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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

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

For the fiscal year ended September 30, 2003

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

Netopia, Inc.

(Exact name of registrant as specified in its charter)



|Delaware (State or
other jurisdiction of incorporation or organization)                                                     |  |  |  | 94-3033136 (I.R.S. Employer Identification Number)
|--------------------------------------------------------------------------------------------------------------------------- |  |  |  | --------------------------------------------------
|6001
Shellmound Street, 4th Floor Emeryville, California 94608 (Address of principal executive offices, including Zip
Code)
|(510)
420-7400 (Registrants telephone number, including area code)                                                        



Indicate by check 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 [X]    No [  ]




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




Indicate by check whether the registrant is an
accelerated filer.   Yes [  ]    No [X]




As of the last business day of the registrants
most recently completed second fiscal quarter, March 31, 2003, the aggregate market value of the voting and non-voting common stock held by
non-affiliates computed by reference to the price at which the common stock was last sold was $27,165,518.




As of December 12, 2003, there were 22,813,659
shares of the registrants common stock outstanding.


DOCUMENTS INCORPORATED BY REFERENCE



Portions of the registrants definitive Proxy
Statement for its Annual Stockholders Meeting to be held on January 30, 2004 are incorporated by reference in Part III of this Form
10-K.


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NETOPIA, INC. FORM 10-K Table of Contents






|                  |  |    |  |                                                                                       |  | Page
|----------------- |  | -- |  | ------------------------------------------------------------------------------------- |  | ----
|PART I           
|Item
1.           |  |    |  | Business                                                                              |  |     
|Item
2.           |  |    |  | Properties                                                                            |  |     
|Item
3.           |  |    |  | Legal Proceedings                                                                     |  |     
|Item
4.           |  |    |  | Submission of Matters to a Vote of Security Holders                                   |  |     
|Item
4A.          |  |    |  | Executive Officers of Registrant                                                      |  |     
|PART II          
|Item
5.           |  |    |  | Market for Registrants Common Equity and Related Stockholder Matters                  |  |     
|Item
6.           |  |    |  | Selected Financial Data                                                               |  |     
|Item
7.           |  |    |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  |     
|Item
7A.          |  |    |  | Quantitative and Qualitative Disclosures about Market Risk                            |  |     
|Item
8.           |  |    |  | Financial Statements and Supplementary Data                                           |  |     
|Item
9.           |  |    |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure  |  |     
|Item
9A.          |  |    |  | Controls and Procedures                                                               |  |     
|PART III         
|Item
10.          |  |    |  | Directors and Executive Officers of the Registrant                                    |  |     
|Item
11.          |  |    |  | Executive Compensation                                                                |  |     
|Item
12.          |  |    |  | Security Ownership of Certain Beneficial Owners and Management                        |  |     
|Item
13.          |  |    |  | Certain Relationships and Related Transactions                                        |  |     
|Item
14.          |  |    |  | Principal Accounting Fees and Services                                                |  |     
|PART IV          
|Item
15.          |  |    |  | Exhibits, Financial Schedules and Reports on Form 8-K                                 |  |     
|Index
to Exhibits |  | 65 | 
|Signatures        |  | 67 | 
|Certifications    |  | 73 | 

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PART I

ITEM 1.    BUSINESS



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


Company Background



We develop, market and support broadband and
wireless (Wi-Fi) products and services that enable our carrier and service provider customers to simplify and enhance the delivery of broadband
services to their residential and business-class 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 Netopia,
Inc. We initially focused on the development of networking products for AppleTalk local area networks (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 (TCP/IP) and routing
expertise. In 1998, we introduced our family of DSL broadband Internet equipment. 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). In 2003, we introduced our Wi-Fi modems and gateways. Our principal offices are located at 6001 Shellmound Street, 4th Floor,
Emeryville, California 94608, and our telephone number is (510) 420-7400.


Event Occurring After September 30, 2003



In October 2003, we acquired JadeSail Systems, Inc.
(JadeSail), a provider of Internet Protocol (IP) services management and network equipment provisioning software. We intend to integrate
JadeSails technology into our netOctopus suite of server software products, adding policy-based IP Services definition and provisioning for
firewall and VPN services.




Under the terms of the purchase agreement, we issued
160,000 shares of our common stock in exchange for all the outstanding common stock of JadeSail. The aggregate purchase price, including the common
stock issued and transaction-related expenses, was approximately $1.4 million. Based upon our valuation of the assets acquired,


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we expect to allocate the purchase price to other intangible assets and goodwill.
The amount allocated to other intangible assets will be amortized through our operating expenses in future periods.

Products and Services



Broadband Equipment.  We have
developed a comprehensive family of broadband Internet modems, routers and 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. This family of
products serves an array of wide area network (WAN) interfaces including DSL, cable and T1, and LAN interfaces including Wi-Fi and Ethernet. Our
broadband Internet products are designed to deliver high performance, excellent reliability, scalability, and affordability, and to be a platform from
which our carrier and service provider customers can offer their customers additional services and applications. We believe key components to our
success are comprehensive interoperability with leading central office DSL equipment, a common firmware platform across all versions of our broadband
Internet products, and technology such as our 3-D ReachTM technology which gives our Wi-Fi products greater and more reliable wireless coverage
than that of many of our competitors. The substantial majority of our revenues are derived from sales of our broadband Internet products, in particular
our DSL modems, routers and gateways. During each of fiscal years 2003, 2002 and 2001, revenue from the sale of our broadband Internet products have
accounted for 79%, 71% and 76%, respectively, of our total revenues. When reading our statement of operations and comprehensive loss, revenues and cost
of revenues related to the sale of our broadband Internet equipment are classified as Internet equipment.




The following table summarizes our broadband
equipment product family and their applications:







|Product Line                                                                       |  |  |  | Description                                                                                                                                                                                                                                               |  | Applications                                                                                                                                                 
|---------------------------------------------------------------------------------- |  |  |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------
|Netopia 3000 Series DSL, Ethernet and Wi-Fi Broadband Modems, Routers and Gateways |  |  |  | DSL gateway that connects to a corresponding DSL device in the service providers central office. Our
smart class of self-installable and remotely manageable and configurable modems and gateways.                                                     |  | For the single or multi-computer home, small business and Internet wireless hot spots. LAN interface options
include Wi-Fi, Ethernet and USB.              
|Netopia 4000 Series DSL and T1 Broadband Gateways                                  |  |  |  | Business class gateways that connect to the service providers central office. Provide robust routing, security, and
management features optimized for the business and enterprise applications.                                                          |  | For small and medium size businesses and distributed enterprises: Ethernet LAN interface; hardware based VPN
acceleration; dial back-up; firewall protection.
|Netopia R-Series DSL, Leased Line, ISDN and Analog Broadband Gateways              |  |  |  | Business class gateways that connect to the service providers central office. Provide robust routing, security, and
management features optimized for the business user. Modular architecture allows for cost-effective WAN interface hardware upgrades. |  | For small and medium size businesses: Ethernet LAN interface; VPN features; firewall protection; dial
back-up.                                               



Broadband Services.  Our service
delivery platform includes the netOctopus suite of server software products and systems management software products. The netOctopus suite includes:
EdgeManager, which enables remote support and centralized management of installed broadband gateways and real-time customer support; eCare and Desktop
Support enable broadband service providers and other enterprise customers to support their customers by remotely viewing and operating the
customers desktop computer; and, our Web eCommerce server solution that 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. Our
systems management software includes Timbuktu, a systems management tool providing remote computer control, configuration, support and file transfer.
We hold one United States patent relating to eCare and Timbuktu systems management software. The term of this patent is through August 2010. During
each of fiscal years 2003, 2002 and 2001, revenue from the sale of our broadband services have accounted for 21%, 29% and 24%, respectively,
of


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our total revenues. When reading our statement of operations and comprehensive
loss, revenues and cost of revenues related to the sale of our broadband services are classified as Web platform licenses and
services.



The following table summarizes our broadband
services product family:







|Product Line                       |  |  |  | Description                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|---------------------------------- |  |  |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|netOctopus Server Platform        
|EdgeManager                        |  |  |  | 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, EdgeManager
enables the service provider to easily and cost-effectively support and provision its installed gateways, improve the quality of customer support, and
increase the level of customer satisfaction.
|DesktopSupport                     |  |  |  | DesktopSupport utilizes a Web architecture requiring a small size personal computer (PC) component, or
thin applet, 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 that enables call centers and help desks to assist computer users
in resolving technical support issues by providing bi-directional remote desktop assistance and the ability to observe and operate the users
desktop. eCare can maintain log and report on call statistics, and can be integrated into an existing customer relation management (CRM)
system.                                                                                                                                                                                                                  
|eCommerce                          |  |  |  | Includes the eSite and eStore hosting solutions which offer no assembly required eSites and
e-commerce enabled eStores for small and medium size businesses.                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|Systems Management Software       
|Timbuktu and netOctopus Enterprise |  |  |  | Includes systems management tools for the multi-platform enterprise, which include remote computer
configuration, computer asset management, software distribution, remote control and file transfer.                                                                                                                                                                                                                                                                                                                                                                                                                   

DSL Technology



The substantial majority of our business is based
and dependent upon products that utilize DSL technology. This technology uses complex modulation methods to enable high-speed data 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: asynchronous DSL (ADSL) which refers to DSL technology that provides bi-directional transmission
capacity at varying speeds; and symmetric DSL (SDSL), symmetric high bit-rate SDL (SHDSL) and integrated services digital network DSL (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), which we do not build or sell, and a DSL modem, gateway or router, which we do build and sell. The DSLAM is a piece of
equipment that typically resides in the telephone carriers central offices and aggregates, or multiplexes, multiple DSL access lines into the
carriers high-speed line back to its core or central network. The DSL modem, gateway, or router resides at the users location, and is a
small device enabling DSL services at the users premises.


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Customers



We sell our products in the United States, and
internationally, primarily in Europe, to:


| |  | Telecommunication carriers, including: incumbent local exchange
carriers (ILECs), such as Swisscom AG (Swisscom), SBC Communications Inc. (SBC), BellSouth Telecommunications, Inc. (BellSouth), Eircom Ltd. (Eircom)
and Verizon Communications Inc. (Verizon); competitive local exchange carriers (CLECs), including Covad Communications Group, Inc. (Covad) and
NextGenTel (NGT); Internet service providers (ISPs) and managed service providers (MSPs), including EarthLink, Inc. (EarthLink), MegaPath Networks,
Inc. (MegaPath) and Netifice Communications, Inc. (Netifice); and Internet exchange carriers (IXCs) including Sprint Corporation (Sprint) and WorldCom,
Inc. (WorldCom);
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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



Historically, we have primarily depended upon the
ability of our customers to successfully offer DSL broadband services. Prior to our acquisition of Cayman in October 2001, our largest customers were
CLECs. Many CLECs filed for protection under the Bankruptcy Act or ceased operations. Covad, which currently is our largest CLEC customer and
historically has been among our largest customers, is expecting operating losses and negative cash flow to continue into 2004.




As a result of financial and operational
difficulties encountered by many of our CLEC customers, which primarily had the business market for DSL services, we acted aggressively to expand our
customer base and markets served. 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 equipment, and have developed new products designed for the residential market for DSL
services, which have enabled us to win new customers such as Swisscom in Switzerland, EarthLink in the United States, and Eircom in Ireland. We expect
that the success of our operations will remain substantially dependent upon our ability to develop and enhance products that meet the needs of both the
residential and business market for DSL and Wi-Fi services and requirements of our ILEC customers. Our major customers are significantly larger than we
are, and are able to exert a high degree of influence over our business. For example, our larger customers may be able to reschedule or cancel orders
without significant penalty and may force lengthy approval and purchase processes before purchasing our products.


Distribution, Sales and Marketing



We sell our products through a domestic and
international field sales organization and through selected distributors. We market our products in the United States, Canada, Europe and the Asia
Pacific region. Our broadband equipment products are generally sold directly to our carrier and service provider 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 detailed requests for information or proposal. Even if our products are selected for further consideration after receiving our response to
such a request, prior to selling our broadband equipment to telecommunication carriers, the products generally undergo lengthy approval and purchase
processes. Although the telecommunication carrier approval processes vary 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 DSL 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.
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Commercial Deployment. 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
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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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 in recent years has not been
materially affected by seasonal trends, to the extent that our products are used more widely by residential customers, we may experience increased
seasonality based on trends in consumer markets.


Research and Development



We believe that our future business and operating
results depend in part on our ability to continue to develop new products and enhance existing products in a timely manner, and to develop strategic
product development relationships. We continuously evaluate changing market needs to provide customers with new broadband Internet equipment and
services incorporating new technologies, standards and functionality. We continue to make a significant investment in product engineering, research and
development. Research and development expenses were $15.6 million, $17.5 million and $13.8 million for fiscal years 2003, 2002 and 2001, 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 netOctopus Server Platform or our systems management software.
Each product development team is generally responsible for conceiving new products for its target markets, 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 endeavors
to achieve enhanced product performance and reduced product costs for each succeeding generation of broadband equipment product. 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 are key criteria 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 our customers and end users, as well as the needs of our customers
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 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 primarily utilize third-party contract
manufacturers, and have a limited internal manufacturing capability, to meet our customer requirements and product demand. Our third-party contract
manufacturers produce our products in factories primarily located in Thailand, China and Mexico. They produce substantially all of the circuit boards
for our broadband Internet equipment and in certain circumstances assemble, package and ship our products


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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 large number of companies offer competitive 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 and services, we primarily compete with 2Wire, Inc., Siemens
Aktiengesellschaft (Siemens) (through its Siemens Subscriber Networks, Inc. subsidiary, formerly known as Efficient Networks), Thomson Corporation
(Thomson), Westell Technologies, Inc. (Westell) and ZyXEL Communications Co. (ZyXEL). In the market for our Web platforms products, we primarily
compete with Altiris, Inc., Computer Associates International, Inc. (Computer Associates), CrossTec Corporation (CrossTec), Expertcity, Inc., LANDesk
Software, Inc. (LANDesk), Microsoft Corporation (Microsoft) and Symantec Corporation (Symantec).




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 that we did not match. Furthermore, 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;
|- |  | ----------------------

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

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

| |  | Integration of hardware and software;
|- |  | -------------------------------------

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

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

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

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

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



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


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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 eCare and Timbuktu and
remote control software. The term of this patent is through August 2010. We also have filed a provisional patent application relating to the design of
our Wi-Fi DSL gateways. We generally enter into confidentiality or license agreements with our employees, consultants, resellers, distributors,
customers and potential customers and limit access to the distribution of our software, hardware designs, documentation and other proprietary
information. However, in some instances, we may find it necessary to release our source code to certain parties.




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


Employees



As of December 12, 2003, we employed 307 persons,
including 112 in research and development, 72 in sales and marketing, 64 in customer service and support, 32 in manufacturing operations, and 27 in
general and administrative functions. We also contract with consultants who provide us short and long-term services in various areas of our business.
During the past two years, we have reduced our workforce to align expenses better with 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


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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 as well as provide extensive training to new hires so
they achieve desired levels of productivity.

Segment Financial Information



You can find certain financial information with
respect to our reportable segments and geographic areas in which we operate in Item 7, Managements Discussion and Analysis of Financial Condition
and Results of Operations, and Item 8, Financial Statements and Supplementary Data, particularly Note 10 of Notes to Consolidated Financial
Statements.


ITEM 2.    PROPERTIES



Each of the facilities we occupy is leased for a
term of one to five years. We believe that our existing facilities are adequate for our current needs and that additional space sufficient to meet our
needs for the foreseeable future will be available on reasonable terms. Since our California facilities are located near major earthquake fault lines
in the San Francisco Bay area, our business could be seriously harmed in the event of a major earthquake. The following table sets forth our facilities
and their related lease terms as of September 30, 2003:







|Location                     |  |  |  | Primary use                                                                                     |  | Operating segment                    |  | Square feet     |                   | Lease term |  | Expires           |  | Renewal option                |  | Renewal term |  | Renewal commences        
|---------------------------- |  |  |  | ----------------------------------------------------------------------------------------------- |  | ------------------------------------ |  | --------------- | ----------------- | ---------- |  | ----------------- |  | ----------------------------- |  | ------------ |  | -------------------------
|Emeryville, California       |  |  |  | Headquarters; research and development, selling, marketing, service, general and
administrative |  | Internet equipment and Web platforms |  |                 | 30,438            |            |  | 5 years, 6 months |  | June 30, 2008                 |  | No           |  | n/a                      
|Billerica, Massachusetts (a) |  |  |  | Research and development, customer service                                                      |  | Internet equipment                   |  |                 | 19,291
     4,909 |            |  | 5 years 5 years   |  | March 31, 2005 March 31, 2005 |  | Yes Yes      |  | 3 years, 9 months 3 years
|San Leandro, California      |  |  |  | Distribution center                                                                             |  | Internet equipment and Web platforms |  |                 | 14,406            |            |  | 2 years, 8 months |  | August 27, 2005               |  | No           |  | n/a                      
|Lawrence, Kansas             |  |  |  | Research and development                                                                        |  | Web platforms                        |  |                 | 7,465             |            |  | 3 years           |  | June 30, 2005                 |  | Yes          |  | 3 years                  
|Fremont, California          |  |  |  | Research and development                                                                        |  | Internet Equipment and Web platforms |  |                 | 7,061             |            |  | 5 years           |  | November 30, 2004             |  | Yes          |  | 5 years                  
|Addison, Texas               |  |  |  | Selling                                                                                         |  | Web platforms                        |  |                 | 7,160             |            |  | 5 years, 8 months |  | August 31, 2008               |  | Yes          |  | 3 years                  
|Other (b)                    |  |  |  | Selling, marketing and research and development                                                 |  | Internet equipment and Web platforms |  | Less than 7,000 |                   |            |  |                   |  |                               |  |              |  |                          

|(a) |  | Subleased from Eastman Kodak Company.
|--- |  | -------------------------------------

|(b) |  | Other office space with less than 7,000 square feet per location
in Orem, Utah; Paris, France; Neunkirchen am Brand, Germany; Maastricht, The Netherlands; Alexandria, Virginia; and Beijing, China used primarily for
selling, marketing and research and development activities.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

8

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ITEM 3.    LEGAL PROCEEDINGS



From time to time we are involved in litigation
incidental to the conduct of our business. We are not party to any legal proceeding that in our opinion is likely to seriously harm our
business.


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



There were no matters submitted to a vote of our
security holders during the fiscal fourth quarter ended September 30, 2003.


ITEM 4A.    EXECUTIVE OFFICERS OF THE
REGISTRANT



Our executive officers, and their ages as of
December 12, 2003, are as follows:







|Name              |  |  |  | Age |    | Position
|----------------- |  |  |  | --- | -- | --------
|Alan B.
Lefkof    |  |  |  |     | 50 |         
|William D.
Baker  |  |  |  |     | 57 |         
|Brooke A.
Hauch   |  |  |  |     | 55 |         
|Jayant
Kadambi    |  |  |  |     | 38 |         
|David A.
Kadish   |  |  |  |     | 51 |         
|Jeffrey G.
Porter |  |  |  |     | 40 |         
|Thomas A.
Skoulis |  |  |  |     | 47 |         



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




William D. Baker.  Mr. Baker,
Senior Vice President, Finance and Operations, and Chief Financial Officer, joined Netopia in July 2001 as Senior Vice President and Chief Financial
Officer. He was appointed to his current position in January 2002. Prior to joining Netopia, Mr. Baker was Vice President and Chief Financial Officer
at BITMICRO NETWORKS, Inc., a developer of solid-state storage devices, from June 2000 through April 2001, and Vice President and Chief Financial
Officer at the JPM Company, an international manufacturer of wire harness and cable assemblies for the computer, networking and telecommunications
industries, from January 1996 through June 2000. Mr. Baker received a B.A. in Business Administration from St. Francis College in 1969 and is a
Certified Public Accountant.




Brooke A. Hauch.  Ms. Hauch, Senior
Vice President, Chief Information Officer, joined Netopia in October 1991 as Director, MIS. Ms. Hauch was appointed Vice President and Chief
Information Officer in May 1997, and became Senior Vice President in October 2000. Prior to joining Netopia, Ms. Hauch served in various positions at
Argonaut Information Systems, Inc., Ross Systems, Inc. and Blue Cross of Northern California. Ms. Hauch holds a bachelors degree in business from
Arizona State University.




Jayant Kadambi.  Mr. Kadambi, Vice
President, Research and Development, joined Netopia in October 1999. Prior to joining Netopia, Mr. Kadambi co-founded StarNet Technologies, Inc.
(StarNet), a provider of voice over DSL equipment that Netopia acquired. Mr. Kadambi previously served in various engineering and marketing positions
at Advanced Micro Devices and was a Member of Technical Staff at AT&T Bell Laboratories. Mr. Kadambi received a B.S.E.E from Rensselaer Polytechnic
University in 1985 and an M.S.E.E from Rensselaer Polytechnic Institute in 1986.




David A. Kadish.  Mr. Kadish,
Senior Vice President, General Counsel and Secretary, joined Netopia in June 1999. Mr. Kadish provided legal services to Netopia as a consultant from
September 1996 to June 1999. Mr. Kadish operated an independent legal consulting practice from May 1996 to June 1999. He previously served in various
corporate legal positions at the Electric Power Research Institute, Integral Systems and BRAE Corporation, and as an associate at the law firm of
Morrison & Foerster. Mr. Kadish received a B.A. in American history from University of California at Santa Cruz in 1973, an M.A. in American
history from Brandeis University in 1974 and a J.D. from Yale University in 1979.


9

---



Jeffrey G. Porter.  Mr. Porter,
Vice President, Marketing, joined Netopia in July 1991 as an Inside Sales Representative. Mr. Porter was appointed Vice President, Timbuktu Marketing
in November 1999, and he became Vice President, Web Platforms Marketing in November 2000. He was appointed to his current position in October 2001. He
previously held various sales positions at Logitech Corporation. Mr. Porter a B.A. in Management Science from University of California at San Diego in
1986.




Thomas A. Skoulis.  Mr. Skoulis,
Senior Vice President and General Manager, joined Netopia in September 1991 as Corporate Accounts Manager. Mr. Skoulis was appointed Vice President,
North America Sales in October 1994, and became Senior Vice President in February 1997. Prior to joining Netopia, Mr. Skoulis held various sales
management positions with 3Com and Digital Equipment Corporation. Mr. Skoulis received a B.A. in business administration from Miami University in
Oxford, Ohio, in 1980.


PART II

|ITEM 5. |  | MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
|------- |  | ---------------------------------------------------------------------



Since our initial public offering in June 1996, our
common stock has been traded on the Nasdaq Stock Market. We were originally listed under the symbol FRLN. In November 1997, when we changed our name
from Farallon Communications, Inc. to Netopia, Inc., our symbol changed to NTPA. The following table sets forth the range of quarterly intra-day high
and low sale prices of our common stock on the Nasdaq Stock Market for the last two fiscal years ended September 30, 2003 and 2002.







|                                         |  |  |  | 2003 |      | 2002 | 
|---------------------------------------- |  |  |  | ---- | ---- | ---- | 
|
|Fourth fiscal
quarter ended September 30 |  |  |  | $    | 7.75 |      | 
|Third fiscal
quarter ended June 30       |  |  |  |      | 4.50 |      | 
|Second fiscal
quarter ended March 31     |  |  |  |      | 2.05 |      | 
|First fiscal
quarter ended December 31   |  |  |  |      | 2.16 |      | 



On December 12, 2003, we had 176 stockholders of
record and 22,813,659 shares of common stock outstanding. The closing price of our common stock as reported on the Nasdaq Stock Market was $14.00 per
share. Historically, we have neither declared nor paid cash dividends on our common stock, and we expect this trend to continue. We maintain stock
option plans under which we grant options to purchase our common stock and an Employee Stock Purchase Plan under which our common stock is sold to
employees participating in such plans. Additional information with respect to these plans can be found in Note 8 of Notes to Consolidated Financial
Statements.




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


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

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

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

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

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

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

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

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

10

---

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

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

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

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



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.


Recent Sales of Unregistered Securities



In March 2002, we issued 300,000 shares of our
common stock to the shareholders of DoBox as consideration for our acquisition of DoBox.




In August 2003, we sold 1,413,914 shares of our
common stock in a private placement to a limited number of qualified institutional investors. The aggregate offering price totaled $6.5 million. We
paid a fee in the amount of approximately $0.4 million to CDC Securities for services related to introducing certain of the investors to us. Net of
fees and expenses, we received $6.1 million, which was used to increase our working capital.




In October 2003, we issued 160,000 shares of our
common stock to the shareholders of JadeSail as consideration for our acquisition of JadeSail. We have agreed to file in January 2004 a registration
statement on Form S-3 registering possible resale of the common stock issued in the transaction.




The sale and issuance of the securities of the
securities described above were effected without general solicitation or advertising and were deemed to be exempt from registration under the
Securities Act of 1933, as amended (the Securities Act), by virtue of Section 4(2) of the Securities Act, in light of, among other facts,
the small number and sophistication of the persons receiving the shares and the investment representations made by those persons.


11

---

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, 2003. 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,              |  |  |  | 2003 |        | 2002 |  | 2001 |         | 2000 |  | 1999
|--------------------------------------------- |  |  |  | ---- | ------ | ---- |  | ---- | ------- | ---- |  | ----
|
|Statements
of operations data:                |  |  |  |      |        |      |  |      |         |      |  |     
|Total
revenues                                |  |  |  | $    | 86,307 |      |  | $    | 64,064  |      |  | $   
|Gross
profit                                  |  |  |  |      | 36,097 |      |  |      | 31,102  |      |  |     
|Operating
loss (a)                            |  |  |  |      | (7,768 | )    |  |      | (31,644 | )    |  |     
|Loss from
continuing operations (a)           |  |  |  |      | (8,320 | )    |  |      | (34,267 | )    |  |     
|Net loss (a,
b, c)                            |  |  |  |      | (8,320 | )    |  |      | (34,267 | )    |  |     
|Per share
data, continuing operations:        |  |  |  |      |        |      |  |      |         |      |  |     
|Basic and
diluted loss per share              |  |  |  | $    | (0.43  | )    |  | $    | (1.86   | )    |  | $   
|Shares used
in the per share calculations (d) |  |  |  |      | 19,560 |      |  |      | 18,455  |      |  |     
|Per share
data, net loss:                     |  |  |  |      |        |      |  |      |         |      |  |     
|Basic and
diluted loss per share              |  |  |  | $    | (0.43  | )    |  | $    | (1.86   | )    |  | $   
|Shares used
in the per share calculations (d) |  |  |  |      | 19,560 |      |  |      | 18,455  |      |  |     






|As of September 30,                               |  |  |  | 2003 |        | 2002 |  | 2001 |        | 2000 |  | 1999
|------------------------------------------------- |  |  |  | ---- | ------ | ---- |  | ---- | ------ | ---- |  | ----
|
|Balance
sheet data:                               |  |  |  |      |        |      |  |      |        |      |  |     
|Cash, cash
equivalents and short-term investments |  |  |  | $    | 22,208 |      |  | $    | 25,022 |      |  | $   
|Working
capital                                   |  |  |  |      | 28,697 |      |  |      | 28,628 |      |  |     
|Total
assets                                      |  |  |  |      | 57,942 |      |  |      | 58,995 |      |  |     
|Long-term
liabilities (e)                         |  |  |  |      | 431    |      |  |      | 4,614  |      |  |     
|Total
stockholders equity                        |  |  |  |      | 40,377 |      |  |      | 40,047 |      |  |     



|(a) |  | Included in our operating loss, loss from continuing operations
and net loss are charges and expenses related to acquisitions of other businesses. Included in fiscal years: 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; 2003 and
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
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 and 2000 are
amounts recorded in connection with our disposition of the LAN Division.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------

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

|(e) |  | In fiscal year 2003, long-term liabilities are comprised of $0.1
million of long-term borrowings under our term loans, $0.1 million of the long-term portion of deferred revenue and $0.2 million of the long-term
portion of deferred rent expense. In fiscal year 2002, long-term liabilities is primarily comprised of $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 and 1999 is primarily 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.)
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

12

---



The following table sets forth certain unaudited
quarterly results of operations data for the eight quarters ended September 30, 2003. This data has been derived from our unaudited interim
consolidated financial statements that, in our opinion, include all adjustments (consisting only of normal recurring adjustments) necessary for a fair
presentation of such information. When reading this information, you also should read Item 7, Managements Discussion and Analysis of Financial
Condition and Results of Operations, and the Consolidated Financial Statements and related notes thereto included elsewhere in this Form
10-K.







|                                                        |  |  |  | Fiscal 2003 |        | Fiscal 2002 | 
|------------------------------------------------------- |  |  |  | ----------- | ------ | ----------- | 
|
|
|REVENUES:                                               |  |  |  |             |        |             | 
|Internet
equipment                                      |  |  |  | $           | 20,821 |             | 
|Web platform
licenses and services                      |  |  |  |             | 4,674  |             | 
|Total
revenues                                          |  |  |  |             | 25,495 |             | 
|COST OF
REVENUES:                                       |  |  |  |             |        |             | 
|Internet
equipment                                      |  |  |  |             | 14,506 |             | 
|Web platform
licenses and services                      |  |  |  |             | 224    |             | 
|Total cost of
revenues                                  |  |  |  |             | 14,730 |             | 
|GROSS
PROFIT                                            |  |  |  |             | 10,765 |             | 
|OPERATING
EXPENSES:                                     |  |  |  |             |        |             | 
|Research and
development                                |  |  |  |             | 3,821  |             | 
|Research and
development project cancellation costs (a) |  |  |  |             |       |             | 
|Selling and
marketing                                   |  |  |  |             | 5,079  |             | 
|General and
administrative (b)                          |  |  |  |             | 1,265  |             | 
|Acquired
in-process research and development (c)        |  |  |  |             |       |             | 
|Amortization
of intangible assets (d)                   |  |  |  |             | 375    |             | 
|Impairment of
goodwill (e)                              |  |  |  |             |       |             | 
|Restructuring
costs (f)                                 |  |  |  |             | (77    | )           | 
|Integration
costs                                       |  |  |  |             |       |             | 
|Total
operating expenses                                |  |  |  |             | 10,463 |             | 
|OPERATING
INCOME (LOSS)                                 |  |  |  |             | 302    |             | 
|Other income
(loss), net                                |  |  |  |             |        |             | 
|Loss on
impaired securities (g)                         |  |  |  |             |       |             | 
|Other income
(expense), net                             |  |  |  |             | (80    | )           | 
|Other income
(loss), net                                |  |  |  |             | (80    | )           | 
|NET INCOME
(LOSS)                                       |  |  |  | $           | 222    |             | 
|Per share data,
net income (loss):                      |  |  |  |             |        |             | 
|Basic and
diluted net income (loss) per share           |  |  |  | $           | 0.01   |             | 
|Shares used
in the basic per share calculations (h)     |  |  |  |             | 20,790 |             | 
|Shares used
in the diluted per share calculations (h)   |  |  |  |             | 22,646 |             | 

---

|(a) |  | Represents material and equipment costs associated with our
joint development efforts with Siemens and Proxim, Inc. (Proxim) to develop a wireless integrated access device (IAD) for sale to AT&T Corp.
(AT&T) to serve AT&Ts anticipated roll-out of DSL services. As a result of AT&T not accepting the final product developed by Siemens
under the agreement between AT&T and Siemens and canceling its plans to deploy these services on its network, there was no longer a customer or
market into which we could sell the product under development.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

13

---

|(b) |  | In fiscal year 2003, general and administrative expense includes
costs related to the relocation of our headquarters facility from Alameda, California to Emeryville, California. In fiscal year 2002, general and
administrative expense includes incremental provisions for doubtful accounts, in addition to standard 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 costs for the periods indicated.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|Three months ended,                          |  |  |  | Sep. 30, 2003 |       | June 30, 2003 |  | Mar. 31, 2003 |     | Dec. 31, 2002 |  | Sep. 30, 2002 |       | June 30, 2002 |  | Mar. 31, 2002 |       | Dec. 31, 2001
|-------------------------------------------- |  |  |  | ------------- | ----- | ------------- |  | ------------- | --- | ------------- |  | ------------- | ----- | ------------- |  | ------------- | ----- | -------------
|Facility
relocation costs                    |  |  |  | $             |      |               |  | $             | 2   |               |  | $             | 93    |               |  | $             | 197   |              
|Incremental
provisions for doubtful accounts |  |  |  |               |      |               |  |               |    |               |  |               |      |               |  |               |      |              
|General and
administrative                   |  |  |  |               | 1,265 |               |  |               | 975 |               |  |               | 1,014 |               |  |               | 1,231 |              
|Total general
and administrative             |  |  |  | $             | 1,265 |               |  | $             | 977 |               |  | $             | 1,107 |               |  | $             | 1,428 |              

|(c) |  | 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 DoBox and
Cayman, respectively. (See Item 7, Managements Discussion and Analysis of Financial Condition and Results of Operations and Note 2 of Notes to
Consolidated Financial Statements.)
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(d) |  | For fiscal years 2003 and 2002, these amounts represent the
amortization of intangible assets related to the acquisition of Cayman. (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) |  | This amount represents full impairment of the remaining goodwill
acquired in connection with the acquisitions of Cayman and StarNet. (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.)
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(f) |  | For the three months ended September 30, 2003, this amount
primarily represents the reversal of the remaining restructuring liability accrued in connection with the Cayman acquisition. For the three months
ended June 30, 2003, December 31, 2002 and December 31, 2001, these amounts represent 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.)
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(g) |  | These amounts represent losses on impaired securities related to
our long-term investments in Everdream Corporation (Everdream) and MegaPath, respectively. (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) |  | See Note 1, Per Share Calculations, of Notes to
Consolidated Financial Statements for information on shares used in the basic and diluted per share calculations.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------

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

Overview



We develop, market and support broadband and Wi-Fi
products and services that enable our carrier and service provider customers to simplify and enhance the delivery of broadband services to their
residential and business-class 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.




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 2003, 2002 and 2001, revenue from the
sale of our broadband Internet gateways have accounted for 79%, 71% and 76%,


14

---

respectively, of our total revenues. When reading our statement of operations and
comprehensive loss, 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 server software products and systems management software products. The netOctopus suite includes
EdgeManager, eCare, and our Web eCommerce server. Our systems management software includes Timbuktu. During each of fiscal years 2003, 2002 and 2001,
revenue from the sale of our broadband services have accounted for 21%, 29% and 24%, respectively, of our total revenues. When reading our statement of
operations and comprehensive loss, 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 consolidated financial statements.




Revenue Recognition.  We recognize
revenue from the sale of broadband Internet equipment at the time of shipment to a third party customer when (a) the customer takes title of the goods;
(b) the price to the customer is fixed or determinable; (c) the customer is obligated to pay the seller and the obligation is not contingent on resale
of the product; (d) the customers obligation to us would not be changed in the event of theft or physical destruction or damage of the product;
and (e) 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 pay when sold separately. Software license revenue is recognized when a
non-cancelable license agreement has been signed or a properly authorized firm purchase order is received and the customer acknowledges an
unconditional obligation to pay, the software product has been delivered, there are no uncertainties surrounding product acceptance, the fees are fixed
and determinable, and collection is considered probable. Maintenance revenues, including revenues included in multiple element arrangements, are
deferred and recognized ratably over the related contract period, generally twelve months. 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. Revenue is recognized based on our achievement, and the 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, we review costs incurred to
date along with an estimate to complete and compare the sum of such amounts against the revenue expected from the arrangement to determine the need for
an accrual for loss contracts.




We apply the provisions of Emerging Issues Task
Force (EITF) Issue No. 00-21, Revenue Arrangements with Multiple Deliverables, to arrangements that involve the delivery or performance of
multiple products, services and/or rights to use assets. Our enhanced web site services generally involve the delivery of multiple services.
We


15

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allocate a portion of the arrangement fee to the undelivered element, generally web
site hosting, based on the residual method utilizing VSOE for the undelivered elements, regardless of any separate prices stated within the contract
for each element. VSOE for hosting is based on the price the customer would pay when sold separately. Fair value for the delivered elements, primarily
fulfillment services, is based on the residual amount of the total arrangement fees after deducting the VSOE for the undelivered elements. Fulfillment
revenue is recognized when a properly authorized firm purchase order is received and the customer acknowledges an unconditional obligation to pay,
there are no uncertainties surrounding product acceptance, the fees are fixed and determinable, collection is considered probable and the fulfillment
has been completed. Hosting revenues are deferred and recognized ratably over the related service period, generally twelve months. We record unearned
revenue for these 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 unearned revenue for software and service
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 and service arrangements when the arrangement qualifies for revenue recognition and cash or other
consideration has not been received from the customer.




Goodwill.  On October 1, 2001, we
adopted Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets, 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.
We perform our annual impairment test, as required by SFAS No. 142, in our fiscal fourth quarter. We performed such test during the fiscal fourth
quarter ended September 30, 2003, the result of which indicated the fair value of the reporting unit was greater than the carrying value of the unit
and therefore no impairment was identified. As of September 30, 2003, we had approximately $1.0 million of goodwill related to our acquisitions of
WebOrder and netOctopus, which is allocated to our Web platform licenses and services reporting unit. (See Note 3 of Notes to Consolidated Financial
Statements.)




Impairment of Long-Lived Assets, Including Other
Intangible Assets.  We adopted 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 other intangible assets in accordance with SFAS
No. 144 and test our long-lived assets and other intangible assets for impairment whenever events or changes in circumstances indicate that the
carrying amount of the asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of
an asset to the estimated undiscounted future net cash flows expected to be generated by the asset group that represents the lowest level for which
identifiable cash flows exist. If an asset group is considered to be impaired, the impairment to be recognized is measured by the amount by which the
carrying amount exceeds the fair value of the assets and is allocated to the long-lived assets of the asset group on a pro rata basis. Fair value is
estimated using the discounted cash flow method. Assets to be disposed of are reported at the lower of carrying values or fair values, less costs of
disposal. At September 30, 2003, our other 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. We did not test our long-lived assets and other intangible assets for
impairment during the fiscal year ended September 30, 2003, because there were no events or changes in circumstances that would indicate that the
carrying amount of the asset groups might not be recoverable. As of September 30, 2003, we had $5.1 million of other intangible assets related to our
acquisition of Cayman and $0.2 million related to a marketing license. (See Note 3 of Notes to Consolidated Financial Statements.)




Accounting for Stock-based
Compensation.  We maintain stock option plans under which we may grant incentive stock options and non-statutory stock options. SFAS No.
123, Accounting for Stock-Based Compensation, encourages, but does not require, companies to record compensation cost for stock-based employee
compensation plans based on the fair market value of options granted. We account for stock based compensation using the intrinsic value method
prescribed in Accounting Principles Board (APB) No. 25, Accounting for Stock Issued to Employees,


16

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and related interpretations. Because the grant price equals the market price on the
date of grant for all options we issue, we do not recognize compensation expense for stock options granted to employees. In accordance with SFAS No.
123, we recognize as an expense, the fair value of options and other equity instruments granted to non-employees. We have not issued any stock options
to non-employees since fiscal year 2001, excluding options issued to our directors. In December 2002, the Financial Accounting Standards Board (FASB)
issued SFAS No. 148, Accounting for Stock Based Compensation  Transition and Disclosure, which amends SFAS No. 123. SFAS No. 148 requires
more prominent and frequent disclosures about the effects of stock-based compensation. We will continue to account for our stock based compensation
according to the provisions of APB No. 25.



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, when evaluating the adequacy of the allowance for doubtful
accounts 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.




Long-Term Investments.  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 for impairment whenever 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. As of September 30, 2003, these investments had a total carrying value of
$1.0 million, and have been permanently written down a total of $3.4 million from original cost. 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 2003, 2002 and 2001 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 ability to realize 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 carry-back potential to realize our deferred tax assets. Based on our estimates for fiscal year 2004 and beyond, we believe the
uncertainty regarding the ability to realize 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 reverse all or a portion of our valuation allowance which will result in an income tax
benefit.


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, 2003, our principal source of
liquidity included cash and cash equivalents in the amount of $22.2 million, a credit facility with a maximum borrowing capacity of up to $15.0 million
from which, at September 30, 2003, we had no outstanding borrowings, and two term loans from which we had amounts outstanding of $0.4
million.


17

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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, 2003, 2002 and 2001.







|                                                  |  |  |  |   |        |  |  |   |        | Increase (decrease) from prior year | 
|------------------------------------------------- |  |  |  | - | ------ |  |  | - | ------ | ----------------------------------- | 
|
|
|Cash, cash
equivalents and short-term investments |  |  |  | $ | 22,208 |  |  | $ | 25,022 |                                     | 



For the fiscal year ended September 30, 2003, cash
and cash equivalents decreased primarily due to cash used by our operating activities, the payoff of borrowings under our credit facility and purchases
of capital equipment. Excluding the changes in operating assets and liabilities, we used $2.4 million to support our net loss. Changes in operating
assets and liabilities used $2.7 million primarily due to an increase in our accounts receivable partially offset by an increase in our accounts
payable. We paid off the borrowings under our credit facility which totaled $4.4 million, we purchased $1.4 million of capital equipment and we
purchased a marketing license for $0.7 million. This use of cash was partially offset by (a) cash received from our sale of approximately 1.4 million
shares of common stock in a private placement in August 2003 which raised $6.1 million, and (b) cash received from our sale of common stock to
employees under our Employee Stock Purchase Plan and employee stock option exercises, which provided $2.6 million.




For the fiscal year ended September 30, 2002, cash
and cash equivalents decreased primarily due to the use of cash to acquire Cayman, cash used by our operating activities, and purchases of capital
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 provided $4.0 million, primarily related to the decrease of inventory and increase of
accounts payable and other liabilities, and $1.1 million primarily received from our sale of common stock to employees under our Employee Stock
Purchase Plan.




At September 30, 2003, we had no borrowings under
our credit facility and approximately $0.4 million borrowed under our term loans. We expect to continue to use our credit facility along with our
existing cash and cash equivalents to support our working capital needs in both the short and long-term. Additionally, we expect our cash and cash
equivalents at December 31, 2003 may be similar to the balances at September 30, 2003, although these balances are impacted to the extent that we need
to purchase additional inventory to build our products or otherwise support our continuing operations. As of September 30, 2003, we did not have any
material commitments for capital expenditures. We will keep our credit facility to finance our future growth and fund our ongoing research and
development activities as needed during fiscal 2004 and beyond. 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 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, 2003, 2002 and
2001.







|                               |  |  |  |         |        |         |  |         |       | Increase (decrease) from prior year | 
|------------------------------ |  |  |  | ------- | ------ | ------- |  | ------- | ----- | ----------------------------------- | 
|
|
|Trade
accounts receivable, net |  |  |  | $       | 16,755 |         |  | $       | 9,950 |                                     | 
|Days sales
outstanding (DSO)   |  |  |  | 60
days |        | 54
days |  | 51
days |       |                                     | 



Changes in our trade accounts receivable, net
balances and days sales outstanding are primarily due to the timing of sales, increased revenues and collections performance. Our targeted range for
DSO is 50 to 60 days. Trade accounts receivable and DSO increased primarily due to a large proportion of sales occurring in the last month of the
three-month period ending September 30, 2003 as well as payment terms that have been provided to certain of our European customers that are generally
up to 30 days longer than our customary payment terms.


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Inventory.  The following table
sets forth our inventory, net as of the fiscal years ended September 30, 2003, 2002 and 2001.







|                |  |  |  |   |       |  |  |   |       | Increase (decrease) from prior year | 
|--------------- |  |  |  | - | ----- |  |  | - | ----- | ----------------------------------- | 
|
|
|Inventory       |  |  |  | $ | 5,968 |  |  | $ | 6,259 |                                     | 
|Inventory
turns |  |  |  |   | 7.9   |  |  |   | 5.8   |                                     | 



Inventory consists primarily of raw material, work
in process, and finished goods. Inventory has decreased and inventory turns have improved as a result of increasing visibility into customer demand
enabling us to more effectively manage inventory levels as well as our manufacturing providers now purchasing directly from suppliers certain raw
material we historically purchased and consigned to our manufacturers which value was carried in our inventory. Inventory levels may increase in the
future if our customers do not provide us with accurate information, if we do not correctly forecast expected customer demand, or if customers defer or
otherwise delay purchases. We may have to borrow against our credit facility to finance any needed inventory increases. We continue to closely monitor
our management of inventory 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 and Term
Loans.  The following table sets forth the outstanding borrowings under our credit facility and term loans as of the fiscal years ended
September 30, 2003 and 2002.







|                                 |  |  |  |   |     |  |  |   |       | Increase (decrease) from prior year | 
|-------------------------------- |  |  |  | - | --- |  |  | - | ----- | ----------------------------------- | 
|
|
|Borrowings
under credit facility |  |  |  | $ |    |  |  | $ | 4,428 |                                     | 
|Borrowings
under term loans      |  |  |  |   | 354 |  |  |   |      |                                     | 



At September 30, 2003, we had no outstanding
borrowings under the credit facility and had a borrowing availability of approximately $12.2 million. At September 30, 2002, borrowings under the
credit facility were used to support our operating activities and purchases of inventory. We used the term loans during fiscal year 2003 to purchase
capital equipment to enhance the capabilities of our test laboratory. (See Note 15 of Notes to Consolidated Financial Statements.) We believe the
amended terms of the credit facility provide adequate access to borrowings to meet our current capital needs.


Commitments



As of September 30, 2003, we had commitments that
consisted of facilities and equipment under operating lease agreements and borrowings under term loans. 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 payments with respect to such agreements.







|Fiscal years ended September 30,         |  |  |  | 2004 |       | 2005 |  | 2006 |       | 2007 |  | 2008 |     | Thereafter |  | Total
|---------------------------------------- |  |  |  | ---- | ----- | ---- |  | ---- | ----- | ---- |  | ---- | --- | ---------- |  | -----
|
|Facility and
operating lease commitments |  |  |  | $    | 1,844 |      |  | $    | 1,355 |      |  | $    | 770 |            |  | $    
|Payments
under term loans                |  |  |  |      | 250   |      |  |      | 104   |      |  |      |    |            |  |      
|Total
commitments                        |  |  |  | $    | 2,094 |      |  | $    | 1,459 |      |  | $    | 770 |            |  | $    

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Results of Operations for Fiscal Years Ended September 30, 2003, 2002 and
2001



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) from prior year |    
|-------------------------------------------------------------------------------------------------------------------------------------------------- |  |  |  | - | ------ | - |  |  | --- | -- |  | - | ------- | - |  | ----------------------------------- | ---
|
|
|REVENUES:                                                                                                                                          |  |  |  |   |        |   |  |  |     |    |  |   |         |   |  |                                     |    
|Internet
equipment                                                                                                                                 |  |  |  | $ | 68,217 |   |  |  | 79  | %  |  | $ | 45,551  |   |  |                                     | 71 
|Web platform
licenses and services                                                                                                                 |  |  |  |   | 18,090 |   |  |  | 21  | %  |  |   | 18,513  |   |  |                                     | 29 
|Total
revenues                                                                                                                                     |  |  |  |   | 86,307 |   |  |  | 100 | %  |  |   | 64,064  |   |  |                                     | 100
|COST OF
REVENUES:                                                                                                                                  |  |  |  |   |        |   |  |  |     |    |  |   |         |   |  |                                     |    
|Internet
equipment                                                                                                                                 |  |  |  |   | 48,896 |   |  |  | 57  | %  |  |   | 32,323  |   |  |                                     | 50 
|Web platform
licenses and services                                                                                                                 |  |  |  |   | 1,314  |   |  |  | 1   | %  |  |   | 639     |   |  |                                     | 1  
|Total cost of
revenues                                                                                                                             |  |  |  |   | 50,210 |   |  |  | 58  | %  |  |   | 32,962  |   |  |                                     | 51 
|GROSS
PROFIT                                                                                                                                       |  |  |  |   | 36,097 |   |  |  | 42  | %  |  |   | 31,102  |   |  |                                     | 49 
|OPERATING
EXPENSES:                                                                                                                                |  |  |  |   |        |   |  |  |     |    |  |   |         |   |  |                                     |    
|Research and
development                                                                                                                           |  |  |  |   | 15,621 |   |  |  | 18  | %  |  |   | 17,522  |   |  |                                     | 27 
|Research and
development project cancellation costs                                                                                                |  |  |  |   | 606    |   |  |  | 1   | %  |  |   |        |   |  |                                     |   
|Selling and
marketing                                                                                                                              |  |  |  |   | 20,969 |   |  |  | 24  | %  |  |   | 24,334  |   |  |                                     | 38 
|General and
administrative                                                                                                                         |  |  |  |   | 4,777  |   |  |  | 6   | %  |  |   | 5,398   |   |  |                                     | 9  
|Amortization
of goodwill and other intangible assets                                                                                               |  |  |  |   | 1,497  |   |  |  | 2   | %  |  |   | 1,497   |   |  |                                     | 2  
|Restructuring
costs                                                                                                                                |  |  |  |   | 395    |   |  |  | 0   | %  |  |   | 482     |   |  |                                     | 1  
|Acquired
in-process research and development                                                                                                       |  |  |  |   |       |   |  |  |    | %  |  |   | 4,058   |   |  |                                     | 6  
|Impairment of
goodwill and other intangible assets                                                                                                 |  |  |  |   |       |   |  |  |    | %  |  |   | 9,146   |   |  |                                     | 14 
|Integration
costs                                                                                                                                  |  |  |  |   |       |   |  |  |    | %  |  |   | 309     |   |  |                                     | 1  
|Terminated
merger costs                                                                                                                            |  |  |  |   |       |   |  |  |    | %  |  |   |        |   |  |                                     |   
|Total
operating expenses                                                                                                                           |  |  |  |   | 43,865 |   |  |  | 51  | %  |  |   | 62,746  |   |  |                                     | 98 
|OPERATING
LOSS                                                                                                                                     |  |  |  |   | (7,768 | ) |  |  | (9  | %) |  |   | (31,644 | ) |  |                                     | (49
|Other income
(loss), net                                                                                                                           |  |  |  |   |        |   |  |  |     |    |  |   |         |   |  |                                     |    
|Loss on
impaired securities                                                                                                                        |  |  |  |   | (457   | ) |  |  | (1  | %) |  |   | (2,943  | ) |  |                                     | (5 
|Other income
(expense), net                                                                                                                        |  |  |  |   | (95    | ) |  |  | 0   | %  |  |   | 320     |   |  |                                     | 1  
|Total other
income (loss), net                                                                                                                     |  |  |  |   | (552   | ) |  |  | (1  | %) |  |   | (2,623  | ) |  |                                     | (4 
|Loss from
continuing operations before cumulative effect from adoption of SAB 101 and before gain on sale of discontinued operations, net of
taxes |  |  |  |   | (8,320 | ) |  |  | (10 | %) |  |   | (34,267 | ) |  |                                     | (53
|Cumulative
effect from adoption of SAB 101                                                                                                         |  |  |  |   |       |   |  |  |    | %  |  |   |        |   |  |                                     |   
|Discontinued
operations, net of taxes                                                                                                              |  |  |  |   |       |   |  |  |    | %  |  |   |        |   |  |                                     |   
|NET LOSS                                                                                                                                           |  |  |  | $ | (8,320 | ) |  |  | (10 | %) |  | $ | (34,267 | ) |  |                                     | (53

REVENUES

2003 Revenues Compared to 2002 Revenues



Total revenues increased for fiscal year 2003 from
fiscal year 2002 primarily due to increased revenues from the sale of our broadband Internet equipment products partially offset by reduced revenues
from the sale of our Web platform licenses and services.




Internet Equipment.  Broadband
Internet equipment revenues increased for fiscal year 2003 from fiscal year 2002 primarily due to increased sales volumes of our ADSL broadband
Internet equipment to ILEC customers, both in the United States and Europe, who serve the market for business and residential-class ADSL Internet
services. Sales volumes increased primarily as a result of sales to Swisscom and EarthLink, neither of which were customers


20

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in fiscal year 2002, and increased purchases by SBC, as we continue to penetrate
the ADSL market with both residential and business-class products, and increased purchases by Covad. These increases were partially offset by reduced
sales to Ingram Micro and BellSouth as well as declining average selling prices 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 current and new customers
will help offset these declines. See the Product Volume and Average Selling Price Information section below, which sets forth our volumes
and average selling prices.



Web Platform Licenses and
Services.  Web platforms revenues decreased for fiscal year 2003 from fiscal year 2002 primarily due to reduced license sales of
Timbuktu, our system management software, and our eSite and eStore products which declined to $7.8 million for fiscal year 2003 from $10.0 million for
fiscal year 2002. This decline was partially offset by revenues related to a software integration project with one specific customer, which increased
to $2.0 million for fiscal year 2003 from $0.3 million for fiscal year 2002. Recurring revenue, primarily related to our eSite and eStore products,
increased slightly to $8.3 million for fiscal year 2003 from $8.2 million for fiscal year 2002.


2002 Revenues Compared to 2001 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.  Broadband
Internet equipment revenues decreased for fiscal year 2002 from fiscal year 2001 primarily due to reduced sales to the CLEC market and reduced average
selling prices partially offset by increased sales volumes. Sales to the CLEC market, as illustrated in the Customer Information section
below, declined as a result of the operational and financial difficulties encountered by customers such as Covad, Rhythms NetConnections, Inc.
(Rhythms) and NorthPoint Communications, Inc. (Northpoint). (Rhythms and NorthPoint subsequently ceased operations.) Average selling prices declined
primarily as a result of the mix of products sold, price competition from foreign and domestic competitors and customer driven demands. Sales volumes
increased primarily as a result of the customers we acquired in connection with our acquisition of Cayman and new customers in Europe. 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. See the Product
Volumes and Average Selling Price Information section below, which sets forth our volumes and average selling prices.




Web Platform Licenses and
Services.  Web platforms revenues increased slightly for fiscal year 2002 from fiscal year 2001 primarily due to increased recurring
revenue, primarily related to hosting of our eSite and eStore products, which increased to $8.2 million for fiscal year 2002 from $6.6 million for
fiscal year 2001 as well as revenues related to a software integration project with one specific customer, which totaled $0.3 million for fiscal year
2002. These increases were almost equally offset by reduced license sales of our eSite, eStore and Timbuktu products. Licensing of our eSite, eStore
and Timbuktu products decreased to $10.0 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.




We licensed our eSite and eStore products to
dot com -type 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, including the eCare and netOctopus Desktop Support software
products, and we intend to license these new products to large corporate accounts.


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Product Volumes and Average Selling Price Information



The following tables sets forth for the periods
indicated, volumes and average selling prices, excluding accessories, of our broadband Internet equipment products. The decline in average selling
prices resulted from increased sales of lower price residential class products as compared to higher price business class products, as well as
competitive market conditions generally. We expect that average selling prices will continue to decline for the same reasons, although at a lesser
rate.







|                       |  |  |  |   |         |  |  |   |         | Increase (decrease) from prior year | 
|---------------------- |  |  |  | - | ------- |  |  | - | ------- | ----------------------------------- | 
|
|
|Product
volumes        |  |  |  |   | 508,345 |  |  |   | 177,467 |                                     | 
|Average
selling prices |  |  |  | $ | 133     |  |  | $ | 247     |                                     | 

Customer Information



We sell our products primarily to ILECs, CLECs,
distributors, 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 2003, 2002 and 2001 accounted for 10% or more of total revenues.







|                       |  |  |  |   |        |  |  |  |    |   |  |   |       |  |  | Increase (decrease) from prior year |   
|---------------------- |  |  |  | - | ------ |  |  |  | -- | - |  | - | ----- |  |  | ----------------------------------- | --
|
|
|Swisscom               |  |  |  | $ | 13,359 |  |  |  | 15 | % |  | $ |      |  |  |                                     |  
|Covad                  |  |  |  |   | 12,787 |  |  |  | 15 | % |  |   | 8,481 |  |  |                                     | 13
|SBC                    |  |  |  |   | 9,273  |  |  |  | 11 | % |  |   | 3,222 |  |  |                                     | 5 
|Ingram
Micro           |  |  |  |   | 5,346  |  |  |  | 6  | % |  |   | 7,970 |  |  |                                     | 12
|Rhythms
NetConnections |  |  |  |   |       |  |  |  |   | % |  |   |      |  |  |                                     |  



Including the greater than 10% customers in the
table above, the following table sets forth, for the periods indicated, the number of customers who each individually represented at least 5% of our
revenues in such period.







|Fiscal years ended September 30, |  |  |  | 2003 |    | 2002 |  | 2001
|-------------------------------- |  |  |  | ---- | -- | ---- |  | ----
|Number of
customers              |  |  |  |      | 4  |      |  |     
|Percent of
total revenue         |  |  |  |      | 47 | %    |  |     

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:







|                               |  |  |  |   |        |  |  |  |     |   |  |   |        |  |  | Increase (decrease) from prior year |    
|------------------------------ |  |  |  | - | ------ |  |  |  | --- | - |  | - | ------ |  |  | ----------------------------------- | ---
|
|
|Europe                         |  |  |  | $ | 24,785 |  |  |  | 29  | % |  | $ | 10,544 |  |  |                                     | 16 
|Canada                         |  |  |  |   | 883    |  |  |  | 1   | % |  |   | 1,046  |  |  |                                     | 2  
|Asia Pacific
and other         |  |  |  |   | 1,599  |  |  |  | 2   | % |  |   | 1,602  |  |  |                                     | 3  
|Subtotal
international revenue |  |  |  |   | 27,267 |  |  |  | 32  | % |  |   | 13,192 |  |  |                                     | 21 
|United
States                  |  |  |  |   | 59,040 |  |  |  | 68  | % |  |   | 50,872 |  |  |                                     | 79 
|Total
revenues                 |  |  |  | $ | 86,307 |  |  |  | 100 | % |  | $ | 64,064 |  |  |                                     | 100

22

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International revenues increased for fiscal year
2003 from fiscal year 2002 primarily due to increased sales of our ADSL broadband equipment into the European residential market through our new
European customers, Swisscom in particular. Revenues from the United States increased for fiscal year 2003 from fiscal year 2002 primarily due to
increased sales volumes of our ADSL broadband equipment to SBC as well as increased sales of our business class broadband equipment to
Covad.




International revenues increased for fiscal year
2002 from fiscal year 2001 primarily due to increased sales of our ADSL broadband equipment 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.


COST OF REVENUES



Cost of revenues consists primarily of material
costs of our Internet equipment products and related manufacturing variances. Total cost of revenues increased for fiscal year 2003 from fiscal year
2002 primarily as a result of increased sales volumes of our ADSL broadband Internet equipment and costs related to our software integration project.
These increases were partially offset by reduced material costs for our broadband Internet equipment as a result of reduced component costs, product
redesigns intended to reduce cost, and the introduction of new products that have a lower average cost. In the past, we have been successful reducing
the product and component costs of our Internet equipment products. We expect cost of revenues to increase slightly as a proportion of revenue in 2004
as excess component inventories that we purchase from our suppliers are depleted and prices for such components increase as a result of improved
general economic conditions and customer demand. To help offset any cost increase, we intend to leverage our increasing volumes with our contract
manufacturers and continue to pursue product redesigns and alternative, lower cost components for our products in an effort to reduce our products
material costs.




Although our sales volumes increased for fiscal year
2002 from fiscal year 2001, total cost of revenues decreased primarily due to reduced 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
reduced component costs.


Gross Margin



Our total gross margin decreased to 42% for fiscal
year 2003 from 49% for fiscal year 2002 primarily due to increased sales of lower margin ADSL broadband Internet equipment and a lower percentage of
higher margin Web platforms revenue in the total revenue mix.




Internet Equipment.  Broadband
Internet equipment gross margin decreased to 28% for fiscal year 2003 from 29% for fiscal year 2002 primarily due to increased sales of lower margin
ADSL products, declining average selling prices as a result of product mix and price competition as well as pricing strategies as we enter new markets
and expand our customer base. This decrease was partially offset by reduced product costs as discussed in the above cost of revenue discussion. The
primary factors influencing our Internet equipment gross margin are product mix, our ability to drive down material and product costs based on
negotiations with our vendors and increased volumes, and the timing of these cost reductions relative to market pricing conditions.




Web Platform Licenses and
Services.  Web platforms gross margin decreased to 93% for fiscal year 2003 from 97% for fiscal year 2002 primarily due to engineering
labor costs, reclassed from research and development expense, associated with the software integration project for one specific customer. Excluding the
effects of this project, Web platforms gross margin was 96% for fiscal year 2003.


23

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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;
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Product and material cost changes;
|- |  | ----------------------------------

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

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



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 reduced 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 reduced product costs as discussed in the
above cost of revenue discussion.




Web Platform Licenses 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.


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 decreased for fiscal year 2003 from fiscal year 2002 primarily due to the reallocation of employee costs
associated with our software integration project from research and development expenses to Web platform cost of revenues as well as decreased research
and development staff and employee related expenses. For fiscal year 2003, we transferred $0.7 million of employee costs, which represents
approximately 7 full-time equivalent employees during such period, from research and development expenses to Web platform cost of revenues. For fiscal
year 2003, our average research and development staff decreased by approximately 10 employees from fiscal year 2002, resulting in approximately $0.7
million in reduced employee related expenses.




Research and development expenses increased for
fiscal year 2002 from fiscal year 2001 primarily due to an increase of research and development staff by approximately 20 employees 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.




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 2004 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. During fiscal year 2003 we capitalized $0.1 million and during fiscal year 2001, we capitalized
$1.1 million of development costs incurred subsequent to delivery of a working model, under development agreements with third parties.


24

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RESEARCH AND DEVELOPMENT PROJECT CANCELLATION COSTS



For fiscal year 2003, research and development
project cancellation costs totaled $0.6 million and consist primarily of material and equipment costs associated with our joint development efforts
with Siemens and Proxim to develop a wireless IAD for sale to AT&T for AT&Ts anticipated roll-out of voice-over-DSL services. As a result
of AT&T not accepting the final product developed by Siemens and canceling its plans to deploy these services, there was no longer a customer or
market into which we could sell the product under development.


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 2003 from fiscal year 2002 primarily due to decreased selling and marketing
staff and employee related expenses as well as decreased travel and entertainment expenses and as a result of our restructurings and expense control
efforts and reduced facility and depreciation expenses. For fiscal year 2003, our average selling and marketing staff decreased by approximately 23
employees from fiscal year 2002, resulting in approximately $2.3 million in reduced employee related and travel and entertainment expenses.
Additionally, facility and depreciation expenses decreased $0.5 million.




Selling and marketing expenses decreased for fiscal
year 2002 from fiscal year 2001 primarily due to the reduction of sales and marketing staff 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.




We expect selling and marketing expenses may
increase in fiscal year 2004 as result of increased headcount, employee related expenses and marketing programs.


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 2003 from fiscal year 2002 primarily due to $0.7 million of reduced provisions for doubtful accounts for outstanding accounts
receivable owed by customers that filed voluntary petitions under the Bankruptcy Act in 2002, decreased headcount and employee related expenses as a
result of our restructurings and expense control efforts as well as reduced use of third party contractors. For fiscal year 2003, our average general
and administrative headcount decreased by approximately 6 employees from fiscal year 2002, resulting in approximately $0.3 million in reduced employee
related expenses and $0.2 million as a result of a reduction in the use of contractors. These reductions were partially offset by $0.3 million of
increased costs related to the relocation of our corporate headquarters from Alameda, California to Emeryville, California as well as $0.2 million of
increased 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.




We expect general and administrative expenses will
remain approximately at current levels for fiscal year 2004.


AMORTIZATION OF GOODWILL AND OTHER INTANGIBLE ASSETS



For fiscal years 2003 and 2002, these amounts
represent the amortization of intangible assets with identifiable lives related to our acquisition of Cayman. For fiscal year 2001, amortization of
goodwill and other intangible assets


25

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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 expect amortization of other intangible assets
will increase in future periods as a result of the amortization of other intangible assets acquired in connection with our acquisition of JadeSail in
October 2003 (our first fiscal quarter of 2004). (See Note 17 of Notes to Consolidated Financial Statements.)


RESTRUCTURING COSTS



For fiscal year 2003, we recorded a net
restructuring charge of $0.4 million. This net charge consisted primarily of $0.6 million of employee severance benefits related to 2 reductions in our
workforce during fiscal year 2003 and facility closure costs related to the closure of a sales office in Hong Kong as well as a reversal of $0.2
million of liabilities we had accrued in connection with our restructurings during fiscal year 2002. (See Note 12 of Notes to Consolidated Financial
Statements.)




For fiscal year 2002, restructuring costs consist
primarily of employee severance benefits recorded in connection with a reduction in our workforce of approximately 24 employees 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. (See Note 12 of Notes to Consolidated Financial
Statements.)


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 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. 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. (See Note 2 of Notes to Consolidated Financial Statements.)


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. 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 and comprehensive loss 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 our IAD products (derived from the technology 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.)


INTEGRATION COSTS



Integration costs consist of expenses incurred in
connection with the acquisition of Cayman and integrating Caymans customers, systems and operations. (See Note 13 of Notes to Consolidated
Financial Statements.)


26

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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. (See Note 14 of Notes to Consolidated Financial Statements.)


OTHER INCOME (LOSS), NET



Other income (loss), net consists of interest income
earned on our cash and cash equivalents, 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 2003, loss on impaired securities represents a $0.5 million loss on impaired securities, fully impairing the remaining investment in
Everdream. For fiscal year 2002, this amount 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 in such year. (See Note 11 of Notes to Consolidated Financial Statements.) For fiscal year 2001, loss on impaired
securities represents the entire loss of our investment in NorthPoint.




Other Income (Expense), Net.  Other
income (expense), net primarily represents interest expense with respect to borrowings under our credit facility, interest income as well as losses on
foreign currency transactions. Other income, net decreased for fiscal years 2003, 2002 and 2001 primarily due to decreased interest income as our cash
and cash equivalents have declined 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. (See Note 1, Revenue Recognition, of Notes to Consolidated Financial Statements.)


Recent Accounting Pronouncements



In November 2002, the FASB issued FIN 45,
Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.  FIN
45 elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain
guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair
value of the obligation undertaken in issuing the guarantee. The provisions of FIN 45 are applicable on a prospective basis to guarantees issued or
modified after December 31, 2002. The disclosure provisions of FIN 45 relate to the warranty we provide on our hardware products (See Note 5 of Notes
to Consolidated Financial Statements.) Adoption of the disclosure provisions did not have a significant impact on our consolidated financial
statements.




In November 2002, the EITF reached a consensus on
Issue No. 00-21, Revenue Arrangements with Multiple Deliverables.  EITF Issue No. 00-21 provides guidance on how to account for
arrangements that involve the delivery or performance of multiple products, services and/or rights to use assets. Adoption of the provisions of EITF
Issue No. 00-21 did not have a significant impact on our consolidated financial statements.




In December 2002, the FASB issued SFAS No. 148,
Accounting for Stock-Based Compensation  Transition and Disclosure, which is effective for fiscal years ending after December 15, 2002.
SFAS No. 148 amends SFAS No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition to the fair value method
of accounting for stock-based employee compensation. We account for, and intend to continue to account for, stock based compensation using the
intrinsic value method prescribed in APB No. 25, Accounting for Stock Issued to Employees, and related interpretations. In addition, SFAS No.
148 amends the disclosure provisions of SFAS No. 123 to require disclosure of the effects of an entitys accounting policy with respect to
stock-based employee compensation on reported net income and earnings per share in annual and interim financial statements. Adoption of the disclosure
provisions has been made.


27

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Risk Factors



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 and Exchange Commission, our 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. We have incurred losses from continuing operations of $8.3 million, $34.3 million and $41.7
million for fiscal years ended September 30, 2003, 2002 and 2001, respectively. We used $2.8 million, $10.7 million and $2.1 million of cash during
fiscal years ended September 30, 2003, 2002 and 2001, respectively. Our cash and cash equivalents totaled $22.2 million at September 30, 2003. 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 or otherwise significantly harm our
business.



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

| |  | 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.
|- |  | ----------------------



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 hosting of eSites and eStores. We can offer no assurance that our strategy of


28

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enabling bundled service offerings will be widely accepted. If telecommunications
carriers do not continue to 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
principally focusing 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 working to expand our
sales in the ILEC channel both domestically and internationally. There continue to be barriers associated with such sales including, but not limited
to, lengthy product evaluation cycles, the 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 2Wire, Siemens (through its Siemens Subscriber
Networks, Inc. subsidiary, formerly known as Efficient Networks), Thomson, Westell and ZyXEL, which have proven to be strong competitors. There is no
guarantee we will be successful in expanding our presence in the ILEC market. 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.



Prior to our acquisition of Cayman in October 2001,
we developed, marketed and sold Internet equipment products primarily to CLECs and ISPs serving the small business market for DSL Internet
connectivity. 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 competitive 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.
|- |  | ------------------------------------------------------------------------------------------------------



If we are unable to overcome these challenges, our
business will be materially and adversely affected.


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, most of our CLEC and ISP customers have experienced
business difficulties and some have filed for bankruptcy or ceased operations. 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
difficulties of these CLEC and ISP customers have materially and adversely affected our operating results. Covad, which emerged from bankruptcy in
December 2001, was our second largest customer during fiscal year 2003, and it continues to incur losses.


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, 2003, there were four customers that each individually represented at least 5% of our
revenues and in the aggregate accounted for 47% 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.


29

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



A substantial portion of our revenues is derived
from sales to international customers, mainly in Europe. For the fiscal year ended September 30, 2003, our international sales represented 32% of total
sales. We expect sales to international customers to continue to comprise a significant portion of our revenues. Sales of broadband Internet equipment
products to some of our European customers have been denominated in Euros. For our international sales that continue to be denominated in United States
dollars, fluctuations in currency exchange rates could cause our products and services to become relatively more expensive to our foreign customers,
which could 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 Euros.


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.


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 2Wire, Siemens (through its Siemens Subscriber Networks, Inc. subsidiary, formerly known as Efficient Networks), Thomson,
Westell and ZyXEL.




In the market for our Web platforms products, we
primarily compete with Altiris, Computer Associates, CrossTec, Expertcity, LANDesk, Microsoft and Symantec. We anticipate intense competition from some
of these companies because some of these competitors provide their products to consumers at no cost.




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


30

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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.

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 ending September 30, 2003, our
revenues have ranged from $15.6 million to $25.5 million, and our net results have ranged from $0.2 million of income to a loss of $15.8 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.




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;
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

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



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


31

---

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 obtain a sufficient quantity of components from independent contractors or specialized suppliers in a timely manner
for any reason, sales of our broadband Internet equipment could be delayed or halted. Similarly, if supplies of circuit boards or products from our
contract manufacturers are interrupted for any reason, we will incur significant losses until we arrange for alternative sources. In addition, we may
be required to pay premiums for components purchased from other vendors should our regular independent contractors and specialized suppliers be unable
to timely provide us with sufficient quantity of components. To the extent we pay any premiums, our gross margins and operating results would be
harmed. Further, we could also be forced to redesign our broadband 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.




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
rapidly evolving and intensely competitive market. For example, we may not correctly anticipate market requirements, or introduce rapidly new products
that meet such requirements for performance, price, features and compatibility with other DSL equipment. Failure to continue to develop and 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, 2003,
revenues from these help desk applications were 58% 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


32

---

on a small number of licensees of our Web platforms to promote the use of our Web
platforms for building web sites and stores. 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 web sites and stores 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 also 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 are 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 be
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.


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 is 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 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.


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 software. The term of this patent is through August 2010. We also have filed a provisional patent application relating to the
design of our Wi-Fi DSL gateways. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our
products or obtain and use information that we regard as proprietary. Policing unauthorized use of our products is difficult, and there is no guarantee
that the safeguards that we employ will protect our intellectual property and other valuable competitive information.




There has been a substantial amount of litigation in
the software and Internet industries regarding intellectual property rights. Although we have not been party to any such litigation, in the future
third parties may claim that


33

---

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.



A small number of stockholders hold a large portion
of our common stock. Our Chairman of the Board owned approximately 4.7% of our common stock outstanding at September 30, 2003. In addition, based on
information contained in filings with the United States Securities and Exchange Commission, three institutional investors owned approximately 7.2%,
4.1% and 4.0%, respectively, of our common stock outstanding at September 30, 2003. To the extent one or more of these large stockholders decides to
sell substantial amounts of our common stock in the public market over a short period of time, based on the historic trading volumes, we expect 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.


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.


34

---

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 expectations;
|- |  | -----------------------------------------------------------------------------------------------------------------------------------

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

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

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

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


ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK



Our exposure to market risk for changes in interest
rates relates primarily to our investment portfolio. Our exposure to foreign exchange risk relates primarily to sales made to international customers
denominated in Euros and our employee related expenses in European Union countries. We do not use derivative financial instruments for speculative or
trading purposes. We place our investments in instruments that meet high credit quality standards, as specified in our investment policy. This policy
also limits the amount of credit exposure to any one issue, issuer and type of instrument. We do not expect any material loss with respect to our
investment portfolio. In order to reduce our exposure resulting from currency fluctuations, we have entered into currency exchange forward contracts.
These contracts guarantee a predetermined exchange rate at the time the contract is purchased. We do not enter into currency exchange contracts for
speculative or trading purposes. All currency exchange contracts have a maturity of less than one year.


Interest Rate Risk



The table below presents the market value and
related weighted-average interest rates for our investment portfolio at September 30, 2003 and 2002. All of our investments mature in twelve months or
less.







|                                  |  |  |  | September 30, 2003 |        | September 30, 2002 | 
|--------------------------------- |  |  |  | ------------------ | ------ | ------------------ | 
|
|
|Cash
equivalents  fixed rate (a) |  |  |  | $                  | 16,279 |                    | 

---

|(a) |  | Cash equivalents represent the portion of our investment
portfolio that mature in less than 90 days.
|--- |  | ----------------------------------------------------------------------------------------------------



Our market interest rate risk for our investment
portfolio relates primarily to changes in the United States short-term prime interest rate. Our market interest rate risk for borrowings under our
credit facility, from which we had no borrowings at September 30, 2003, relates primarily to the rate we are charged by Silicon Valley Bank for our
credit facility. The credit facility bears interest at a rate equal to the prime rate (the rate announced by Silicon Valley Bank as its prime
rate) plus 0.75% per annum. To the extent we borrow heavily against the credit facility and Silicon Valley Bank were to increase its prime rate,
it would cost us more to borrow and our interest expense would increase.


35

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Foreign Currency Exchange Risk



The table below presents the carrying value, in
United States dollars, of our accounts receivable denominated in Euros at September 30, 2003 and 2002. The accounts receivable at September 30, 2003
are valued at the United States/Euro exchange rate as of September 30, 2003 and the accounts receivable at September 30, 2002 are valued at the United
States/Euro exchange rate as of September 30, 2002. The carrying value approximates fair value at September 30, 2003 and 2002.







|                                         |  |  |  | September 30, 2003 |       | September 30, 2002 | 
|---------------------------------------- |  |  |  | ------------------ | ----- | ------------------ | 
|
|
|Accounts
receivable denominated in Euros |  |  |  | $                  | 1,839 |                    | 



The table below presents the carrying value of our
currency exchange forward contracts, in United States dollars, at September 30, 2003 and 2002. The carrying value approximates fair value at September
30, 2003 and 2002.







|                                      |  |  |  | September 30, 2003 |     | September 30, 2002 | 
|------------------------------------- |  |  |  | ------------------ | --- | ------------------ | 
|
|
|Currency
exchange forward contract #1 |  |  |  | $                  | 228 |                    | 
|Currency
exchange forward contract #2 |  |  |  |                    |    |                    | 
|Currency
exchange forward contract #3 |  |  |  |                    |    |                    | 



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


ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA



The information required by Item 8 of Form 10-K
regarding disclosure of our quarterly results for each full quarter within the two most recent fiscal years is set forth in Part II, Item 6, Selected
Financial Data, of this Form 10-K.


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                                                                                              |  |  |  |     
|Consolidated
Balance Sheets at September 30, 2003 and 2002                                                                |  |  |  |     
|Consolidated
Statements of Operations and Comprehensive Loss for the fiscal years ended September 30, 2003, 2002 and 2001 |  |  |  |     
|Consolidated
Statements of Stockholders Equity for the fiscal years ended September 30, 2003, 2002 and 2001              |  |  |  |     
|Consolidated
Statements of Cash Flows for the fiscal years ended September 30, 2003, 2002 and 2001                        |  |  |  |     
|Notes to
Consolidated Financial Statements                                                                                |  |  |  |     
|Financial
Statement Schedule:                                                                                             |  |  |  |     
|Valuation and
Qualifying Accounts                                                                                         |  |  |  |     

36

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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 also have 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,
2003 and 2002 and the results of their operations and their cash flows for each of the years in the three-year period ended September 30, 2003 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.




KPMG LLP


San Francisco, California November 3, 2003

37

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NETOPIA, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS






|September 30,                                                                                                                                                      |  |  |  | 2003 |          | 2002
|------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  |  |  | ---- | -------- | ----
|
|ASSETS                                                                                                                                                            
|Current
assets:                                                                                                                                                    |  |  |  |      |          |     
|Cash and cash
equivalents                                                                                                                                          |  |  |  | $    | 22,208   |     
|Trade
accounts receivable less allowance for doubtful accounts and returns of $178 and $567 at September 30, 2003 and 2002,
respectively                           |  |  |  |      | 16,755   |     
|Inventories                                                                                                                                                        |  |  |  |      | 5,968    |     
|Prepaid
expenses and other current assets                                                                                                                          |  |  |  |      | 899      |     
|Total current
assets                                                                                                                                               |  |  |  |      | 45,830   |     
|Furniture,
fixtures and equipment, net                                                                                                                             |  |  |  |      | 3,740    |     
|Acquired
technology and other intangible assets, net                                                                                                               |  |  |  |      | 5,251    |     
|Goodwill                                                                                                                                                           |  |  |  |      | 984      |     
|Long-term
investments                                                                                                                                              |  |  |  |      | 1,032    |     
|Deposits and
other assets                                                                                                                                          |  |  |  |      | 1,105    |     
|TOTAL
ASSETS                                                                                                                                                       |  |  |  | $    | 57,942   |     
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                              
|Current
liabilities:                                                                                                                                               |  |  |  |      |          |     
|Accounts
payable                                                                                                                                                   |  |  |  | $    | 11,222   |     
|Accrued
compensation                                                                                                                                               |  |  |  |      | 1,965    |     
|Accrued
liabilities                                                                                                                                                |  |  |  |      | 1,924    |     
|Deferred
revenue                                                                                                                                                   |  |  |  |      | 1,659    |     
|Current
portion of borrowings under term loans                                                                                                                     |  |  |  |      | 250      |     
|Other current
liabilities                                                                                                                                          |  |  |  |      | 113      |     
|Total current
liabilities                                                                                                                                          |  |  |  |      | 17,133   |     
|Long-term
liabilities:                                                                                                                                             |  |  |  |      |          |     
|Borrowings
under credit facility and term loans                                                                                                                    |  |  |  |      | 104      |     
|Other
long-term liabilities                                                                                                                                        |  |  |  |      | 328      |     
|Total
liabilities                                                                                                                                                  |  |  |  |      | 17,565   |     
|Commitments
and contingencies                                                                                                                                      |  |  |  |      |          |     
|Stockholders equity:                                                                                                                                              |  |  |  |      |          |     
|Common stock:
$0.001 par value, 50,000,000 shares authorized; 21,631,832 and 18,905,223 shares issued and outstanding at September 30, 2003 and 2002,
respectively |  |  |  |      | 22       |     
|Additional
paid-in capital                                                                                                                                         |  |  |  |      | 156,132  |     
|Accumulated
deficit                                                                                                                                                |  |  |  |      | (115,777 | )   
|Total
stockholders equity                                                                                                                                         |  |  |  |      | 40,377   |     
|TOTAL
LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                         |  |  |  | $    | 57,942   |     

See accompanying notes to consolidated financial statements.

38

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NETOPIA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE LOSS






|Fiscal years ended September 30,                                                                                                                                               |  |  |  | 2003 |        | 2002 |  | 2001
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  |  |  | ---- | ------ | ---- |  | ----
|
|REVENUES:                                                                                                                                                                      |  |  |  |      |        |      |  |     
|Internet
equipment                                                                                                                                                             |  |  |  | $    | 68,217 |      |  | $   
|Web platform
licenses and service                                                                                                                                              |  |  |  |      | 18,090 |      |  |     
|Total
revenues                                                                                                                                                                 |  |  |  |      | 86,307 |      |  |     
|COST OF
REVENUES:                                                                                                                                                              |  |  |  |      |        |      |  |     
|Internet
equipment                                                                                                                                                             |  |  |  |      | 48,896 |      |  |     
|Web platform
licenses and services                                                                                                                                             |  |  |  |      | 1,314  |      |  |     
|Total cost of
revenues                                                                                                                                                         |  |  |  |      | 50,210 |      |  |     
|GROSS
PROFIT                                                                                                                                                                   |  |  |  |      | 36,097 |      |  |     
|OPERATING
EXPENSES:                                                                                                                                                            |  |  |  |      |        |      |  |     
|Research and
development                                                                                                                                                       |  |  |  |      | 15,621 |      |  |     
|Research and
development project cancellation costs                                                                                                                            |  |  |  |      | 606    |      |  |     
|Selling and
marketing                                                                                                                                                          |  |  |  |      | 20,969 |      |  |     
|General and
administrative                                                                                                                                                     |  |  |  |      | 4,777  |      |  |     
|Amortization
of intangible assets                                                                                                                                              |  |  |  |      | 1,497  |      |  |     
|Amortization
of goodwill                                                                                                                                                       |  |  |  |      |       |      |  |     
|Restructuring
costs                                                                                                                                                            |  |  |  |      | 395    |      |  |     
|Acquired
in-process research and development                                                                                                                                   |  |  |  |      |       |      |  |     
|Impairment of
goodwill and other intangible assets                                                                                                                             |  |  |  |      |       |      |  |     
|Integration
costs                                                                                                                                                              |  |  |  |      |       |      |  |     
|Terminated
merger costs                                                                                                                                                        |  |  |  |      |       |      |  |     
|Total
operating expenses                                                                                                                                                       |  |  |  |      | 43,865 |      |  |     
|OPERATING
LOSS                                                                                                                                                                 |  |  |  |      | (7,768 | )    |  |     
|Other income
(loss), net                                                                                                                                                       |  |  |  |      |        |      |  |     
|Loss on
impaired securities                                                                                                                                                    |  |  |  |      | (457   | )    |  |     
|Other income
(expense), net                                                                                                                                                    |  |  |  |      | (95    | )    |  |     
|Total other
income (loss), net                                                                                                                                                 |  |  |  |      | (552   | )    |  |     
|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 |  |  |  |      | (8,320 | )    |  |     
|Cumulative
effect from adoption of SAB 101                                                                                                                                     |  |  |  |      |       |      |  |     
|Gain on sale
of discontinued operations, net of taxes                                                                                                                          |  |  |  |      |       |      |  |     
|NET LOSS                                                                                                                                                                       |  |  |  | $    | (8,320 | )    |  | $   
|Comprehensive
loss:                                                                                                                                                            |  |  |  |      |        |      |  |     
|Net
loss                                                                                                                                                                       |  |  |  | $    | (8,320 | )    |  | $   
|Other
comprehensive income                                                                                                                                                     |  |  |  |      |       |      |  |     
|Total
comprehensive loss                                                                                                                                                       |  |  |  | $    | (8,320 | )    |  | $   
|Per share
data, loss from continuing operations:                                                                                                                               |  |  |  |      |        |      |  |     
|Basic and
diluted loss per share                                                                                                                                               |  |  |  | $    | (0.43  | )    |  | $   
|Common shares
used in the per share calculations                                                                                                                               |  |  |  |      | 19,560 |      |  |     
|Per share
data, net loss:                                                                                                                                                      |  |  |  |      |        |      |  |     
|Basic and
diluted net loss per share                                                                                                                                           |  |  |  | $    | (0.43  | )    |  | $   
|Common shares
used in the per share calculations                                                                                                                               |  |  |  |      | 19,560 |      |  |     

See accompanying notes to consolidated financial statements.

39

---



NETOPIA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF
STOCKHOLDERS EQUITY






|                                                                   |  |  |  | Common stock |           
|------------------------------------------------------------------ |  |  |  | ------------ | ----------
|
|
|BALANCES,
SEPTEMBER 30, 2000                                       |  |  |  |              | 17,587,615
|Exercise of
stock options                                          |  |  |  |              | 239,042   
|Issuance of
common stock under Employee Stock Purchase Plan        |  |  |  |              | 250,155   
|Issuance of
common stock warrants                                  |  |  |  |              |          
|Costs related
to issuance of common stock under secondary offering |  |  |  |              |          
|Net unrealized
investment income                                   |  |  |  |              |          
|Net
loss                                                           |  |  |  |              |          
|BALANCES,
SEPTEMBER 30, 2001                                       |  |  |  |              | 18,076,812
|Exercise of
stock options                                          |  |  |  |              | 99,231    
|Issuance of
common stock under Employee Stock Purchase Plan        |  |  |  |              | 429,180   
|Issuance of
common stock for acquisitions                          |  |  |  |              | 300,000   
|Stock options
granted to non-employees                             |  |  |  |              |          
|Net
loss                                                           |  |  |  |              |          
|BALANCES,
SEPTEMBER 30, 2002                                       |  |  |  |              | 18,905,223
|Exercise of
stock options                                          |  |  |  |              | 556,505   
|Issuance of
common stock under Employee Stock Purchase Plan        |  |  |  |              | 756,190   
|Issuance of
common stock in private placement                      |  |  |  |              | 1,413,914 
|Costs related
to issuance of common stock under private placement  |  |  |  |              |          
|Net
loss                                                           |  |  |  |              |          
|BALANCES,
SEPTEMBER 30, 2003                                       |  |  |  |              | 21,631,832

See accompanying notes to consolidated financial statements.

40

---



NETOPIA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH
FLOWS






|Fiscal years ended September 30,                                              |  |  |  | 2003 |        | 2002 |  | 2001
|----------------------------------------------------------------------------- |  |  |  | ---- | ------ | ---- |  | ----
|
|Cash flows
from operating activities:                                         |  |  |  |      |        |      |  |     
|Net
loss                                                                      |  |  |  | $    | (8,320 | )    |  | $   
|Adjustments
to reconcile net loss to net cash used in operating activities:   |  |  |  |      |        |      |  |     
|Depreciation
and amortization                                                 |  |  |  |      | 5,592  |      |  |     
|Non-cash
compensation for services                                            |  |  |  |      |       |      |  |     
|Loss on
impaired securities                                                   |  |  |  |      | 457    |      |  |     
|Charge for
in-process research and development                                |  |  |  |      |       |      |  |     
|Charge for
impairment of goodwill and other intangible assets                 |  |  |  |      |       |      |  |     
|Write-off of
capitalized product development costs                            |  |  |  |      | 271    |      |  |     
|Changes in
allowance for doubtful accounts and returns on accounts receivable |  |  |  |      | (389   | )    |  |     
|Changes in
operating assets and liabilities, net of effects of acquisition:   |  |  |  |      |        |      |  |     
|Trade
accounts receivable                                                     |  |  |  |      | (6,416 | )    |  |     
|Inventories                                                                   |  |  |  |      | 291    |      |  |     
|Prepaid
expenses and other current assets                                     |  |  |  |      | 832    |      |  |     
|Deposits and
other assets                                                     |  |  |  |      | (89    | )    |  |     
|Accounts
payable and accrued liabilities                                      |  |  |  |      | 3,328  |      |  |     
|Deferred
revenue                                                              |  |  |  |      | (668   | )    |  |     
|Other
liabilities                                                             |  |  |  |      | 32     |      |  |     
|Net cash used
in operating activities                                         |  |  |  |      | (5,079 | )    |  |     
|Cash flows
from investing activities:                                         |  |  |  |      |        |      |  |     
|Purchase of
short-term investments                                            |  |  |  |      |       |      |  |     
|Proceeds from
the sale of short-term investments                              |  |  |  |      |       |      |  |     
|Purchase of
furniture, fixtures and equipment                                 |  |  |  |      | (1,439 | )    |  |     
|Other
intangible assets acquired                                              |  |  |  |      | (700   | )    |  |     
|Purchase of
long-term investment                                              |  |  |  |      | (26    | )    |  |     
|Capitalization of software development costs                                  |  |  |  |      | (146   | )    |  |     
|Acquisition
of businesses                                                     |  |  |  |      |       |      |  |     
|Net cash
provided by (used in) investing activities                           |  |  |  |      | (2,311 | )    |  |     
|Cash flows
from financing activities:                                         |  |  |  |      |        |      |  |     
|(Repayment)/borrowing under credit facility                                   |  |  |  |      | (4,428 | )    |  |     
|Borrowing,
net under term loans                                               |  |  |  |      | 354    |      |  |     
|Proceeds from
the issuance of common stock, net                               |  |  |  |      | 8,650  |      |  |     
|Net cash
provided by financing activities                                     |  |  |  |      | 4,576  |      |  |     
|Net decrease
in cash and cash equivalents                                     |  |  |  |      | (2,814 | )    |  |     
|Cash and cash
equivalents, beginning of year                                  |  |  |  |      | 25,022 |      |  |     
|Cash and cash
equivalents, end of year                                        |  |  |  | $    | 22,208 |      |  | $   
|Supplemental
disclosures of cash flow activities:                             |  |  |  |      |        |      |  |     
|Income taxes
paid                                                             |  |  |  | $    | 20     |      |  | $   
|Supplemental
disclosures of non-cash investing and financing activities:      |  |  |  |      |        |      |  |     
|Issuance of
common stock for acquisition of businesses                        |  |  |  | $    |       |      |  | $   
|Issuance of
common stock equivalents for consulting services                  |  |  |  | $    |       |      |  | $   

See accompanying notes to consolidated financial statements.

41

---

NETOPIA, INC.NOTES TO CONSOLIDATED STATEMENTS

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



Nature of Business.  Netopia, Inc.
(the Company) develops, markets and supports broadband and wireless (Wi-Fi) products and services that are intended to simplify and enhance
broadband delivery 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.  Cash equivalents
consist of money market funds with original maturities of 90 days or less. Cash equivalents as of September 30, 2003 and 2002 consisted of the
following:







|September 30,      |  |  |  | 2003 |        | 2002
|------------------ |  |  |  | ---- | ------ | ----
|
|Money market
funds |  |  |  | $    | 16,279 |     



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 customer
takes title of the goods; (b) the price to the customer is fixed or determinable; (c) the customer is obligated to pay the seller and the obligation is
not contingent on resale of the product; (d) 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 (e) 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 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 recognized 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 applies the provisions of Emerging
Issues Task Force (EITF) Issue No. 00-21, Revenue Arrangements with Multiple Deliverables, to arrangements that involve the delivery or
performance of multiple products, services and/or rights to use assets. The Companys enhanced web site services generally involve the delivery of
multiple services. The Company allocates a portion of the arrangement fee to the undelivered element, generally web site hosting, based on the residual
method utilizing VSOE for the undelivered elements, regardless of any separate prices stated within the contract for each element. VSOE for hosting is
based on the price the


42

---

NETOPIA, INC.NOTES TO CONSOLIDATED STATEMENTS
(Continued)

(1)  Nature of Business and Summary of Significant Accounting Policies (Continued)
customer would pay when sold separately. Fair value for the delivered elements, primarily fulfillment services, is based on the residual amount of the
total arrangement fees after deducting the VSOE for the undelivered elements. Fulfillment revenue is recognized when a properly authorized firm
purchase order is received and the customer acknowledges an unconditional obligation to pay, there are no uncertainties surrounding product acceptance,
the fees are fixed and determinable, collection is considered probable and the fulfillment has been completed. Hosting revenues are deferred and
recognized ratably over the related service period, generally twelve months.



The Company records unearned revenue for its
software and service 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 its software and service 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 included 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 101 deferred revenue
|----------------------------------------------------- |  |  |  | ------------------------
|
|Charge for
SAB 101 deferred revenue                   |  |  |  | $                       
|Less amounts
recognized:                              |  |  |  |                         
|Fiscal year
ended September 30, 2001                  |  |  |  |                         
|Fiscal year
ended September 30, 2002                  |  |  |  |                         
|Fiscal year
ended September 30, 2003                  |  |  |  |                         
|Subtotal                                              |  |  |  |                         
|Net SAB 101
deferred revenue as of September 30, 2003 |  |  |  | $                       



Concentrations of Credit
Risk.  Financial instruments that potentially expose the Company to concentrations of credit risk principally consist of cash, cash
equivalents 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. During fiscal year 2003, the Company did not experience significant losses on trade receivables from any particular customer, industry, or
geographic region. However, during fiscal years 2002 and 2001, the Company fully reserved $0.6 million and $2.9 million, respectively, of outstanding
accounts receivable primarily owed by certain telecommunication carrier customers.




Inventories.  Inventories are
recorded at the lower of cost (first-in, first-out method) or market. Cost includes material costs and applicable manufacturing
overheads.


43

---

NETOPIA, INC.NOTES TO CONSOLIDATED STATEMENTS
(Continued)

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



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)                                   
|----------------------- |  |  |  | -----------------------------------------------------------
|Manufacturing
tooling   |  |  |  |                                                            
|Computers               |  |  |  |                                                            
|Machinery and
equipment |  |  |  |                                                            
|Furniture and
fixtures  |  |  |  |                                                            
|Leasehold
improvements  |  |  |  | Shorter of
estimated useful life or remaining term of lease



Goodwill and Other Intangible
Assets.  The Company adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other
Intangible Assets, on October 1, 2001. SFAS No. 142 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. 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 has not been amortized. The Company performs the annual impairment test required by SFAS No. 142 in its
fiscal fourth quarter.




Impairment of Long-Lived Assets, Including Other
Intangible Assets.  The Company adopted 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 group to the estimated undiscounted future net cash flows expected to be generated by the asset group. 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 asset
group. 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.




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. In fiscal years 2003 and 2002, the Company fully expensed certain product development costs it had earlier capitalized as the Company decided
not to incorporate the technology into its products.




Amortization of capitalized development costs begins
when the products are available for general release to customers. The Company amortizes such costs using the straight-line method over the remaining
estimated


44

---

NETOPIA, INC.NOTES TO CONSOLIDATED STATEMENTS
(Continued)

(1)  Nature of Business and Summary of Significant Accounting Policies (Continued)
economic life of the product, which is generally three years. All other research and development expenditures are charged to research and development
expense in the period incurred. During fiscal years 2003, 2002 and 2001, the Company capitalized $0.1 million, $0 and $1.1 million, respectively, of
development costs incurred subsequent to delivery of a working model, under development agreements with third parties.



Advertising Costs.  The Company
expenses advertising costs as incurred. Advertising expense was $0.5 million, $0.7 million and $1.0 million for fiscal years 2003, 2002 and 2001,
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 years 2003 and 2002, the Company recorded losses on these investments of $0.5 million
and $2.9 million, respectively. These impairment charges were recorded in connection with recent valuations of the underlying companies performed in
connection with their efforts to raise additional capital.




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.




Pro Forma Disclosure  Compensatory Stock
Arrangements.  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,                        |  |  |  | 2003 |         | 2002 |  | 2001
|------------------------------------------------------- |  |  |  | ---- | ------- | ---- |  | ----
|
|Net loss
 as reported                                  |  |  |  | $    | (8,320  | )    |  | $   
|Deduct:
Compensation cost as prescribed by SFAS No. 123 |  |  |  |      | (6,977  | )    |  |     
|Net loss
 pro forma                                    |  |  |  | $    | (15,297 | )    |  | $   
|Basic and
diluted net loss per share  as reported      |  |  |  | $    | (0.43   | )    |  | $   
|Basic and
diluted net loss per share  pro forma        |  |  |  | $    | (0.78   | )    |  | $   
|Shares used
in the per share calculations  as reported |  |  |  |      | 19,560  |      |  |     
|Shares used
in the per share calculations  pro forma   |  |  |  |      | 19,560  |      |  |     



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 Black-Scholes Single Option weighted average
fair value of employee stock options granted during fiscal years 2003, 2002 and 2001 was $3.15, $2.75 and $4.40, respectively. The weighted average
exercise price of employee stock options granted during fiscal years 2003, 2002 and 2001 was $3.31, $3.71 and $5.93, 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


45

---

NETOPIA, INC.NOTES TO CONSOLIDATED STATEMENTS
(Continued)

(1)  Nature of Business and Summary of Significant Accounting Policies (Continued)
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, |  |  |  | 2003 |       | 2002 |  | 2001
|------------------------- |  |  |  | ---- | ----- | ---- |  | ----
|Expected
volatility       |  |  |  |      | 174.1 | %    |  |     
|Risk-free
interest rate   |  |  |  |      | 3.27  | %    |  |     
|Expected
dividend yield   |  |  |  |      |      |      |  |     



For fiscal year 2003, the expected lives of options
under the Employee Stock Option and Employee Stock Purchase Plans are estimated at seven years and two years, respectively. For fiscal years 2002 and
2001, the expected lives of options under the Employee Stock Option and Employee Stock Purchase Plans are estimated at four years and six months,
respectively.




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
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 2003, 2002 and 2001, 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 7,633,740 shares in fiscal year 2003, 7,170,338 shares in fiscal year 2002; 3,268,128 shares in fiscal year 2001; and a warrant
to purchase common stock totaling 5,000 shares in fiscal years 2002 and 2001 which expired in January 2003.




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 United States 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.




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


46

---

NETOPIA, INC.NOTES TO CONSOLIDATED STATEMENTS
(Continued)

(1)  Nature of Business and Summary of Significant Accounting Policies (Continued)
and receivables. These gains and losses are classified as a component of other income (loss), net on the Companys consolidated statement of
operations and comprehensive loss.



Recent Accounting
Pronouncements.  In November 2002, the FASB issued FIN 45, Guarantors Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others. FIN 45 elaborates on the disclosures to be made by a guarantor in its interim and annual
financial statements about its obligations under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at
the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The provisions of FIN 45 are
applicable on a prospective basis to guarantees issued or modified after December 31, 2002. The disclosure provisions of FIN 45 relate to the warranty
provided by the Company on its hardware products (See Note 5 of Notes to Consolidated Financial Statements.) Adoption of the disclosure provisions did
not have a significant impact on the Companys consolidated financial statements.




In November 2002, the EITF reached a consensus on
Issue No. 00-21, Revenue Arrangements with Multiple Deliverables. EITF Issue No. 00-21 provides guidance on how to account for arrangements that
involve the delivery or performance of multiple products, services and/or rights to use assets. Adoption of the provisions of EITF Issue No. 00-21 did
not have a significant impact on the Companys consolidated financial statements.




In December 2002, the FASB issued SFAS No. 148,
Accounting for Stock-Based Compensation  Transition and Disclosure, which is effective for fiscal years ending after December 15, 2002.
SFAS No. 148 amends SFAS No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition to the fair value method
of accounting for stock-based employee compensation. The Company accounts for, and intends to continue to account for, stock based compensation using
the intrinsic value method prescribed in APB No. 25, Accounting for Stock Issued to Employees, and related interpretations. In addition, SFAS
No. 148 amends the disclosure provisions of SFAS No. 123 to require disclosure of the effects of an entitys accounting policy with respect to
stock-based employee compensation on reported net income and earnings per share in annual and interim financial statements. Adoption of the disclosure
provisions has been made.


(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 and content filtering 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 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 and comprehensive loss.




Cayman Systems, Inc. (Cayman).  In
October 2001, the Company and Cayman, a Massachusetts corporation, consummated a merger whereby a wholly-owned subsidiary of Netopia (was merged with
and into Cayman. 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. Approximately $1.7
million was held in escrow to satisfy Caymans indemnification obligations under the Merger Agreement. Caymans indemnification obligations
have been satisfied and all amounts have been released from escrow.


47

---

NETOPIA, INC.NOTES TO CONSOLIDATED STATEMENTS
(Continued)

(2)  Acquisitions (Continued)



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
|-------------------------------------------- |  |  |  | ------ | ------ | ------------------- |  | -----------
|
|Current
assets                               |  |  |  | $      | 4,455  |                     |  |            
|Long-term
assets                             |  |  |  |        | 895    |                     |  |            
|Current
liabilities                          |  |  |  |        | (8,021 | )                   |  |            
|Identified
intangible assets:                |  |  |  |        |        |                     |  |            
|Developed
product technology                 |  |  |  |        | 1,120  |                     |  | $          
|Core
technology leveraged                    |  |  |  |        | 5,570  |                     |  |            
|Sales channel
relationships                  |  |  |  |        | 1,380  |                     |  |            
|Goodwill                                     |  |  |  |        | 7,325  |                     |  |            
|Acquired
in-process research and development |  |  |  |        | 2,150  |                     |  |            
|Total
purchase price                         |  |  |  | $      | 14,874 |                     |  | $          



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 and comprehensive loss 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.




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


48

---

NETOPIA, INC.NOTES TO CONSOLIDATED STATEMENTS
(Continued)

(2)  Acquisitions (Continued)
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.




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 a wholly owned subsidiary. WebOrder was a developer of eCommerce infrastructure for small and medium size businesses.




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.




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.




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 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.




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.




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 and
comprehensive loss in the fiscal year ended September 30, 2002 representing the full impairment of the remaining goodwill acquired in connection with
the StarNet acquisition.


49

---

NETOPIA, INC.NOTES TO CONSOLIDATED STATEMENTS
(Continued)

(3)  Goodwill and Other Intangible Assets



The Companys intangible assets at September
30, 2003 consist primarily of goodwill acquired in connection with the acquisitions of WebOrder and netOctopus which the Company is not amortizing,
other 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 a marketing license which the Company is amortizing over the term of the license.




During fiscal year 2002, 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 determined 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 goodwill allocated to 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 and comprehensive loss 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.




During fiscal year 2003, the Company performed the
annual impairment test required by SFAS No. 142 on August 31, 2003 for the remaining goodwill that is allocated to its Web platforms-reporting unit. To
complete the first step of the analysis, the Company discounted the cash flows generated by its Web platforms reporting units 5 year plans and
applied the Gordon Growth factor to determine the residual value. At August 31, 2003 there was no indication of impairment as, based upon the
Companys analysis, the implied fair value of the Companys Web platforms-reporting unit was found to be greater than its carrying
amount.




The following chart details the Companys
goodwill allocated to the Web platforms-reporting unit as of September 30, 2003 (there is no goodwill allocated to the Internet equipment reporting
unit):







|               |  |  |  | Acquisition date |  | Balance at September 30, 2002 |     | Goodwill acquired during the period |  | Goodwill impairment charges |   | Balance at September 30, 2003
|-------------- |  |  |  | ---------------- |  | ----------------------------- | --- | ----------------------------------- |  | --------------------------- | - | -----------------------------
|
|Web
platforms: |  |  |  |                  |  |                               |     |                                     |  |                             |   |                              
|WebOrder       |  |  |  | Mar-00           |  | $                             | 519 |                                     |  | $                           |  |                              
|netOctopus     |  |  |  | Dec-98           |  |                               | 465 |                                     |  |                             |  |                              
|Total          |  |  |  |                  |  | $                             | 984 |                                     |  | $                           |  |                              



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, 2001:







|Fiscal year ended September 30,               |  |  |  | 2003 |        | 2002 |  | 2001
|--------------------------------------------- |  |  |  | ---- | ------ | ---- |  | ----
|Net
loss:                                     |  |  |  |      |        |      |  |     
|As
reported                                   |  |  |  | $    | (8,320 | )    |  | $   
|Less:
amortization of goodwill                |  |  |  |      |       |      |  |     
|Adjusted net
loss                             |  |  |  | $    | (8,320 | )    |  | $   
|Basic and
diluted net loss per share:         |  |  |  |      |        |      |  |     
|As
reported                                   |  |  |  | $    | (0.43  | )    |  | $   
|Less:
amortization of goodwill                |  |  |  |      |       |      |  |     
|Adjusted
basic and diluted net loss per share |  |  |  | $    | (0.43  | )    |  | $   



At September 30, 2003, the Companys other
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 marketing license. The Company did not test its long-lived assets and other intangible assets for impairment during the
fiscal


50

---

NETOPIA, INC.NOTES TO CONSOLIDATED STATEMENTS
(Continued)

(3)  Goodwill and Other Intangible Assets
(Continued)
year ended September 30, 2003, because there were no events or changes in circumstances that would indicate that the carrying amount of the asset
groups might not be recoverable.



In fiscal year 2002, 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 other
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 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.




The following chart details the Companys other
intangible assets, by reporting unit, as of September 30, 2003:







|                            |  |  |  | Acquisition date |  | Balance at September 30, 2002 |       | Other intangible assets acquired during the period |  | Amortization expense |     | Balance at September 30, 2003
|--------------------------- |  |  |  | ---------------- |  | ----------------------------- | ----- | -------------------------------------------------- |  | -------------------- | --- | -----------------------------
|
|Internet
equipment:         |  |  |  |                  |  |                               |       |                                                    |  |                      |     |                              
|Acquired
technology         |  |  |  | Oct-01           |  | $                             | 5,538 |                                                    |  | $                    |    |                              
|Sales channel
relationships |  |  |  | Oct-01           |  |                               | 1,035 |                                                    |  |                      |    |                              
|Subtotal                    |  |  |  |                  |  |                               | 6,573 |                                                    |  |                      |    |                              
|Web
platforms:              |  |  |  |                  |  |                               |       |                                                    |  |                      |     |                              
|Marketing
license           |  |  |  | Jul-99           |  |                               | 138   |                                                    |  |                      |    |                              
|Marketing
license           |  |  |  | Jan-03           |  |                               |      |                                                    |  |                      | 700 |                              
|Subtotal                    |  |  |  |                  |  |                               | 138   |                                                    |  |                      | 700 |                              
|Total                       |  |  |  |                  |  | $                             | 6,711 |                                                    |  | $                    | 700 |                              



Estimated amortization expense for the next five
years related to the Companys other intangible assets as of September 30, 2003 is as follows:







|Fiscal years ended September 30, |  |  |  | 2004 |       | 2005 |  | 2006 |       | 2007 |  | 2008
|-------------------------------- |  |  |  | ---- | ----- | ---- |  | ---- | ----- | ---- |  | ----
|
|Internet
equipment:              |  |  |  |      |       |      |  |      |       |      |  |     
|Acquired
technology              |  |  |  | $    | 1,152 |      |  | $    | 1,152 |      |  | $   
|Sales channel
relationships      |  |  |  |      | 345   |      |  |      | 344   |      |  |     
|Subtotal                         |  |  |  |      | 1,497 |      |  |      | 1,496 |      |  |     
|Web
platforms:                   |  |  |  |      |       |      |  |      |       |      |  |     
|Marketing
license                |  |  |  |      | 175   |      |  |      |      |      |  |     
|Total                            |  |  |  | $    | 1,672 |      |  | $    | 1,496 |      |  | $   

51

---

NETOPIA, INC.NOTES TO CONSOLIDATED STATEMENTS
(Continued)

(4)  Inventories



Inventories consisted of the
following:







|September 30,   |  |  |  | 2003 |       | 2002
|--------------- |  |  |  | ---- | ----- | ----
|
|Raw
materials   |  |  |  | $    | 1,175 |     
|Work in
process |  |  |  |      | 213   |     
|Finished
goods  |  |  |  |      | 4,580 |     
|                |  |  |  | $    | 5,968 |     

(5)  Warranty Liability



Warranty liability is recorded as a component of
accrued liabilities on the Companys consolidated balance sheet. For the Companys Internet equipment products, the Company generally
provides a one-year warranty to domestic purchasers and a two-year warranty to international purchasers. The Company generally does not offer a
warranty on its Web platforms products. On a monthly basis, the Company accrues for its estimated warranty liability based upon a percentage of such
months cost of revenues. On a quarterly basis, the Company analyzes its estimated warranty liability based upon historic return rates and records
adjustments to its warranty liability as necessary.




Warranty liability consisted of the
following:







|                                     |  |  |  | Beginning balance |      | Cost of warranty replacements |  | Warranty accrued |     | Ending balance
|------------------------------------ |  |  |  | ----------------- | ---- | ----------------------------- |  | ---------------- | --- | --------------
|
|Fiscal year
ended September 30, 2003 |  |  |  | $                 | (323 | )                             |  | $                | 369 |               

(6)  Furniture, Fixtures and Equipment



Furniture, fixtures and equipment consisted of the
following:







|September 30,                             |  |  |  | 2003 |        | 2002
|----------------------------------------- |  |  |  | ---- | ------ | ----
|
|Manufacturing
tooling                     |  |  |  | $    | 897    |     
|Machinery and
equipment                   |  |  |  |      | 2,541  |     
|Furniture and
fixtures                    |  |  |  |      | 1,800  |     
|Computers                                 |  |  |  |      | 7,187  |     
|Leasehold
improvements                    |  |  |  |      | 302    |     
|                                          |  |  |  |      | 12,727 |     
|Accumulated
depreciation and amortization |  |  |  |      | (8,987 | )   
|                                          |  |  |  | $    | 3,740  |     

(7)  Income Taxes



For financial reporting purposes, the Companys
loss from continuing operations includes the following:







|Fiscal years ended September 30,       |  |  |  | 2003 |        | 2002 |  | 2001
|-------------------------------------- |  |  |  | ---- | ------ | ---- |  | ----
|
|Domestic                               |  |  |  | $    | (8,439 | )    |  | $   
|Foreign                                |  |  |  |      | 182    |      |  |     
|Loss before
provision for income taxes |  |  |  |      | (8,257 | )    |  | $   
|Foreign tax
expense (a)                |  |  |  |      | 63     |      |  |     
|Net loss from
continuing operations    |  |  |  | $    | (8,320 | )    |  | $   



|(a) |  | The current foreign tax expense of $63,000 is included in the
Companys operating expenses in the consolidated statement of operations and comprehensive loss.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------

52

---

NETOPIA, INC.NOTES TO CONSOLIDATED STATEMENTS
(Continued)

(7)  Income Taxes (Continued)



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







|Fiscal years ended September 30, |  |  |  | 2003 |    | 2002 |  | 2001
|-------------------------------- |  |  |  | ---- | -- | ---- |  | ----
|
|Current:                         |  |  |  |      |    |      |  |     
|Federal                          |  |  |  | $    |   |      |  | $   
|State                            |  |  |  |      |   |      |  |     
|Foreign
(a)                      |  |  |  |      | 63 |      |  |     
|                                 |  |  |  |      | 63 |      |  |     
|Deferred:                        |  |  |  |      |    |      |  |     
|Federal                          |  |  |  |      |   |      |  |     
|State                            |  |  |  |      |   |      |  |     
|                                 |  |  |  |      |   |      |  |     
|Total tax
expense (a)            |  |  |  | $    | 63 |      |  | $   

---

|(a) |  | The current foreign tax expense of $63,000 is included in the
Companys operating expenses in the consolidated statement of operations and comprehensive loss.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------



Income tax expense (benefit) related to continuing
operations differs from the amounts computed by applying the statutory income tax rate of 34% for 2003, 2002 and 2001 to pretax loss as a result of the
following:







|Fiscal years ended September 30,   |  |  |  | 2003 |        | 2002 |  | 2001
|---------------------------------- |  |  |  | ---- | ------ | ---- |  | ----
|
|Computed
expected benefit of 34% |  |  |  | $    | (2,807 | )    |  | $   
|Net operating
loss not benefited   |  |  |  |      | 2,621  |      |  |     
|Investment
impairment              |  |  |  |      | 155    |      |  |     
|Amortization
of goodwill           |  |  |  |      |       |      |  |     
|Foreign taxes
(a)                  |  |  |  |      | 63     |      |  |     
|State tax and
other, net           |  |  |  |      | 31     |      |  |     
|Total tax
expense (a)              |  |  |  | $    | 63     |      |  | $   

---

|(a) |  | The current foreign tax expense of $63,000 is included in the
Companys operating expenses in the consolidated statement of operations and comprehensive loss.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------



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







|September 30,                  |  |  |  | 2003 |         | 2002 |  | 2001
|------------------------------ |  |  |  | ---- | ------- | ---- |  | ----
|
|Deferred tax
assets:           |  |  |  |      |         |      |  |     
|Reserves and
accruals          |  |  |  | $    | 1,167   |      |  | $   
|Deferred
rent                  |  |  |  |      | 141     |      |  |     
|Research and
other credits     |  |  |  |      | 4,304   |      |  |     
|Tangible and
intangible assets |  |  |  |      | 8,740   |      |  |     
|Net operating
losses (NOLs)    |  |  |  |      | 28,838  |      |  |     
|Subtotal                       |  |  |  |      | 43,190  |      |  |     
|Less:
valuation allowance      |  |  |  |      | (43,190 | )    |  |     
|Total
deferred tax assets      |  |  |  | $    |        |      |  | $   

53

---

NETOPIA, INC.NOTES TO CONSOLIDATED STATEMENTS
(Continued)

(7)  Income Taxes (Continued)



The net change in the total valuation allowance for
the years ended September 30, 2003 and 2002 was an increase of $7.6 million and $11.9 million, respectively.




At September 30, 2003, the Company believed that
based upon available objective evidence, there was sufficient uncertainty regarding the ability to realize its deferred tax assets to warrant a full
valuation allowance. The factors considered included the relative shorter life cycles in the high technology industry and the uncertainty of
longer-term taxable income estimates.




At September 30, 2003, the Company had net operating
loss carry-forwards of approximately $80.3 million for federal tax purposes and $26.4 million for state tax purposes. If not earlier utilized, the
federal net operating loss carry-forwards will expire in various years from 2018 through 2023 and the state net operating loss carry-forwards will
expire in various years from 2004 through 2014.




At September 30, 2003, the Company also had research
credit carry-forwards 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 carry-forwards will expire in various years beginning 2006 through 2023. The state research credit carries forward indefinitely
until utilized. The Company has California manufacturing credit carry-forwards of approximately $0.1 million, which expire in various years beginning
2006 through 2008.




At September 30, 2003, the Company also had minimum
tax credit carry-forwards of approximately $0.1 million for federal tax purposes and $0.2 million for state tax purposes. These credits carry forward
indefinitely until utilized.




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


(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, 2003.




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 was $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 expired unexercised in January
2003.


Stock Option Plans



1996 Stock Option Plan.  In April
1996, the Company adopted the 1996 Stock Option Plan (the 1996 Plan) providing for the issuance of incentive or non-statutory options to directors,
employees, and non-employee consultants. Options are granted at the discretion of the Board of Directors or the Compensation Committee of the Board of
Directors. Incentive stock options may be granted at not less than 100% of the fair market value per share


54

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NETOPIA, INC.NOTES TO CONSOLIDATED STATEMENTS
(Continued)

(8)  Stockholders Equity and Stock Option Plans
(Continued)

and non-statutory stock options may be granted at not less than 85% of the fair
market value per share at the date of grant as determined by the Board of Directors or the Compensation Committee, except for options granted to a
person owning greater than 10% of the total combined voting power of all classes of stock of the Company, for which the exercise price of the options
must be not less than 110% of the fair market value. Included in the 1996 Plan is a provision for the automatic grant of non-statutory options to
non-employee directors of the Company. The current provisions relating to the automatic grant of options to directors are described below.



2000 Stock Incentive Plan.  In
October 2000, the Company adopted the 2000 Stock Incentive Plan (the 2000 Plan) providing for issuance of non-statutory options and restricted stock to
employees, officers, directors, consultants, independent contractors and advisors of the Company or any subsidiary of the Company. Options and
restricted stock awards granted under the 2000 Plan are granted at the discretion of the Board of Directors or the Compensation Committee of the Board
of Directors. The 2000 Plan is not a stockholder approved stock option plan and is intended to comply with the exception for broadly based option plans
in which a majority of the participants are rank and file employees not officers or directors, and a majority of the grants are made to such employees.
Only nonqualified stock options that do not qualify as incentive stock options within the meaning of Section 422(b) of the 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, 2003, there were
no restricted stock awards granted under the 2000 Plan.




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




The initial number of shares of common stock
available for issuance under the 2002 Plan was 750,000 shares. The number of shares of common stock available for issuance under the 2002 Plan
automatically increases on the first trading day of each calendar year beginning 2003 by an amount equal to four and three-quarter percent (4.75%) of
the shares of common stock outstanding on December 31 of the immediately preceding calendar year, provided, however, that no such automatic annual
increase may exceed 1,000,000 shares. As a result of this automatic increase provision, an additional 898,081 shares of common stock become available
on January 2, 2003 for issuance under the 2002 Plan.




Amendments to Automatic Option Grant Programs in
Stock Option Plans.  Amendments to the Companys Automatic Option Grant Programs that are included in the 1996 Stock Option Plan and
2002 Equity Incentive Plan to increase the number of options granted to non-employee directors of the Company were approved at the Companys
Annual Meeting of Stockholders in January 2003. As amended, the Automatic Option Grant Programs provide that each non-employee director who is first
elected or appointed on or after the date of the 2003 Annual Meeting of Stockholders will receive the grant of an option to purchase 50,000 shares of
common stock. The


55

---

NETOPIA, INC.NOTES TO CONSOLIDATED STATEMENTS
(Continued)

(8)  Stockholders Equity and Stock Option Plans
(Continued)

Automatic Option Grant Programs also provide for the grant on the date of each
annual stockholder meeting beginning with the 2003 Annual Meeting of Stockholders of (a) an option to purchase 15,000 shares of common stock to each
non-employee director, and (b) an additional option to purchase 5,000 shares of common stock to each non-employee director who is a member of the Audit
Committee of the Companys Board of Directors.



As of September 30, 2003, the Company had 7,633,740
shares subject to outstanding options and 179,786 shares available for grant.




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, 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                      |  |  |  |                      | 4,723,330  |                                
|Options
exercised                    |  |  |  |                      | (99,231    | )                              
|Options
cancelled                    |  |  |  |                      | (721,889   | )                              
|Outstanding
as of September 30, 2002 |  |  |  |                      | 7,170,338  |                                
|Options
granted                      |  |  |  |                      | 1,867,750  |                                
|Options
exercised                    |  |  |  |                      | (556,505   | )                              
|Options
cancelled                    |  |  |  |                      | (847,843   | )                              
|Outstanding
as of September 30, 2003 |  |  |  |                      | 7,633,740  |                                
|Exercisable                          |  |  |  |                      | 4,515,306  |                                



The fair market value, based upon the Black-Scholes
option valuation model, of the options granted during fiscal years 2003, 2002 and 2001 were $3.15, $2.75 and $4.40, respectively.




The following table summarizes information with
respect to the Companys stock options outstanding at September 30, 2003:







|                |  |  |  | Options outstanding |           | Options exercisable | 
|--------------- |  |  |  | ------------------- | --------- | ------------------- | 
|
|$1.200 
$2.500 |  |  |  |                     | 1,148,515 |                     | 
|2.580
  3.600  |  |  |  |                     | 817,098   |                     | 
|3.610
  3.700  |  |  |  |                     | 695,063   |                     | 
|3.800
  3.800  |  |  |  |                     | 1,140,000 |                     | 
|3.844
  4.250  |  |  |  |                     | 1,244,434 |                     | 
|4.260
  5.531  |  |  |  |                     | 645,592   |                     | 
|5.550
  5.550  |  |  |  |                     | 1,081,824 |                     | 
|5.625
  9.500  |  |  |  |                     | 774,362   |                     | 
|10.50
  14.875 |  |  |  |                     | 49,840    |                     | 
|18.00
  48.00  |  |  |  |                     | 37,012    |                     | 
|                |  |  |  |                     | 7,633,740 |                     | 

56

---

NETOPIA, INC.NOTES TO CONSOLIDATED STATEMENTS
(Continued)

(8)  Stockholders Equity and Stock Option Plans
(Continued)



1996 Employee Stock Purchase
Plan.  In April 1996, the Board of Directors adopted the 1996 Employee Stock Purchase Plan (the Purchase Plan). To date a total of
3,000,000 shares of common stock 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. An amendment to the
Companys Employee Stock Purchase Plan was approved at the Companys Annual Meeting of Stockholders in January 2003 to increase the number of
shares of common stock that each participating employee may purchase in any purchase period from 2,000 shares to 5,000 shares.




Shares issued under the Purchase Plan totaled
756,190 in fiscal year 2003, 429,180 in fiscal year 2002 and 250,155 in fiscal year 2001. As of September 30, 2003, 2,096,945 shares have been issued
under the Purchase Plan and 903,055 shares were reserved for future issuance 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 were outstanding
under 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.




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 Stock Market.


(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 2008. 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:







|Fiscal years ended September 30,         |  |  |  | 2004 |       | 2005 |  | 2006 |       | 2007 |  | 2008 |     | thereafter |  | Total
|---------------------------------------- |  |  |  | ---- | ----- | ---- |  | ---- | ----- | ---- |  | ---- | --- | ---------- |  | -----
|
|Facility and
operating lease commitments |  |  |  | $    | 1,844 |      |  | $    | 1,355 |      |  | $    | 770 |            |  | $    



Total rental expense for all operating leases
amounted to $1.6 million, $2.0 million and $1.9 million for fiscal years 2003, 2002 and 2001, respectively.




Term Loans.  As of September 30,
2003, the Company has two outstanding term loans payable at various dates through 2005. (See Note 15 of Notes to Consolidated Financial Statements.)
The following is a schedule of future loan payments required under the loan agreement:







|Fiscal years ended September 30, |  |  |  | 2004 |     | 2005 |  | thereafter |     | Total
|-------------------------------- |  |  |  | ---- | --- | ---- |  | ---------- | --- | -----
|
|Payments
under term loans        |  |  |  | $    | 250 |      |  | $          | 104 |      



Litigation.  The Company is
involved in various legal matters that have arisen in the normal course of business. Management believesany 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, subject to maximum contributions permitted under law. In addition, the Company may make discretionary retirement contributions to
the plan. No discretionary retirement contributions were made in any period presented.


57

---

NETOPIA, INC.NOTES TO CONSOLIDATED STATEMENTS
(Continued)

(10)  Segment, Geographic and Significant Customer
Information



Segment Information.  SFAS No. 131,
Disclosure about Segments of an Enterprise and Related Information, 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 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, 2003 |        | September 30, 2002 |  | September 30, 2001 |       
|------------------------------ |  |  |  | ------------------ | ------ | ------------------ |  | ------------------ | ------
|
|
|Revenue                        |  |  |  | $                  | 68,217 |                    |  | $                  | 18,090
|Cost of
revenues               |  |  |  |                    | 48,896 |                    |  |                    | 1,314 
|Gross
profit                   |  |  |  |                    | 19,321 |                    |  |                    | 16,776
|Gross
margin                   |  |  |  |                    | 28     | %                  |  |                    | 93    
|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. Disaggregated financial information regarding the Companys revenues by geographic region for
the fiscal years 2003, 2002 and 2001 is as follows:







|Fiscal year ended September 30, |  |  |  | 2003 |        | 2002 |  | 2001 |    
|------------------------------- |  |  |  | ---- | ------ | ---- |  | ---- | ---
|
|Europe                          |  |  |  | $    | 24,785 |      |  |      | 29 
|Canada                          |  |  |  |      | 883    |      |  |      | 1  
|Asia Pacific
and other          |  |  |  |      | 1,599  |      |  |      | 2  
|Subtotal
international revenue  |  |  |  |      | 27,267 |      |  |      | 32 
|United
States                   |  |  |  |      | 59,040 |      |  |      | 68 
|Total
revenues                  |  |  |  | $    | 86,307 |      |  |      | 100



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




Customer Information.  The Company
sells its products primarily to incumbent local exchange carriers (ILECs), competitive local exchange carriers (CLECs), distributors, Internet service
providers (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 2003, 2002 and 2001 accounted for 10% or more of total revenues.


58

---

NETOPIA, INC.NOTES TO CONSOLIDATED STATEMENTS
(Continued)

(10)  Segment, Geographic and Significant Customer Information
(Continued)






|Fiscal year ended September 30, |  |  |  | 2003 |        | 2002 |  | 2001 |   
|------------------------------- |  |  |  | ---- | ------ | ---- |  | ---- | --
|
|Swisscom                        |  |  |  | $    | 13,359 |      |  |      | 15
|Covad                           |  |  |  |      | 12,787 |      |  |      | 15
|SBC                             |  |  |  |      | 9,273  |      |  |      | 11
|Ingram
Micro                    |  |  |  |      | 5,346  |      |  |      | 6 
|Rhythms
NetConnections          |  |  |  |      |       |      |  |      |  



No other customers during the fiscal years ended
September 30, 2003, 2002 and 2001 accounted for 10% or more of the Companys total revenues. For fiscal year 2003, there were four customers who
each individually represented at least 5% of the Companys revenues and in the aggregate, accounted for 47% of the Companys total revenues.
For fiscal year 2002, there were three customers who each individually represented at least 5% of the Companys revenues and in the aggregate,
accounted for 30% 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 total revenues and in aggregate, accounted for 38% 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, |  |  |  | 2003 |       | 2002 |  | 2001 |   
|------------------------------- |  |  |  | ---- | ----- | ---- |  | ---- | --
|
|Swisscom                        |  |  |  | $    | 4,680 |      |  |      | 28
|Covad                           |  |  |  |      | 1,133 |      |  |      | 7 
|SBC                             |  |  |  |      | 931   |      |  |      | 6 
|Ingram
Micro                    |  |  |  |      | 704   |      |  |      | 4 

(11)  Long-Term Investments



In fiscal year 2001, the Company purchased $2.0
million of Series D Preferred stock in MegaPath Networks Inc. (MegaPath). In fiscal year 2002, the Company purchased $0.4 million of Series E Preferred
Stock in MegaPath. In fiscal year 2003, MegaPath completed an additional round of financing in which the Company invested $26,000. The Company owns
approximately 4.0% of MegaPath. MegaPath offers high-speed DSL access and eCommerce and Web hosting services to small and medium size businesses.
During fiscal years 2003, 2002 and 2001, MegaPath purchased $1.3 million, $0.9 million and $0.1 million, respectively, of the Companys products.
At September 30, 2003, MegaPaths accounts receivable with the Company was $0.1 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
for the Series E Preferred Stock financing. Although there is no public market for MegaPaths stock, the Company believes that the market value of
its investment in MegaPath is not less than the Companys $1.0 million carrying value at September 30, 2003 due to the fact that the fiscal year
2003 financing in which the Company used the same valuation as the Series E Preferred Stock financing.




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 years 2003 and 2002 and did not account for any accounts receivable at September 30, 2003. In fiscal year 2002,
the Company recorded a $1.5 million unrealized loss on impaired securities related to its investment in Everdream. In fiscal year 2003, the Company
recorded a $0.5 million loss on impaired securities, fully impairing the remaining balance of the Companys investment in Everdream. These
impairments were recorded based on the Companys resulting ownership interest in Everdream after Everdreams subsequent
financings.


59

---

NETOPIA, INC.NOTES TO CONSOLIDATED STATEMENTS
(Continued)

(12)  Restructuring Costs



The Company generally maintains accruals relating to
restructurings for up to two years unless the Company earlier has definitive closure of the specific liabilities accrued. The balance of each
outstanding restructuring charge is described below.




During the three months ended June 30, 2003, the
Company recorded a restructuring charge of $0.3 million, primarily consisting of employee severance benefits resulting from a reduction in the
Companys workforce. Details of the restructuring charge are as follows:







|                              |  |  |  | Employee severance benefits |     | Other |  | Total
|----------------------------- |  |  |  | --------------------------- | --- | ----- |  | -----
|
|Total
charge                  |  |  |  | $                           | 243 |       |  | $    
|Less: Amounts
paid            |  |  |  |                             | 228 |       |  |      
|Balance at
September 30, 2003 |  |  |  | $                           | 15  |       |  | $    



During the three months ended December 31, 2002, the
Company recorded a restructuring charge of $0.3 million, primarily consisting of employee severance benefits resulting from a reduction in the
Companys workforce, and facility closure costs related to closure of a sales office in Hong Kong. The Company believes that no liabilities remain
outstanding related to this restructuring, and for that reason reversed the remaining liability during the three months ended September 30, 2003.
Details of the restructuring charge are as follows:







|                                        |  |  |  | Employee severance benefits |     | Facility closure costs |  | Other |    | Total
|--------------------------------------- |  |  |  | --------------------------- | --- | ---------------------- |  | ----- | -- | -----
|
|Total
charge                            |  |  |  | $                           | 313 |                        |  | $     | 25 |      
|Less: Amounts
paid                      |  |  |  |                             | 310 |                        |  |       | 25 |      
|Non-cash
charges                        |  |  |  |                             |    |                        |  |       |   |      
|Reversal due
to expiration of liability |  |  |  |                             | 3   |                        |  |       |   |      
|Balance at
September 30, 2003           |  |  |  | $                           |    |                        |  | $     |   |      



During fiscal year 2002, the Company recorded a
restructuring charge of $0.5 million, primarily consisting of employee severance benefits resulting from a reduction in the Companys workforce of
approximately 24 employees whose positions were determined to be redundant as a result of the Cayman acquisition. The Company believes that no
liabilities remain outstanding related to this restructuring, and for that reason reversed the remaining liability during the three months ended
September 30, 2003. Details of the restructuring charge are as follows:







|                                        |  |  |  | Employee severance benefits |     | Other |  | Total
|--------------------------------------- |  |  |  | --------------------------- | --- | ----- |  | -----
|
|Total
charge                            |  |  |  | $                           | 394 |       |  | $    
|Less: Amounts
paid                      |  |  |  |                             | 308 |       |  |      
|Non-cash
charges                        |  |  |  |                             |    |       |  |      
|Reversal due
to expiration of liability |  |  |  |                             | 86  |       |  |      
|Balance at
September 30, 2003           |  |  |  | $                           |    |       |  | $    

60

---

NETOPIA, INC.NOTES TO CONSOLIDATED STATEMENTS
(Continued)

(12)  Restructuring Costs (Continued)



During fiscal year 2001, the Company recorded a
restructuring charge in connection with a reduction in the Companys workforce of approximately 27 employees 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. The Company believes that no liabilities remain outstanding related to this restructuring, and for
that reason reversed the remaining liability during the fiscal year 2003. Details of the restructuring charge are as follows:







|                                        |  |  |  | Employee severance benefits |     | Internet portal exit costs |  | Facility costs |     | Total
|--------------------------------------- |  |  |  | --------------------------- | --- | -------------------------- |  | -------------- | --- | -----
|
|Total
charge                            |  |  |  | $                           | 475 |                            |  | $              | 510 |      
|Less: Amounts
paid                      |  |  |  |                             | 344 |                            |  |                | 97  |      
|Non-cash
charges                        |  |  |  |                             | 63  |                            |  |                | 413 |      
|Reversal due
to expiration of liability |  |  |  |                             | 68  |                            |  |                |    |      
|Balance at
September 30, 2003           |  |  |  | $                           |    |                            |  | $              |    |      

(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:







|                              |  |  |  | Customer integration communications |     | Systems integration |  | Total
|----------------------------- |  |  |  | ----------------------------------- | --- | ------------------- |  | -----
|
|Total
charge                  |  |  |  | $                                   | 269 |                     |  | $    
|Less: Amounts
paid            |  |  |  |                                     | 269 |                     |  |      
|Balance at
September 30, 2003 |  |  |  | $                                   |    |                     |  | $    

(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 and development expenses in
anticipation of the merger that the Company had undertaken at the direction of Proxim, certain shared merger costs, and other related expenses. The
Company believes that no liabilities remain outstanding related to this merger, and for that reason reversed the remaining liability during fiscal year
2003. Details of the charge is as follows:







|                                |  |  |  | Accounting and legal advisory services |       | Joint marketing commitments |  | Joint research and development costs |     | Shared merger costs |  | Other |     | Total
|------------------------------- |  |  |  | -------------------------------------- | ----- | --------------------------- |  | ------------------------------------ | --- | ------------------- |  | ----- | --- | -----
|
|Total
charge                    |  |  |  | $                                      | 1,257 |                             |  | $                                    | 572 |                     |  | $     | 429 |      
|Less: Amounts
paid              |  |  |  |                                        | 1,257 |                             |  |                                      | 560 |                     |  |       | 429 |      
|Non-cash
charges                |  |  |  |                                        |      |                             |  |                                      |    |                     |  |       |    |      
|Reversal of
remaining liability |  |  |  |                                        |      |                             |  |                                      | 12  |                     |  |       |    |      
|Balance at
September 30, 2003   |  |  |  | $                                      |      |                             |  | $                                    |    |                     |  | $     |    |      

61

---

NETOPIA, INC.NOTES TO CONSOLIDATED STATEMENTS
(Continued)

(15)  Credit Facility



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 time is determined using a formula
relating to the amount of eligible accounts receivable and inventory at the borrowing date. On June 12, 2003, the Company and Silicon Valley Bank
amended the Credit Facility to extend the term from June 30, 2004 to June 30, 2005. Silicon Valley Bank also agreed to amend the tangible net worth
covenant in the Credit Facility to provide that the Company must maintain a minimum tangible net worth of $20 million plus 50% of the Companys
net income in each fiscal quarter through June 2004. The minimum tangible net worth covenant was amended because the Company had not met the tangible
net worth covenant of $23.5 million at April 30, 2003. As part of the June 2003 amendment, Silicon Valley Bank waived the default of this covenant
retroactively to April 1, 2003. There is no assurance that Silicon Valley Bank will waive any future default of this or any other covenant contained in
the Credit Facility. 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.




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, 2003, the interest
rate was 5.0%. 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, 2003, the Company had no
outstanding borrowings and had a borrowing availability of approximately $12.2 million.




Term Loan A.  On February 25, 2003,
Silicon Valley Bank made a term loan to the Company in the original principal amount of $0.2 million. The principal amount of Term Loan A is payable in
twenty-four equal monthly payments of principal in the amount of $8,333.33 per month, commencing on March 1, 2003 and continuing until paid in full.
$100,000 of the outstanding balance of Term Loan A is recorded as a current liability on the Companys September 30, 2003 consolidated balance
sheet because that portion of the principal of Term Loan A will be repaid within one year of the balance sheet date. The remaining balance is recorded
as a long-term liability. Term Loan A bears interest at a rate equal to Silicon Valley Banks prime rate plus 0.75% per annum. At September 30,
2003, the interest rate was 5.0%. Upon the repayment of any portion of Term Loan A, such portion may not be re-borrowed. The outstanding principal
balance of Term Loan A shall be reserved from the amount of credit facility otherwise available to the Company.




Term Loan B.  On February 25, 2003,
Silicon Valley Bank made a term loan to the Company in the original principal amount of $0.3 million. The principal amount of Term Loan B is payable in
twenty-four equal monthly payments of principal in the amount of $12,500.00 per month, commencing on March 1, 2003 and continuing until paid in full.
$150,000 of the outstanding balance of Term Loan B is recorded as a current liability on the Companys September 30, 2003 consolidated balance
sheet because that portion of the principal of Term Loan B will be repaid within one year of the balance sheet date. The remaining balance is recorded
as a long-term liability. Term Loan B bears interest at a rate equal to Silicon Valley Banks prime rate plus 0.75% per annum. At September 30,
2003, the interest rate was 5.0%. Upon the repayment of any portion of Term Loan B, such portion may not be re-borrowed.


62

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NETOPIA, INC.NOTES TO CONSOLIDATED STATEMENTS
(Continued)

(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, |  |  |  | 2003 |      | 2002 |  | 2001
|-------------------------------- |  |  |  | ---- | ---- | ---- |  | ----
|
|Interest
income                  |  |  |  | $    | 183  |      |  | $   
|Interest
expense                 |  |  |  |      | (161 | )    |  |     
|Loss on
impaired securities      |  |  |  |      | (457 | )    |  |     
|Other
expense                    |  |  |  |      | (117 | )    |  |     
|Total other
income (loss), net   |  |  |  | $    | (552 | )    |  | $   

(17)  Subsequent Event



In October 2003, the Company acquired JadeSail
Systems, Inc. (JadeSail), a provider of Internet Protocol (IP) services management and network equipment provisioning software. Under the terms of the
purchase agreement, the Company issued shares of its common stock in exchange for all the outstanding common stock of JadeSail. The aggregate purchase
price was approximately $1.4 million and consisted of (a) 160,000 shares of the Companys common stock, which were valued using the average of the
closing price of the Companys common stock for the 5 day period beginning two days prior to and ending two days after the closing date, and (b)
other transaction related expenses of approximately $0.2 million.


63

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Schedule  Valuation and Qualifying Accounts






|Description                          |  |  |  | Balance at beginning of period |       | Charged (credited) to costs and expenses |  | Deductions |       | Balance at end of period
|------------------------------------ |  |  |  | ------------------------------ | ----- | ---------------------------------------- |  | ---------- | ----- | ------------------------
|
|Allowance for
doubtful accounts:     |  |  |  |                                |       |                                          |  |            |       |                         
|Fiscal
year ended September 30, 2003 |  |  |  | $                              | 93    |                                          |  | $          | 97    |                         
|Fiscal year
ended September 30, 2002 |  |  |  |                                | 513   |                                          |  |            | 637   |                         
|Fiscal year
ended September 30, 2001 |  |  |  |                                | 2,817 |                                          |  |            | 3,052 |                         
|Allowance for
returns and rebates:   |  |  |  |                                |       |                                          |  |            |       |                         
|Fiscal
year ended September 30, 2003 |  |  |  | $                              | 474   |                                          |  | $          | 223   |                         
|Fiscal year
ended September 30, 2002 |  |  |  |                                | 128   |                                          |  |            | 349   |                         
|Fiscal year
ended September 30, 2001 |  |  |  |                                | 441   |                                          |  |            |      |                         

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



None.


ITEM 9A.    CONTROLS AND PROCEDURES



As of the end of the period covered by this report,
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 (as defined in Securities
Exchange Act Rules 13a-15(e) and 15d-15(e)). Based upon this evaluation, our President and Chief Executive Officer and our Chief Financial Officer
concluded that, as of September 30, 2003, our disclosure controls and procedures were adequate to ensure that information 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.




During our fourth fiscal quarter, there were no
changes in our internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal
controls over financial reporting.


PART III

ITEM 10.    DIRECTORS AND EXECUTIVE OFFICERS OF THE
REGISTRANT



The information required by Item 10 of Form 10-K
regarding our directors is incorporated by reference to the information contained in the section captioned Proposal No. 1  Election of
Directors in our Proxy Statement to be filed with the United States Securities and Exchange Commission within 120 days after the end of the
fiscal year ended September 30, 2003. The information required by Item 10 of Form 10-K regarding our executive officers is set forth in Part I, Item
4A, Executive Officers of the Registrant, of this Form 10-K.




Our Code of Business Conduct and Ethics, is attached
as Exhibit 14.1, and is also available in the About Netopia section of our web site located at www.netopia.com.


ITEM 11.    Executive Compensation



The information required by Item 11 of Form 10-K is
incorporated by reference to the information contained in the section captioned Executive Compensation and Other Matters in our
Proxy Statement to be filed with the United States Securities and Exchange Commission within 120 days after the end of the fiscal year ended September
30, 2003.


64

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ITEM 12.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT



The information required by Item 12 is incorporated
by reference to the information contained in the section captioned Security Ownership of Certain Beneficial Owners and Management in
our Proxy Statement to be filed with the United States Securities and Exchange Commission within 120 days after the end of the fiscal year ended
September 30, 2003.


ITEM 13.    CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS



During the fiscal year ended September 30, 2003,
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 know 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.    PRINCIPAL ACCOUNTING FEES AND
SERVICES



The information required by Item 14 of Form 10-K is
incorporated by reference to the information contained in the section captioned Audit-Related Fees under Proposal No. 3
 Ratification of Appointment of Independent Auditors in our Proxy Statement to be filed with the United States Securities and Exchange
Commission within 120 days after the end of the fiscal year ended September 30, 2003.


PART IV

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

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

|(b) |  | During the three months ended September 30, 2003, we filed the
following reports on Form 8-K:
|--- |  | ---------------------------------------------------------------------------------------------

| |  | On August 5, 2003, we filed a Form 8-K reporting Item 5 
Other Events and Item 7  Financial Statements and Exhibits, furnishing a copy of the press release announcing our private placement of
approximately 1.4 million shares of common stock.
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | On July 22, 2003, we filed a Form 8-K reporting Item 7 
Financial Statements and Exhibits and Item 9  Regulation FD Disclosure, furnishing a copy of the press release announcing our financial results
for the quarter ended June 30, 2003.
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(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                                                                                                                       

65

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|Exhibit Number |  |  |  | Description                                                                                                                                                                                                                                                               
|-------------- |  |  |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|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)        |  |  |  | 2000 Stock Incentive Plan and forms of agreements thereunder                                                                                                                                                                                                              
|10.7(d)        |  |  |  | Agreement and Plan of Merger and Reorganization among Netopia, Inc., Amazon Merger Corporation, Cayman Systems, Inc., Certain Holders of
Convertible Subordinated Promissory Notes and Richard Burnes, as Security Holders Representative, dated as of September 19,
2001
|10.8(e)        |  |  |  | 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                                                                                                  
|10.9(f)        |  |  |  | Silicon Valley Bank Loan and Security Agreement entered into on June 27, 2002                                                                                                                                                                                             
|10.10(g)       |  |  |  | Office Lease Agreement dated December 9, 2002 between the Company and Christie Avenue Partner  JS                                                                                                                                                                        
|10.11(h)       |  |  |  | Limited Waiver and Amendment to Loan Documents entered into between Silicon Valley Bank and Netopia, Inc. on June 12, 2003                                                                                                                                                
|11.1           |  |  |  | Reference is made to Note 1 of Notes to Consolidated Financial Statements                                                                                                                                                                                                 
|14.1           |  |  |  | Code of Business Conduct and Ethics                                                                                                                                                                                                                                       
|23.1           |  |  |  | Consent of KPMG LLP, Independent Auditors                                                                                                                                                                                                                                 
|24.1           |  |  |  | Power of Attorney (see Signature page)                                                                                                                                                                                                                                    
|31.1           |  |  |  | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                        
|31.2           |  |  |  | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                        
|32.1           |  |  |  | Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                        
|32.2.          |  |  |  | Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                        



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

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

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

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

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

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

66

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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 19th day of December 2003.


|By: |  | /s/ Alan B. Lefkof Alan B. Lefkof President and Chief Executive Officer
|--- |  | -----------------------------------------------------------------------

|By: |  | /s/ William D. Baker William D. Baker Senior Vice President, Finance and Operations, and Chief Financial Officer (Principal Financial
and Accounting Officer)
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------

Dated: December 19, 2003

POWER OF ATTORNEY



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




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







|Signature                                |  |  |  | Title                              |  | Date             
|---------------------------------------- |  |  |  | ---------------------------------- |  | -----------------
|/s/ Reese M.
JonesReese M. Jones         |  |  |  | Chairman of the Board of Directors |  | December 19, 2003
|/s/ David F.
MarquardtDavid F. Marquardt |  |  |  | Director                           |  | December 19, 2003
|/s/ Robert
LeeRobert Lee                 |  |  |  | Director                           |  | December 19, 2003
|/s/ Howard T.
SlayenHoward T. Slayen     |  |  |  | Director                           |  | December 19, 2003
|/s/ Harold S.
WillsHarold S. Wills       |  |  |  | Director                           |  | December 19, 2003

67

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