |  | 2002           |         |   | 2001 |  
|----------------------------------------- |  | -------------- | ------- | - | ---- | -
|                                          |  | (in thousands) |        
|Machinery and equipment                   |  | $              | 3,655   |   |      | $
|Furniture and fixtures                    |  |                | 2,804   |   |      |  
|Computers                                 |  |                | 8,733   |   |      |  
|Leasehold improvements                    |  |                | 407     |   |      |  
|                                          |  |                |         |   |      |  
|                                          |  |                | 15,599  |   |      |  
|Accumulated depreciation and amortization |  |                | (10,092 | ) |      |  
|                                          |  |                |         |   |      |  
|                                          |  | $              | 5,507   |   |      | $
|                                          |  |                |         |   |      |  



(7) Income Taxes



Total income tax expense (benefit) for fiscal years ended September 30, 2002, 2001, and 2000
is allocated as follows:



|September 30,           |  | 2002           |   | 2001 |   | 2000 | 
|----------------------- |  | -------------- | - | ---- | - | ---- | 
|                        |  | (in thousands) |  
|Continuing operations   |  | $              |  |      | $ |     | 
|Discontinued operations |  |                |  |      |   |     | 
|                        |  |                |   |      |   |      | 
|                        |  | $              |  |      | $ |     | 
|                        |  |                |   |      |   |      | 



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



|September 30,                            |  | 2002           |         |   | 2001 |   |         | 2000 | 
|---------------------------------------- |  | -------------- | ------- | - | ---- | - | ------- | ---- | 
|                                         |  | (in thousands) |        
|Computed expected tax (benefit) of 34% |  | $              | (11,651 | ) |      | $ | (14,182 | )    | 
|Net operating loss not benefited         |  |                | 10,601  |   |      |   | 9,405   |      | 
|Research credits                         |  |                |        |   |      |   |        |      | 
|Investment impairment                    |  |                | 1,001   |   |      |   |        |      | 
|Amortization of goodwill                 |  |                | 18      |   |      |   | 4,777   |      | 
|State tax and other, net                 |  |                | 31      |   |      |   |        |      | 
|                                         |  |                |         |   |      |   |         |      | 
|                                         |  | $              |        |   |      | $ |        |      | 
|                                         |  |                |         |   |      |   |         |      | 



The tax effects of temporary
differences that give rise to significant portions of the deferred tax assets are presented below:



|September 30,                                  |  | 2002           |         |   | 2001 |   |         | 2000 | 
|---------------------------------------------- |  | -------------- | ------- | - | ---- | - | ------- | ---- | 
|                                               |  | (in thousands) |        
|Deferred tax assets:                           |  |                |         |   |      |   |         |      | 
|Reserves and accruals not currently deductible |  | $              | 1,740   |   |      | $ | 1,163   |      | 
|Deferred rent                                  |  |                | 10      |   |      |   |        |      | 
|Research and other credits                     |  |                | 2,822   |   |      |   | 3,712   |      | 
|Tangible and intangible assets                 |  |                | 6,431   |   |      |   | 616     |      | 
|Net operating losses                           |  |                | 24,594  |   |      |   | 18,254  |      | 
|                                               |  |                |         |   |      |   |         |      | 
|Gross deferred assets                          |  |                | 35,597  |   |      |   | 23,745  |      | 
|Less valuation allowance                       |  |                | (35,597 | ) |      |   | (23,745 | )    | 
|                                               |  |                |         |   |      |   |         |      | 
|Total deferred tax assets                      |  |                |        |   |      |   |        |      | 
|                                               |  |                |         |   |      |   |         |      | 
|Deferred tax liabilities:                      |  |                |         |   |      |   |         |      | 
|Tangible and intangible assets                 |  |                |        |   |      |   |        |      | 
|                                               |  |                |         |   |      |   |         |      | 
|Total deferred tax liabilities                 |  |                |        |   |      |   |        |      | 
|                                               |  |                |         |   |      |   |         |      | 
|Net deferred tax assets (liabilities)          |  | $              |        |   |      | $ |        |      | 
|                                               |  |                |         |   |      |   |         |      | 



The net change in the total valuation
allowance for fiscal years 2002 and 2001 was an increase of $11.9 million and $10.0 million, respectively.



At September 30, 2002 and 2001, the Company believed that based upon available objective evidence, there was sufficient uncertainty regarding the realizability of 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.



At September 30, 2002, the Company had net operating loss carryforwards of approximately $63.7 million for federal tax purposes and $33.1
million for state tax purposes. If not utilized, the federal net operating loss carryforwards will expire in various years beginning in 2018 through 2022 and the state net operating loss carryforwards will expire in various years beginning 2002
through 2013.



At September 30, 2002, the Company had research credit
carryforwards of approximately $3.2 million for federal tax purposes and $1.6 million for state tax purposes. If not earlier utilized, the federal research credit carryforwards will expire in various years beginning 2006 through 2022. The state
research credits carry forward indefinitely until utilized. The Company has California manufacturing credit carryforwards of approximately $0.1 million, which expire in various years beginning 2006 through 2008.



At September 30, 2002, the Company also had minimum tax credit carryforwards of approximately
$114,000 for federal tax purposes and $169,000 for state tax purposes. These credits carryforward indefinitely until utilized.



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Federal and California state tax laws impose substantial restrictions on the utilization of net operating loss
carryforwards 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 will be subject to annual limitations in future years.



(8) Stockholders Equity and Stock Option Plans



In April 1996, the Company was reincorporated in the State of Delaware. The Companys authorized capital consists of 50,000,000 shares of $0.001 par value common stock and 5,000,000 shares of $0.001 par value
preferred stock. There was no preferred stock issued or outstanding at September 30, 2002.



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.



Common Stock Warrant. A
warrant to purchase 5,000 shares of common stock was issued in fiscal year 2001 for consulting services provided. The exercise price of the warrant is $5.625, the fair market value of the Companys common stock on the date of grant. The Company
recognized an expense of $16,000 for the estimated fair value of the warrant on the date of grant, as determined by the Black-Scholes option valuation model. The warrant will expire on January 11, 2003 unless exercised on or prior to that date.



Stock Option Plans. On April 16, 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 Board of Director members of 25,000 shares on the effective date of the Companys initial public offering at the initial offering price. These options were granted
to two non-employee Board of Director members, of which one currently remains on the Companys Board of Directors. Thereafter, each new director will be granted an option to purchase 25,000 shares of Common Stock on the date he or she becomes a
Board member of the Company at the then current fair market value. Initial options issued to Board members after January 13, 2000 are exercisable in four successive and equal annual installments over the non-employee Board members period of
continued service as a Board member, beginning one year from the grant date of the option. In addition, each non-employee Board member who is serving on the date of the Annual Stockholders Meeting is granted on the date of the meeting a
non-statutory option to purchase 6,000 shares of common stock. The annual options become exercisable in full upon completion of one years Board service measured from the option grant date. Options issued under the 1996 Plan normally vest over
four years commencing on the date of the grant, although other vesting schedules may be approved by the Compensation Committee of the Board of Directors in their discretion.



On October 18, 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 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



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nonqualified stock options that do not qualify as incentive stock options within the meaning of Section 422(b) of the
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. 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, 2002, there were no restricted stock awards granted under the 2000 Plan.



On December 13, 2001, subject to approval by the Companys stockholders, 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 on January 30, 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.



The initial number of shares of common stock of the Company, which may be issued under the
2002 Plan, is 750,000 shares. The number of shares of common stock available for issuance under the 2002 Plan will automatically increase 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.



Included in the 2002 Plan is a provision for the automatic grant of non-statutory options to
non-employee Board of Director members of 25,000 shares on the on the date he or she becomes a Board member of the Company at the then current fair market value. Initial options issued to Board members are exercisable in four successive and equal
annual installments over the non-employee Board members period of continued service as a Board member, beginning one year from the grant date of the option. In addition, each non-employee Board member who is serving on the date of the Annual
Stockholders Meeting is granted on the date of the meeting a non-statutory option to purchase 6,000 shares of common stock. The annual options become exercisable in full upon completion of one years Board service measured from the option grant
date. 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.



As of September 30, 2002, the Company had 7,199,088 shares subject to outstanding options and
274,537 shares available for grant.



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



|Stock options                        |  | Shares under options |   |  | Weighted average exercise price
|------------------------------------ |  | -------------------- | - |  | -------------------------------
|Outstanding as of September 30, 1999 |  | 4,040,520            |   |  | $                              
|Options granted                      |  | 1,564,823            |   |  |                                
|Options exercised                    |  | (1,203,369           | ) |  |                                
|Options cancelled                    |  | (382,494             | ) |  |                                
|                                     |  |                      |   |  |                                
|Outstanding as of September 30, 2000 |  | 4,019,480            |   |  |                                
|Options granted                      |  | 3,529,000            |   |  |                                
|Options exercised                    |  | (239,042             | ) |  |                                
|Options cancelled                    |  | (4,041,310           | ) |  |                                
|                                     |  |                      |   |  |                                
|Outstanding as of September 30, 2001 |  | 3,268,128            |   |  |                                
|Options granted                      |  | 4,729,830            |   |  |                                
|Options exercised                    |  | (99,231              | ) |  |                                
|Options cancelled                    |  | (699,639             | ) |  |                                
|                                     |  |                      |   |  |                                
|Outstanding as of September 30, 2002 |  | 7,199,088            |   |  | $                              
|                                     |  |                      |   |  |                                
|Exercisable                          |  | 3,436,653            |   |  | $                              
|                                     |  |                      |   |  |                                



The fair market value, based upon the
Black-Scholes option valuation model, of the options granted during fiscal years 2002, 2001 and 2000 were $2.75, $4.40 and $31.22, respectively,



The following table summarizes information about the Companys stock options outstanding at September 30, 2002:



|                         |  | Options outstanding                                  |  | Options exercisable                                  
|------------------------ |  | ---------------------------------------------------- |  | -----------------------------------------------------
|Range of exercise prices |  | Number ofoutstanding shares as of September 30, 2002 |  | Weighted  average remaining contractual life (years)
|$0.6105  $1.2000        |  | 799,400                                              |  | 9.59                                                 
|1.6000    3.3300        |  | 844,712                                              |  | 8.89                                                 
|3.5500    3.6000        |  | 552,638                                              |  | 9.00                                                 
|3.6100    3.7000        |  | 834,963                                              |  | 9.37                                                 
|3.8438    4.0000        |  | 567,061                                              |  | 8.87                                                 
|4.2400    4.2500        |  | 882,487                                              |  | 8.19                                                 
|4.3700    5.5313        |  | 598,098                                              |  | 5.88                                                 
|5.5500    5.5500        |  | 1,241,880                                            |  | 9.25                                                 
|5.6250    48.000        |  | 877,849                                              |  | 5.58                                                 
|                         |  |                                                      |  |                                                      
|                         |  | 7,199,088                                            |  | 8.35                                                 
|                         |  |                                                      |  |                                                      



1996 Employee Stock Purchase
Plan. In April 1996, the Board of Directors adopted the 1996 Employee Stock Purchase Plan (the Purchase Plan) and reserved 300,000 shares of common stock for issuance under the Purchase Plan. To date an additional 1,950,000 shares have been
approved for issuance under the 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 Purchase Plan totaled 429,180 in fiscal year 2002; 250,155 in fiscal
year 2001; and 130,306 in fiscal year 2000. As of September 30, 2002, 1,340,755 shares have been issued under the Purchase Plan and 909,245 shares were reserved for future issuances under the plan.



Option Exchange Offer. In April 2001, the Companys Board of Directors approved
an offer by the Company to its employees who regularly work more than 30 hours per week, and to its directors, an offer to exchange (the Offer to Exchange) all options to purchase shares of the Companys common stock that are outstanding under



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the 1996 Plan with an exercise price above $10.00 per share, for new options to purchase shares of common stock to be
granted by the Company under the Plan. The key features of the new options are as follows:



| |  |  | The number of shares subject to the new option will equal the number of shares subject to cancelled options, subject to adjustments for any stock splits, stock dividends and similar
events.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The exercise price of the new option will equal the closing sale price of the Companys common stock as reported on the Nasdaq National Market on the replacement grant date
which shall be no sooner than six months and one day from the date of the exchange.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The new option will vest and become exercisable on the same dates with respect to the same number of shares as the cancelled options.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The new option will be an incentive stock option to the extent possible under applicable tax laws.
| | - |  | --------------------------------------------------------------------------------------------------



| |  |  | The new option will have other terms and conditions that are substantially the same as those of the cancelled option.
| | - |  | ---------------------------------------------------------------------------------------------------------------------



Pursuant to the Offer to Exchange, on June 4, 2001 the Company accepted for exchange, options
to purchase an aggregate of 1,509,911 shares of the Companys common stock, representing approximately 86.5% of the shares subject to options that were eligible to be exchanged under the Offer to Exchange. On December 31, 2001, pursuant to the
Offer to Exchange, the Compensation Committee of the Board of Directors approved the grant of 912,066 new options. The exercise price of the new options was $5.55 per share, which was the closing sale price of the Companys common stock as
reported by the Nasdaq National Market.



Pro Forma Disclosure 
Compensatory Stock Arrangements. Stock options are granted at not less than the fair market value of the common stock on the date of grant. All options expire no later than 10 years from the date of grant. The Company has adopted the disclosure
provisions of SFAS No. 123,Accounting for Stock Based Compensation, which was issued in October 1995. As permitted by the provisions of SFAS No. 123, the Company applies APB Opinion 25 and related interpretations in accounting for its stock
option plans.



If the Company had elected to recognize compensation cost based
on the fair value of the options granted at grant date and the fair value of shares purchased under the plan as prescribed by SFAS No. 123, net loss and per share results would have been the pro forma amounts indicated in the table below:



|Fiscal years ended September 30,                      |  | 2002                                     |         |   | 2001 |   |         | 2000 | 
|----------------------------------------------------- |  | ---------------------------------------- | ------- | - | ---- | - | ------- | ---- | 
|                                                      |  | (in thousands, except per share amounts) |        
|Net lossas reported                                  |  | $                                        | (34,267 | ) |      | $ | (43,111 | )    | 
|Add: Compensation cost as prescribed by SFAS No. 123  |  |                                          | 7,693   |   |      |   | 11,202  |      | 
|                                                      |  |                                          |         |   |      |   |         |      | 
|Net losspro forma                                    |  | $                                        | (41,960 | ) |      | $ | (54,313 | )    | 
|                                                      |  |                                          |         |   |      |   |         |      | 
|Basic and diluted net loss per shareas reported      |  | $                                        | (1.86   | ) |      | $ | (2.41   | )    | 
|                                                      |  |                                          |         |   |      |   |         |      | 
|Basic and diluted net loss per sharepro forma        |  | $                                        | (2.27   | ) |      | $ | (3.03   | )    | 
|                                                      |  |                                          |         |   |      |   |         |      | 
|Shares used in the per share calculationsas reported |  |                                          | 18,455  |   |      |   | 17,902  |      | 
|                                                      |  |                                          |         |   |      |   |         |      | 
|Shares used in the per share calculationspro forma   |  |                                          | 18,455  |   |      |   | 17,902  |      | 
|                                                      |  |                                          |         |   |      |   |         |      | 



The effect on net loss and net loss
per share is not expected to be indicative of the effects on results in future years.



The effect of applying SFAS No. 123 for disclosing compensation costs may not be representative of the effects on reported net loss for the future years as pro forma net loss reflects compensation costs only for stock options granted
beginning in fiscal year 1997. The Black-Scholes Single Option weighted average fair value of employee stock options granted during fiscal years 2002, 2001 and 2000 was $2.75, $4.40 and $31.22, respectively.



The Black-Scholes option valuation model was developed for use in estimating the fair value
of traded options, which have no vesting restrictions and are fully transferable while the Companys employee stock options have



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characteristics significantly different from those of traded options. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price volatility. The fair value of each option grant and share purchased under the Purchase Plan are estimated on the date of grant or share purchase using the Black-Scholes
option-pricing model with the following assumptions:



|Years ended September 30, |  | 2002  |   |  | 2001  |   |  | 2000  |  
|------------------------- |  | ----- | - |  | ----- | - |  | ----- | -
|Expected volatility       |  | 110.3 | % |  | 108.0 | % |  | 103.5 | %
|Risk-free interest rate   |  | 2.63  | % |  | 4.12  | % |  | 5.77  | %
|Expected dividend yield   |  |      |   |  |      |   |  |      |  



The expected lives of options under
the Employee Stock Option and Employee Stock Purchase Plans are estimated at four years and six months, respectively, for all years presented.



(9) Commitments and Contingencies



Leases.The Company conducts its operations in leased facilities and with equipment under operating lease agreements expiring at various dates through 2005.
The following is a schedule of future minimum rental payments required under these leases that have initial or remaining non-cancelable lease terms in excess of one year (in thousands):



|Fiscal years ended September 30,         |  | 2003 |       | 2004 |   | 2005 |  | Total
|---------------------------------------- |  | ---- | ----- | ---- | - | ---- |  | -----
|Facility and operating lease commitments |  | $    | 1,535 |      | $ | 926  |  | $    



Total rental expense for all operating
leases amounted to $2.0 million, $1.9 million and $1.7 million for fiscal years 2002, 2001 and 2000, respectively.



Subsequent to September 30, 2002, the Company entered into a lease for new headquarters facilities located in Emeryville, California. The future minimum rental payments
related to this new lease are not included in the table above. The following is a schedule of the future minimum rental payments required under this new lease agreement (in thousands):



|Fiscal years ended September 30,         |  | 2003 |     | 2004 |   | 2005 |  | 2006 |     | 2007 |   | 2008 |  | Total
|---------------------------------------- |  | ---- | --- | ---- | - | ---- |  | ---- | --- | ---- | - | ---- |  | -----
|Facility and operating lease commitments |  | $    | 101 |      | $ | 624  |  | $    | 642 |      | $ | 663  |  | $    



Litigation. The Company is
involved in various legal matters that have arisen in the normal course of business. Management believes, after consultation with counsel, any liability that may result from the disposition of such legal matters will not have a material adverse
effect on the Companys operating results and financial condition.



Plan for Savings and Investments. The Company maintains a plan for savings and investments under which eligible employees may contribute up to 15% of their annual compensation. In addition, the Company may make discretionary
retirement contributions to the plan. No discretionary retirement contributions were made in any period presented.



(10) Segment, Geographic and Significant Customer Information



Segment Information.The Company adopted the provisions of SFAS No. 131, Disclosure about Segments of an Enterprise and Related Information, during fiscal
year 1999. SFAS No. 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 (CODM) uses for operational decisions and assessing financial performance. Netopias Chief Executive Officer (CEO)
is considered the Companys CODM. For purposes of making operating decisions and assessing financial performance, the Companys CEO reviews financial information presented on a consolidated basis accompanied by disaggregated information
for revenues and gross margins by product group as well as



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revenues by geographic region and by customer. Operating expenses and assets are not disaggregated by product group for
purposes of making operating decisions and assessing financial performance.



The Company generates revenue from two groups of products and services. Disaggregated financial information regarding the operating segments is as follows:



|                               |  | September 30, 2002 |        |   | September 30, 2001 |   |        | September 30, 2000 | 
|------------------------------ |  | ------------------ | ------ | - | ------------------ | - | ------ | ------------------ | 
|                               |  | Internet equipment |        |   | Web platform       |   |        | Total              | 
|                               |  | (in thousands)     |       
|Revenue                        |  | $                  | 45,551 |   |                    | $ | 18,513 |                    | 
|Cost of revenues               |  |                    | 32,323 |   |                    |   | 639    |                    | 
|                               |  |                    |        |   |                    |   |        |                    | 
|Gross profit                   |  |                    | 13,228 |   |                    |   | 17,874 |                    | 
|Gross margin                   |  |                    | 29     | % |                    |   | 97     | %                  | 
|Unallocated operating expenses |  |                    |        |   |                    |   |        |                    | 
|                               |  |                    |        |   |                    |   |        |                    | 
|Operating loss                 |  |                    |        |   |                    |   |        |                    | 
|                               |  |                    |        |   |                    |   |        |                    | 



Geographic Information. The
Company sells its products and provides services worldwide through a direct sales force, independent distributors, and value-added resellers. It currently operates in four regions: United States, Europe, Canada, and Asia Pacific and other. Revenues
outside of the United States are primarily export sales denominated in United States dollars. The Company does not have material operating assets outside of the United States. Disaggregated financial information regarding the Companys revenues
by geographic region for the fiscal years 2002, 2001 and 2000 is as follows:



|Fiscal year ended September 30, |  | 2002             |        |  | 2001 |   |  | 2000 |       
|------------------------------- |  | ---------------- | ------ |  | ---- | - |  | ---- | ------
|                                |  | ($ in thousands) |       
|Europe                          |  | $                | 10,544 |  | 16   | % |  | $    | 9,378 
|Canada                          |  |                  | 1,046  |  | 2    | % |  |      | 1,168 
|Asia Pacific and other          |  |                  | 1,602  |  | 3    | % |  |      | 1,030 
|                                |  |                  |        |  |      |   |  |      |       
|Subtotal international revenue  |  |                  | 13,192 |  | 21   | % |  |      | 11,576
|United States                   |  |                  | 50,872 |  | 79   | % |  |      | 65,742
|                                |  |                  |        |  |      |   |  |      |       
|Total revenues                  |  | $                | 64,064 |  | 100  | % |  | $    | 77,318
|                                |  |                  |        |  |      |   |  |      |       



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



Customer Information. Historically,
the Company has sold its products to competitive local exchange carriers (CLECs), distributors, ILECs, Internet service providers (ISPs) and directly to end-users. Disaggregated financial information regarding the Companys customers who
accounted for 10% or more of the Companys revenue for the fiscal years 2002, 2001 and 2000 is as follows:



|Fiscal year ended September 30,                  |  | 2002             |       |  | 2001 |   |  | 2000 |       
|------------------------------------------------ |  | ---------------- | ----- |  | ---- | - |  | ---- | ------
|                                                 |  | ($ in thousands) |      
|Covad Communications Company (Covad) (a)         |  | $                | 8,481 |  | 13   | % |  | $    | 12,565
|Ingram Micro Inc. (Ingram Micro)                 |  |                  | 7,970 |  | 12   | % |  |      | 8,380 
|Rhythms NetConnections, Inc. (Rhythms) (b)       |  |                  |      |  |     |   |  |      | 8,204 
|NorthPoint Communications, Inc. (NorthPoint) (c) |  |                  |      |  |     |   |  |      | 2,415 

---

|(a) |  | Covad filed a voluntary petition under the Bankruptcy Act in August 2001 as part of a capital-restructuring plan. Covad emerged from bankruptcy in December 2001and has announced
that it has adequate cash to allow it to become cash flow positive by the latter half of 2003.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(b) |  | Rhythms received Bankruptcy Court approval and completed the sale of a substantial portion of its assets to Worldcom Group in December 2001.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------

|(c) |  | NorthPoint ceased operations during March 2001.
|--- |  | -----------------------------------------------



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No other customers during the fiscal years ended September 30, 2002, 2001 and 2000 accounted for 10% or more of the
Companys total revenues. For fiscal year 2002, there were four customers who each individually represented at least 5% of the Companys revenues and in the aggregate, accounted for 36% of the Companys total revenues. For fiscal year
2001, there were three customers who each individually represented at least 5% of the Companys revenues and in the aggregate, accounted for 38% of the Companys total revenues. For fiscal year 2000, there were five customers who each
individually represented at least 5% of the Companys total revenues and in aggregate, accounted for 46% of the Companys total revenues.



The following table sets forth the accounts receivable balance for the customers identified above along with such data expressed as a percentage of total accounts
receivable:



|Fiscal year ended September 30, |  | 2002             |       |  | 2001 |   |  | 2000 |      
|------------------------------- |  | ---------------- | ----- |  | ---- | - |  | ---- | -----
|                                |  | ($ in thousands) |      
|Covad                           |  | $                | 1,144 |  | 11   | % |  | $    | 1,649
|Ingram Micro                    |  |                  | 1,480 |  | 15   | % |  |      | 1,881
|Rhythms(a)                      |  |                  |      |  |     | % |  |      |     
|NorthPoint(b)                   |  |                  |      |  |     | % |  |      |     

---

|(a) |  | Beginning June 2001, Rhythms prepaid for all purchases of the Companys broadband Internet equipment products, and consequently accounted for no additional amounts of accounts
receivable.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(b) |  | NorthPoint ceased operations during March 2001. During the three months ended December 31, 2000, the Company fully reserved approximately $1.7 million related to NorthPoints
outstanding accounts receivable balance. Beginning January 2001, NorthPoint prepaid for all purchases of the Companys broadband Internet equipment products, and consequently accounted for no additional amounts of accounts receivable other than
the amount previously fully reserved. During fiscal 2002, in a private transaction whereby the Company sold its claim in the NorthPoint bankruptcy proceedings, the Company recovered approximately $0.2 million of the $1.7 million receivable for which
the Company had recorded a provision for doubtful accounts in fiscal 2001.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



(11) Long-Term Investments



In fiscal
year 2001, the Company purchased $2.0 million of Series D Preferred stock in MegaPath Networks Inc. (MegaPath). MegaPath offers high-speed DSL access and eCommerce and Web hosting services to small and medium size businesses. During fiscal years
2002 and 2001, MegaPath purchased $0.9 million and $0.1 million, respectively, of the Companys products. At September 30, 2002, MegaPaths accounts receivable with the Company was $0.2 million. In fiscal year 2002, the Company recorded a
$1.4 million unrealized loss on impaired securities related to its investment in MegaPath. This impairment was recorded in connection with the valuation of MegaPath in its most recent round of financing, in which the Company purchased $0.4 million
of Series E Preferred Stock in MegaPath. The Company currently owns approximately 4.0% of MegaPath. Although there is no public market for MegaPaths stock, the Company believes that the market value of its investment in Series D and Series E
Preferred shares is not less than the Companys $1.0 million carrying value at September 30, 2002.



In fiscal year 2000, the Company purchased $2.0 million of Series C Preferred Stock in Everdream Corporation (Everdream). Everdream provides outsourced information technology (IT) expertise, products and services that
enable small and medium size businesses to focus on their core competencies. During fiscal year 2000, the Company entered into an agreement with Everdream to host a co-branded version of the Companys eStore platform for Everdreams
customers. During fiscal years 2001 and 2000, Everdream purchased $5,000 and $0.1 million, respectively, of the Companys products. Everdream did not purchase any of the Companys products during fiscal year 2002 and did not account for
any accounts receivable at September 30, 2002. In fiscal year 2002, the Company recorded a $1.5 million unrealized loss on impaired securities related to its investment in Everdream. This impairment was recorded in connection with the valuation of
Everdream based upon its most recent round of financing. The Company currently owns approximately 2.5% of Everdream. Although there is no public market for Everdreams stock, the Company believes that the market value of these shares is not
less than the Companys $0.5 million carrying value at September 30, 2002.



In April 1999, the Company purchased $1.0 million of Series D-1 Preferred Stock of NorthPoint. Upon the initial public offering of the common stock of NorthPoint in May 1999, the Companys Series D-1 Preferred



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Stock converted into 55,555 shares of Class B common stock. During fiscal year 2001, the Company recorded an unrealized
loss on impaired securities to reflect the entire loss of the investment in NorthPoint.



(12) Restructuring Costs



During fiscal
year 2002, the Company recorded a restructuring charge of $0.5 million in connection with a reduction in the Companys workforce of approximately 24 people whose positions were determined to be redundant subsequent to the closing of the Cayman
acquisition. The charge consisted primarily of employee severance benefits. Details of the restructuring charge is as follows (in thousands):



|Total charge                  |  | $ | 482
|----------------------------- |  | - | ---
|Less:                         |  |   |    
|Amounts paid                  |  |   | 301
|Non-cash charges              |  |   | 58 
|                              |  |   |    
|Balance at September 30, 2002 |  | $ | 123
|                              |  |   |    



During fiscal year 2001, the Company
recorded a restructuring charge in connection with a reduction in the Companys workforce of approximately 27 people and costs to exit certain business activities. The charge consisted of employee severance benefits, costs related to exiting
certain Internet portal business activities and future lease costs associated with facilities to be abandoned. Details of the restructuring charge is as follows:



|                              |  | Employeeseverancebenefits |     | Internetportal exitcosts |   | Facility costs |  | Total
|----------------------------- |  | ------------------------- | --- | ------------------------ | - | -------------- |  | -----
|                              |  | (in thousands)           
|Total charge                  |  | $                         | 475 |                          | $ | 510            |  | $    
|Less:                         |  |                           |     |                          |   |                |  |      
|Amounts paid                  |  |                           | 320 |                          |   | 97             |  |      
|Non-cash charges              |  |                           | 63  |                          |   | 413            |  |      
|                              |  |                           |     |                          |   |                |  |      
|Balance at September 30, 2001 |  |                           | 92  |                          |   |               |  |      
|Less:                         |  |                           |     |                          |   |                |  |      
|Amounts paid                  |  |                           | 20  |                          |   |               |  |      
|                              |  |                           |     |                          |   |                |  |      
|Balance at September 30, 2002 |  | $                         | 72  |                          | $ |               |  | $    
|                              |  |                           |     |                          |   |                |  |      



(13) Integration Costs



During fiscal year 2002, the Company recorded a charge of $0.3 million
for integration costs incurred in connection with the Cayman acquisition for integrating Caymans customers, systems and operations. Details of the charge for integration costs is as follows:



|                              |  | Customerintegration communications |     | Systems integration |   | Total
|----------------------------- |  | ---------------------------------- | --- | ------------------- | - | -----
|                              |  | (in thousands)                    
|Total charge                  |  | $                                  | 269 |                     | $ | 40   
|Less amounts paid             |  |                                    | 269 |                     |   | 17   
|                              |  |                                    |     |                     |   |      
|Balance at September 30, 2002 |  | $                                  |    |                     | $ | 23   
|                              |  |                                    |     |                     |   |      



(14) Terminated Merger Costs



During fiscal year 2001, the Company recorded a non-recurring charge of
$2.6 million for costs incurred in connection with the terminated merger between the Company and Proxim. The non-recurring charge consisted of fees for accounting and legal advisory services, initiation of joint marketing and research



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and development expenses in anticipation of the merger that we had undertaken at the direction of Proxim, certain shared
merger costs, and other related expenses. Details of the charge is as follows:



|                              |  | Accountingand legaladvisoryservices |       | Joint marketing commitments |   | Joint researchand developmentcosts |  | Sharedmergercosts |     | Other |   | Total
|----------------------------- |  | ----------------------------------- | ----- | --------------------------- | - | ---------------------------------- |  | ----------------- | --- | ----- | - | -----
|                              |  | (in thousands)                      |       |                            
|Total charge                  |  | $                                   | 1,257 |                             | $ | 572                                |  | $                 | 429 |       | $ | 150  
|Less:                         |  |                                     |       |                             |   |                                    |  |                   |     |       |   |      
|Amounts paid                  |  |                                     | 1,257 |                             |   | 560                                |  |                   | 429 |       |   | 117  
|Non-cash charges              |  |                                     |      |                             |   |                                   |  |                   |    |       |   |     
|                              |  |                                     |       |                             |   |                                    |  |                   |     |       |   |      
|Balance at September 30, 2001 |  |                                     |      |                             |   | 12                                 |  |                   |    |       |   | 33   
|Less:                         |  |                                     |       |                             |   |                                    |  |                   |     |       |   |      
|Amounts paid                  |  |                                     |      |                             |   |                                   |  |                   |    |       |   |     
|Non-cash charges              |  |                                     |      |                             |   |                                   |  |                   |    |       |   |     
|                              |  |                                     |       |                             |   |                                    |  |                   |     |       |   |      
|Balance at September 30, 2002 |  | $                                   |      |                             | $ | 12                                 |  | $                 |    |       | $ | 33   
|                              |  |                                     |       |                             |   |                                    |  |                   |     |       |   |      



(15) Credit Facility



In June 2002, the Company entered into a Loan and Security Agreement with
Silicon Valley Bank (the Credit Facility). Pursuant to the Credit Facility, the Company may borrow up to $15.0 million from time to time from Silicon Valley Bank. The actual amount that can be borrowed at any times is determined using a
formula relating to the amount of eligible accounts receivable and inventory at the borrowing date. The term of the Credit Facility is two years. The Company must maintain an adjusted quick ratio, as defined as the ratio of (i) the
Companys unrestricted cash maintained at Silicon Valley Bank plus cash equivalents maintained at Silicon Valley Bank plus receivables and investments made on behalf of the Company through Silicon Valley Banks Investment Product Services
Division (ISP Division) to (ii) the Companys current liabilities plus the outstanding principal amount of any obligations less deferred revenues, of not less than 1.25 to 1 from June 2002 through December 31, 2002 and 1.5 to
1 from January 1, 2003 to the end of the term.



For the first year of the
Credit Facility, the Company must maintain a tangible net worth of not less than $32.0 million; the minimum tangible net worth covenant will be reset for the second year of the Credit Facility. On December 9, 2002, Silicon Valley Bank waived the
Companys default of the tangible net worth covenant for the first year as set forth in the Credit Facility agreement. There is no assurance that Silicon Valley Bank will waive any future default of this or any other covenant contained in the
Credit Facility agreement.



The Credit Facility bears interest at a rate equal
to the prime rate (the rate announced by Silicon Valley Bank as its prime rate) plus 0.75% per annum. At September 30, 2002, the interest rate was 5.5%. 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, 2002, the Company had outstanding borrowings, collateralized by the Companys accounts receivable and inventory, of $4.4 million. This borrowing
was recorded as a long-term liability on the Companys September 30, 2002 consolidated balance sheet based upon the contractual repayment terms that exceed one year from the balance sheet date. As of September 30, 2002, $0.8 million was
available under the Credit Facility. As of November 30, 2002, the Company had repaid the borrowings outstanding as of September 30, 2002.



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(16) 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, realized and unrealized gains and losses on foreign currency transactions as well as losses on impaired securities that the Company deems other than temporary. The following
table sets forth for the periods indicated, detail of the Companys other income (loss), net:



|Fiscal years ended September 30, |  | 2002 |        |   | 2001 |   |        | 2000 | 
|-------------------------------- |  | ---- | ------ | - | ---- | - | ------ | ---- | 
|Interest income                  |  | $    | 468    |   |      | $ | 2,619  |      | 
|Interest expense                 |  |      | (25    | ) |      |   |       |      | 
|Loss on impaired securities      |  |      | (2,943 | ) |      |   | (1,000 | )    | 
|Other income (expense)           |  |      | (123   | ) |      |   | (109   | )    | 
|                                 |  |      |        |   |      |   |        |      | 
|Total                            |  | $    | (2,623 | ) |      | $ | 1,510  |      | 
|                                 |  |      |        |   |      |   |        |      | 



ScheduleValuation and Qualifying Accounts



|Description                          |  | Balance at beginning ofperiod |       | Charged (credited) to costs and expenses |   | Deductions |  | Balance atend of period
|------------------------------------ |  | ----------------------------- | ----- | ---------------------------------------- | - | ---------- |  | -----------------------
|                                     |  | (in thousands)               
|Allowance for doubtful accounts:     |  |                               |       |                                          |   |            |  |                        
|Fiscal year ended September 30, 2002 |  | $                             | 513   |                                          | $ | 637        |  | $                      
|Fiscal year ended September 30, 2001 |  |                               | 2,817 |                                          |   | 3,052      |  |                        
|Fiscal year ended September 30, 2000 |  |                               | 579   |                                          |   | 2,832      |  |                        
|                                     |  |                               |       |                                         
|Allowance for returns and rebates:   |  |                               |       |                                          |   |            |  |                        
|Fiscal year ended September 30, 2002 |  | $                             | 128   |                                          | $ | 349        |  | $                      
|Fiscal year ended September 30, 2001 |  |                               | 441   |                                          |   |           |  |                        
|Fiscal year ended September 30, 2000 |  |                               | 217   |                                          |   | 336        |  |                        



PART III.



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



During the fiscal year ended September 30, 2002, there were no transactions, or series of similar transactions, or any proposed transactions, or series of similar
transactions, to which we or any of our 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 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. |  | CONTROLS AND PROCEDURES
|-------- |  | -----------------------



As of a date within ninety (90) days of the date of this report (the Evaluation Date), we carried out an evaluation, under the supervision and with the
participation of our management, including our President and Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-14 under the Securities
Exchange Act of 1934, as amended (the Exchange Act).



Based upon
this evaluation, our President and Chief Executive Officer and our Chief Financial Officer concluded that, as of the Evaluation Date, our disclosure controls and procedures were adequate to ensure that information



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required to be disclosed in the reports filed or submitted under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the United States Securities and Exchange Commission rules and forms.



Additionally, our President and Chief Executive Officer and Chief Financial Officer determined, as of a date within ninety (90) days of the date of this report, that
there were no significant changes in our internal controls or in other factors that could significantly affect our internal controls subsequent to the date of their evaluation and that our disclosure controls and procedures are effective.



PART IV.



|ITEM 15. |  | EXHIBITS, FINANCIAL SCHEDULES AND REPORTS ON FORM 8-K
|-------- |  | -----------------------------------------------------



|(a) |  | See Item 8 for an index to the consolidated financial statements and supplementary financial information.
|--- |  | ---------------------------------------------------------------------------------------------------------



|(b) |  | We did not file any Forms 8-K during the three months ended September 30, 2002.
|--- |  | -------------------------------------------------------------------------------



|(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                                                                                                                                                                                                                                                               
|-------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.1(a)         |  | Restated and Amended Certificate of Incorporation                                                                                                                                                                                                                         
|3.2(a)         |  | Restated and Amended Bylaws of the Registrant                                                                                                                                                                                                                             
|3.3(b)         |  | Certificate of Ownership and Merger (Corporate Name Change)                                                                                                                                                                                                               
|4.1            |  | Reference is made to Exhibits 3.1, 3.2 and 3.3                                                                                                                                                                                                                            
|4.2(a)         |  | Amended and Restated Investor Rights Agreement, dated March 27, 1992, among the Registrant and the Investors and Founders named therein, as amended                                                                                                                       
|10.1(a)        |  | Form of Indemnification Agreement entered into between the Registrant and it Directors and Officers                                                                                                                                                                       
|10.2(a)        |  | 1996 Stock Option Plan and forms of agreements thereunder                                                                                                                                                                                                                 
|10.3(a)        |  | Employee Stock Purchase Plan                                                                                                                                                                                                                                              
|10.4(b)        |  | Office Lease Agreement between the Company and WHLW Real Estate Limited Partnership, dated May 1, 1997                                                                                                                                                                    
|10.5(b)        |  | Real Property Lease Extension Agreement between the Company and Bobwhite Meadow, L.P., dated March 1,1996                                                                                                                                                                 
|10.6(c)        |  | Agreement of Purchase and Sale of Assets, dated August 5, 1998, by and between Netopia, Inc., a Delaware corporation, and Farallon Networking Corporation, a Delaware
corporation                                                                                         
|10.7(d)        |  | Serus Asset Purchase Agreement by and among Netopia, Inc., Serus LLC, Serus Acquisition Corporation and the Members of Serus LLC dated as of December 16, 1998 (including exhibits
thereto)                                                                               
|10.8(e)        |  | Agreement and Plan of Reorganization dated September 28, 1999 by and between Netopia, Inc., a Delaware corporation, SN Merger Corporation, a Delaware corporation that is a
wholly-owned subsidiary of Netopia, and StarNet Technologies, Inc., a California corporation  
|10.9(f)        |  | Agreement and Plan of Reorganization, dated February 22, 2000 by and among Netopia, Inc., a Delaware corporation, WO Merger Corporation, a Delaware corporation and wholly-owned
subsidiary of Netopia (Sub) and WebOrder, a California corporation                       
|10.10(g)       |  | 2000 Stock Incentive Plan and forms of agreements thereunder                                                                                                                                                                                                              
|10.11(h)       |  | 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
|10.12(i)       |  | 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                                                                                                  
|10.13(j)       |  | Silicon Valley Bank Loan and Security Agreement entered into on June 27, 2002                                                                                                                                                                                             



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|          | 
|--------- | 
|10.14     | 
|          | 
|11.1      | 
|          | 
|21.1(k,l) | 
|          | 
|23.1      | 
|          | 
|24.1      | 
|          | 
|99.1      | 

---

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

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

|(c) |  | Incorporated by reference to our Form 8-K as filed on August 20, 1998.
|--- |  | ----------------------------------------------------------------------

|(d) |  | Incorporated by reference to our form 10-K for the fiscal year ended September 30, 1998.
|--- |  | ----------------------------------------------------------------------------------------

|(e) |  | Incorporated by reference to our Form 8-K as filed on October 28, 1999.
|--- |  | -----------------------------------------------------------------------

|(f) |  | Incorporated by reference to our Form 8-K as filed on April 7, 2000.
|--- |  | --------------------------------------------------------------------

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

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

|(i) |  | Incorporated by reference to our Form 10-Q as filed on May 15, 2002.
|--- |  | --------------------------------------------------------------------

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

|(k) |  | Incorporated by reference to our Registration Statement on Form S-1 (No. 333-3868) for our Subsidiary in France.
|--- |  | ----------------------------------------------------------------------------------------------------------------

|(l) |  | Updated for our new subsidiaries in the United States.
|--- |  | ------------------------------------------------------



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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 15th day of July 2003.



By:

/s/    ALAN B.
LEFKOFAlan B. Lefkof President and Chief Executive Officer




By:

/s/    WILLIAM D.
BAKERWilliam D. Baker Senior Vice President, Finance and Operations, and Chief Financial Officer (Principal Financial and Accounting Officer)




Dated: July 15, 2003



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CERTIFICATION



I, Alan B. Lefkof, certify that:



|1. |  | I have reviewed this annual report on Form 10-K/A of Netopia, Inc.;
|-- |  | -------------------------------------------------------------------



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



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



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



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



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



| | c) |  | presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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



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



|6. |  | The registrants other certifying officer and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Date: July 15, 2003



By:

/s/    ALAN B.
LEFKOFAlan B. Lefkof President and Chief Executive Officer




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CERTIFICATION



I, William D. Baker, certify that:



|1. |  | I have reviewed this annual report on Form 10-K/A of Netopia, Inc.;
|-- |  | -------------------------------------------------------------------



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



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



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



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



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



| | c) |  | presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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



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



|6. |  | The registrants other certifying officer and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Date: July 15, 2003



By:

/s/    WILLIAM D.
BAKERWilliam D. Baker Senior Vice President, Finance and Operations, and Chief Financial Officer (Principal Financial and Accounting Officer)




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