##### Table of Contents

---

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



---



FORM 10-K



---



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



For the fiscal year ended September 30, 2004



Or



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



For the transition period fromto



Commission file number 0-28450



---



Netopia, Inc.

(Exact name of registrant as specified in its charter)



---



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



6001 Shellmound
Street, 4thFloor

Emeryville, California 94608

(Address of principal executive offices, including Zip Code)



(510) 420-7400

(Registrants telephone number, including area code)



---



Indicate by check ü whether the registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yesþ    No ̈



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



Indicate by check ü whether the registrant is an accelerated
filer.    Yesþ    No ̈



As of the last business day of the registrants most
recently completed second fiscal quarter, March 31, 2004, 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 $282,201,021.



As of January 28, 2005, there were 24,899,119 shares of the
registrants common stock outstanding.



DOCUMENTS
INCORPORATED BY REFERENCE



No documents are incorporated by
reference herein.



---



---

##### Table of Contents

NETOPIA, INC.



FORM 10-K



Table of Contents



|                  |  |                                                                                       |  |     
|----------------- |  | ------------------------------------------------------------------------------------- |  | ----
|                  |  |                                                                                       |  | Page
|                  |  | PART I                                                                                |  |     
|                  |  |                                                                                      
|Item 1.           |  | Business                                                                              |  | 1   
|                  |  |                                                                                      
|Item 2.           |  | Properties                                                                            |  | 9   
|                  |  |                                                                                      
|Item 3.           |  | Legal Proceedings                                                                     |  | 10  
|                  |  |                                                                                      
|Item 4.           |  | Submission of Matters to a Vote of Security Holders                                   |  | 11  
|                  |  |                                                                                      
|Item 4A.          |  | Executive Officers of Registrant                                                      |  | 11  
|                  |  |                                                                                      
|                  |  | PART II                                                                               |  |     
|                  |  |                                                                                      
|Item 5.           |  | Market for Registrants Common Equity and Related Stockholder Matters                 |  | 13  
|                  |  |                                                                                      
|Item 6.           |  | Selected Financial Data                                                               |  | 15  
|                  |  |                                                                                      
|Item 7.           |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 18  
|                  |  |                                                                                      
|Item 7A.          |  | Quantitative and Qualitative Disclosures about Market Risk                            |  | 46  
|                  |  |                                                                                      
|Item 8.           |  | Financial Statements and Supplementary Data                                           |  | 47  
|                  |  |                                                                                      
|Item 9.           |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure  |  | 88  
|                  |  |                                                                                      
|Item 9A.          |  | Controls and Procedures                                                               |  | 88  
|                  |  |                                                                                      
|                  |  | PART III                                                                              |  |     
|                  |  |                                                                                      
|Item 10.          |  | Directors and Executive Officers of the Registrant                                    |  | 90  
|                  |  |                                                                                      
|Item 11.          |  | Executive Compensation                                                                |  | 93  
|                  |  |                                                                                      
|Item 12.          |  | Security Ownership of Certain Beneficial Owners and Management                        |  | 99  
|                  |  |                                                                                      
|Item 13.          |  | Certain Relationships and Related Transactions                                        |  | 101 
|                  |  |                                                                                      
|Item 14.          |  | Principal Accounting Fees and Services                                                |  | 102 
|                  |  |                                                                                      
|                  |  | PART IV                                                                               |  |     
|                  |  |                                                                                      
|Item 15.          |  | Exhibits, Financial Schedules and Reports on Form 8-K                                 |  | 103 
|                  | 
|Index to Exhibits |  | 103                                                                                  
|                  | 
|Signatures        |  | 105                                                                                  
|                  | 
|Certifications    |  |                                                                                      



---

##### Table of Contents

PART I



ITEM 1. BUSINESS



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



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 broadband 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 and reduce support costs for their customers. Our
broadband modems, routers and gateways are installed by the customers of carrier and broadband service providers to obtain high-speed, always-on access to the Internet. Our digital subscriber line (DSL) and other broadband gateways are often bundled
with virtual private networking (VPN) capabilities that allow more secure communications over the Internet, firewall protection, parental controls, hot spot access, 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 Netopia Broadband Server (NBBS) software platform products enable remote support and management of installed broadband gateways and centralized service provisioning for value-added
broadband services such as parental controls or hot spot access. This architecture allows carriers and broadband service providers to provide support to their customers on a remote basis and potentially reduce the cost of installation and broadband
service provisioning over the lifetime of the customer. We also offer Timbuktu and eCare software products for enterprise help desk customers and IT organizations. These products allow help desks to provide support on a remote basis when computer
users experience problems or require additional software upgrades for 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 to 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 by using our transmission control protocol/Internet protocol (TCP/IP) and routing expertise. In 1998, we introduced our family of DSL broadband 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 October 2003, we acquired JadeSail Systems, Inc. (JadeSail), a provider of Internet Protocol (IP)
services management and network equipment provisioning software. We have integrated JadeSails technology into our NBBS platform, adding policy-based IP Services definition and provisioning for firewall and VPN services. In 2003, we introduced
our Wi-Fi modems and gateways. In 2004, we introduced new broadband value-added service offerings, which include turnkey hot spot venue access and parental controls. We additionally enhanced our product line of broadband modems, routers and gateways
to support triple play



1



---

##### Table of Contents

services (voice, video and data) and to support the data requirements of carriers focused on deploying high-speed triple play networks over fiber, commonly
known as fiber to the home (FTTH) or fiber to the premises (FTTP). Our principal offices are located at 6001 Shellmound Street, 4thFloor, Emeryville, California 94608, and our telephone number is (510) 420-7400.



Unless the context otherwise required, in this Annual Report on Form 10-K, the terms Netopia, the Company, we,
us, and our refers to Netopia, Inc. and its subsidiaries. Our fiscal year ends on September 30 and fiscal years are referred to by the calendar years in which they end. For example, fiscal year 2004 and
fiscal 2004 refer to the fiscal year ended September 30, 2004.



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 carrier networks including the local copper loop and new deployments of fiber-optic
networks. This family of products serves many of wide area network (WAN) interfaces including DSL, Ethernet 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 Reach technology which we believe 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 fiscal years 2004, 2003 and 2002, revenues from the sale of our broadband
Internet products accounted for 84.6%, 79.4% and 70.9%, respectively, of our total revenues.



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 |  | Broadband gateway that connects to a corresponding DSL, Optical Network or Ethernet switching 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 spot venue. 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 Software
and Services. Our service delivery platform includes the Netopia Broadband Server software (NBBS), which enables carrier and service providers to manage remotely Netopia and other third party devices and to deliver value-added broadband
services. The NBBS platform includes modules that perform different functions: Zero Touch provisioning for the initial installation of broadband equipment at the customer



2



---

##### Table of Contents

premises and ongoing remote administration and support; Hot Spot Manager for the provisioning, authentication and management of hot spot venue access;
Parental Controls for Web content filtering and email and chat management; VPN Policy Manager for the setup and administration of secure VPN enabled WAN networks. Our eCommerce solution provides no assembly required Web sites and online
stores that we call eSites and eStores, with a wide variety of vertical market content packages to suit many needs, from franchisees to sole proprietors. 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 Timbuktu systems management software. The term of this patent is through August 2010. During fiscal years 2004, 2003 and 2002, revenues from the
sale of our broadband software and services have accounted for 15.4%, 20.6% and 29.1%, respectively, of our total revenues.



The following table summarizes our broadband software and services product family:



|                                   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|---------------------------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Product Line                       |  | Description                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|Netopia Broadband Server Platform 
|                                   | 
|Zero Touch                         |  | Our Zero Touch provisioning and support service is designed to allow carriers and service providers to ship generic broadband devices to customer sites and automatically install and provision
broadband access and specific value-added broadband services on an individualized basis. This service can provide cost reductions in inventory management and provisioning as well as on-going support cost reductions for change management of deployed
devices.
|                                   | 
|Hot Spot Manager                   |  | Providing turn-key hot spot provisioning, Wi-Fi authentication and security, Hot Spot Manager allows carriers and service providers to offer hot spot functionality to their customer base.
Included with these services are custom branding and eCommerce functionality along with Family Friendly Surfing which eliminates objectionable content from being viewed at a Hot Spot venue.                                                                        
|                                   | 
|Parental Controls                  |  | Our Parental Controls solution provides server-based filtering, with code included with the gateway to enforce rule sets for Internet usage in the home environment. With Netopias Parental
Controls service, carrier and service providers can offer a revenue-generating broadband service which governs Internet access by time-of-day, content, email and chat.                                                                                             
|                                   | 
|VPN Policy Manager                 |  | VPN Policy Manager allows service providers to offer managed business services including the setup and administration of Virtual Private Networks (VPNs), firewall and configuration policy
management as well as firmware change control. This service can reduce the overall cost of service management for carriers while enabling value-added business services for additional revenue.                                                                      
|                                   | 
|E-commerce                         |  | 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.                                                                                                                                                                                                                                                            



Broadband Technology



DSL



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



3



---

##### Table of Contents

24Mbps, or many 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 20,000 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, ADSL2, ADSL2+ and VDSL) 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.



Fiber-to-the-Premises (FTTP)



Carriers and services providers are seeking to deliver triple play services including voice, video and data for increased market penetration and
incremental revenue. These services demand higher bandwidth and quality of service (QoS) capabilities. As a result, new investments are being made in high-speed fiber-optic networks and VDSL technology, which enables improved data transmission rates
to the home or business subscriber.



The fiber-optic network is
comprised of an Optical Line Terminal located in the carriers central office, which aggregates fiber-optic connections. The premise connection consists of either a remote VDSL DSLAM, which then connects via copper to the home, or office or the
fiber-optic cable is connected directly to an Optical Network Terminator (ONT), which delivers up to 100Mbps via Ethernet into the home or office. Netopia does not develop, sell or market these devices however we do provide the gateway, which
resides in the home or office and connects directly to the VDSL DSLAM or ONT.



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, SBC Communications Inc., BellSouth Telecommunications, Inc., eircom Ltd. and
Verizon Communications Inc.; competitive local exchange carriers (CLECs), including Covad Communications Group, Inc. and NextGenTel; and Internet service providers (ISPs) and managed service providers (MSPs), including EarthLink, Inc., MegaPath
Networks, Inc. and Netifice Communications, Inc.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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



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 and Europe both directly and through distributors, and



4



---

##### Table of Contents

in Canada and the Asia Pacific region through distributors. 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 software and services 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 and services 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 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 and in certain circumstances may be cancelled without significant penalty.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Although our business historically was not materially affected by seasonal trends, to the extent that our customers market our products to residential
customers more widely, we believe that we may experience increased seasonality. The effect of this seasonality is that our first fiscal quarter may benefit, and that our second fiscal quarter may be weaker than the preceding first fiscal quarter,
which we experienced in fiscal year 2004.



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 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 (R&D) expenses
were $15.8 million, $15.6 million and $17.4 million for fiscal years 2004, 2003 and 2002, respectively. We expect to continue to devote substantial resources to product and technological development.



Our R&D personnel are organized into development teams focused either on
the development of our broadband equipment, our NBBS software 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.



5



---

##### Table of Contents

Product and Customer Support



We believe that effective product and customer support are important criteria used by our customers in selecting our
broadband 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 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 equipment and services.



With different service programs, including VPN set-up services enabled by VPN Policy Manager, 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. We believe that the effect of these activities is to build customer loyalty to us as the single source for broadband equipment and services.



Manufacturing



We primarily utilize third-party contract manufacturers, and have a limited internal configuration capability, to meet our customer requirements and
product demand. Our third-party contract manufacturers produce our hardware products in factories primarily located in Thailand, China and Mexico. They produce substantially all of the circuit boards for our broadband equipment and in certain
circumstances assemble, package and ship our products directly to our customers. Reliance on third-party subcontractors involves several risks, including the potential absence of adequate capacity and reduced control over product quality, delivery
schedules, manufacturing yields and costs.



Competition



The markets for our broadband 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 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 equipment and services, we primarily compete with 2Wire, Inc., Siemens AG (through its
Siemens Subscriber Networks, Inc. subsidiary, formerly known as Efficient Networks), Thomson Corporation, Westell Technologies, Inc. and ZyXEL Communications Co. In the market for our broadband software and services products, we primarily compete
with Altiris, Inc., Computer Associates International, Inc., CrossTec Corporation, Expertcity, Inc., LANDesk Software, Inc., Microsoft Corporation and Symantec Corporation.



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



6



---

##### Table of Contents

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 provide assurance that we will be able to compete successfully in the future. Our inability to successfully compete would seriously harm our
business.



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 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, 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



7



---

##### Table of Contents

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 January 28, 2005, we employed 261 persons, including 84 in research and development, 65 in sales and marketing, 28 in professional services, 29 in
customer service and support, 26 in manufacturing operations, and 29 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. With the exception of our Interim Senior Vice President and Chief Financial Officer, who entered into a
six month employment agreement commencing in October 2004, 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 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.



Available Information



The Companys Internet website address is http://www.netopia.com.At this website we make available, free of charge, our Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to those reports, as soon as reasonably practicable after we electronically file
such material with, or furnish them to, the SEC. Our SEC reports can be accessed through the investor relations section of our website. The information found on our website is not part of this report or any report we file with, or furnish to, the
SEC.



8



---

##### Table of Contents

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, 2004:



|                             |  |                                                                                                 |  |                                                         |  |               |  |                  |  |                              |  |               |  |                           |  |                           
|---------------------------- |  | ----------------------------------------------------------------------------------------------- |  | ------------------------------------------------------- |  | ------------- |  | ---------------- |  | ---------------------------- |  | ------------- |  | ------------------------- |  | --------------------------
|Location                     |  | Primary use                                                                                     |  | Operating segment                                       |  | Square Feet   |  | Lease term       |  | Expires                      |  | Renewaloption |  | Renewalterm               |  | Renewal commences         
|Emeryville, California       |  | Headquarters; research and development, selling, marketing, service, general and administrative |  | Broadband equipment and Broadband software and services |  | 30,438        |  | 5 years,6 months |  | June 30,2008                 |  | No            |  | n/a                       |  | n/a                       
|                             |  |                                                                                                 |  |                                                         |  |               |  |                 
|Billerica, Massachusetts (a) |  | Research and development, customer service                                                      |  | Broadband equipment                                     |  | 19,291  4,909 |  | 5 years  5
years |  | March 31,2005  March
31,2005 |  | Yes  Yes      |  | 3 years,9 months  3 years |  | April 1,2005  April 1,2005
|                             |  |                                                                                                 |  |                                                         |  |               |  |                 
|San Leandro, California      |  | Distribution center                                                                             |  | Broadband equipment and Broadband software and services |  | 14,406        |  | 2 years,8 months |  | August 27,2005               |  | No            |  | n/a                       |  | n/a                       
|                             |  |                                                                                                 |  |                                                         |  |               |  |                 
|Lawrence, Kansas             |  | Research and development                                                                        |  | Broadband software and services                         |  | 7,465         |  | 3 years          |  | June 30, 2005                |  | Yes           |  | 3 years                   |  | July 1,2005               
|                             |  |                                                                                                 |  |                                                         |  |               |  |                 
|Fremont, California          |  | Research and development                                                                        |  | Broadband equipment and Broadband software and services |  | 7,061         |  | 5 years          |  | November 30,2004             |  | Yes           |  | 5 years                   |  | December 1,2004           
|                             |  |                                                                                                 |  |                                                         |  |               |  |                 
|Addison, Texas               |  | Selling                                                                                         |  | Broadband software and services                         |  | 7,847         |  | 5 years,8 months |  | August 31,2008               |  | Yes           |  | 3 years                   |  | September 1,2008          
|                             |  |                                                                                                 |  |                                                         |  |               |  |                 
|Other (b)                    |  | Selling, marketing and research and development                                                 |  | Broadband equipment and Broadband software and services |  | Lessthan7,000 |  |                  |  |                              |  |               |  |                           |  |                           

---

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

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



9



---

##### Table of Contents

ITEM 3. LEGAL PROCEEDINGS



We are
named as a defendant in an action pending in the United States Bankruptcy Court for the Northern District of California entitled E. Lynn Schoenmann, trustee of NorthPoint Communications, Inc. v. Netopia. In this action commenced on January
11, 2003, the trustee of the bankruptcy estate of NorthPoint Communications, Inc. (NorthPoint) is seeking to recover approximately $1.2 million that NorthPoint paid to us within the 90 day preference period before NorthPoint filed for
bankruptcy in January 2001. NorthPoints trustee is claiming that NorthPoint was insolvent at the time it made these payments, and that therefore the payments are recoverable preferences within the meaning of the Bankruptcy Code. We believe
that we have defenses to the claims asserted by NorthPoints trustee, and we intend to continue to defend ourselves vigorously. We do not believe that the outcome of this lawsuit is likely to harm our business seriously.



In August 2004, the first of four purported class action complaints,
Valentin Serafimov, on behalf of himself and all others similarly situated, v. Netopia, Inc., Alan B. Lefkof and William D. Baker, was filed in the United States District Court for the Northern District of California. The complaint alleged
violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended. The complaint alleged that during the purported class period, November 6, 2003 and July 6, 2004, we made materially false, misleading and incomplete
statements and issued false and misleading reports regarding our earnings, product costs, and sales to foreign customers. The other three complaints that subsequently were filed made additional related claims based on the same announcements and
allegations of misstatements. As provided in the Private Securities Litigation Reform Act of 1995, the plaintiffs in these actions filed motions to consolidate and to appoint lead plaintiff and lead plaintiff counsel. On December 3, 2004, the court
issued an order consolidating the cases under the name In re Netopia, Inc. Securities Litigation, and appointing a lead plaintiff and plaintiffs counsel. The lead plaintiff has not filed its consolidated amended complaint. We believe
that we have strong defenses to the claims asserted in the complaints as initially filed. We intend to defend the case vigorously.



In August 2004, the first of four purported derivative actions, Freeport Partners, LLC, Derivatively on Behalf of Nominal Defendant Netopia, Inc., v.
Alan B. Lefkof, William D. Baker, Reese M. Jones, Harold S. Wills, Robert Lee and Netopia, Inc., was filed in the United States District Court for the Northern District of California. Two purported derivative actions are pending in the United
States District Court for the Northern District of California, and two related purported derivative actions are pending in the Superior Court of California for the County of Alameda. These actions make claims against our officers and directors
arising out of the same announcements and alleged misstatements described above in connection with the purported class actions. In November 2004, the derivative plaintiffs agreed to coordinate the four derivative actions. The parties have agreed to
a stay of the federal derivative actions, which was ordered by the court in January 2005. The state actions have been consolidated under the name In re Netopia, Inc. Derivative Litigation. The plaintiffs have not filed their consolidated
amended complaint. We believe that we have strong defenses to the claims asserted in the complaints as initially filed. We intend to defend the cases vigorously.



On October 29, 2004, we were advised by the Securities and Exchange Commission that an informal inquiry previously commenced
by the Securities and Exchange Commission had become the subject of a formal order of investigation. This investigation is to determine whether the federal securities laws have been violated. We cooperated fully with the informal inquiry, and we are
cooperating fully with the formal investigation. Responding to the formal investigation will likely continue to require significant attention and resources of management. If the Securities and Exchange Commission elects to pursue an enforcement
action, the defense against this type of action could be costly and require additional management resources. If we were unsuccessful in defending against this or other investigations or proceedings, we could face civil or criminal penalties that
would seriously harm our business and results of operations.



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



10



---

##### Table of Contents

participation in the Internal Accounting Review conducted by the audit committee. We filed a response to the complaint on January 21, 2005 with OSHA. (The
Internal Accounting Review is described below in greater detail in Item 7, Managements Discussion and Analysis of Financial Condition and Results of Operation.) The agency has not determined whether it will conduct an investigation into this
matter. We believe that we have strong defenses and intend to defend the complaint vigorously.



Defending against the securities class action and derivative actions will likely require significant attention and resources of management and, regardless of the outcome, result in significant legal expense. If our
defenses ultimately are unsuccessful, or if we are unable to achieve a favorable settlement, we could be liable for large damage awards that could seriously harm our business and results of operation. While we have provided notice of the securities
class action and derivative actions to our directors and officers liability insurance carriers, the insurance carriers have not agreed to pay for our legal expenses incurred in defending against these actions or agreed that they are responsible to
pay any damages that ultimately could be awarded to the plaintiffs. Furthermore, we have only a limited amount of insurance, and even if our insurers agree to make payments under the policies, the damage awards or settlements may be greater than the
amount of insurance, and we would in all cases be liable for any amounts in excess of our insurance policy limits.



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



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, 2004.



ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT



Our executive officers, and their ages as of January 28, 2005, are as follows:



|                  |  |     |  |                                                          
|----------------- |  | --- |  | ---------------------------------------------------------
|Name              |  | Age |  | Position                                                 
|Alan B. Lefkof    |  | 51  |  | President, Chief Executive Officer and Director          
|Mark H. Perry     |  | 54  |  | Interim Senior Vice President and Chief Financial Officer
|Brooke A. Hauch   |  | 56  |  | Senior Vice President, Professional Services             
|David A. Kadish   |  | 52  |  | Senior Vice President, General Counsel and Secretary     
|Bao Nguyen        |  | 41  |  | Vice President of Software Engineering                   
|Jeffrey G. Porter |  | 41  |  | Vice President, Marketing                                
|Dano Ybarra       |  | 47  |  | Senior Vice President, Sales and Marketing               



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



Mark H. Perry. Mr. Perry joined Netopia in October 2004 as Interim Senior Vice President and Chief Financial Officer. Prior to joining Netopia, Mr.
Perry served as Senior Vice President and Controller for URS Corporation from 2001 to 2004. Previously, Mr. Perry served as Executive Vice President and Chief Financial Officer at Covad Communications Group Inc. from 2000 to 2001, and as Vice
President of Finance and Administration for U.S. West, Inc., where he worked for 11 years. Mr. Perry received a B.S. in Accounting from Fairleigh Dickinson University in 1972 and is a Certified Public Accountant.



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



11



---

##### Table of Contents

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



Bao Nguyen. Mr. Nguyen joined Netopia in June 2004 as Vice President of Software Engineering. Prior to joining Netopia, Mr. Nguyen served as Vice President of Software Engineering at 2Wire, Inc. from 2002 to 2004, Vice President of
Software Engineering at TCSI, Inc. in 2001, and Vice President of Research & Development at GVN Technologies, Inc. in 2000. Mr. Nguyen received a BSEE degree (Bachelor of Science in Electrical Engineering) from the University of Minnesota in
1987, and a M.B.A. from the University of St. Thomas in 1990.



Jeffrey G. Porter. Mr. Porter, Vice President, Marketing, joined Netopia in July 1991 as a Sales Representative. Mr. Porter was appointed Vice President, Software Product Marketing in November 1999. He was appointed to his current
position in October 2001. Mr. Porter received a B.A. in Management Science from University of California at San Diego in 1986.



Dano Ybarra. Mr. Ybarra, Senior Vice President, Sales and Marketing, joined Netopia in July 2003 as Vice President of Business Development, was
named Vice President of Marketing in January 2004, and took on his current role in September 2004. Prior to joining Netopia, he served as a Vice President and General Manager, Business Solutions Division of the Siemens Subscriber Networks, Inc.
subsidiary of Siemens AG, formerly Efficient Networks, from 1997 to 2003. Mr. Ybarra received a B.S. in Computer Science from Portland State University in 1984.



12



---

##### Table of Contents

PART II



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



Following our initial public offering in June 1996, our common stock traded on the NASDAQ Stock Market. Effective October 20, 2004, our stock was delisted
because we had failed as of that date to file our Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2004, due to an internal accounting review. For additional information on the internal accounting review and related restatements,
see Note 2 of Notes to Consolidated Financial Statements.



Effective October 20, 2004, our common stock has been trading on the National Daily Quotations Journal, often referred to as the pink sheets, where subscribing dealers can submit bid and ask prices on a daily basis. Our common
stock symbol on the pink sheets is NTPA.PK.



The
following table sets forth the range of quarterly high and low sale prices of our common stock on the Nasdaq Stock Market for the last two fiscal years ended September 30, 2004 and 2003.



|                                         |  |      |       |      |   |       |  |     |      |  |   |     
|---------------------------------------- |  | ---- | ----- | ---- | - | ----- |  | --- | ---- |  | - | ----
|                                         |  | 2004 |       | 2003
|                                         |  | High |       | Low  |   | High  |  | Low
|Fourth fiscal quarter ended September 30 |  | $    | 6.47  |      | $ | 1.74  |  | $   | 7.65 |  | $ | 4.03
|Third fiscal quarter ended June 30       |  |      | 13.85 |      |   | 5.22  |  |     | 4.35 |  |   | 1.59
|Second fiscal quarter ended March 31     |  |      | 19.90 |      |   | 11.25 |  |     | 2.00 |  |   | 1.39
|First fiscal quarter ended December 31   |  |      | 15.85 |      |   | 6.97  |  |     | 2.10 |  |   | 1.03



On January 28, 2005,
we had 152 stockholders of record and 24,899,119 shares of common stock outstanding. The closing price of our common stock as reported on the National Daily Quotations Journal was $4.05 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 10 of Notes to Consolidated Financial Statements. We did not repurchase any of our shares of common stock in the fiscal quarter ended September 30,
2004.



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



| |  |  | Developments in ongoing litigation matters and the SEC investigation of us;
| | - |  | ---------------------------------------------------------------------------



| |  |  | Our ability to have our common stock listed again on The Nasdaq Stock Market;
| | - |  | -----------------------------------------------------------------------------



| |  |  | 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;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------



13



---

##### Table of Contents

| |  |  | 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.



Sales
of Unregistered Securities



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 filed on December 30, 2003 a registration statement on Form S-3 registering possible resale of the common stock issued in the
transaction, and this registration statement became effective on January 17, 2004.



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. We filed on August 18,
2003 a registration statement on Form S-3 registering possible resale of the common stock issued in the transaction, and this registration became effective on September 2, 2003.



In March 2002, we issued 300,000 shares of our common stock to the shareholders of DoBox as consideration for our
acquisition of DoBox. We filed on May 7, 2003 a registration statement on Form S-3 registering possible resale of the common stock issued in the transaction, and this registration became effective on July 17, 2003.



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.



14



---

##### Table of Contents

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, 2004, including the restated
financial statements for the fiscal years ended September 30, 2003 and 2002. It is important that when reading this information you also read Item 7, Managements Discussion and Analysis of Financial Condition and Results of Operations, the
annual audited consolidated financial statements and related notes thereto included elsewhere in this Form 10-K.



|                                                  |  |                                              |         |   |          |   |        |          |  |   |          |   |  |          |         |   |  |   |         |  
|------------------------------------------------- |  | -------------------------------------------- | ------- | - | -------- | - | ------ | -------- |  | - | -------- | - |  | -------- | ------- | - |  | - | ------- | -
|                                                  |  |                                              |         |   | Restated |   |        | Restated |  |   | As Filed |   |  | As Filed |        
|Fiscal years ended September 30,                  |  | 2004                                         |         |   | 2003     |   |        | 2002     |  |   | 2001     |   |  | 2000     |        
|                                                  |  | (in thousands, except for per share amounts) |        
|Statements of operations data:                    |  |                                              |         |   |          |   |        |          |  |   |          |   |  |          |         |   |  |   |         |  
|Total revenues                                    |  | $                                            | 101,335 |   |          | $ | 84,920 |          |  | $ | 62,923   |   |  | $        | 77,318  |   |  | $ | 90,206  |  
|Gross profit                                      |  |                                              | 35,892  |   |          |   | 33,453 |          |  |   | 28,665   |   |  |          | 37,358  |   |  |   | 42,927  |  
|Operating loss (a)                                |  |                                              | (8,955  | ) |          |   | (8,313 | )        |  |   | (31,852  | ) |  |          | (43,222 | ) |  |   | (21,197 | )
|Loss from continuing operations (a)               |  |                                              | (8,809  | ) |          |   | (8,865 | )        |  |   | (34,276  | ) |  |          | (41,712 | ) |  |   | (17,618 | )
|Net loss (a, b, c)                                |  |                                              | (8,809  | ) |          |   | (8,865 | )        |  |   | (34,276  | ) |  |          | (43,111 | ) |  |   | (15,137 | )
|                                                  |  |                                              |         |   |         
|Per share data, continuing operations:            |  |                                              |         |   |          |   |        |          |  |   |          |   |  |          |         |   |  |   |         |  
|Basic and diluted loss per share                  |  | $                                            | (0.34   | ) |          | $ | (0.45  | )        |  | $ | (1.86    | ) |  | $        | (2.33   | ) |  | $ | (1.05   | )
|                                                  |  |                                              |         |   |          |   |        |          |  |   |          |   |  |          |         |   |  |   |         |  
|Shares used in the per share calculations         |  |                                              | 23,573  |   |          |   | 19,560 |          |  |   | 18,455   |   |  |          | 17,902  |   |  |   | 16,830  |  
|                                                  |  |                                              |         |   |          |   |        |          |  |   |          |   |  |          |         |   |  |   |         |  
|                                                  |  |                                              |         |   |         
|Per share data, net loss:                         |  |                                              |         |   |          |   |        |          |  |   |          |   |  |          |         |   |  |   |         |  
|Basic and diluted loss per share                  |  | $                                            | (0.37   | ) |          | $ | (0.45  | )        |  | $ | (1.86    | ) |  | $        | (2.41   | ) |  | $ | (0.90   | )
|                                                  |  |                                              |         |   |          |   |        |          |  |   |          |   |  |          |         |   |  |   |         |  
|Shares used in the per share calculations         |  |                                              | 23,573  |   |          |   | 19,560 |          |  |   | 18,455   |   |  |          | 17,902  |   |  |   | 16,830  |  
|                                                  |  |                                              |         |   |          |   |        |          |  |   |          |   |  |          |         |   |  |   |         |  
|                                                  |  |                                              |         |   |         
|                                                  |  |                                              |         |   | Restated |   |        | Restated |  |   | As Filed |   |  | As Filed |        
|As of September 30,                               |  | 2004                                         |         |   | 2003     |   |        | 2002     |  |   | 2001     |   |  | 2000     |        
|                                                  |  | (in thousands)                               |        
|Balance sheet data:                               |  |                                              |         |   |          |   |        |          |  |   |          |   |  |          |         |   |  |   |         |  
|Cash, cash equivalents and short-term investments |  | $                                            | 23,973  |   |          | $ | 22,208 |          |  | $ | 25,022   |   |  | $        | 48,996  |   |  | $ | 59,777  |  
|Working capital                                   |  |                                              | 31,240  |   |          |   | 28,341 |          |  |   | 29,074   |   |  |          | 56,593  |   |  |   | 72,292  |  
|Total assets                                      |  |                                              | 59,587  |   |          |   | 57,019 |          |  |   | 58,969   |   |  |          | 82,712  |   |  |   | 128,373 |  
|Long-term liabilities (d)                         |  |                                              | 406     |   |          |   | 630    |          |  |   | 5,198    |   |  |          | 256     |   |  |   | 328     |  
|Total stockholders equity                        |  |                                              | 41,130  |   |          |   | 39,823 |          |  |   | 40,038   |   |  |          | 71,713  |   |  |   | 112,289 |  

---

|(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 and
2000, are amounts allocated to in-process research and development; 2001 and 2000, are amounts related to the amortization of goodwill and other intangible assets; 2004, 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 Broadband software and services for 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. (See Item 7, Managements Discussion and
Analysis of Financial Condition and Results of Operations, and Note 4 of Notes to Consolidated Financial Statements.)
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(d) | In fiscal year 2004, long-term liabilities are comprised of $0.2 of the long-term portion of deferred revenue and $0.2 of the long-term portion of deferred rent expense. 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, $0.2 million of the long-term portion of deferred rent expense and $0.2 million
of long term lease payable. In fiscal year 2002, long-term liabilities are primarily comprised of $4.4 million of long-term debt from borrowings under our credit facility and $0.8 million of long-term lease payable. (See Item 7, Managements
Discussion and Analysis of Financial Condition and Results of Operations, and Note 16 of Notes to Consolidated Financial Statements.)
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



15



---

##### Table of Contents

The following table sets forth certain unaudited quarterly results of operations data for the twelve
quarters ended September 30, 2004. This data has been derived from our unaudited interim consolidated financial statements, as restated, that, in our opinion, include all adjustments necessary for a fair presentation of such information. The
restated financial statements include all quarters in the fiscal years ended September 30, 2003 and 2002, and the quarters ended December 31, 2003 and March 31, 2004. 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 2004                              |        | Fiscal 2003 |              |   | Fiscal 2002 |             
|                                                        |  |                                          |        |             |              |   |             | Restated     |  |   | Restated     |   | Restated     |   |        | Restated      |   |        | Restated     |  |   | Restated     |   |  | Restated     |        |   | Restated     |   |        | Restated     |  |   | Restated     |  
|Three months ended,                                     |  | Sep. 30,2004                             |        |             | Jun. 30,2004 |   |             | Mar. 31,2004 |  |   | Dec. 31,2003 |   | Sep. 30,2003 |   |        | Jun. 30, 2003 |   |        | Mar. 31,2003 |  |   | Dec. 31,2002 |   |  | Sep. 30,2002 |        |   | Jun. 30,2002 |   |        | Mar. 31,2002 |  |   | Dec. 31,2001 |  
|                                                        |  | (in thousands; except per share amounts) |       
|REVENUES:                                               |  |                                          |        |             |              |   |             |              |  |   |              |   |              |   |        |               |   |        |              |  |   |              |   |  |              |        |   |              |   |        |              |  |   |              |   |  |   |        |   |  |   |        |   |  |   |        |  
|Broadband equipment                                     |  | $                                        | 22,276 |             |              | $ | 21,891      |              |  | $ | 17,878       |   |              | $ | 23,657 |               | $ | 20,622 |              |  | $ | 17,718       |   |  | $            | 14,647 |   |              | $ | 14,406 |              |  | $ | 12,016       |   |  | $ | 9,880  |   |  | $ | 11,070 |   |  | $ | 11,638 |  
|Broadband software and services                         |  |                                          | 3,559  |             |              |   | 3,543       |              |  |   | 3,879        |   |              |   | 4,652  |               |   | 4,294  |              |  |   | 4,114        |   |  |              | 4,214  |   |              |   | 4,905  |              |  |   | 5,053        |   |  |   | 4,898  |   |  |   | 4,319  |   |  |   | 4,049  |  
|                                                        |  |                                          |        |             |              |   |             |              |  |   |              |   |              |   |        |               |   |        |              |  |   |              |   |  |              |        |   |              |   |        |              |  |   |              |   |  |   |        |   |  |   |        |   |  |   |        |  
|Total revenues                                          |  |                                          | 25,835 |             |              |   | 25,434      |              |  |   | 21,757       |   |              |   | 28,309 |               |   | 24,916 |              |  |   | 21,832       |   |  |              | 18,861 |   |              |   | 19,311 |              |  |   | 17,069       |   |  |   | 14,778 |   |  |   | 15,389 |   |  |   | 15,687 |  
|                                                        |  |                                          |        |             |              |   |             |              |  |   |              |   |              |   |        |               |   |        |              |  |   |              |   |  |              |        |   |              |   |        |              |  |   |              |   |  |   |        |   |  |   |        |   |  |   |        |  
|COST OF REVENUES:                                       |  |                                          |        |             |              |   |             |              |  |   |              |   |              |   |        |               |   |        |              |  |   |              |   |  |              |        |   |              |   |        |              |  |   |              |   |  |   |        |   |  |   |        |   |  |   |        |  
|Broadband equipment                                     |  |                                          | 17,471 |             |              |   | 16,757      |              |  |   | 12,573       |   |              |   | 16,450 |               |   | 14,330 |              |  |   | 12,808       |   |  |              | 11,239 |   |              |   | 10,624 |              |  |   | 9,656        |   |  |   | 7,795  |   |  |   | 7,969  |   |  |   | 7,047  |  
|Broadband software and services                         |  |                                          | 286    |             |              |   | 267         |              |  |   | 231          |   |              |   | 208    |               |   | 224    |              |  |   | 316          |   |  |              | 345    |   |              |   | 429    |              |  |   | 175          |   |  |   | 154    |   |  |   | 146    |   |  |   | 164    |  
|Amortization of acquired technology                     |  |                                          | 300    |             |              |   | 300         |              |  |   | 300          |   |              |   | 300    |               |   | 288    |              |  |   | 288          |   |  |              | 288    |   |              |   | 288    |              |  |   | 288          |   |  |   | 288    |   |  |   | 288    |   |  |   | 288    |  
|                                                        |  |                                          |        |             |              |   |             |              |  |   |              |   |              |   |        |               |   |        |              |  |   |              |   |  |              |        |   |              |   |        |              |  |   |              |   |  |   |        |   |  |   |        |   |  |   |        |  
|Total cost of revenues                                  |  |                                          | 18,057 |             |              |   | 17,324      |              |  |   | 13,104       |   |              |   | 16,958 |               |   | 14,842 |              |  |   | 13,412       |   |  |              | 11,872 |   |              |   | 11,341 |              |  |   | 10,119       |   |  |   | 8,237  |   |  |   | 8,403  |   |  |   | 7,499  |  
|                                                        |  |                                          |        |             |              |   |             |              |  |   |              |   |              |   |        |               |   |        |              |  |   |              |   |  |              |        |   |              |   |        |              |  |   |              |   |  |   |        |   |  |   |        |   |  |   |        |  
|GROSS PROFIT                                            |  |                                          | 7,778  |             |              |   | 8,110       |              |  |   | 8,653        |   |              |   | 11,351 |               |   | 10,074 |              |  |   | 8,420        |   |  |              | 6,989  |   |              |   | 7,970  |              |  |   | 6,950        |   |  |   | 6,541  |   |  |   | 6,986  |   |  |   | 8,188  |  
|                                                        |  |                                          |        |             |              |   |             |              |  |   |              |  
|OPERATING EXPENSES:                                     |  |                                          |        |             |              |   |             |              |  |   |              |   |              |   |        |               |   |        |              |  |   |              |   |  |              |        |   |              |   |        |              |  |   |              |   |  |   |        |   |  |   |        |   |  |   |        |  
|Research and development                                |  |                                          | 3,974  |             |              |   | 3,846       |              |  |   | 4,057        |   |              |   | 3,951  |               |   | 3,812  |              |  |   | 3,764        |   |  |              | 4,011  |   |              |   | 3,983  |              |  |   | 4,337        |   |  |   | 4,632  |   |  |   | 4,295  |   |  |   | 4,150  |  
|Research and development project cancellation costs (a) |  |                                          |       |             |              |   |            |              |  |   |             |   |              |   |       |               |   |       |              |  |   |             |   |  |              |       |   |              |   | 606    |              |  |   |             |   |  |   |       |   |  |   |       |   |  |   |       |  
|Selling and marketing                                   |  |                                          | 5,266  |             |              |   | 5,199       |              |  |   | 5,037        |   |              |   | 5,026  |               |   | 4,845  |              |  |   | 4,855        |   |  |              | 4,939  |   |              |   | 5,471  |              |  |   | 5,729        |   |  |   | 5,898  |   |  |   | 5,818  |   |  |   | 5,955  |  
|General and administrative (b)                          |  |                                          | 3,556  |             |              |   | 1,184       |              |  |   | 1,172        |   |              |   | 1,235  |               |   | 1,276  |              |  |   | 961          |   |  |              | 1,091  |   |              |   | 1,412  |              |  |   | 1,674        |   |  |   | 1,450  |   |  |   | 1,267  |   |  |   | 973    |  
|Amortization of intangible assets (c)                   |  |                                          | 86     |             |              |   | 86          |              |  |   | 87           |   |              |   | 86     |               |   | 87     |              |  |   | 86           |   |  |              | 86     |   |              |   | 86     |              |  |   | 86           |   |  |   | 86     |   |  |   | 86     |   |  |   | 86     |  
|Restructuring costs (d)                                 |  |                                          | 999    |             |              |   |            |              |  |   |             |   |              |   |       |               |   | (77    | )            |  |   | 130          |   |  |              |       |   |              |   | 342    |              |  |   |             |   |  |   |       |   |  |   |       |   |  |   | 482    |  
|Integration costs                                       |  |                                          |       |             |              |   |            |              |  |   |             |   |              |   |       |               |   |       |              |  |   |             |   |  |              |       |   |              |   |       |              |  |   |             |   |  |   |       |   |  |   |       |   |  |   | 309    |  
|Acquired in-process research and development (e)        |  |                                          |       |             |              |   |            |              |  |   |             |   |              |   |       |               |   |       |              |  |   |             |   |  |              |       |   |              |   |       |              |  |   |             |   |  |   |       |   |  |   | 1,908  |   |  |   | 2,150  |  
|Impairment of goodwill and other intangible assets (f)  |  |                                          |       |             |              |   |            |              |  |   |             |   |              |   |       |               |   |       |              |  |   |             |   |  |              |       |   |              |   |       |              |  |   | 9,146        |   |  |   |       |   |  |   |       |   |  |   |       |  
|                                                        |  |                                          |        |             |              |   |             |              |  |   |              |   |              |   |        |               |   |        |              |  |   |              |   |  |              |        |   |              |   |        |              |  |   |              |   |  |   |        |   |  |   |        |   |  |   |        |  
|Total operating expenses                                |  |                                          | 13,881 |             |              |   | 10,315      |              |  |   | 10,353       |   |              |   | 10,298 |               |   | 9,943  |              |  |   | 9,796        |   |  |              | 10,127 |   |              |   | 11,900 |              |  |   | 20,972       |   |  |   | 12,066 |   |  |   | 13,374 |   |  |   | 14,105 |  
|                                                        |  |                                          |        |             |              |   |             |              |  |   |              |   |              |   |        |               |   |        |              |  |   |              |   |  |              |        |   |              |   |        |              |  |   |              |   |  |   |        |   |  |   |        |   |  |   |        |  
|OPERATING INCOME (LOSS)                                 |  |                                          | (6,103 | )           |              |   | (2,205      | )            |  |   | (1,700       | ) |              |   | 1,053  |               |   | 131    |              |  |   | (1,376       | ) |  |              | (3,138 | ) |              |   | (3,930 | )            |  |   | (14,022      | ) |  |   | (5,525 | ) |  |   | (6,388 | ) |  |   | (5,917 | )
|Other income (loss), net (g)                            |  |                                          |        |             |              |   |             |              |  |   |              |   |              |   |        |               |   |        |              |  |   |              |   |  |              |        |   |              |   |        |              |  |   |              |   |  |   |        |   |  |   |        |   |  |   |        |  
|Loss on impaired securities                             |  |                                          |       |             |              |   |            |              |  |   |             |   |              |   |       |               |   |       |              |  |   |             |   |  |              | (457   | ) |              |   |       |              |  |   | (1,543       | ) |  |   |       |   |  |   | (1,400 | ) |  |   |       |  
|Other income (expense), net                             |  |                                          | 31     |             |              |   | (52         | )            |  |   | 77           |   |              |   | 168    |               |   | (80    | )            |  |   | (3           | ) |  |              | (5     | ) |              |   | (7     | )            |  |   | 29           |   |  |   | 54     |   |  |   | 80     |   |  |   | 156    |  
|                                                        |  |                                          |        |             |              |   |             |              |  |   |              |   |              |   |        |               |   |        |              |  |   |              |   |  |              |        |   |              |   |        |              |  |   |              |   |  |   |        |   |  |   |        |   |  |   |        |  
|Other income (loss), net                                |  |                                          | 31     |             |              |   | (52         | )            |  |   | 77           |   |              |   | 168    |               |   | (80    | )            |  |   | (3           | ) |  |              | (462   | ) |              |   | (7     | )            |  |   | (1,514       | ) |  |   | 54     |   |  |   | (1,320 | ) |  |   | 156    |  
|                                                        |  |                                          |        |             |              |   |             |              |  |   |              |   |              |   |        |               |   |        |              |  |   |              |   |  |              |        |   |              |   |        |              |  |   |              |   |  |   |        |   |  |   |        |   |  |   |        |  
|Provision for income taxes                              |  |                                          | 13     |             |              |   | 19          |              |  |   | (11          | ) |              |   | 57     |               |   |       |              |  |   |             |   |  |              |       |   |              |   |       |              |  |   |             |   |  |   | (200   | ) |  |   |       |   |  |   |       |  
|                                                        |  |                                          |        |             |              |   |             |              |  |   |              |  
|NET INCOME (LOSS)                                       |  | $                                        | (6,085 | )           |              | $ | (2,276      | )            |  | $ | (1,612       | ) |              | $ | 1,164  |               | $ | 51     |              |  | $ | (1,379       | ) |  | $            | (3,600 | ) |              | $ | (3,937 | )            |  | $ | (15,536      | ) |  | $ | (5,271 | ) |  | $ | (7,708 | ) |  | $ | (5,761 | )
|                                                        |  |                                          |        |             |              |   |             |              |  |   |              |   |              |   |        |               |   |        |              |  |   |              |   |  |              |        |   |              |   |        |              |  |   |              |   |  |   |        |   |  |   |        |   |  |   |        |  
|Per share data, net income (loss):                      |  |                                          |        |             |              |   |             |              |  |   |              |   |              |   |        |               |   |        |              |  |   |              |   |  |              |        |   |              |   |        |              |  |   |              |   |  |   |        |   |  |   |        |   |  |   |        |  
|Basic net income (loss) per share                       |  | $                                        | (0.25  | )           |              | $ | (0.09       | )            |  | $ | (0.07        | ) |              | $ | 0.05   |               | $ | 0.00   |              |  | $ | (0.07        | ) |  | $            | (0.19  | ) |              | $ | (0.21  | )            |  | $ | (0.83        | ) |  | $ | (0.28  | ) |  | $ | (0.42  | ) |  | $ | (0.32  | )
|                                                        |  |                                          |        |             |              |   |             |              |  |   |              |   |              |   |        |               |   |        |              |  |   |              |   |  |              |        |   |              |   |        |              |  |   |              |   |  |   |        |   |  |   |        |   |  |   |        |  
|Diluted net income (loss) per share                     |  | $                                        | (0.25  | )           |              | $ | (0.09       | )            |  | $ | (0.07        | ) |              | $ | 0.04   |               | $ | 0.00   |              |  | $ | (0.07        | ) |  | $            | (0.19  | ) |              | $ | (0.21  | )            |  | $ | (0.83        | ) |  | $ | (0.28  | ) |  | $ | (0.42  | ) |  | $ | (0.32  | )
|                                                        |  |                                          |        |             |              |   |             |              |  |   |              |   |              |   |        |               |   |        |              |  |   |              |   |  |              |        |   |              |   |        |              |  |   |              |   |  |   |        |   |  |   |        |   |  |   |        |  
|Shares used in the computation of net income (loss):    |  |                                          |        |             |              |   |             |              |  |   |              |   |              |   |        |               |   |        |              |  |   |              |   |  |              |        |   |              |   |        |              |  |   |              |   |  |   |        |   |  |   |        |   |  |   |        |  
|Shares used in the basic per share calculations         |  |                                          | 24,490 |             |              |   | 24,033      |              |  |   | 23,536       |   |              |   | 22,236 |               |   | 20,790 |              |  |   | 19,370       |   |  |              | 19,163 |   |              |   | 18,906 |              |  |   | 18,822       |   |  |   | 18,648 |   |  |   | 18,255 |   |  |   | 18,092 |  
|                                                        |  |                                          |        |             |              |   |             |              |  |   |              |   |              |   |        |               |   |        |              |  |   |              |   |  |              |        |   |              |   |        |              |  |   |              |   |  |   |        |   |  |   |        |   |  |   |        |  
|Shares used in the diluted per share calculations       |  |                                          | 24,490 |             |              |   | 24,033      |              |  |   | 23,536       |   |              |   | 26,020 |               |   | 22,646 |              |  |   | 19,370       |   |  |              | 19,163 |   |              |   | 18,906 |              |  |   | 18,822       |   |  |   | 18,648 |   |  |   | 18,255 |   |  |   | 18,092 |  
|                                                        |  |                                          |        |             |              |   |             |              |  |   |              |   |              |   |        |               |   |        |              |  |   |              |   |  |              |        |   |              |   |        |              |  |   |              |   |  |   |        |   |  |   |        |   |  |   |        |  



16



---

##### Table of Contents

---

|(a) | Represents material and equipment costs associated with our joint development efforts with Siemens and Proxim, Inc. to develop a wireless integrated access device (IAD) for sale to
AT&T Corp.. 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 DSL services on its network, there was no longer a customer or market
into which we could sell the product under development.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(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 |       | Jun. 30,2003 |   | Mar. 31,2003 |  | Dec. 31,2002 |       | Sep. 30,2002 |   | Jun. 30,2002 |  | Mar. 31,2002 |       | Dec. 31, 2001
|Facility relocation costs                    |  | $            |      |              | $ | 2            |  | $            | 93    |              | $ | 197          |  | $            |      |               | $ |      |  | $ |      |  | $ |   
|Incremental provisions for doubtful accounts |  |              |      |              |   |             |  |              |      |              |   |             |  |              | 264   |               |   | 307   |  |   |      |  |   |   
|General and administrative                   |  |              | 1,276 |              |   | 959          |  |              | 998   |              |   | 1,215        |  |              | 1,410 |               |   | 1,143 |  |   | 1,267 |  |   | 973
|                                             |  |              |       |              |   |              |  |              |       |              |   |              |  |              |       |               |   |       |  |   |       |  |   |    
|Total general and administrative             |  | $            | 1,276 |              | $ | 961          |  | $            | 1,091 |              | $ | 1,412        |  | $            | 1,674 |               | $ | 1,450 |  | $ | 1,267 |  | $ | 973
|                                             |  |              |       |              |   |              |  |              |       |              |   |              |  |              |       |               |   |       |  |   |       |  |   |    



|(c) | For fiscal years 2004, 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.)
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(d) | 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 13 of Notes to Consolidated Financial Statements.)
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(e) | 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.)
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(f) | 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.)
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(g) | These amounts represent losses on impaired securities related to our long-term investments in Everdream Corporation and MegaPath, respectively. (See Item 7, Managements
Discussion and Analysis of Financial Condition and Results of Operations, and Note 12 of Notes to Consolidated Financial Statements.)
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



17



---

##### Table of Contents

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



The following discussion and analysis should be read in conjunction with our consolidated financial statements and related notes included elsewhere in
this Annual Report on Form 10-K. This Annual Report on Form 10-K amends our Annual Reports on Form 10-K previously filed for the fiscal years ended September 30, 2003 and September 30, 2002, and our previously filed Form 10-Qs for the fiscal
quarters ended March 31, 2004 and December 31, 2003, to reflect the restatements of our consolidated financial statements for all such previously reported periods, as described elsewhere in this Annual Report on Form 10-K.



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 2004, 2003 and 2002, revenue from the sale of our broadband Internet gateways have accounted for 84.6%, 79.4% and 70.9%,
respectively, of our total revenues.



Broadband Software and
Services. Our service delivery platform includes the Netopia Broadband Server (NBBS) software products and systems management software products. The netOctopus suite includes nBBS, eCare, and our Web eCommerce server. Our systems management
software includes Timbuktu. Additionally, we derive revenues from services, maintenance, and software license agreements. During each of fiscal years 2004, 2003 and 2002, revenue from the sale of our broadband software and services have accounted
for 15.4%, 20.6% and 29.1%, respectively, of our total revenues.



Since our inception, we have generated significant net losses and we continue to experience negative operating cash flow. As of September 30, 2004, we had an accumulated deficit of approximately $125.0 million. We expect these losses and
negative cash flow to continue in the future, which may require us to raise additional capital or borrow under our credit facility agreement. We believe we have adequate cash, cash equivalents and borrowing capacity to meet our anticipated capital
needs for at least the next twelve months.



We have devoted
substantial resources and managements time in connection with the Internal Accounting Review described below, which has resulted in the restatement of our financial statements for the fiscal years ended September 30, 2002 and 2003, and our
interim financial statements for fiscal quarters ended December 31, 2003 and March 31, 2004. As a result of the Internal Accounting Review commenced in July 2004, the filing of both our Report on Form 10-Q for the third fiscal quarter ended June 30,
2004 and this Annual Report on Form 10-K have been delayed beyond the designated filing deadlines.



The Company has restated its consolidated statements for the fiscal years ended September 30, 2002 and 2003 and for all quarters from December 31, 2001
through March 31, 2004, inclusive. All applicable financial information in these consolidated financial statements in this Form 10-K gives effect to these restatements. Accordingly, the financial statements for those fiscal periods described above
that have been included in the Companys previous filings with the Securities and Exchange Commission or included in previous announcements should not be relied upon.



18



---

##### Table of Contents

Internal Accounting Review



We announced on July 22, 2004, that the Audit Committee of our Board of Directors had initiated an Internal Accounting
Review of our accounting and reporting practices, including the appropriateness and timing of the revenue recognition of software license and maintenance fees in two transactions with a single software reseller customer. On September 10, 2004, KPMG
LLP, which had served as our independent registered accountant, resigned. At the time of its resignation, KPMG LLP advised us that our audited financial statements for fiscal year ended September 30, 2003 should no longer be relied upon. On
September 30, 2004, the Audit Committee engaged Burr, Pilger & Mayer LLP (BPM) as our new independent registered public accounting firm to audit our consolidated financial statements for the fiscal years ended September 30, 2004,
2003 and 2002.



The Internal Accounting Review determined that
both software transactions referred to above were contingent sales. As a consequence, and, in accordance with the principles of Statement of Position (SOP) 97-2, Software Revenue Recognition, as amended, we are restating revenue to reflect:



First Transaction



| |  |  | the elimination of $750,000 of software license revenue of the approximately $1.5 million originally recorded in the third fiscal quarter ended June 30, 2002 to reflect the proceeds
not received during the quarter;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the recognition of $632,000 of software license revenue in the fourth fiscal quarter ended September 30, 2002 to reflect the proceeds received during the quarter; and
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the recognition of $118,000 of maintenance revenue ratably over the four fiscal quarters commencing July 1, 2003 and ending June 30, 2004 during which periods the maintenance
revenues were earned, the proceeds for which were received in the fourth fiscal quarter ended September 30, 2002;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Second Transaction



| |  |  | the elimination of $750,400 of software license, maintenance and deferred revenue in the fourth fiscal quarter ended September 30, 2003 because no proceeds were received during the
quarter;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the recognition of $273,000 of software license revenue in the fourth fiscal quarter ended September 30, 2004 to reflect the proceeds received during the quarter; and
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the recognition of $64,000 of maintenance revenue ratably over the five fiscal quarters commencing July 1, 2004 and ending September 30, 2005 during which periods the maintenance
revenues will be earned, the proceeds for which were received in the fourth fiscal quarter ended September 30, 2004.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | In addition, we will recognize $262,500 of software license revenue in the first fiscal quarter of fiscal year 2005 ended December 31, 2004, reflecting additional proceeds received
during the first fiscal quarter of fiscal year 2005 with respect to the second transaction.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



As a result of the Internal Accounting Review, we will be recognizing approximately $2.1 million of software license and maintenance revenue with respect
to the two transactions, which is the total amount of proceeds that we have received from the software reseller. This amount is $150,000 less than originally recorded because during the fourth fiscal quarter of fiscal year 2004, we entered into an
agreement with the software reseller to reduce the amount payable with respect to the second transaction by $150,000. This agreement confirms that we have satisfied all of our outstanding obligations and that the reseller will make no additional
payments with respect to this sale.



19



---

##### Table of Contents

Other Significant Transactions Requiring Restatement



During the course of our review of the financial statements for fiscal years
2002, 2003 and the first and second fiscal quarters of 2004, we determined that other transactions required adjustment in order for our financial statements to conform more properly to Generally Accepted Accounting Principles (GAAP).
These adjustments are described below.



Marketing Incentive Programs



We have participated with certain of our distributor and
reseller customers in marketing incentive programs that have resulted in the provision of rebates, credits and discounts to these customers. These transactions were originally recorded as marketing expenses. We have determined that these rebates,
credits and discounts should be accounted for in accordance with Emerging Issues Task Force (EITF) Issue No. 01-09, Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendors Products),
as a reduction to revenues and not as marketing expenses. As a result, for the fiscal years ended September 30, 2002 and 2003, we are reducing revenues by $935,000 and $824,000, respectively, and making offsetting reductions to marketing expenses
during the same periods. The adjustments to record these transactions properly are being made on a quarterly basis. For the three months ended December 31, 2003 and March 31, 2004, we are reducing revenues by $289,000 and $174,000, respectively, and
making offsetting reductions to marketing expenses during these periods. These adjustments do not change our previously reported net loss for any period.



Rent Expense



We determined that we recorded expenses in error relating to a rental obligation for which we previously had accrued a charge in conjunction with an
acquisition. We are correcting this error by reversing (i) $109,000 of operating expenses for fiscal year ended September 30, 2002; (ii) $50,000 of operating expenses for the fiscal year ended September 30, 2003; and (iii) $10,000 and $12,000 of
operating expenses for the three months ended December 31, 2003 and March 31, 2004, respectively. These adjustments will reduce our previously reported net loss or increase our previously reported net income for these periods. These adjustments are
being recorded on a quarterly basis.



Income Tax Expense



We are reducing our income tax expense by $200,000 for the fiscal quarter
ended June 30, 2002 to reflect the receipt of an income tax refund for which there is no associated liability. This adjustment will reduce our net loss for the three months and fiscal year ended June 30, 2002 and September 30, 2002,
respectively.



Inventory



We determined that manufacturing overhead had not been properly applied to
cost of sales and ending inventory for prior fiscal periods. As a result, inventory valuation was (i) understated by $242,000 at September 30, 2002; (ii) overstated by $320,000 at September 30, 2003; and (iii) and overstated by $16,000 for the first
and second fiscal quarters of fiscal years 2004. Accordingly, cost of revenues increased/(decreased) by ($242,000), $320,000, and $16,000 for the fiscal years ended September 30, 2002 and 2003, and for the first and second fiscal quarters of fiscal
year 2004, respectively, as a result of these adjustments. The adjustments to properly record manufacturing overhead are being recorded on a quarterly basis, and this summary describes the annual effect of these adjustments.



We determined that the Reserve for Excess and Obsolete Inventory for prior
years was inadequate based on information that was known at the end of these periods. The effect of these adjustments was to decrease the net value of inventory by $385,000 and $155,000 at September 30, 2002 and 2003, respectively. Cost of Revenues
increased/(decreased) by $385,000, ($230,000), and ($155,000) for the years ended September 30, 2002, 2003 and 2004, respectively, as a result of these adjustments.



20



---

##### Table of Contents

Amortization of Other Intangible Assets



We determined that the amortization of other intangible assets, with identifiable lives, related to the acquisitions of
Cayman and JadeSail were included incorrectly in operating expenses. We have reclassified the expenses to cost of revenue for fiscal years 2002 and 2003 and for the first quarter of fiscal year 2004. Cost of revenues increased by $288,000 per
quarter or $1.2 million for fiscal years ended September 30, 2002 and 2003. For the first quarter of fiscal year 2004, cost of revenues increased by $300,000. Although these adjustments do not impact our previously reported net loss/income for these
periods, they will reduce the gross margins reported for these periods.



Summary



On January 25, 2005, the Audit
Committee met with the Companys Interim Senior Vice President and Chief Financial Officer and BPM to review the effect on the Companys previously issued financial statements of: (i) the findings of the Internal Accounting Review, (ii)
the other significant transactions requiring adjustment, as described above, and (iii) and certain other adjustments, including other revenue and expense transactions that were overstated in certain periods and understated in other periods. While
the amounts associated with these other adjustments are relatively small, we believe that it is appropriate to record them as part of these restatements so that our financial statements are as accurate as possible. The Audit Committee approved the
adjustments and resulting restatements to previously issued financial statements.



The net effect of all of the restatement adjustments is to:



| |  |  | decrease our net loss by approximately $23,000 during the fiscal quarter ended March 31, 2004;
| | - |  | ----------------------------------------------------------------------------------------------



| |  |  | increase our net income by approximately $34,000 during the fiscal quarter ended December 31, 2003;
| | - |  | ---------------------------------------------------------------------------------------------------



| |  |  | increase our net loss by approximately $545,000 for the fiscal year ended September 30, 2003; and
| | - |  | -------------------------------------------------------------------------------------------------



| |  |  | increase our net loss by approximately $9,000 for the fiscal year ended September 30, 2002.
| | - |  | -------------------------------------------------------------------------------------------



| |  |  | As described above, as a result of the restatement adjustments, we also will recognize $262,500 of software license revenue in the first fiscal quarter of fiscal year 2005 ended
December 31, 2004, reflecting additional proceeds received during the first fiscal quarter of fiscal year 2005.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



21



---

##### Table of Contents

The following tables set forth certain unaudited quarterly results of operations data for the twelve
quarters ended September 30, 2004, both as previously reported and as restated.



|                                                     |  |                                          |        |   |               |   |        |              |  |   |                 |   |  |              |        |                 |  |   |        |  |   |       
|---------------------------------------------------- |  | ---------------------------------------- | ------ | - | ------------- | - | ------ | ------------ |  | - | --------------- | - |  | ------------ | ------ | --------------- |  | - | ------ |  | - | ------
|                                                     |  | Fiscal 2004                             
|                                                     |  |                                          |        |   |               |   |        | Restated     |  |   | PreviouslyFiled |   |  | Restated     |        | PreviouslyFiled
|Three months ended,                                  |  | Sep. 30, 2004                            |        |   | Jun. 30, 2004 |   |        | Mar. 31,2004 |  |   | Mar. 31,2004    |   |  | Dec. 31,2003 |        | Dec. 31,2003   
|                                                     |  | (in thousands; except per share amounts)
|REVENUES:                                            |  |                                          |        |   |               |   |        |              |  |   |                 |   |  |              |        |                 |  |   |        |  |   |       
|Broadband equipment                                  |  | $                                        | 22,276 |   |               | $ | 21,891 |              |  | $ | 17,878          |   |  | $            | 18,052 |                 |  | $ | 23,657 |  | $ | 23,946
|Broadband software and services                      |  |                                          | 3,559  |   |               |   | 3,543  |              |  |   | 3,879           |   |  |              | 3,844  |                 |  |   | 4,652  |  |   | 4,653 
|                                                     |  |                                          |        |   |               |   |        |              |  |   |                 |   |  |              |        |                 |  |   |        |  |   |       
|Total revenues                                       |  |                                          | 25,835 |   |               |   | 25,434 |              |  |   | 21,757          |   |  |              | 21,896 |                 |  |   | 28,309 |  |   | 28,599
|                                                     |  |                                          |        |   |               |   |        |              |  |   |                 |   |  |              |        |                 |  |   |        |  |   |       
|COST OF REVENUES:                                    |  |                                          |        |   |               |   |        |              |  |   |                 |   |  |              |        |                 |  |   |        |  |   |       
|Broadband equipment                                  |  |                                          | 17,471 |   |               |   | 16,757 |              |  |   | 12,573          |   |  |              | 12,533 |                 |  |   | 16,450 |  |   | 16,459
|Broadband software and services                      |  |                                          | 286    |   |               |   | 267    |              |  |   | 231             |   |  |              | 231    |                 |  |   | 208    |  |   | 208   
|Amortization of acquired technology                  |  |                                          | 300    |   |               |   | 300    |              |  |   | 300             |   |  |              | 300    |                 |  |   | 300    |  |   |      
|                                                     |  |                                          |        |   |               |   |        |              |  |   |                 |   |  |              |        |                 |  |   |        |  |   |       
|Total cost of revenues                               |  |                                          | 18,057 |   |               |   | 17,324 |              |  |   | 13,104          |   |  |              | 13,064 |                 |  |   | 16,958 |  |   | 16,667
|                                                     |  |                                          |        |   |               |   |        |              |  |   |                 |   |  |              |        |                 |  |   |        |  |   |       
|GROSS PROFIT                                         |  |                                          | 7,778  |   |               |   | 8,110  |              |  |   | 8,653           |   |  |              | 8,832  |                 |  |   | 11,351 |  |   | 11,932
|                                                     |  |                                          |        |   |               |  
|OPERATING EXPENSES:                                  |  |                                          |        |   |               |   |        |              |  |   |                 |   |  |              |        |                 |  |   |        |  |   |       
|Research and development                             |  |                                          | 3,974  |   |               |   | 3,846  |              |  |   | 4,057           |   |  |              | 4,069  |                 |  |   | 3,951  |  |   | 3,961 
|Research and development project cancellation costs  |  |                                          |       |   |               |   |       |              |  |   |                |   |  |              |       |                 |  |   |       |  |   |      
|Selling and marketing                                |  |                                          | 5,266  |   |               |   | 5,199  |              |  |   | 5,037           |   |  |              | 5,211  |                 |  |   | 5,026  |  |   | 5,315 
|General and administrative                           |  |                                          | 3,556  |   |               |   | 1,184  |              |  |   | 1,172           |   |  |              | 1,188  |                 |  |   | 1,235  |  |   | 1,251 
|Amortization of intangible assets                    |  |                                          | 86     |   |               |   | 86     |              |  |   | 87              |   |  |              | 87     |                 |  |   | 86     |  |   | 386   
|Restructuring costs                                  |  |                                          | 999    |   |               |   |       |              |  |   |                |   |  |              |       |                 |  |   |       |  |   |      
|Integration costs                                    |  |                                          |       |   |               |   |       |              |  |   |                |   |  |              |       |                 |  |   |       |  |   |      
|Acquired in-process research and development         |  |                                          |       |   |               |   |       |              |  |   |                |   |  |              |       |                 |  |   |       |  |   |      
|Impairment of goodwill and other intangible assets   |  |                                          |       |   |               |   |       |              |  |   |                |   |  |              |       |                 |  |   |       |  |   |      
|                                                     |  |                                          |        |   |               |   |        |              |  |   |                 |   |  |              |        |                 |  |   |        |  |   |       
|Total operating expenses                             |  |                                          | 13,881 |   |               |   | 10,315 |              |  |   | 10,353          |   |  |              | 10,555 |                 |  |   | 10,298 |  |   | 10,913
|                                                     |  |                                          |        |   |               |   |        |              |  |   |                 |   |  |              |        |                 |  |   |        |  |   |       
|OPERATING INCOME (LOSS)                              |  |                                          | (6,103 | ) |               |   | (2,205 | )            |  |   | (1,700          | ) |  |              | (1,723 | )               |  |   | 1,053  |  |   | 1,019 
|                                                     |  |                                          |        |   |               |  
|Other income (loss), net                             |  |                                          |        |   |               |   |        |              |  |   |                 |   |  |              |        |                 |  |   |        |  |   |       
|Loss on impaired securities                          |  |                                          |       |   |               |   |       |              |  |   |                |   |  |              |       |                 |  |   |       |  |   |      
|Other income (expense), net                          |  |                                          | 31     |   |               |   | (52    | )            |  |   | 77              |   |  |              | 77     |                 |  |   | 168    |  |   | 168   
|                                                     |  |                                          |        |   |               |   |        |              |  |   |                 |   |  |              |        |                 |  |   |        |  |   |       
|Other income (loss), net                             |  |                                          | 31     |   |               |   | (52    | )            |  |   | 77              |   |  |              | 77     |                 |  |   | 168    |  |   | 168   
|                                                     |  |                                          |        |   |               |   |        |              |  |   |                 |   |  |              |        |                 |  |   |        |  |   |       
|Provision for income taxes                           |  |                                          | 13     |   |               |   | 19     |              |  |   | (11             | ) |  |              | (11    | )               |  |   | 57     |  |   | 57    
|                                                     |  |                                          |        |   |               |  
|NET INCOME (LOSS)                                    |  | $                                        | (6,085 | ) |               | $ | (2,276 | )            |  | $ | (1,612          | ) |  | $            | (1,635 | )               |  | $ | 1,164  |  | $ | 1,130 
|                                                     |  |                                          |        |   |               |   |        |              |  |   |                 |   |  |              |        |                 |  |   |        |  |   |       
|Per share data, net income (loss):                   |  |                                          |        |   |               |   |        |              |  |   |                 |   |  |              |        |                 |  |   |        |  |   |       
|Basic net income (loss) per share                    |  | $                                        | (0.25  | ) |               | $ | (0.09  | )            |  | $ | (0.07           | ) |  | $            | (0.07  | )               |  | $ | 0.05   |  | $ | 0.05  
|                                                     |  |                                          |        |   |               |   |        |              |  |   |                 |   |  |              |        |                 |  |   |        |  |   |       
|Diluted net income (loss) per share                  |  | $                                        | (0.25  | ) |               | $ | (0.09  | )            |  | $ | (0.07           | ) |  | $            | (0.07  | )               |  | $ | 0.04   |  | $ | 0.04  
|                                                     |  |                                          |        |   |               |   |        |              |  |   |                 |   |  |              |        |                 |  |   |        |  |   |       
|Shares used in the computation of net income (loss): |  |                                          |        |   |               |   |        |              |  |   |                 |   |  |              |        |                 |  |   |        |  |   |       
|Shares used in the basic per share calculations      |  |                                          | 24,490 |   |               |   | 24,033 |              |  |   | 23,536          |   |  |              | 23,536 |                 |  |   | 22,236 |  |   | 22,236
|                                                     |  |                                          |        |   |               |   |        |              |  |   |                 |   |  |              |        |                 |  |   |        |  |   |       
|Shares used in the diluted per share calculations    |  |                                          | 24,490 |   |               |   | 24,033 |              |  |   | 23,536          |   |  |              | 23,536 |                 |  |   | 26,020 |  |   | 26,091
|                                                     |  |                                          |        |   |               |   |        |              |  |   |                 |   |  |              |        |                 |  |   |        |  |   |       



22



---

##### Table of Contents

|                                                     |  |                                          |        |   |                 |   |        |               |  |   |                 |   |  |               |        |   |                 |   |        |               |  |   |                 |   |  |   |        |   |  |   |        |  
|---------------------------------------------------- |  | ---------------------------------------- | ------ | - | --------------- | - | ------ | ------------- |  | - | --------------- | - |  | ------------- | ------ | - | --------------- | - | ------ | ------------- |  | - | --------------- | - |  | - | ------ | - |  | - | ------ | -
|                                                     |  | Fiscal 2003                              |       
|                                                     |  | Restated                                 |        |   | PreviouslyFiled |   |        | Restated      |  |   | PreviouslyFiled |   |  | Restated      |        |   | PreviouslyFiled |   |        | Restated      |  |   | PreviouslyFiled |  
|Three months ended,                                  |  | Sep. 30, 2003                            |        |   | Sep. 30,2003    |   |        | Jun. 30, 2003 |  |   | Jun. 30,2003    |   |  | Mar. 31, 2003 |        |   | Mar. 31,2003    |   |        | Dec. 31, 2002 |  |   | Dec. 31,2002    |  
|                                                     |  | (in thousands; except per share amounts) |       
|REVENUES:                                            |  |                                          |        |   |                 |   |        |               |  |   |                 |   |  |               |        |   |                 |   |        |               |  |   |                 |   |  |   |        |   |  |   |        |  
|Broadband equipment                                  |  | $                                        | 20,622 |   |                 | $ | 20,821 |               |  | $ | 17,718          |   |  | $             | 17,962 |   |                 | $ | 14,647 |               |  | $ | 14,838          |   |  | $ | 14,406 |   |  | $ | 14,596 |  
|Broadband software and services                      |  |                                          | 4,294  |   |                 |   | 4,674  |               |  |   | 4,114           |   |  |               | 4,009  |   |                 |   | 4,214  |               |  |   | 4,400           |   |  |   | 4,905  |   |  |   | 5,007  |  
|                                                     |  |                                          |        |   |                 |   |        |               |  |   |                 |   |  |               |        |   |                 |   |        |               |  |   |                 |   |  |   |        |   |  |   |        |  
|Total revenues                                       |  |                                          | 24,916 |   |                 |   | 25,495 |               |  |   | 21,832          |   |  |               | 21,971 |   |                 |   | 18,861 |               |  |   | 19,238          |   |  |   | 19,311 |   |  |   | 19,603 |  
|                                                     |  |                                          |        |   |                 |   |        |               |  |   |                 |   |  |               |        |   |                 |   |        |               |  |   |                 |   |  |   |        |   |  |   |        |  
|COST OF REVENUES:                                    |  |                                          |        |   |                 |   |        |               |  |   |                 |   |  |               |        |   |                 |   |        |               |  |   |                 |   |  |   |        |   |  |   |        |  
|Broadband equipment                                  |  |                                          | 14,330 |   |                 |   | 14,218 |               |  |   | 12,808          |   |  |               | 12,471 |   |                 |   | 11,239 |               |  |   | 10,632          |   |  |   | 10,624 |   |  |   | 10,423 |  
|Broadband software and services                      |  |                                          | 224    |   |                 |   | 224    |               |  |   | 316             |   |  |               | 316    |   |                 |   | 345    |               |  |   | 345             |   |  |   | 429    |   |  |   | 429    |  
|Amortization of acquired technology                  |  |                                          | 288    |   |                 |   | 288    |               |  |   | 288             |   |  |               | 288    |   |                 |   | 288    |               |  |   | 288             |   |  |   | 288    |   |  |   | 288    |  
|                                                     |  |                                          |        |   |                 |   |        |               |  |   |                 |   |  |               |        |   |                 |   |        |               |  |   |                 |   |  |   |        |   |  |   |        |  
|Total cost of revenues                               |  |                                          | 14,842 |   |                 |   | 14,730 |               |  |   | 13,412          |   |  |               | 13,075 |   |                 |   | 11,872 |               |  |   | 11,265          |   |  |   | 11,341 |   |  |   | 11,140 |  
|                                                     |  |                                          |        |   |                 |   |        |               |  |   |                 |   |  |               |        |   |                 |   |        |               |  |   |                 |   |  |   |        |   |  |   |        |  
|GROSS PROFIT                                         |  |                                          | 10,074 |   |                 |   | 10,765 |               |  |   | 8,420           |   |  |               | 8,896  |   |                 |   | 6,989  |               |  |   | 7,973           |   |  |   | 7,970  |   |  |   | 8,463  |  
|                                                     |  |                                          |        |   |                 |   |        |              
|OPERATING EXPENSES:                                  |  |                                          |        |   |                 |   |        |               |  |   |                 |   |  |               |        |   |                 |   |        |               |  |   |                 |   |  |   |        |   |  |   |        |  
|Research and development                             |  |                                          | 3,812  |   |                 |   | 3,821  |               |  |   | 3,764           |   |  |               | 3,791  |   |                 |   | 4,011  |               |  |   | 4,026           |   |  |   | 3,983  |   |  |   | 3,983  |  
|Research and development project cancellation costs  |  |                                          |       |   |                 |   |       |               |  |   |                |   |  |               |       |   |                 |   |       |               |  |   |                |   |  |   | 606    |   |  |   | 606    |  
|Selling and marketing                                |  |                                          | 4,845  |   |                 |   | 5,079  |               |  |   | 4,855           |   |  |               | 5,099  |   |                 |   | 4,939  |               |  |   | 5,130           |   |  |   | 5,471  |   |  |   | 5,661  |  
|General and administrative                           |  |                                          | 1,276  |   |                 |   | 1,265  |               |  |   | 961             |   |  |               | 977    |   |                 |   | 1,091  |               |  |   | 1,107           |   |  |   | 1,412  |   |  |   | 1,428  |  
|Amortization of intangible assets                    |  |                                          | 87     |   |                 |   | 375    |               |  |   | 86              |   |  |               | 374    |   |                 |   | 86     |               |  |   | 374             |   |  |   | 86     |   |  |   | 374    |  
|Restructuring costs                                  |  |                                          | (77    | ) |                 |   | (77    | )             |  |   | 130             |   |  |               | 130    |   |                 |   |       |               |  |   |                |   |  |   | 342    |   |  |   | 342    |  
|Integration costs                                    |  |                                          |       |   |                 |   |       |               |  |   |                |   |  |               |       |   |                 |   |       |               |  |   |                |   |  |   |       |   |  |   |       |  
|Acquired in-process research and development         |  |                                          |       |   |                 |   |       |               |  |   |                |   |  |               |       |   |                 |   |       |               |  |   |                |   |  |   |       |   |  |   |       |  
|Impairment of goodwill and other intangible assets   |  |                                          |       |   |                 |   |       |               |  |   |                |   |  |               |       |   |                 |   |       |               |  |   |                |   |  |   |       |   |  |   |       |  
|                                                     |  |                                          |        |   |                 |   |        |               |  |   |                 |   |  |               |        |   |                 |   |        |               |  |   |                 |   |  |   |        |   |  |   |        |  
|Total operating expenses                             |  |                                          | 9,943  |   |                 |   | 10,463 |               |  |   | 9,796           |   |  |               | 10,371 |   |                 |   | 10,127 |               |  |   | 10,637          |   |  |   | 11,900 |   |  |   | 12,394 |  
|                                                     |  |                                          |        |   |                 |   |        |               |  |   |                 |   |  |               |        |   |                 |   |        |               |  |   |                 |   |  |   |        |   |  |   |        |  
|OPERATING INCOME (LOSS)                              |  |                                          | 131    |   |                 |   | 302    |               |  |   | (1,376          | ) |  |               | (1,475 | ) |                 |   | (3,138 | )             |  |   | (2,664          | ) |  |   | (3,930 | ) |  |   | (3,931 | )
|                                                     |  |                                          |        |   |                 |   |        |              
|Other income (loss), net                             |  |                                          |        |   |                 |   |        |               |  |   |                 |   |  |               |        |   |                 |   |        |               |  |   |                 |   |  |   |        |   |  |   |        |  
|Loss on impaired securities                          |  |                                          |       |   |                 |   |       |               |  |   |                |   |  |               |       |   |                 |   | (457   | )             |  |   | (457            | ) |  |   |       |   |  |   |       |  
|Other income (expense), net                          |  |                                          | (80    | ) |                 |   | (80    | )             |  |   | (3              | ) |  |               | (3     | ) |                 |   | (5     | )             |  |   | (5              | ) |  |   | (7     | ) |  |   | (7     | )
|                                                     |  |                                          |        |   |                 |   |        |               |  |   |                 |   |  |               |        |   |                 |   |        |               |  |   |                 |   |  |   |        |   |  |   |        |  
|Other income (loss), net                             |  |                                          | (80    | ) |                 |   | (80    | )             |  |   | (3              | ) |  |               | (3     | ) |                 |   | (462   | )             |  |   | (462            | ) |  |   | (7     | ) |  |   | (7     | )
|                                                     |  |                                          |        |   |                 |   |        |               |  |   |                 |   |  |               |        |   |                 |   |        |               |  |   |                 |   |  |   |        |   |  |   |        |  
|Provision for income taxes                           |  |                                          |       |   |                 |   |       |               |  |   |                |   |  |               |       |   |                 |   |       |               |  |   |                |   |  |   |       |   |  |   |       |  
|NET INCOME (LOSS)                                    |  | $                                        | 51     |   |                 | $ | 222    |               |  | $ | (1,379          | ) |  | $             | (1,478 | ) |                 | $ | (3,600 | )             |  | $ | (3,126          | ) |  | $ | (3,937 | ) |  | $ | (3,938 | )
|                                                     |  |                                          |        |   |                 |   |        |               |  |   |                 |   |  |               |        |   |                 |   |        |               |  |   |                 |   |  |   |        |   |  |   |        |  
|Per share data, net income (loss):                   |  |                                          |        |   |                 |   |        |               |  |   |                 |   |  |               |        |   |                 |   |        |               |  |   |                 |   |  |   |        |   |  |   |        |  
|Basic net income (loss) per share                    |  | $                                        | 0.00   |   |                 | $ | 0.01   |               |  | $ | (0.07           | ) |  | $             | (0.08  | ) |                 | $ | (0.19  | )             |  | $ | (0.16           | ) |  | $ | (0.21  | ) |  | $ | (0.21  | )
|                                                     |  |                                          |        |   |                 |   |        |               |  |   |                 |   |  |               |        |   |                 |   |        |               |  |   |                 |   |  |   |        |   |  |   |        |  
|Diluted net income (loss) per share                  |  | $                                        | 0.00   |   |                 | $ | 0.01   |               |  | $ | (0.07           | ) |  | $             | (0.08  | ) |                 | $ | (0.19  | )             |  | $ | (0.16           | ) |  | $ | (0.21  | ) |  | $ | (0.21  | )
|                                                     |  |                                          |        |   |                 |   |        |               |  |   |                 |   |  |               |        |   |                 |   |        |               |  |   |                 |   |  |   |        |   |  |   |        |  
|Shares used in the computation of net income (loss): |  |                                          |        |   |                 |   |        |               |  |   |                 |   |  |               |        |   |                 |   |        |               |  |   |                 |   |  |   |        |   |  |   |        |  
|Shares used in the basic per share calculations      |  |                                          | 20,790 |   |                 |   | 20,790 |               |  |   | 19,370          |   |  |               | 19,370 |   |                 |   | 19,163 |               |  |   | 19,163          |   |  |   | 18,906 |   |  |   | 18,906 |  
|                                                     |  |                                          |        |   |                 |   |        |               |  |   |                 |   |  |               |        |   |                 |   |        |               |  |   |                 |   |  |   |        |   |  |   |        |  
|Shares used in the diluted per share calculations    |  |                                          | 22,646 |   |                 |   | 22,646 |               |  |   | 19,370          |   |  |               | 19,370 |   |                 |   | 19,163 |               |  |   | 19,163          |   |  |   | 18,906 |   |  |   | 18,906 |  
|                                                     |  |                                          |        |   |                 |   |        |               |  |   |                 |   |  |               |        |   |                 |   |        |               |  |   |                 |   |  |   |        |   |  |   |        |  



23



---

##### Table of Contents

|                                                     |  |                                          |         |   |                 |   |         |               |  |   |                 |   |  |               |        |   |                 |   |        |               |  |   |                 |   |  |   |        |   |  |   |        |  
|---------------------------------------------------- |  | ---------------------------------------- | ------- | - | --------------- | - | ------- | ------------- |  | - | --------------- | - |  | ------------- | ------ | - | --------------- | - | ------ | ------------- |  | - | --------------- | - |  | - | ------ | - |  | - | ------ | -
|                                                     |  | Fiscal 2002                              |        
|                                                     |  | Restated                                 |         |   | PreviouslyFiled |   |         | Restated      |  |   | PreviouslyFiled |   |  | Restated      |        |   | PreviouslyFiled |   |        | Restated      |  |   | PreviouslyFiled |  
|Three months ended,                                  |  | Sep. 30, 2002                            |         |   | Sep. 30,2002    |   |         | Jun. 30, 2002 |  |   | Jun. 30,2002    |   |  | Mar. 31, 2002 |        |   | Mar. 31,2002    |   |        | Dec. 31, 2001 |  |   | Dec. 31,2001    |  
|                                                     |  | (in thousands; except per share amounts) |        
|REVENUES:                                            |  |                                          |         |   |                 |   |         |               |  |   |                 |   |  |               |        |   |                 |   |        |               |  |   |                 |   |  |   |        |   |  |   |        |  
|Broadband equipment                                  |  | $                                        | 12,016  |   |                 | $ | 12,405  |               |  | $ | 9,880           |   |  | $             | 10,096 |   |                 | $ | 11,070 |               |  | $ | 11,239          |   |  | $ | 11,638 |   |  | $ | 11,811 |  
|Broadband software and services                      |  |                                          | 5,053   |   |                 |   | 4,501   |               |  |   | 4,898           |   |  |               | 5,468  |   |                 |   | 4,319  |               |  |   | 4,470           |   |  |   | 4,049  |   |  |   | 4,074  |  
|                                                     |  |                                          |         |   |                 |   |         |               |  |   |                 |   |  |               |        |   |                 |   |        |               |  |   |                 |   |  |   |        |   |  |   |        |  
|Total revenues                                       |  |                                          | 17,069  |   |                 |   | 16,906  |               |  |   | 14,778          |   |  |               | 15,564 |   |                 |   | 15,389 |               |  |   | 15,709          |   |  |   | 15,687 |   |  |   | 15,885 |  
|                                                     |  |                                          |         |   |                 |   |         |               |  |   |                 |   |  |               |        |   |                 |   |        |               |  |   |                 |   |  |   |        |   |  |   |        |  
|COST OF REVENUES:                                    |  |                                          |         |   |                 |   |         |               |  |   |                 |   |  |               |        |   |                 |   |        |               |  |   |                 |   |  |   |        |   |  |   |        |  
|Broadband equipment                                  |  |                                          | 9,656   |   |                 |   | 8,984   |               |  |   | 7,795           |   |  |               | 7,452  |   |                 |   | 7,969  |               |  |   | 7,640           |   |  |   | 7,047  |   |  |   | 7,095  |  
|Broadband software and services                      |  |                                          | 175     |   |                 |   | 175     |               |  |   | 154             |   |  |               | 154    |   |                 |   | 146    |               |  |   | 146             |   |  |   | 164    |   |  |   | 164    |  
|Amortization of acquired technology                  |  |                                          | 288     |   |                 |   | 288     |               |  |   | 288             |   |  |               | 288    |   |                 |   | 288    |               |  |   | 288             |   |  |   | 288    |   |  |   | 288    |  
|                                                     |  |                                          |         |   |                 |   |         |               |  |   |                 |   |  |               |        |   |                 |   |        |               |  |   |                 |   |  |   |        |   |  |   |        |  
|Total cost of revenues                               |  |                                          | 10,119  |   |                 |   | 9,447   |               |  |   | 8,237           |   |  |               | 7,894  |   |                 |   | 8,403  |               |  |   | 8,074           |   |  |   | 7,499  |   |  |   | 7,547  |  
|                                                     |  |                                          |         |   |                 |   |         |               |  |   |                 |   |  |               |        |   |                 |   |        |               |  |   |                 |   |  |   |        |   |  |   |        |  
|GROSS PROFIT                                         |  |                                          | 6,950   |   |                 |   | 7,459   |               |  |   | 6,541           |   |  |               | 7,670  |   |                 |   | 6,986  |               |  |   | 7,635           |   |  |   | 8,188  |   |  |   | 8,338  |  
|                                                     |  |                                          |         |   |                 |   |         |              
|OPERATING EXPENSES:                                  |  |                                          |         |   |                 |   |         |               |  |   |                 |   |  |               |        |   |                 |   |        |               |  |   |                 |   |  |   |        |   |  |   |        |  
|Research and development                             |  |                                          | 4,337   |   |                 |   | 4,481   |               |  |   | 4,632           |   |  |               | 4,546  |   |                 |   | 4,295  |               |  |   | 4,348           |   |  |   | 4,150  |   |  |   | 4,148  |  
|Research and development project cancellation costs  |  |                                          |        |   |                 |   |        |               |  |   |                |   |  |               |       |   |                 |   |       |               |  |   |                |   |  |   |       |   |  |   |       |  
|Selling and marketing                                |  |                                          | 5,729   |   |                 |   | 6,028   |               |  |   | 5,898           |   |  |               | 6,204  |   |                 |   | 5,818  |               |  |   | 5,975           |   |  |   | 5,955  |   |  |   | 6,128  |  
|General and administrative                           |  |                                          | 1,674   |   |                 |   | 1,690   |               |  |   | 1,450           |   |  |               | 1,466  |   |                 |   | 1,267  |               |  |   | 1,267           |   |  |   | 973    |   |  |   | 973    |  
|Amortization of intangible assets                    |  |                                          | 86      |   |                 |   | 374     |               |  |   | 86              |   |  |               | 374    |   |                 |   | 86     |               |  |   | 374             |   |  |   | 86     |   |  |   | 374    |  
|Restructuring costs                                  |  |                                          |        |   |                 |   |        |               |  |   |                |   |  |               |       |   |                 |   |       |               |  |   |                |   |  |   | 482    |   |  |   | 482    |  
|Integration costs                                    |  |                                          |        |   |                 |   |        |               |  |   |                |   |  |               |       |   |                 |   |       |               |  |   |                |   |  |   | 309    |   |  |   | 309    |  
|Acquired in-process research and development         |  |                                          |        |   |                 |   |        |               |  |   |                |   |  |               |       |   |                 |   | 1,908  |               |  |   | 1,908           |   |  |   | 2,150  |   |  |   | 2,150  |  
|Impairment of goodwill and other intangible assets   |  |                                          | 9,146   |   |                 |   | 9,146   |               |  |   |                |   |  |               |       |   |                 |   |       |               |  |   |                |   |  |   |       |   |  |   |       |  
|                                                     |  |                                          |         |   |                 |   |         |               |  |   |                 |   |  |               |        |   |                 |   |        |               |  |   |                 |   |  |   |        |   |  |   |        |  
|Total operating expenses                             |  |                                          | 20,972  |   |                 |   | 21,719  |               |  |   | 12,066          |   |  |               | 12,590 |   |                 |   | 13,374 |               |  |   | 13,872          |   |  |   | 14,105 |   |  |   | 14,564 |  
|                                                     |  |                                          |         |   |                 |   |         |               |  |   |                 |   |  |               |        |   |                 |   |        |               |  |   |                 |   |  |   |        |   |  |   |        |  
|OPERATING INCOME (LOSS)                              |  |                                          | (14,022 | ) |                 |   | (14,260 | )             |  |   | (5,525          | ) |  |               | (4,920 | ) |                 |   | (6,388 | )             |  |   | (6,237          | ) |  |   | (5,917 | ) |  |   | (6,226 | )
|                                                     |  |                                          |         |   |                 |   |         |              
|Other income (loss), net                             |  |                                          |         |   |                 |   |         |               |  |   |                 |   |  |               |        |   |                 |   |        |               |  |   |                 |   |  |   |        |   |  |   |        |  
|Loss on impaired securities                          |  |                                          | (1,543  | ) |                 |   | (1,543  | )             |  |   |                |   |  |               |       |   |                 |   | (1,400 | )             |  |   | (1,400          | ) |  |   |       |   |  |   |       |  
|Other income (expense), net                          |  |                                          | 29      |   |                 |   | 29      |               |  |   | 54              |   |  |               | 54     |   |                 |   | 80     |               |  |   | 80              |   |  |   | 156    |   |  |   | 156    |  
|                                                     |  |                                          |         |   |                 |   |         |               |  |   |                 |   |  |               |        |   |                 |   |        |               |  |   |                 |   |  |   |        |   |  |   |        |  
|Other income (loss), net                             |  |                                          | (1,514  | ) |                 |   | (1,514  | )             |  |   | 54              |   |  |               | 54     |   |                 |   | (1,320 | )             |  |   | (1,320          | ) |  |   | 156    |   |  |   | 156    |  
|                                                     |  |                                          |         |   |                 |   |         |               |  |   |                 |   |  |               |        |   |                 |   |        |               |  |   |                 |   |  |   |        |   |  |   |        |  
|Provision for income taxes                           |  |                                          |        |   |                 |   |        |               |  |   | (200            | ) |  |               |       |   |                 |   |       |               |  |   |                |   |  |   |       |   |  |   |       |  
|NET INCOME (LOSS)                                    |  | $                                        | (15,536 | ) |                 | $ | (15,774 | )             |  | $ | (5,271          | ) |  | $             | (4,866 | ) |                 | $ | (7,708 | )             |  | $ | (7,557          | ) |  | $ | (5,761 | ) |  | $ | (6,070 | )
|                                                     |  |                                          |         |   |                 |   |         |               |  |   |                 |   |  |               |        |   |                 |   |        |               |  |   |                 |   |  |   |        |   |  |   |        |  
|Per share data, net income (loss):                   |  |                                          |         |   |                 |   |         |               |  |   |                 |   |  |               |        |   |                 |   |        |               |  |   |                 |   |  |   |        |   |  |   |        |  
|Basic net income (loss) per share                    |  | $                                        | (0.83   | ) |                 | $ | (0.84   | )             |  | $ | (0.28           | ) |  | $             | (0.26  | ) |                 | $ | (0.42  | )             |  | $ | (0.41           | ) |  | $ | (0.32  | ) |  | $ | (0.34  | )
|                                                     |  |                                          |         |   |                 |   |         |               |  |   |                 |   |  |               |        |   |                 |   |        |               |  |   |                 |   |  |   |        |   |  |   |        |  
|Diluted net income (loss) per share                  |  | $                                        | (0.83   | ) |                 | $ | (0.84   | )             |  | $ | (0.28           | ) |  | $             | (0.26  | ) |                 | $ | (0.42  | )             |  | $ | (0.41           | ) |  | $ | (0.32  | ) |  | $ | (0.34  | )
|                                                     |  |                                          |         |   |                 |   |         |               |  |   |                 |   |  |               |        |   |                 |   |        |               |  |   |                 |   |  |   |        |   |  |   |        |  
|Shares used in the computation of net income (loss): |  |                                          |         |   |                 |   |         |               |  |   |                 |   |  |               |        |   |                 |   |        |               |  |   |                 |   |  |   |        |   |  |   |        |  
|Shares used in the basic per share calculations      |  |                                          | 18,822  |   |                 |   | 18,822  |               |  |   | 18,648          |   |  |               | 18,648 |   |                 |   | 18,255 |               |  |   | 18,255          |   |  |   | 18,092 |   |  |   | 18,092 |  
|                                                     |  |                                          |         |   |                 |   |         |               |  |   |                 |   |  |               |        |   |                 |   |        |               |  |   |                 |   |  |   |        |   |  |   |        |  
|Shares used in the diluted per share calculations    |  |                                          | 18,822  |   |                 |   | 18,822  |               |  |   | 18,648          |   |  |               | 18,648 |   |                 |   | 18,255 |               |  |   | 18,255          |   |  |   | 18,092 |   |  |   | 18,092 |  
|                                                     |  |                                          |         |   |                 |   |         |               |  |   |                 |   |  |               |        |   |                 |   |        |               |  |   |                 |   |  |   |        |   |  |   |        |  



24



---

##### Table of Contents

Critical Accounting Policies and Estimates



Managements discussion and analysis of our financial condition and results of operations are based upon our
consolidated financial statements, which have been prepared in accordance with United States generally accepted accounting principles. We review the accounting policies used in reporting our financial results on a regular basis. The preparation of
these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. On an ongoing basis, we evaluate our processes used to develop estimates, including those related
to revenue, accounts receivable, inventories, investments, intangible assets and goodwill. We base our estimates on historical experience, expectations of future results, and on various other assumptions that are believed to be reasonable for making
judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates due to actual outcomes being different from those on which we based our assumptions. These
estimates and judgments are reviewed by management on an ongoing basis. The Audit Committee reviews any changes in our methodology for arriving at our estimates, and discusses the appropriateness of any such changes with management and our
independent auditors on a quarterly basis. We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.



Revenue Recognition. We generally recognize revenue from the sale of
broadband equipment at the time of shipment to a third party customer when (a) persuasive evidence of an arrangement exists; (b) the price to the customer is fixed or determinable; (c) the customer is obligated to pay us 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; (e) we do not have significant obligations for future performance to directly
bring about resale of the product by the customer; and (f) the customer takes title of the goods. However, determining whether and when some of these criteria have been satisfied often involve assumptions and judgements that can have significant
impact on the timing and amount of revenue we report. At the date of shipment, assuming that the revenue recognition criteria specified above is met, we provide for an estimate of returns and warranty expense based on historical experience of
returns of similar products and warranty costs incurred, respectively.



We recognize software revenue in accordance with Statement of Position (SOP) 97-2, Software Revenue Recognition, as amended by SOP 98-9, and SEC Staff Accounting Bulletin (SAB) No. 104, Revenue Recognition. 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. For these contracts,
which involve significant implementation or other services which are essential to the functionality of the software and which are reasonably estimable, the license and services revenue is recognized over the period of each implementation, primarily
using the percentage-of-completion method. Labor hours incurred are used as the measure of progress towards completion. A provision for estimated losses on engagements is made in the period in which the loss becomes probable and can be reasonably
estimated. In cases where a sale of a license does not include implementation services, as in the sale of additional seats, revenue is recorded upon delivery with an appropriate deferral for maintenance services, if



25



---

##### Table of Contents

applicable, provided all of the other relevant conditions have been met. 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 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.



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



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.



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.



26



---

##### Table of Contents

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



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.



Recent Accounting Pronouncements



In January 2003, the Emerging Issues Task Force reached consensus on Issue No. 00-21 (EITF 00-21), Revenue Arrangements with Multiple
Deliverables. EITF 00-21 provides guidance on how to determine whether an arrangement involving multiple deliverables requires that such deliverables be accounted for separately. EITF 00-21 allows for prospective adoption for arrangements
entered into after June 15, 2003 or adoption via a cumulative effect of a change in accounting principle. We adopted EITF 00-21 in the year ended September 30, 2004; however, it did not have a material impact on our disclosures in our Consolidated
Financial Statements.



In March 2004, the Emerging Issues Task
Force ratified the consensus reached on paragraphs 6 through 23 of Issue No. 03-01 (EITF 03-1), The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments. EITF 03-1 requires that certain
quantitative and qualitative disclosures should be required for debt and marketable equity securities classified as available-for-sale or held-to-maturity under SFAS No. 115, Accounting for Certain Investments in Debt and Equity
Securities and SFAS No. 124, Accounting for Certain Investments Held by Not-for-Profit Organizations that are impaired at the balance sheet date but for which an other-than-temporary impairment has not been recognized. We adopted
EITF 03-1 in the year ended September 30, 2004; however, it did not have a material impact on the disclosures in our Consolidated Financial Statements.



In December 2004, the Financial Accounting Standards Board issued SFAS No. 123 (revised 2004), Share-Based Payment. This Statement is a
revision of SFAS No. 123, Accounting for Stock-Based Compensation, and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and its related implementation guidance. SFAS No. 123(R) requires that compensation
cost relating to share-based payment transactions be recognized in financial statements. That cost will be measured based on the fair value of the equity or liability instruments issued. This statement is effective beginning with our third quarter
of fiscal 2005 ending June 30, 2005. We are currently evaluating the requirements of SFAS No. 123(R) and although we believe the impact to our financial statements will be in a similar range as the amounts presented in our pro forma financial
results required to be disclosed under the current SFAS No. 123, we have not yet fully determined its impact on our consolidated financial statements.



In November 2004, the FASB issued SFAS No. 151, Inventory Costs (SFAS 151), an amendment of ARB No. 43, Chapter 4. SFAS 151
clarifies the accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted material. SFAS 151 is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The Company does not believe
adoption of SFAS 151 will have a material effect on our Consolidated Financial Statements.



27



---

##### Table of Contents

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, 2004, our principal source of liquidity included cash and cash equivalents in the amount of $23.9 million, a credit facility with a maximum borrowing capacity of up to $15.0 million from which we had no
outstanding borrowings and had a borrowing availability of approximately $8.4 million. Additionally, we have two term loans from which in total we had amounts outstanding of approximately $0.1 million.



Cash and Cash Equivalents. The following table sets forth our cash,
cash equivalents and short-term investments as of the fiscal years ended September 30, 2004, 2003 and 2002.



|                                 |  |      |        |      |   |        |  |                                     |        |  |      |   |  |      |   |  |     |  
|-------------------------------- |  | ---- | ------ | ---- | - | ------ |  | ----------------------------------- | ------ |  | ---- | - |  | ---- | - |  | --- | -
|                                 |  |      |        |      |   |        |  | Increase (decrease) from prior year |       
|Fiscal years ended September 30, |  | 2004 |        | 2003 |   | 2002   |  | 2004                                |        |  | 2003 |   |  | 2002 |  
|Cash and cash equivalents        |  | $    | 23,973 |      | $ | 22,208 |  | $                                   | 25,022 |  | 8    | % |  | -11  | % |  | -49 | %



For the fiscal year
ended September 30, 2004, cash and cash equivalents increased primarily due to the proceeds we received from the issuance of our common stock offset by cash used in our operating activities and capital equipment purchases. We do not have any
off-balance sheet transactions at September 30, 2004, 2003 and 2002.



Net
Cash Used in Operating Activities



During the fiscal year
ended September 30, 2004, our operating activities utilized approximately $5.2 million of cash. Excluding the changes in operating assets and liabilities, our operating activities utilized $3.1 million of cash primarily due to our net loss offset
primarily by depreciation and amortization. Changes in our operating assets and liabilities used $2.2 million of cash primarily as a result of increased accounts receivable and inventory purchases in addition to increases in our deposits and prepaid
assets. Our inventory increased as a result of increased ocean shipments of in-transit finished goods, a greater number of shipments billed Delivered Duty Paid (DDP), with respect to which the Company does not recognize the sale and
receivable until the product is received by the customer, and increased sales.



Net Cash Used in Investing Activities



During
the fiscal year ended September 30, 2004, investing activities used approximately $2.9 million of cash, of which $1.3 million was related to the purchase of capital equipment primarily for use in our development and manufacturing operations in
addition to $1.5 million utilized in the acquisition of JadeSail.



Net Cash
Provided from Financing Activities



During the fiscal year
ended September 30, 2004, we generated approximately $9.0 million of cash from financing activities, primarily due to the proceeds we received from the issuance of our common stock, offset by payments to the Companys term loans.



As of September 30, 2004, 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 2005 and beyond. We believe we have adequate cash, cash equivalents and borrowing
capacity to fund our operating activities for at least the next twelve months. During the next twelve months, we expect to incur significant expenses associated with securities litigation and the SEC investigation, and related to compliance with
Section 404 of the Sarbanes-Oxley Act. For our long-term sustainability and cash preservation, we must continue to improve margins and reduce costs. If we issue additional stock to raise capital, our existing stockholders percentage ownership
in Netopia would be reduced.



28



---

##### Table of Contents

Trade Accounts Receivable, Net. The following table sets forth our trade accounts receivables, net
as of the quarter ended September 30, 2004, 2003 and 2002.



|                                 |  |                |         |      |   |         |  |                                     |         |  |      |   |  |      |   |  |   |  
|-------------------------------- |  | -------------- | ------- | ---- | - | ------- |  | ----------------------------------- | ------- |  | ---- | - |  | ---- | - |  | - | -
|                                 |  |                |         |      |   |         |  | Increase (decrease) from prior year |        
|Fiscal years ended September 30, |  | 2004           |         | 2003 |   | 2002    |  | 2004                                |         |  | 2003 |   |  | 2002 |  
|                                 |  | (in thousands) |        
|Trade accounts receivable, net   |  | $              | 17,812  |      | $ | 16,062  |  | $                                   | 9,970   |  | 11   | % |  | 61   | % |  | 4 | %
|Days sales outstanding (DSO)     |  |                | 63 days |      |   | 59 days |  |                                     | 54 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. 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, 2004 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.



Inventory. The following table sets forth our inventory, net as of the
fiscal years ended September 30, 2004, 2003 and 2002.



|                                 |  |                |       |      |   |       |  |                                     |       |  |      |   |  |      |   |  |     |  
|-------------------------------- |  | -------------- | ----- | ---- | - | ----- |  | ----------------------------------- | ----- |  | ---- | - |  | ---- | - |  | --- | -
|                                 |  |                |       |      |   |       |  | Increase (decrease) from prior year |      
|Fiscal years ended September 30, |  | 2004           |       | 2003 |   | 2002  |  | 2004                                |       |  | 2003 |   |  | 2002 |  
|                                 |  | (in thousands) |      
|Inventory                        |  | $              | 6,280 |      | $ | 5,738 |  | $                                   | 6,213 |  | 9    | % |  | -8   | % |  | -13 | %
|Inventory turns                  |  |                | 7.0   |      |   | 8.2   |  |                                     | 4.4   |  |      |   |  |      |   |  |     |  



Inventory consists
primarily of raw material, work in process, and finished goods. At September 30, 2004, inventory increased $0.6 million or 10% from September 30, 2003 primarily due to longer lead times between the customer order and their required ship date. Our
inventory turns at September 30, 2004 have decreased due to decreased visibility into our customers demand. We strive to balance our inventory so that we remain responsive to our customers needs through timely shipments of products against our
need to turn inventory quickly thus providing better use of our cash. 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
cancel, defer, delay orders. 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, 2004, 2003 and 2002.



|                                 |  |                |     |      |   |      |  |                                     |       |  |      |   |  |      |   |  |    
|-------------------------------- |  | -------------- | --- | ---- | - | ---- |  | ----------------------------------- | ----- |  | ---- | - |  | ---- | - |  | ---
|                                 |  |                |     |      |   |      |  | Increase (decrease) from prior year
|Fiscal years ended September 30, |  | 2004           |     | 2003 |   | 2002 |  | 2004                                |       |  | 2003 |   |  | 2002
|                                 |  | (in thousands)
|Borrowings under credit facility |  | $              |    |      | $ |     |  | $                                   | 4,428 |  | n/a  |   |  | -100 | % |  | n/a
|Borrowings under term loans      |  | $              | 104 |      | $ | 354  |  | $                                   |      |  | -71  | % |  | n/a  |   |  | n/a



At September 30, 2004,
we have no outstanding borrowings under the credit facility and had an available borrowing availability of approximately $8.4 million. At September 30, 2003, we had no outstanding borrowings under the credit facility and had a borrowing availability
of approximately $12.2 million. 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.



29



---

##### Table of Contents

Commitments



As of September 30, 2004, we had commitments that consisted of facilities and equipment under operating lease agreements,
borrowings under term loans and purchase commitments primarily for inventory. Purchase obligations are comprised of purchase commitments with our contract manufacturers. Our contract manufacturers procure component inventory on our behalf based on
our production orders. We are obligated to purchase component inventory that the contract manufacturer procures in accordance with the orders, unless cancellation is given within applicable lead times. 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 |        |     
|Contractual obligation     |  | 2005         |        | 2006 |   | 2007 |  | 2008 |     | 2009 |   | Thereafter |  | Totals
|Purchase obligations       |  | $            | 13,987 |      | $ |     |  | $    |    |      | $ |           |  |       |  |  |  | $ | 13,987
|Property lease obligations |  |              | 1,291  |      |   | 938  |  |      | 966 |      |   | 650        |  |       |  |  |  |   | 3,845 
|Term loan                  |  |              | 104    |      |   |     |  |      |    |      |   |           |  |       |  |  |  |   | 104   
|                           |  |              |        |      |   |      |  |      |     |      |   |            |  |        |  |   |  |   |       
|Totals                     |  | $            | 15,382 |      | $ | 938  |  | $    | 966 |      | $ | 650        |  |       |  |  |  | $ | 17,936
|                           |  |              |        |      |   |      |  |      |     |      |   |            |  |        |  |   |  |   |       



30



---

##### Table of Contents

Results of Operations for Fiscal Years Ended September 30, 2004, 2003 and 2002



The following table sets forth for the periods indicated certain restated
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. This data has been derived from the consolidated financial statements
elsewhere in this Form 10-K. The operating results for any period should not be considered indicative of results for any future period. This information should be read in conjunction with the Consolidated Financial Statements and Notes thereto
included elsewhere in this Form 10-K.



|                                                    |  |                |         |   |          |     |   |          |   |        |                                    |  |     |      |  |   |         |   |  |     |   |  |      |   |  |      |  
|--------------------------------------------------- |  | -------------- | ------- | - | -------- | --- | - | -------- | - | ------ | ---------------------------------- |  | --- | ---- |  | - | ------- | - |  | --- | - |  | ---- | - |  | ---- | -
|                                                    |  |                |         |   | Restated |     |   | Restated |   |        | Increase (decrease)from prior year | 
|Fiscal years ended September 30,                    |  | 2004           |         |   | 2003     |     |   | 2002     |   |        | 2004                               |  |     | 2003 | 
|                                                    |  | (in thousands) |        
|REVENUES:                                           |  |                |         |   |          |     |   |          |   |        |                                    |  |     |      |  |   |         |   |  |     |   |  |      |   |  |      |  
|Broadband equipment                                 |  | $              | 85,702  |   |          | 85  | % |          | $ | 67,393 |                                    |  | 79  | %    |  | $ | 44,604  |   |  | 71  | % |  | 27   | % |  | 51   | %
|Broadband software and services                     |  |                | 15,633  |   |          | 15  | % |          |   | 17,527 |                                    |  | 21  | %    |  |   | 18,319  |   |  | 29  | % |  | -11  | % |  | -4   | %
|                                                    |  |                |         |   |          |     |   |          |   |        |                                    |  |     |      |  |   |         |   |  |     |   |  |      |   |  |      |  
|Total revenues                                      |  |                | 101,335 |   |          | 100 | % |          |   | 84,920 |                                    |  | 100 | %    |  |   | 62,923  |   |  | 100 | % |  | 19   | % |  | 35   | %
|                                                    |  |                |         |   |          |     |   |          |   |        |                                    |  |     |      |  |   |         |   |  |     |   |  |      |   |  |      |  
|COST OF REVENUES:                                   |  |                |         |   |          |     |   |          |   |        |                                    |  |     |      |  |   |         |   |  |     |   |  |      |   |  |      |  
|Broadband equipment                                 |  |                | 63,251  |   |          | 62  | % |          |   | 49,001 |                                    |  | 58  | %    |  |   | 32,467  |   |  | 52  | % |  | 29   | % |  | 51   | %
|Broadband software and services                     |  |                | 992     |   |          | 1   | % |          |   | 1,314  |                                    |  | 2   | %    |  |   | 639     |   |  | 1   | % |  | -25  | % |  | 106  | %
|Amortization of acquired technology                 |  |                | 1,200   |   |          | 1   | % |          |   | 1,152  |                                    |  | 1   | %    |  |   | 1,152   |   |  | 2   | % |  | 4    | % |  | 0    | %
|                                                    |  |                |         |   |          |     |   |          |   |        |                                    |  |     |      |  |   |         |   |  |     |   |  |      |   |  |      |  
|Total cost of revenues                              |  |                | 65,443  |   |          | 65  | % |          |   | 51,467 |                                    |  | 61  | %    |  |   | 34,258  |   |  | 54  | % |  | 27   | % |  | 50   | %
|                                                    |  |                |         |   |          |     |   |          |   |        |                                    |  |     |      |  |   |         |   |  |     |   |  |      |   |  |      |  
|GROSS PROFIT                                        |  |                | 35,892  |   |          | 35  | % |          |   | 33,453 |                                    |  | 39  | %    |  |   | 28,665  |   |  | 46  | % |  | 7    | % |  | 17   | %
|                                                    |  |                |         |   |          |     |   |         
|OPERATING EXPENSES:                                 |  |                |         |   |          |     |   |          |   |        |                                    |  |     |      |  |   |         |   |  |     |   |  |      |   |  |      |  
|Research and development                            |  |                | 15,828  |   |          | 16  | % |          |   | 15,570 |                                    |  | 18  | %    |  |   | 17,414  |   |  | 28  | % |  | 2    | % |  | -11  | %
|Research and development project cancellation costs |  |                |        |   |          | 0   | % |          |   | 606    |                                    |  | 1   | %    |  |   |        |   |  | 0   | % |  | -100 | % |  |     | %
|Selling and marketing                               |  |                | 20,528  |   |          | 20  | % |          |   | 20,110 |                                    |  | 24  | %    |  |   | 23,400  |   |  | 37  | % |  | 2    | % |  | -14  | %
|General and administrative                          |  |                | 7,147   |   |          | 7   | % |          |   | 4,740  |                                    |  | 6   | %    |  |   | 5,364   |   |  | 9   | % |  | 51   | % |  | -12  | %
|Amortization of intangible assets                   |  |                | 345     |   |          | 0   | % |          |   | 345    |                                    |  | 0   | %    |  |   | 344     |   |  | 1   | % |  | 0    | % |  | 0    | %
|Restructuring costs                                 |  |                | 999     |   |          | 1   | % |          |   | 395    |                                    |  | 0   | %    |  |   | 482     |   |  | 1   | % |  | 153  | % |  | -18  | %
|Integration costs                                   |  |                |        |   |          | 0   | % |          |   |       |                                    |  | 0   | %    |  |   | 309     |   |  | 0   | % |  |     | % |  | -100 | %
|Acquired in-process research and development        |  |                |        |   |          | 0   | % |          |   |       |                                    |  | 0   | %    |  |   | 4,058   |   |  | 6   | % |  |     | % |  | -100 | %
|Impairment of goodwill and other intangible assets  |  |                |        |   |          | 0   | % |          |   |       |                                    |  | 0   | %    |  |   | 9,146   |   |  | 15  | % |  |     | % |  | -100 | %
|                                                    |  |                |         |   |          |     |   |          |   |        |                                    |  |     |      |  |   |         |   |  |     |   |  |      |   |  |      |  
|Total operating expenses                            |  |                | 44,847  |   |          | 44  | % |          |   | 41,766 |                                    |  | 49  | %    |  |   | 60,517  |   |  | 96  | % |  | 7    | % |  | -31  | %
|                                                    |  |                |         |   |          |     |   |          |   |        |                                    |  |     |      |  |   |         |   |  |     |   |  |      |   |  |      |  
|OPERATING LOSS                                      |  |                | (8,955  | ) |          | -9  | % |          |   | (8,313 | )                                  |  | -10 | %    |  |   | (31,852 | ) |  | -51 | % |  | 8    | % |  | -74  | %
|                                                    |  |                |         |   |          |     |   |         
|Other income (loss), net                            |  |                |         |   |          |     |   |          |   |        |                                    |  |     |      |  |   |         |   |  |     |   |  |      |   |  |      |  
|Loss on impaired securities                         |  |                |        |   |          | 0   | % |          |   | (457   | )                                  |  | -1  | %    |  |   | (2,943  | ) |  | -5  | % |  | -100 | % |  | -84  | %
|Other income (expense), net                         |  |                | 224     |   |          | 0   | % |          |   | (95    | )                                  |  | 0   | %    |  |   | 319     |   |  | 1   | % |  | -336 | % |  | -130 | %
|                                                    |  |                |         |   |          |     |   |          |   |        |                                    |  |     |      |  |   |         |   |  |     |   |  |      |   |  |      |  
|Other income (loss), net                            |  |                | 224     |   |          | 0   | % |          |   | (552   | )                                  |  | -1  | %    |  |   | (2,624  | ) |  | -4  | % |  | -141 | % |  | -79  | %
|                                                    |  |                |         |   |          |     |   |          |   |        |                                    |  |     |      |  |   |         |   |  |     |   |  |      |   |  |      |  
|Provision for income taxes                          |  |                | 78      |   |          | 0   | % |          |   |       |                                    |  | 0   | %    |  |   | (200    | ) |  | 0   | % |  |     | % |  | -100 | %
|NET LOSS                                            |  | $              | (8,809  | ) |          | -9  | % |          | $ | (8,865 | )                                  |  | -10 | %    |  | $ | (34,276 | ) |  | -54 | % |  | -1   | % |  | -74  | %
|                                                    |  |                |         |   |          |     |   |          |   |        |                                    |  |     |      |  |   |         |   |  |     |   |  |      |   |  |      |  



31



---

##### Table of Contents

REVENUES



2004 Revenues Compared to 2003 Revenues; 2003 Revenues Compared to 2002 Revenues



Total revenues increased for fiscal year 2004 by 19% to $101.3 million from $84.9 for fiscal year 2003. The increase
resulted from increased sales of our broadband equipment. Our unit sale increase was offset by a decline in average selling prices (ASPs) resulting from competitive pressures. Total revenues increased for fiscal year 2003 from
fiscal year 2002 by 35% from $62.9 million primarily due to increased revenues from the sale of our broadband equipment products partially offset by reduced revenues from the sale of our broadband software and services.



Broadband Equipment. Broadband equipment revenues increased for fiscal
year 2004 by 27% to $85.7 million from $67.4 million for fiscal year 2003. The increase is primarily due to increased sales volumes of our ADSL broadband equipment, the introduction of our wireless products and increased sales of our accessories to
ILEC customers, both in the United States and Europe, who serve the market for business and residential-class ADSL Internet services. Offsetting our increase in revenue for fiscal year 2004 over fiscal year 2003 were decreased shipments to our
primary distributors in the United States of approximately $2.1 million or 25.5%, primarily the result of declining ASPs. See the Product Volume and Average Selling Price Information section below, which sets forth our volumes and
average selling prices.



For fiscal year 2003, sales increased
by 51% to $67.4 million compared to $44.6 million in fiscal 2002 primarily as a result of increased sales to our key customers, including two new key customers, neither of which were customers in fiscal year 2002, as we continued to penetrate the
ADSL market with both residential and business-class products These increases were partially offset by 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.



Broadband Software and
Services. Our broadband software and services revenues decreased in fiscal year 2004 by 11% to $15.6 million compared to $17.5 million in fiscal year 2003. The decrease resulted from a reduction in our recurring revenue of our eSites and eStores
hosting solutions in addition to decreased software license sales of our system management software, Timbutku and netOctopus Enterprise.



Broadband software and services revenues decreased in fiscal year 2003 by 4% to $17.5 million compared to $18.3 million in fiscal year 2002 primarily due
to reduced license sales of Timbuktu 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 $2.1 million for fiscal year 2003 from $0.2 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.



We expect
that broadband software and services revenues will continue to decrease as a percentage of our total revenues.



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 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.



|                                 |  |                |     |      |   |      |  |                                     |     |  |      |   |  |      |   |  |     |  
|-------------------------------- |  | -------------- | --- | ---- | - | ---- |  | ----------------------------------- | --- |  | ---- | - |  | ---- | - |  | --- | -
|                                 |  |                |     |      |   |      |  | Increase (decrease) from prior year |    
|Fiscal years ended September 30, |  | 2004           |     | 2003 |   | 2002 |  | 2004                                |     |  | 2003 |   |  | 2002 |  
|                                 |  | (in thousands) |    
|Product Volumes                  |  |                | 964 |      |   | 508  |  |                                     | 178 |  | 90   | % |  | 186  | % |  | 9   | %
|Average Selling Prices           |  | $              | 89  |      | $ | 133  |  | $                                   | 251 |  | -33  | % |  | -47  | % |  | -30 | %



32



---

##### Table of Contents

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 any year of the three years reported, along with such data expressed as a percentage of total revenues. No other customers for fiscal years 2004, 2003 and 2002 accounted for 10%
or more of total revenues.



|                                |  |                  |        |  |      |   |  |      |        |  |    |   |  |   |       |  |    |  
|------------------------------- |  | ---------------- | ------ |  | ---- | - |  | ---- | ------ |  | -- | - |  | - | ----- |  | -- | -
|Fiscal year ended September 30, |  | 2004             |        |  | 2003 |   |  | 2002 |       
|                                |  | ($ in thousands) |       
|Swisscom                        |  | $                | 19,031 |  | 19   | % |  | $    | 13,359 |  | 16 | % |  | $ |      |  |   | %
|SBC                             |  |                  | 10,348 |  | 10   | % |  |      | 9,276  |  | 11 | % |  |   | 3,222 |  | 5  | %
|Bellsouth                       |  |                  | 10,111 |  | 10   | % |  |      | 3,148  |  | 4  | % |  |   | 4,031 |  | 6  | %
|Covad                           |  |                  | 7,869  |  | 8    | % |  |      | 12,760 |  | 15 | % |  |   | 8,481 |  | 13 | %
|Ingram Micro                    |  |                  | 3,861  |  | 4    | % |  |      | 5,346  |  | 6  | % |  |   | 7,970 |  | 13 | %



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) fromprior year |  
|Fiscal years ended September 30, |  | 2004             |         |  | 2003 |   |  | 2002 |        |  | 2004                               |   |  | 2003 |        |  | 2002 |  
|                                 |  | ($ in thousands) |        
|Europe                           |  | $                | 41,480  |  | 40   | % |  | $    | 24,785 |  | 29                                 | % |  | $    | 10,544 |  | 17   | % |  | 67  | % |  | 135 | % |  | 12  | %
|Canada                           |  |                  | 612     |  | 1    | % |  |      | 883    |  | 1                                  | % |  |      | 1,046  |  | 2    | % |  | -31 | % |  | -16 | % |  | -10 | %
|Asia Pacific and other           |  |                  | 2,549   |  | 3    | % |  |      | 1,599  |  | 2                                  | % |  |      | 1,602  |  | 2    | % |  | 59  | % |  | 0   | % |  | 56  | %
|                                 |  |                  |         |  |      |   |  |      |        |  |                                    |   |  |      |        |  |      |   |  |     |   |  |     |   |  |     |  
|Subtotal international revenue   |  |                  | 44,641  |  | 44   | % |  |      | 27,267 |  | 32                                 | % |  |      | 13,192 |  | 21   | % |  | 64  | % |  | 107 | % |  | 14  | %
|United States                    |  |                  | 56,694  |  | 56   | % |  |      | 57,653 |  | 68                                 | % |  |      | 49,731 |  | 79   | % |  | -2  | % |  | 16  | % |  | -24 | %
|                                 |  |                  |         |  |      |   |  |      |        |  |                                    |   |  |      |        |  |      |   |  |     |   |  |     |   |  |     |  
|Total revenues                   |  | $                | 101,335 |  |      |   |  | $    | 84,920 |  |                                    |   |  | $    | 62,923 |  |      |   |  | 19  | % |  | 35  | % |  | -19 | %
|                                 |  |                  |         |  |      |   |  |      |        |  |                                    |   |  |      |        |  |      |   |  |     |   |  |     |   |  |     |  



International revenues
increased for fiscal year 2004 by 64% to $44.6 million compared to $27.3 million in fiscal year 2003 due to increased volume shipments to our key European customers. Our revenues derived from sales to customers in the United States remained
consistent in absolute dollars with fiscal year 2003 revenues primarily the result of increased shipments to a key ILEC customer of our new wireless products and wireless accessories for use by both their business and residential customers.



For fiscal year 2003, our international revenue increased by
107% to $27.3 million compared to $13.2 million in fiscal year 2002. This increase resulted from increased shipments of our ADSL broadband equipment into the European residential market through our new European customers. 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.



We are not able to predict accurately the source or type of future revenues
due to our limited visibility of our customers expected demand in addition to our customers shortened lead times when ordering products. In addition, because of intense competition in all markets in which we sell our products, we cannot
predict whether our international revenues will continue to increase as a percentage of our total revenues.



COST OF REVENUES



Cost
of broadband equipment consists primarily of material costs of our Internet equipment products, related manufacturing variances, the cost of personnel and equipment associated with manufacturing support and manufacturing engineering, and
amortization of acquired technology costs. Cost of broadband software and



33



---

##### Table of Contents

services consists primarily of payroll related costs for employees involved in providing technical support and services, amortization of acquired technology
costs, and cost of rental space for the servers that host the customers. The total cost of revenues increased by 27% or by $13.9 million in fiscal year 2004 compared to fiscal 2003. This increase is the result of increased volume shipments in
addition to increased costs of some components, particularly with respect to flash storage and SDRAM memory experienced throughout the year.



Total cost of revenues increased for fiscal year 2003 by 50% to $51.5 million compared to $34.3 million in fiscal year 2002 primarily as a result of
increased sales volumes of our ADSL broadband equipment and costs related to our software integration project. These increases were partially offset by reduced material costs for our broadband 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 in reducing the product and component costs of our broadband equipment products.



To help offset any future 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.



Gross Margin



Our total gross margin decreased to 35% for fiscal 2004 from 39% for fiscal year 2003 and from 46% for fiscal year 2002
primarily due to increased sales of lower margin ADSL broadband equipment and a lower percentage of higher-margin broadband software and services revenue in the total revenue mix.



Broadband Equipment. Broadband equipment gross margin decreased to 25% for fiscal year 2004 as compared to 26% in
fiscal year 2003. For fiscal year 2002, broadband equipment gross margin was 25%. The decrease in margin in fiscal year 2004 from 2003 is primarily due to increased sales of lower margin ADSL products, declining ASP as a result of product mix and
price competition as well as pricing strategies as we enter new markets and expand our customer base. The primary factors influencing our broadband 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.



Broadband Software and Services. Broadband software and services gross margin remained consistant at 93% for fiscal year 2004 as compared to fiscal
year 2003. Broadband software and services gross margin decreased from 96% for fiscal year 2002 as compared to 93% for fiscal year 2003. The decrease in gross margins in fiscal 2003 from 2002 is primarily the result of the completion of a software
integration project for a specific customer in fiscal 2003, thus lowering our associated engineering and labor costs.



Our broadband equipment has a lower average gross margin than our broadband software and services. Accordingly, to the extent that we continue to sell
more broadband equipment than broadband software and services, 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 continued shift in mix towards a greater percentage of sales of our broadband equipment than of broadband software and services, which typically have higher gross margins;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



| |  |  | Increased sales of our residential-class broadband equipment which have lower average selling prices than our business-class broadband equipment;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------



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



| |  |  | the cost of personnel and equipment associated with manufacturing support and manufacturing engineering;
| | - |  | --------------------------------------------------------------------------------------------------------



34



---

##### Table of Contents

| |  |  | provision for excess inventory;
| | - |  | -------------------------------



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



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



RESEARCH AND DEVELOPMENT



Research and development (R&D) expenses consist primarily of employee related expenses, depreciation and amortization, development related
expenses such as product prototyping, design and testing, and overhead. R&D expenses for fiscal year 2004 increased by 2% to $15.8 million from fiscal 2003 expenses. For fiscal year 2003, research and development expenses decreased by 11% to
$15.6 million compared to $17.4 million for fiscal year 2002. This decrease is attributable to the assignment of certain R&D resources to our software integration project.



We expect to continue to devote substantial resources to product and technological development. In fiscal year 2005, we may
increase in absolute dollars research and development expenses 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. We did not capitalize development costs in fiscal year 2004. During fiscal year 2003 we capitalized $0.1 million of development costs incurred subsequent to delivery of a working model, under development agreements with
third parties.



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. As a result of AT&T not accepting
the final product developed by Siemens and canceling its plans to deploy voice-over-DSL, 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 increased in fiscal year 2004 by 2% to $20.5 million compared to $20.1 million in fiscal year 2003. For fiscal year 2003, selling and
marketing expenses decreased by 14% from $23.4 million for fiscal year 2002. The increase in fiscal year 2004 from fiscal year 2003 was primarily related to increased commission expense as a result of increased revenues in addition to increased
marketing and advertising expenses related to new product offerings introduced in fiscal 2004. The decrease in selling and marketing expenses in fiscal 2003 from fiscal year 2002 was 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.



In fiscal 2005, selling and marketing expenses may increase as a result of
continued marketing programs and increased salary and commission costs.



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 increased in fiscal year 2004 by 51% to $7.1 million compared to
$4.7 million in fiscal 2003 due to increased professional and legal expenses related to the Internal Accounting Review. General and administrative expenses decreased for fiscal year 2003 by 12% from $5.4 million for 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.



35



---

##### Table of Contents

We anticipate that general and administrative expenses for fiscal 2005 may increase as a result of the
ongoing legal expenses relating to the SEC investigation and private securities litigation resulting from the Internal Accounting Review and the restatements of our financial statements, as well as increased expenses related to implementation of
Section 404 of the Sarbanes-Oxley Act, which requires our management to assess the effectiveness of our internal controls over financial reporting.



AMORTIZATION OF GOODWILL AND OTHER INTANGIBLE ASSETS



For fiscal years 2004, 2003 and 2002, these amounts represent the amortization of intangible assets with identifiable lives related to our acquisition of
Cayman. (See Notes 2 and 3 of Notes to Consolidated Financial Statements.)



RESTRUCTURING COSTS



For fiscal year 2004, we
critically reviewed our operations and cost structure and took actions to reduce costs and strengthen our position in executing our strategy. These decisions resulted in a restructuring charge of approximately $1.0 million primarily related to
severance and related benefit charges in conjunction with our approximate 10% reduction in personnel and costs associated with the planned closure of our German subsidiary.



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 two 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, we recorded a net restructuring charge of $0.5 million. These restructuring costs consisted 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. (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 broadband equipment and Broadband
software and services-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.)



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.)



36



---

##### Table of Contents

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.)



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 gains or losses on foreign currency transactions. Other income, net increased for fiscal year 2004 when compared to fiscal year 2003 due
primarily to increased interest income and foreign currency transaction gains. For fiscal year 2003 and 2002, other income, net decreased primarily due to decreased interest income as our cash and cash equivalents have declined combined with
reductions in interest rates.



Risk Factors



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



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.



For fiscal year ended September 30,
2004, we incurred a loss of $8.8 million and used $5.2 million of cash for operating activities. We incurred losses from continuing operations of $8.9 million and $34.3 million for the fiscal years ended September 30, 2003 and 2002, respectively,
and used $5.4 million and $9.8 million of cash for operating activities during fiscal years ended September 30, 2003 and 2002, respectively. Our cash and cash equivalents totaled $24.0 million at September 30, 2004. We may not be able to reach,
sustain or increase profitability or generate cash on a quarterly or annual basis, which could significantly harm our business.



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



We must continue to enhance and expand our product and service offerings in order to maintain our competitive position and to increase our market share. As a result, and due to any future net losses and use of cash, the continuing
operations of our business may require capital infusions. Whether or when we can achieve cash flow levels sufficient to support our operations cannot be accurately predicted. Unless such cash flow levels are achieved, we may require additional
borrowings or the sale of debt or equity securities, sale of non-strategic assets, or some combination thereof, to provide funding for our operations. We believe we have adequate cash, cash equivalents and borrowing capacity are adequate 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 and adversely affected and
we would not be able to operate our business.



37



---

##### Table of Contents

If we are unable to resolve pending private securities litigation and the SEC investigation related to and arising out
of the restatement of our consolidated financial statements in a timely and economic manner, our business could be significantly harmed.



We currently are named as a defendant in a consolidated private securities action brought as a purported class action. In addition, there are purported
derivative actions pending in state and federal court in California. We also are the subject of a formal order of investigation by the Securities and Exchange Commission to determine whether the federal securities laws have been violated. Responding
to the formal order of investigation will require significant attention and resources of management. If the SEC elects to pursue an enforcement action, the defense could be costly and require additional management resources. If we were unsuccessful
in defending against this or other investigations or proceedings, we could face civil or criminal penalties that would seriously harm our business and results of operations. Defending against the securities class action and derivative actions also
will likely require significant attention and resources of management and, regardless of the outcome, result in significant legal expense. If our defenses ultimately are unsuccessful, or if we are unable to achieve a favorable settlement, we could
we liable for large damage awards that could seriously harm our business and results of operations. While we have provided notice of the securities class action and derivative actions to our directors and officers liability insurance carriers, the
insurance carriers have not agreed to pay for our legal expenses incurred in defending against these actions or agreed that they are responsible to pay any damages that ultimately could be awarded to the plaintiffs. Furthermore, we have only a
limited amount of insurance, and even if our insurers agree to make payments under the policies, the damage awards or settlements may be greater than the amount of insurance, and we would in all cases be liable for any amounts in excess of our
insurance policy limits.



Substantial sales of our broadband equipment will
not occur unless telecommunications carriers and service providers continue to expand their deployments of DSL and other broadband services, and this could reduce our revenues and significantly harm our business.



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



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



| |  |  | The continued improvement of business models for DSL and other broadband services, including the capability to market, sell, install and maintain DSL and other broadband services;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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



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



We offer to carriers and service providers the opportunity to bundle basic DSL connectivity with value-added features that enable the provider to bundle
differentiated features and services that we believe can justify higher recurring revenues from end users. These features and services include dial backup, VPNs, remote management and configuration, a parental controls service, and hosting of eSites
and eStores. We can offer no assurance that our strategy of enabling bundled service offerings will be widely accepted. If telecommunications carriers and service providers do not continue to expand their deployments of DSL and other broadband
services, our revenues could decline and our business could be significantly harmed.



We expect our revenues to become increasingly dependent on our ability to sell our broadband 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. 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



38



---

##### Table of Contents

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, Inc., Siemens Aktiengesellschaft (through its Siemens Subscriber Networks, Inc. subsidiary, formerly known as Efficient Networks), Thomson Corporation, Westell
Technologies, Inc. and ZyXEL Communications Co., which have proven to be strong competitors. All of these competitors are larger than us and may have greater financial resources. There is no guarantee we will be successful in expanding our presence
in the ILEC market. If we fail to 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 and sell broadband equipment into 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 allow us to compete effectively for sales of Internet equipment to ILECs serving the residential market. There are numerous risks associated with our entrance
into the residential broadband gateway market including, but not limited to:



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



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



If we are unable to increase our sales to ILECs and our market share of
residential class broadband gateways, our business will be materially and adversely affected.



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



We rely on a small number of customers for a large portion of our revenues.
For the fiscal years ended September 30, 2004, 2003 and 2002, there were five, four and four customers, respectively, that represented at least 5% of our revenues, and in the aggregate accounted for 53%, 47% and 36%, respectively, of our total
revenues. Our revenues will decline and our business may be harmed significantly if one or more of our significant customers stop buying our products, or reduce or delay purchases of our products.



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



A substantial portion of our revenues is derived from sales to international customers, mainly in Europe. For the fiscal years ended September 30, 2004, 2003 and 2002, our international sales represented 44%, 32% and 21%, respectively, of
our total revenues. We expect sales to international customers to continue to comprise a significant portion of our revenues. Sales of broadband equipment products to many of our European customers are 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, who could result in 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, but not limited to:



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



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



39



---

##### Table of Contents

| |  |  | 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 additional costs that would be difficult to reduce quickly because of
employee-related laws and practices in those countries.



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



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



In the market for broadband equipment, we primarily compete with 2Wire, Siemens (through its Siemens Subscriber Networks, Inc. subsidiary, formerly known
as Efficient Networks), Thomson, Westell and ZyXEL.



In the
market for our Broadband software and services products, we primarily compete with Altiris, Inc., Computer Associates International, Inc., CrossTec Corporation, Expertcity, Inc., LANDesk Software, Inc., Microsoft Corporation and Symantec
Corporation. 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 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, 2004, our revenues have ranged from $18.9 million to $28.3 million, and our net results have ranged from $1.2 million of income to a loss of
$6.1 million. As a result, we believe that period-to-period comparisons of our operating results are not necessarily meaningful. Investors should not rely on the results of any one quarter or series of quarters as an indication of our future
performance.



40



---

##### Table of Contents

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



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



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



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



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



| |  |  | The price and availability of components for our broadband 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 at an economic price would adversely affect our business.



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



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



We
do not manufacture any of the components used in our products and perform only limited assembly on some products. All of our broadband equipment relies on components that are supplied by independent contractors and specialized suppliers.
Furthermore, substantially all of our broadband equipment includes printed circuit boards that are manufactured by fewer than five contract manufacturers that assemble and package our products. We do not have guaranteed supply arrangements with
these third parties and they could cease selling components to us at any time. Moreover, the ability of independent contractors and specialized suppliers to



41



---

##### Table of Contents

provide us with sufficient components for our broadband equipment also depends on our ability to accurately forecast our future requirements. If we are
unable to obtain a sufficient quantity of components from independent contractors or specialized suppliers in a timely manner for any reason, sales of our broadband equipment could be delayed or halted. Similarly, if supplies of circuit boards or
products from our contract manufacturers are interrupted for any reason, we will incur significant losses until we arrange for alternative sources. In addition, we may be required to pay premiums for components purchased from other vendors should
our regular independent contractors and specialized suppliers be unable to timely provide us with sufficient quantity of components. To the extent we pay any premiums, our gross margins and operating results would be harmed. Further, we could also
be forced to redesign our broadband equipment and qualify new suppliers of components. The resulting stoppage or delay in selling our products and the expense of redesigning our broadband equipment would seriously harm our reputation and business.



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



We compete in markets characterized by continuing technological advancement, changes in customer requirements and evolving industry standards. To compete
successfully, we must design, develop, manufacture and sell new or enhanced products and services that provide increasingly higher levels of performance, reliability, compatibility, and cost savings for our customers. We will need to continue to
integrate our DSL modem and router technology with the architectures of leading central office equipment providers in order to enhance the reliability, ease-of-use and management functions of our 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 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 broadband software and services 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 broadband software and services revenues are derived from the sale of software products for corporate
help desks, including Timbuktu and eCare. For the fiscal year ended September 30, 2004, revenues from these help desk applications were 70% of total revenues for our broadband software and services. We anticipate that the market for Timbuktu will
grow more slowly than the market for our other broadband software and services. We also have not derived significant revenues from the Netopia Broadband Server software platform. In addition, we rely on a small number of licensees of our eSite and
eStore broadband software to promote the use of our broadband software and services for building web sites and stores. As a result, we derive the majority of the recurring revenues from our broadband software and services products from fewer than
five customers. The extent and nature of the promotions by licensees of our broadband software are outside



42



---

##### Table of Contents

of our control. If licensees of our eSite and eStore broadband software and services 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 broadband software and services perform poorly, our revenue may decline and we could be sued.



We depend on our servers, networking hardware and software
infrastructure, and third-party service and maintenance of these items to provide reliable, high-performance hosting for eSite and eStore customers and subscribers to our parental controls service. In addition, our servers are located at third-party
facilities. Failure or poor performance by third parties with which we contract for maintenance services could also lead to interruption or deterioration of our parental controls, eSite and eStore hosting services. Additionally, a slowdown or
failure of our systems for any reason could also lead to interruption or deterioration of our parental controls, eSite and eStore hosting services. In such a circumstance, our hosting and subscription revenues may decline. In addition, if our
parental controls, eSite and eStore hosting services are interrupted, perform poorly, or are unreliable, we are at risk of litigation from our customers, the outcome of which could harm our business.



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



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



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



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



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



We depend on our ability to develop and maintain the
proprietary aspects of our technology. To protect our proprietary technology, we rely primarily on a combination of contractual provisions, confidentiality procedures, trade secrets, and patent, copyright and trademark law. We presently 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.



43



---

##### Table of Contents

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



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



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



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



Our products are complex and may contain undetected or unresolved defects when first introduced or as new versions are released. Although we historically have not experienced material problems with product defects, if
our products do contain undetected or unresolved defects, we may lose market share, experience delays in or losses of market acceptance or be required to issue a product recall. Similarly, although we have not experienced material warranty claims,
if warranty claims exceed our reserves for such claims, our business would be seriously harmed. In addition, we would be at risk of product liability litigation because of defects in our products. Although we attempt to limit our liability to end
users through disclaimers of special, consequential and indirect damages and similar provisions, we cannot assure you that such limitations of liability will be legally enforceable.



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



A small number of stockholders hold a large portion of our common stock. One
of our directors owns approximately 3.7% of our common stock outstanding as of January 28, 2005. To the extent any of our large stockholders decides to sell substantial amounts of our common stock in the public market over a short period of time,
based on 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 equipment, and companies in the telecommunications industry must comply with numerous regulations. If our industry or industries on which we depend become subject to regulatory changes that increase the cost of
doing business or doing business with us, our revenues could decline and our business could be harmed. For example, if a regulatory agency imposed restrictions on DSL service that were not also imposed on other forms of high-speed Internet access,
our business could be harmed.



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



Our operations are vulnerable to interruption by fire, earthquake, power loss, telecommunications failure, terrorist attacks, labor disputes by
transportation providers, and other events beyond our control. In particular, our headquarters are located near earthquake fault lines in the San Francisco Bay area and may be susceptible to the risk of earthquakes. If there is an earthquake in the
region, our business could be seriously harmed. We do not



44



---

##### Table of Contents

have a detailed disaster recovery plan. In addition, our business interruption insurance may not be sufficient to compensate us fully for losses that may
occur and any losses or damages incurred by us in the event we are unable to deliver products and services to our customers could have a material adverse effect on our business.



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



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



| |  |  | Variations in our quarterly operating results, including shortfalls in revenues or earnings from securities analysts 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 as it has in the past, including fluctuations that are unrelated to our performance. In the past, securities class action litigation has often been brought against a company following periods of volatility in market price of its securities.
We have recently experienced significant volatility in the price of our stock. We currently are and may in the future be the target of securities litigation. Securities litigation could result in substantial costs and divert managements
attention and resources, which could seriously harm our business.



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.



45



---

##### Table of Contents

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, 2004 and 2003. All of
our investments mature in twelve months or less.



|                                                       |  |                    |        |                   |                    |                       |                |      |            |  |                   |        |                       |   |        |  |      |  
|------------------------------------------------------ |  | ------------------ | ------ | ----------------- | ------------------ | --------------------- | -------------- | ---- | ---------- |  | ----------------- | ------ | --------------------- | - | ------ |  | ---- | -
|                                                       |  | September 30, 2004 |        |                   | September 30, 2003 |                      
|Principal (notional) amounts in United States dollars: |  | Cost basis         |        | Fair market value |                    | Average interest rate |                |      | Cost basis |  | Fair market value |        | Average interest rate |  
|                                                       |  | (in thousands)     |        |                   |                    |                       | (in thousands) |      |            | 
|Cash equivalents  fixed rate (a)                      |  | $                  | 20,955 |                   | $                  | 20,955                |                | 0.08 | %          |  | $                 | 16,279 |                       | $ | 16,279 |  | 0.08 | %

---

|(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, 2004, 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 1.00% 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.



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, 2004 and 2003. The accounts receivable at September 30, 2004 are valued at the United States/Euro
exchange rate as of September 30, 2004 and the accounts receivable at September 30, 2003 are valued at the United States/Euro exchange rate as of September 30, 2003. The carrying value approximates fair value at September 30, 2004 and 2003.



|                                                       |  |                    |       |                    |        |                 |   |               |  |       
|------------------------------------------------------ |  | ------------------ | ----- | ------------------ | ------ | --------------- | - | ------------- |  | ------
|                                                       |  | September 30, 2004 |       | September 30, 2003
|Principal (notional) amounts in United States dollars: |  | Carrying amount    |       | Exchange Rate      |        | Carrying amount |   | Exchange rate
|                                                       |  | (in thousands)     |       | (in thousands)    
|Accounts receivable denominated in Euros               |  | $                  | 2,991 |                    | 1.2209 |                 | $ | 1,844         |  | 1.1253



46



---

##### Table of Contents

The table below presents the carrying value of our currency exchange forward contracts, in United States
dollars, at September 30, 2004 and 2003. The carrying value approximates fair value at September 30, 2004 and 2003.



|                                       |  |                    |       |                    |        |                 |        |                 |   |           |  |                 |  |       
|-------------------------------------- |  | ------------------ | ----- | ------------------ | ------ | --------------- | ------ | --------------- | - | --------- |  | --------------- |  | ------
|                                       |  | September 30, 2004 |       | September 30, 2003
|Principal (notional) amounts in Euros: |  | Carrying amount    |       | Spot rate          |        | Settlement date |        | Carrying amount |   | Spot rate |  | Settlement date
|                                       |  | (in thousands)     |       | (in thousands)    
|Currency exchange forward contract # 1 |  | $                  | 61    |                    | 1.2333 |                 | Oct-04 |                 | $ | 228       |  | 1.1375          |  | Oct-03
|Currency exchange forward contract # 2 |  |                    | 512   |                    | 1.2333 |                 | Oct-04 |                 |   |          |  |                |  |       
|Currency exchange forward contract # 3 |  |                    | 634   |                    | 1.2333 |                 | Oct-04 |                 |   |          |  |                |  |       
|Currency exchange forward contract # 4 |  | $                  | 1,547 |                    | 1.2333 |                 | Nov-04 |                 |   |          |  |                |  |       



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.



47



---

##### Table of Contents

Index to Financial Statements



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



|                                                                                                             |  |     
|------------------------------------------------------------------------------------------------------------ |  | ----
|                                                                                                             |  | Page
|Consolidated Financial Statements:                                                                           |  |     
|Report of Independent Registered Public Accounting Firm                                                      |  | 49  
|Consolidated Balance Sheets at September 30, 2004, 2003, and 2002                                            |  | 50  
|Consolidated Statements of Operations for the fiscal years ended September 30, 2004, 2003 and 2002           |  | 51  
|Consolidated Statements of Stockholders Equity for the fiscal years ended September 30, 2004, 2003 and 2002 |  | 52  
|Consolidated Statements of Cash Flows for the fiscal years ended September 30, 2004, 2003 and 2002           |  | 53  
|Notes to Consolidated Financial Statements                                                                   |  | 54  
|                                                                                                             | 
|Financial Statement Schedule:                                                                                |  |     
|Valuation and Qualifying Accounts                                                                            |  |     



48



---

##### Table of Contents

Report of Independent Registered Public Accounting Firm



The Board of Directors and Shareholders of Netopia, Inc.

Netopia, Inc.:



We have audited the consolidated balance sheets of Netopia, Inc. and subsidiaries as of September 30, 2004, 2003 and 2002,
and the related consolidated statements of operations, stockholders equity and cash flows for the years then ended. In connection with our audits of the consolidated financial statements, we have also audited the financial statement
schedulevaluation and qualifying accounts. 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 the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits 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, 2004, 2003, and 2002, and the results of their operations and their cash flows for the years then ended, 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.



/s/    BURR, PILGER & MAYER LLP



San Francisco, California

January 31, 2005



49



---

##### Table of Contents

Netopia, Inc. and Subsidiaries



Consolidated Balance Sheets



|                                                                                                                                                                                      |  |                |          |   |              |   |          |              |  |   |          |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------- | -------- | - | ------------ | - | -------- | ------------ |  | - | -------- | -
|September 30,                                                                                                                                                                         |  | 2004           |          |   | Restated2003 |   |          | Restated2002 | 
|                                                                                                                                                                                      |  | (in thousands) |          |   |              |  
|ASSETS                                                                                                                                                                                |  |                |          |   |              |   |          |              |  |   |          |  
|Current Assets:                                                                                                                                                                       |  |                |          |   |              |   |          |              |  |   |          |  
|Cash and cash equivalents                                                                                                                                                             |  | $              | 23,973   |   |              | $ | 22,208   |              |  | $ | 25,022   |  
|Trade accounts receivable, net of allowances for doubtful accounts of $111, $190 and $579 at September 30, 2004, 2003 and 2002,
respectively                                          |  |                | 17,812   |   |              |   | 16,062   |              |  |   | 9,970    |  
|Inventories, net                                                                                                                                                                      |  |                | 6,280    |   |              |   | 5,738    |              |  |   | 6,213    |  
|Prepaid expenses and other current assets                                                                                                                                             |  |                | 1,226    |   |              |   | 899      |              |  |   | 1,602    |  
|                                                                                                                                                                                      |  |                |          |   |              |   |          |              |  |   |          |  
|Total current assets                                                                                                                                                                  |  |                | 49,291   |   |              |   | 44,907   |              |  |   | 42,807   |  
|                                                                                                                                                                                      |  |                |         
|Furniture, fixtures and equipment, net                                                                                                                                                |  |                | 2,694    |   |              |   | 3,740    |              |  |   | 5,531    |  
|Acquired technology and other intangible assets, net                                                                                                                                  |  |                | 4,016    |   |              |   | 5,251    |              |  |   | 6,711    |  
|Goodwill                                                                                                                                                                              |  |                | 1,668    |   |              |   | 984      |              |  |   | 984      |  
|Long-term investments                                                                                                                                                                 |  |                | 1,032    |   |              |   | 1,032    |              |  |   | 1,463    |  
|Deposits and other assets                                                                                                                                                             |  |                | 886      |   |              |   | 1,105    |              |  |   | 1,473    |  
|                                                                                                                                                                                      |  |                |          |   |              |   |          |              |  |   |          |  
|TOTAL ASSETS                                                                                                                                                                          |  | $              | 59,587   |   |              | $ | 57,019   |              |  | $ | 58,969   |  
|                                                                                                                                                                                      |  |                |          |   |              |   |          |              |  |   |          |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                                  |  |                |          |   |              |   |          |              |  |   |          |  
|Current liabilities:                                                                                                                                                                  |  |                |          |   |              |   |          |              |  |   |          |  
|Accounts payable                                                                                                                                                                      |  | $              | 9,827    |   |              | $ | 11,222   |              |  | $ | 7,088    |  
|Accrued compensation                                                                                                                                                                  |  |                | 2,582    |   |              |   | 1,930    |              |  |   | 2,736    |  
|Accrued liabilities                                                                                                                                                                   |  |                | 3,806    |   |              |   | 1,385    |              |  |   | 1,450    |  
|Deferred revenue                                                                                                                                                                      |  |                | 1,679    |   |              |   | 1,666    |              |  |   | 2,417    |  
|Current portion of borrowings under term loans                                                                                                                                        |  |                | 104      |   |              |   | 250      |              |  |   |         |  
|Other current liabilities                                                                                                                                                             |  |                | 53       |   |              |   | 113      |              |  |   | 42       |  
|                                                                                                                                                                                      |  |                |          |   |              |   |          |              |  |   |          |  
|Total current liabilities                                                                                                                                                             |  |                | 18,051   |   |              |   | 16,566   |              |  |   | 13,733   |  
|                                                                                                                                                                                      |  |                |         
|Long-term liabilities:                                                                                                                                                                |  |                |          |   |              |   |          |              |  |   |          |  
|Borrowings under credit facility and term loans                                                                                                                                       |  |                |         |   |              |   | 104      |              |  |   | 4,428    |  
|Other long-term liabilities                                                                                                                                                           |  |                | 406      |   |              |   | 526      |              |  |   | 770      |  
|                                                                                                                                                                                      |  |                |          |   |              |   |          |              |  |   |          |  
|Total liabilities                                                                                                                                                                     |  |                | 18,457   |   |              |   | 17,196   |              |  |   | 18,931   |  
|                                                                                                                                                                                      |  |                |          |   |              |   |          |              |  |   |          |  
|                                                                                                                                                                                      |  |                |         
|Commitments and contingencies                                                                                                                                                         |  |                |         |   |              |   |         |              |  |   |         |  
|                                                                                                                                                                                      |  |                |         
|Stockholders equity:                                                                                                                                                                 |  |                |          |   |              |   |          |              |  |   |          |  
|Common stock: $ 0.001 par value, 50,000,000 shares authorized: 24,717,503, 21,631,832 and 18,905,223 shares issued and outstanding at
September 30, 2004, 2003 and 2002, respectively |  |                | 25       |   |              |   | 22       |              |  |   | 19       |  
|Additional paid-in capital                                                                                                                                                            |  |                | 166,245  |   |              |   | 156,132  |              |  |   | 147,485  |  
|Accumulated deficit                                                                                                                                                                   |  |                | (125,140 | ) |              |   | (116,331 | )            |  |   | (107,466 | )
|                                                                                                                                                                                      |  |                |          |   |              |   |          |              |  |   |          |  
|Total stockholders equity                                                                                                                                                            |  |                | 41,130   |   |              |   | 39,823   |              |  |   | 40,038   |  
|                                                                                                                                                                                      |  |                |          |   |              |   |          |              |  |   |          |  
|TOTAL LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                            |  | $              | 59,587   |   |              | $ | 57,019   |              |  | $ | 58,969   |  
|                                                                                                                                                                                      |  |                |          |   |              |   |          |              |  |   |          |  



See accompanying notes
to consolidated financial statements.



50



---

##### Table of Contents

Netopia, Inc. and Subsidiaries



Consolidated Statements of Operations



|                                                    |  |                |         |   |               |   |        |               |  |   |         |  
|--------------------------------------------------- |  | -------------- | ------- | - | ------------- | - | ------ | ------------- |  | - | ------- | -
|Fiscal years ended September 30,                    |  | 2004           |         |   | Restated 2003 |   |        | Restated 2002 | 
|                                                    |  |               
|                                                    |  | (in thousands) |        
|REVENUES:                                           |  |                |         |   |               |   |        |               |  |   |         |  
|Broadband equipment                                 |  | $              | 85,702  |   |               | $ | 67,393 |               |  | $ | 44,604  |  
|Broadband software and services                     |  |                | 15,633  |   |               |   | 17,527 |               |  |   | 18,319  |  
|                                                    |  |                |         |   |               |   |        |               |  |   |         |  
|Total revenues                                      |  |                | 101,335 |   |               |   | 84,920 |               |  |   | 62,923  |  
|                                                    |  |                |         |   |               |   |        |               |  |   |         |  
|COST OF REVENUES:                                   |  |                |         |   |               |   |        |               |  |   |         |  
|Broadband equipment                                 |  |                | 63,251  |   |               |   | 49,001 |               |  |   | 32,467  |  
|Broadband software and services                     |  |                | 992     |   |               |   | 1,314  |               |  |   | 639     |  
|Amortization of acquired technology                 |  |                | 1,200   |   |               |   | 1,152  |               |  |   | 1,152   |  
|                                                    |  |                |         |   |               |   |        |               |  |   |         |  
|Total cost of revenues                              |  |                | 65,443  |   |               |   | 51,467 |               |  |   | 34,258  |  
|                                                    |  |                |         |   |               |   |        |               |  |   |         |  
|GROSS PROFIT                                        |  |                | 35,892  |   |               |   | 33,453 |               |  |   | 28,665  |  
|                                                    |  |                |        
|OPERATING EXPENSES:                                 |  |                |         |   |               |   |        |               |  |   |         |  
|Research and development                            |  |                | 15,828  |   |               |   | 15,570 |               |  |   | 17,414  |  
|Research and development project cancellation costs |  |                |        |   |               |   | 606    |               |  |   |        |  
|Selling and marketing                               |  |                | 20,528  |   |               |   | 20,110 |               |  |   | 23,400  |  
|General and administrative                          |  |                | 7,147   |   |               |   | 4,740  |               |  |   | 5,364   |  
|Amortization of intangible assets                   |  |                | 345     |   |               |   | 345    |               |  |   | 344     |  
|Restructuring costs                                 |  |                | 999     |   |               |   | 395    |               |  |   | 482     |  
|Integration costs                                   |  |                |        |   |               |   |       |               |  |   | 309     |  
|                                                    |  |                |        
|Acquired in-process research and development        |  |                |        |   |               |   |       |               |  |   | 4,058   |  
|Impairment of goodwill and other intangible assets  |  |                |        |   |               |   |       |               |  |   | 9,146   |  
|                                                    |  |                |         |   |               |   |        |               |  |   |         |  
|Total operating expenses                            |  |                | 44,847  |   |               |   | 41,766 |               |  |   | 60,517  |  
|                                                    |  |                |         |   |               |   |        |               |  |   |         |  
|OPERATING LOSS                                      |  |                | (8,955  | ) |               |   | (8,313 | )             |  |   | (31,852 | )
|                                                    |  |                |        
|Other income (loss), net                            |  |                |         |   |               |   |        |               |  |   |         |  
|Loss on impaired securities                         |  |                |        |   |               |   | (457   | )             |  |   | (2,943  | )
|Other income (expense), net                         |  |                | 224     |   |               |   | (95    | )             |  |   | 319     |  
|                                                    |  |                |         |   |               |   |        |               |  |   |         |  
|Other income (loss), net                            |  |                | 224     |   |               |   | (552   | )             |  |   | (2,624  | )
|                                                    |  |                |         |   |               |   |        |               |  |   |         |  
|Provision for income taxes                          |  |                | 78      |   |               |   |       |               |  |   | (200    | )
|                                                    |  |                |         |   |               |   |        |               |  |   |         |  
|                                                    |  |                |        
|NET LOSS                                            |  | $              | (8,809  | ) |               | $ | (8,865 | )             |  | $ | (34,276 | )
|                                                    |  |                |         |   |               |   |        |               |  |   |         |  
|                                                    |  |                |        
|Per share data, loss from continuing operations:    |  |                |         |   |               |   |        |               |  |   |         |  
|Basic and diluted loss per share                    |  | $              | (0.38   | ) |               | $ | (0.43  | )             |  | $ | (1.73   | )
|                                                    |  |                |         |   |               |   |        |               |  |   |         |  
|Common shares used in the per share calculations    |  |                | 23,573  |   |               |   | 19,560 |               |  |   | 18,455  |  
|                                                    |  |                |         |   |               |   |        |               |  |   |         |  
|                                                    |  |                |        
|Per share data, net loss:                           |  |                |         |   |               |   |        |               |  |   |         |  
|Basic and diluted net loss per share                |  | $              | (0.37   | ) |               | $ | (0.45  | )             |  | $ | (1.86   | )
|                                                    |  |                |         |   |               |   |        |               |  |   |         |  
|Common shares used in the per share calculations    |  |                | 23,573  |   |               |   | 19,560 |               |  |   | 18,455  |  
|                                                    |  |                |         |   |               |   |        |               |  |   |         |  



See accompanying notes
to consolidated financial statements.



51



---

##### Table of Contents

Netopia, Inc. and Subsidiaries



Consolidated Statements of Stockholders Equity



|                                              |  |                                      |  |                          |    |  |                    |         |   |                          |   |          |   |  |   |         |  
|--------------------------------------------- |  | ------------------------------------ |  | ------------------------ | -- |  | ------------------ | ------- | - | ------------------------ | - | -------- | - |  | - | ------- | -
|                                              |  | Common stock                         |  | Additionalpaid-incapital |    |  | Accumulateddeficit |         |   | Totalstockholdersequity |  
|                                              |  | Shares                               |  | Amount                   |    |  |                   
|                                              |  | (in thousands, except share amounts) | 
|Balances, September 30, 2001                  |  | 18,076,812                           |  | $                        | 17 |  | $                  | 144,886 |   |                          | $ | (73,190  | ) |  | $ | 71,713  |  
|                                              |  |                                      |  |                          |   
|Exercise of stock options                     |  | 99,231                               |  |                          |   |  |                    | 299     |   |                          |   |         |   |  |   | 299     |  
|Issuance of common stock under Employee       |  |                                      |  |                          |    |  |                    |         |   |                          |   |          |   |  |   |         |  
|Stock Purchase Plan                           |  | 429,180                              |  |                          | 1  |  |                    | 809     |   |                          |   |         |   |  |   | 810     |  
|Issuance of common stock for acquisitions     |  | 300,000                              |  |                          | 1  |  |                    | 1,485   |   |                          |   |         |   |  |   | 1,486   |  
|Stock options granted to non-employees        |  |                                     |  |                          |   |  |                    | 6       |   |                          |   |         |   |  |   | 6       |  
|Net lossRestated                             |  |                                     |  |                          |   |  |                    |        |   |                          |   | (34,276  | ) |  |   | (34,276 | )
|                                              |  |                                      |  |                          |    |  |                    |         |   |                          |   |          |   |  |   |         |  
|Balances, September 30, 2002                  |  | 18,905,223                           |  |                          | 19 |  |                    | 147,485 |   |                          |   | (107,466 | ) |  |   | 40,038  |  
|                                              |  |                                      |  |                          |   
|Exercise of stock options                     |  | 556,505                              |  |                          | 1  |  |                    | 1,568   |   |                          |   |         |   |  |   | 1,569   |  
|Issuance of common stock under Employee       |  |                                      |  |                          |    |  |                    |         |   |                          |   |          |   |  |   |         |  
|Stock Purchase Plan                           |  | 756,190                              |  |                          | 1  |  |                    | 976     |   |                          |   |         |   |  |   | 977     |  
|Issuance of common stock in private placement |  | 1,413,914                            |  |                          | 1  |  |                    | 6,491   |   |                          |   |         |   |  |   | 6,492   |  
|Costs related to issuance of common stock     |  |                                     |  |                          |   |  |                    | (388    | ) |                          |   |         |   |  |   | (388    | )
|Net lossRestated                             |  |                                     |  |                          |   |  |                    |        |   |                          |   | (8,865   | ) |  |   | (8,865  | )
|                                              |  |                                      |  |                          |    |  |                    |         |   |                          |   |          |   |  |   |         |  
|Balances, September 30, 2003                  |  | 21,631,832                           |  |                          | 22 |  |                    | 156,132 |   |                          |   | (116,331 | ) |  |   | 39,823  |  
|                                              |  |                                      |  |                          |   
|Exercise of stock options                     |  | 1,784,347                            |  |                          | 2  |  |                    | 7,163   |   |                          |   |         |   |  |   | 7,165   |  
|Issuance of common stock under Employee       |  |                                      |  |                          |    |  |                    |         |   |                          |   |          |   |  |   |         |  
|Stock Purchase Plan                           |  | 1,141,324                            |  |                          | 1  |  |                    | 1,702   |   |                          |   |         |   |  |   | 1,703   |  
|Issuance of common stock for acquisitions     |  | 160,000                              |  |                          |   |  |                    | 1,248   |   |                          |   |         |   |  |   | 1,248   |  
|Net loss                                      |  |                                     |  |                          |   |  |                    |        |   |                          |   | (8,809   | ) |  |   | (8,809  | )
|                                              |  |                                      |  |                          |    |  |                    |         |   |                          |   |          |   |  |   |         |  
|Balances, September 30, 2004                  |  | 24,717,503                           |  | $                        | 25 |  | $                  | 166,245 |   |                          | $ | (125,140 | ) |  | $ | 41,130  |  
|                                              |  |                                      |  |                          |    |  |                    |         |   |                          |   |          |   |  |   |         |  



See accompanying notes
to consolidated financial statements.



52



---

##### Table of Contents

Netopia, Inc. and Subsidiaries



Consolidated Statement of Cash Flows



|                                                                                                                                |  |                |        |   |              |   |        |              |  |   |         |  
|------------------------------------------------------------------------------------------------------------------------------- |  | -------------- | ------ | - | ------------ | - | ------ | ------------ |  | - | ------- | -
|Fiscal years ended September 30,                                                                                                |  | 2004           |        |   | Restated2003 |   |        | Restated2002 | 
|                                                                                                                                |  | (in thousands) |       
|Cash flow from operating activities:                                                                                            |  |                |        |   |              |   |        |              |  |   |         |  
|Net loss                                                                                                                        |  | $              | (8,809 | ) |              | $ | (8,865 | )            |  | $ | (34,276 | )
|Adjustments to reconcile net income (loss) to net cash used in operating activities:                                            |  |                |        |   |              |   |        |              |  |   |         |  
|Depreciation & amortization                                                                                                     |  |                | 4,168  |   |              |   | 5,810  |              |  |   | 4,254   |  
|Gain on disposal of fixed assets                                                                                                |  |                | (19    | ) |              |   | (107   | )            |  |   | (11     | )
|Charge for acquired in-process research and development                                                                         |  |                |       |   |              |   |       |              |  |   | 4,058   |  
|Unrealized loss on impaired securities                                                                                          |  |                |       |   |              |   | 457    |              |  |   | 2,943   |  
|Charge for impairment of goodwill and other intangible assets                                                                   |  |                |       |   |              |   |       |              |  |   | 9,146   |  
|Charge for impairment of capitalized software/dev costs                                                                         |  |                |       |   |              |   |       |              |  |   | 80      |  
|Changes in allowance for doubtful accounts                                                                                      |  |                | 138    |   |              |   | 97     |              |  |   | 637     |  
|Restructure costs                                                                                                               |  |                | 999    |   |              |   | 395    |              |  |   | 480     |  
|Changes in operating assets and liabilities (timing differences):                                                               |  |                |        |   |              |   |        |              |  |   |         |  
|(Increase) decrease in accounts receivable                                                                                      |  |                | (1,888 | ) |              |   | (6,189 | )            |  |   | (1,057  | )
|(Increase) decrease in inventory                                                                                                |  |                | (542   | ) |              |   | 475    |              |  |   | 943     |  
|(Increase) decrease in prepaid & other current assets                                                                           |  |                | (160   | ) |              |   | 703    |              |  |   | 32      |  
|(Increase) decrease in deposits and other assets                                                                                |  |                | 55     |   |              |   | (89    | )            |  |   | (98     | )
|Increase (decrease) in accounts payable                                                                                         |  |                | (1,395 | ) |              |   | 4,134  |              |  |   | 2,375   |  
|Increase (decrease) in accrued payables                                                                                         |  |                | 485    |   |              |   | (806   | )            |  |   | 588     |  
|Increase (decrease) in income taxes payable                                                                                     |  |                |       |   |              |   |       |              |  |   | (200    | )
|Increase (decrease) in deferred revenue                                                                                         |  |                | 13     |   |              |   | (751   | )            |  |   | (172    | )
|Increase (decrease) in other liabilities                                                                                        |  |                | 1,707  |   |              |   | (633   | )            |  |   | 433     |  
|                                                                                                                                |  |                |        |   |              |   |        |              |  |   |         |  
|Net cash used in operating activities                                                                                           |  |                | (5,248 | ) |              |   | (5,369 | )            |  |   | (9,845  | )
|                                                                                                                                |  |                |        |   |              |   |        |              |  |   |         |  
|Cash flow from investing activities:                                                                                            |  |                |        |   |              |   |        |              |  |   |         |  
|Purchase of short-term investments                                                                                              |  |                |       |   |              |   |       |              |  |   | (4,793  | )
|Proceeds from the sale of short-term investments                                                                                |  |                |       |   |              |   |       |              |  |   | 18,086  |  
|Purchase of furniture, fixtures and equipment                                                                                   |  |                | (1,335 | ) |              |   | (1,295 | )            |  |   | (3,093  | )
|Acquisition of long term investment                                                                                             |  |                |       |   |              |   | (26    | )            |  |   | (406    | )
|Acquisition spending                                                                                                            |  |                | (1,518 | ) |              |   | (700   | )            |  |   | (17,659 | )
|                                                                                                                                |  |                |        |   |              |   |        |              |  |   |         |  
|Net cash provided by (used in) investing activities                                                                             |  |                | (2,853 | ) |              |   | (2,021 | )            |  |   | (7,865  | )
|                                                                                                                                |  |                |        |   |              |   |        |              |  |   |         |  
|Cash provided by (used in) financing activities:                                                                                |  |                |        |   |              |   |        |              |  |   |         |  
|Increase (decrease) in borrowings                                                                                               |  |                | (250   | ) |              |   | (4,074 | )            |  |   | 4,428   |  
|Increase (decrease) in common stock                                                                                             |  |                | 8,868  |   |              |   | 2,547  |              |  |   | 1,115   |  
|Issuance of common stock for acquisition of businesses                                                                          |  |                | 1,248  |   |              |   |       |              |  |   | 1,486   |  
|Issuance of common stock for private placement                                                                                  |  |                |       |   |              |   | 6,103  |              |  |   |        |  
|                                                                                                                                |  |                |        |   |              |   |        |              |  |   |         |  
|Net cash provided by financing activities                                                                                       |  |                | 9,866  |   |              |   | 4,576  |              |  |   | 7,029   |  
|                                                                                                                                |  |                |        |   |              |   |        |              |  |   |         |  
|Net increase (decrease) in cash and cash equivalents                                                                            |  |                | 1,765  |   |              |   | (2,814 | )            |  |   | (10,681 | )
|Cash and cash equivalents, beginning of year                                                                                    |  |                | 22,208 |   |              |   | 25,022 |              |  |   | 35,703  |  
|                                                                                                                                |  |                |        |   |              |   |        |              |  |   |         |  
|Cash and cash equivalents, end of year                                                                                          |  | $              | 23,973 |   |              | $ | 22,208 |              |  | $ | 25,022  |  
|                                                                                                                                |  |                |        |   |              |   |        |              |  |   |         |  
|Supplemental disclosures of cash flow activities: Income taxes paid                                                             |  | $              | 30     |   |              | $ | 20     |              |  | $ | 5       |  
|                                                                                                                                |  |                |        |   |              |   |        |              |  |   |         |  
|Interest paid                                                                                                                   |  | $              | 8      |   |              | $ | 161    |              |  | $ | 25      |  
|                                                                                                                                |  |                |        |   |              |   |        |              |  |   |         |  
|Supplemental disclosures of non-cash investing and financing activities: Issuance of common stock for acquisition of
businesses |  | $              | 1,248  |   |              | $ |       |              |  | $ | 1,485   |  
|                                                                                                                                |  |                |        |   |              |   |        |              |  |   |         |  



See accompanying notes
to consolidated financial statements.



53



---

##### Table of Contents

Netopia, Inc. and Subsidiaries



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 from the time of purchase. Cash equivalents are recorded at costs, which approximates fair value. Cash equivalents as of September 30, 2004 and 2003 consisted of the
following:



|                   |  |                |        |      |   |       
|------------------ |  | -------------- | ------ | ---- | - | ------
|September 30,      |  | 2004           |        | 2003
|                   |  | (in thousands)
|Money market funds |  | $              | 20,955 |      | $ | 16,279



Revenue
Recognition. The Company generally recognizes revenue from the sale of broadband equipment at the time of shipment when (a) persuasive evidence of an arrangement exists; (b) delivery has occurred; (c) the price to the customer is fixed
and determinable; (d) collectibility is probable; (e) the customer is obligated to pay the seller and the obligation is not contingent on resale of the product; and (f) the Company does not have significant obligations for future performance to
directly bring about resale of the product by the customer. However, determining whether and when some of these criteria have been satisfied often involves assumptions and judgments that can have a significant impact on the timing and amount of
revenue the Company reports. 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 sales to our distributors and resellers are generally recognized at the time title to our product passes to the distributor or reseller, provided all other criteria for revenue recognition are met. This policy is predicated on the
Companys ability to estimate sales returns. The Company is also required to evaluate whether our distributors and resellers have the ability to honor their commitment to make fixed and determinable payments, regardless of whether they collect
cash from their customers. If we were to change any of these assumptions or judgments, it could cause a material increase or decrease in the amount of revenue that we report in a particular period.



The Company generally recognizes software revenue in accordance with
Statement of Position (SOP) 97-2, Software Revenue Recognition, as amended by SOP 98-9, and SEC Staff Accounting Bulletin (SAB) No. 104, Revenue Recognition. 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. Maintenance revenues, including revenues included in multiple element arrangements, are deferred and
recognized ratably over the related contract period, generally twelve months.



54



---

##### Table of Contents

Netopia, Inc. and Subsidiaries



Notes to Consolidated Statements(Continued)



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. For these contracts, which involve significant implementation or other services which are essential
to the functionality of the software and which are reasonably estimable, the license and services revenue is recognized over the period of each implementation, primarily using the percentage-of-completion method. Labor hours incurred are used as the
measure of progress towards completion. A provision for estimated losses on engagements is made in the period in which the loss becomes probable and can be reasonably estimated. In cases where a sale of a license does not include implementation
services, as in the sale of additional seats, revenue is recorded upon delivery with an appropriate deferral for maintenance services, if applicable, provided all of the other relevant conditions have been met. 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 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.



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s accounts receivable are derived from sales to direct customers, resellers and distributors in
the America, Europe and the Asia Pacific region. The Company performs ongoing credit evaluations of its customers financial condition and limits the amount of credit extended when deemed necessary, but generally requires no collateral. In
addition, allowances are maintained for potential credit losses associated with problem accounts. 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.



During fiscal year 2004, the Company did not experience significant losses on trade receivables from any particular customer, industry, or geographic region. However, during fiscal years 2003 and 2002, the Company fully reserved $0.6
million and $2.9 million, respectively, of outstanding accounts receivable primarily owed by certain carrier customers.



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



55



---

##### Table of Contents

Netopia, Inc. and Subsidiaries



Notes to Consolidated Statements(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   |  | 2                                                         
|Computers               |  | 3                                                         
|Machinery and equipment |  | 4                                                         
|Furniture and fixtures  |  | 7                                                         
|Leasehold improvements  |  | Shorter of estimated useful life orremaining term of lease



Research and
Development and Software Development Costs. Research and development (R&D) 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. No expenses related to development costs were incurred for fiscal year 2004.



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 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 2004, 2003 and 2002, the Company capitalized $0 million, $0.1 and $0 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 $0.7 million, $0.5 million and $0.7 million for fiscal years 2004, 2003 and 2002, 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 a minority investment in two privately held companies. The investments are accounted for using the
cost method of accounting, as the Company does not have the ability to exert significant influence on the investees. As of September 30, 2004 the net carrying cost of the investment in MegaPath is $1.0 million. The investment in Everdream
Corporation was impaired in fiscal year 2002, thus fully impairing the remaining balance of the Companys investment in Everdream. 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 2004, 2003 and 2002 the Company recorded losses on these investments of $0 million and $.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.



56



---

##### Table of Contents

Netopia, Inc. and Subsidiaries



Notes to Consolidated Statements(Continued)



Stock-Based Compensation. In December 2002, the Financial Accounting Statements Board
(FASB) issued FAS 148, Accounting for Stock-Based CompensationTransition and Disclosure. FAS 148 amends FAS 123, Accounting for Stock-Based Compensation, by providing alternative methods of transition for a
voluntary change to the fair value-based method of accounting for stock-based employee compensation. In addition, FAS 148 amends the disclosure requirements of FAS 123 to require prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and the effect of the method used on reported results.



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, the pro-forma stock-based incentive expense has no impact on our cash flow. In the future, we will be required to use a
different valuation model, which could result in a significantly different impact on our net income or loss. The following table illustrates the effect on our net loss and per share if we had applied the fair value recognition provisions of SFAS
123:



|                                                                                                                                    |  |                                          |         |   |              |   |         |              |  |   |         |  
|----------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------------------------- | ------- | - | ------------ | - | ------- | ------------ |  | - | ------- | -
|Fiscal years ended September 30,                                                                                                    |  | 2004                                     |         |   | Restated2003 |   |         | Restated2002 | 
|                                                                                                                                    |  | (in thousands, except per share amounts) |        
|Net lossas restated                                                                                                                |  | $                                        | (8,809  | ) |              | $ | (8,865  | )            |  | $ | (34,276 | )
|Add: Stock-based employee compensation expense included in reported net loss, net of related tax effects                            |  |                                          |        |   |              |   |        |              |  |   |        |  
|Deduct: Total stock-based employee compensation determined under fair value based method for all awards, net of related tax
effects |  |                                          | (6,618  | ) |              |   | (6,977  | )            |  |   | (7,693  | )
|                                                                                                                                    |  |                                          |        
|Net losspro forma                                                                                                                  |  |                                          | (15,427 | ) |              |   | (15,842 | )            |  |   | (41,969 | )
|Basic and diluted net loss per shareas reported                                                                                    |  | $                                        | (0.37   | ) |              | $ | (0.45   | )            |  | $ | (1.86   | )
|                                                                                                                                    |  |                                          |         |   |              |   |         |              |  |   |         |  
|Basic and diluted net loss per sharepro forma                                                                                      |  | $                                        | (0.65   | ) |              | $ | (0.81   | )            |  | $ | (2.27   | )
|                                                                                                                                    |  |                                          |         |   |              |   |         |              |  |   |         |  
|Shares used in the per share calculationsas reported                                                                               |  |                                          | 23,573  |   |              |   | 19,560  |              |  |   | 18,455  |  
|Shares used in the per share calculationspro forma                                                                                 |  |                                          | 23,573  |   |              |   | 19,560  |              |  |   | 18,455  |  



The fiscal years 2004,
2003 and 2002 pro forma amounts are not indicative of future period pro forma amounts.



Use of Estimates. The preparation of the consolidated financial statements in conformity with generally accepted accounting principles 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 2004, 2003 and 2002, 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 5,971,110 shares in fiscal year 2004,
7,633,740 shares in fiscal year 2003; and 7,170,338 shares in fiscal year 2002.



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.



57



---

##### Table of Contents

Netopia, Inc. and Subsidiaries



Notes to Consolidated Statements(Continued)



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.



The change in the foreign currency value is recognized at the end of the month for the foreign currency denominated payables and receivables. These gains and losses are classified as a component of other income (loss), net on the
Companys consolidated statement of operations and comprehensive loss.



Recent Accounting Pronouncements. In December 2004, the Financial Accounting Standards Board issued SFAS No. 123 (revised 2004), Share-Based Payment. This Statement is a revision of SFAS No. 123,
Accounting for Stock-Based Compensation, and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and its related implementation guidance. SFAS No. 123(R) requires that compensation cost relating to share-based
payment transactions be recognized in financial statements. That cost will be measured based on the fair value of the equity or liability instruments issued. This statement is effective beginning with our third quarter of fiscal 2005 ending June 30,
2005. We are currently valuating the requirements of SFAS No. 123(R) and although we believe the impact to our financial statements will be in a similar range as the amounts presented in our pro forma financial results required to be disclosed under
the current SFAS No. 123, we have not yet fully determined its impact on our consolidated financial statements.



In March 2004, the Emerging Issues Task Force ratified the consensus reached on paragraphs 6 through 23 of Issue No. 03-01 (EITF 03-1),
The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments. EITF 03-1 requires that certain quantitative and qualitative disclosures should be required for debt and marketable equity securities classified
as available-for-sale or held-to-maturity under SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities and SFAS No. 124, Accounting for Certain Investments Held by Not-for-Profit Organizations that are
impaired at the balance sheet date but for which an other-than-temporary impairment has not been recognized. We adopted EITF 03-1 in the year ended September 30, 2004; however, it did not have a material impact on the disclosures in our Consolidated
Financial Statements.



In January 2003, the Emerging Issues
Task Force reached consensus on Issue No. 00-21 (EITF 00-21), Revenue Arrangements with Multiple Deliverables. EITF 00-21 provides guidance on how to determine whether an arrangement involving multiple deliverables requires
that such deliverables be accounted for separately. EITF 00-21 allows for prospective adoption for arrangements entered into after June 15, 2003 or adoption via a cumulative effect of a change in accounting principle. We adopted EITF 00-21 in the
year ended September 30, 2004; however, it did not have a material impact on our disclosures in our Consolidated Financial Statements.



Fair Value of Financial Instruments. The fair value of cash and cash equivalents, investments, accounts receivable and accounts payable for all
periods presented approximates their respective carrying amounts.



58



---

##### Table of Contents

Netopia, Inc. and Subsidiaries



Notes to Consolidated Statements(Continued)



(2) Restatement of Financial Statements



We have restated our consolidated financial statements for the fiscal years ended September 30, 2003 and 2002 and for the
first and second fiscal quarters of fiscal year 2004. All applicable financial information contained in these consolidated financial statements in this Form 10-K give effect to these restatements. Accordingly, the financial statements for those
fiscal periods described above that have been included in our prior filings with the SEC or included in previous announcements should not be relied upon.



Internal Accounting Review



We announced on July 22, 2004, that the Audit Committee of our Board of Directors had initiated an Internal Accounting Review of our accounting and
reporting practices, including the appropriateness and timing of the revenue recognition of software license and maintenance fees in two transactions with a single software reseller customer. On September 10, 2004, KPMG LLP, which had served as our
independent registered accountant, resigned. At the time of its resignation, KPMG LLP advised us that our audited financial statements for fiscal year ended September 30, 2003 should no longer be relied upon. On September 30, 2004, the Audit
Committee engaged Burr, Pilger & Mayer LLP (BPM) as our new independent registered public accounting firm to audit our consolidated financial statements for the fiscal years ended September 30, 2004, 2003 and 2002.



The Internal Accounting Review determined that both software transactions
referred to above were contingent sales. As a consequence, and, in accordance with the principles of Statement of Position (SOP) 97-2, Software Revenue Recognition, as amended, we are restating revenue to reflect:



First Transaction



| |  |  | the elimination of $750,000 of software license revenue of the approximately $1.5 million originally recorded in the third fiscal quarter ended June 30, 2002 to reflect the proceeds
not received during the quarter;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the recognition of $632,000 of software license revenue in the fourth fiscal quarter ended September 30, 2002 to reflect the proceeds received during the quarter; and
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the recognition of $118,000 of maintenance revenue ratably over the four fiscal quarters commencing July 1, 2003 and ending June 30, 2004 during which periods the maintenance
revenues were earned, the proceeds for which were received in the fourth fiscal quarter ended September 30, 2002;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Second Transaction



| |  |  | the elimination of $750,400 of software license, maintenance and deferred revenue in the fourth fiscal quarter ended September 30, 2003 because no proceeds were received during the
quarter;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the recognition of $273,000 of software license revenue in the fourth fiscal quarter ended September 30, 2004 to reflect the proceeds received during the quarter; and
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the recognition of $64,000 of maintenance revenue ratably over the five fiscal quarters commencing July 1, 2004 and ending September 30, 2005 during which periods the maintenance
revenues will be earned, the proceeds for which were received in the fourth fiscal quarter ended September 30, 2004.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | In addition, we will recognize $262,500 of software license revenue in the first fiscal quarter of fiscal year 2005 ended December 31, 2004, reflecting additional proceeds received
during the first fiscal quarter of fiscal year 2005 with respect to the second transaction.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



59



---

##### Table of Contents

Netopia, Inc. and Subsidiaries



Notes to Consolidated Statements(Continued)



As a result of the Internal Accounting Review, we will be recognizing approximately $2.1 million of
software license and maintenance revenue with respect to the two transactions, which is the total amount of proceeds that we have received from the software reseller. This amount is $150,000 less than originally recorded because during the fourth
fiscal quarter of fiscal year 2004, we entered into an agreement with the software reseller to reduce the amount payable with respect to the second transaction by $150,000. This agreement confirms that we have satisfied all of our outstanding
obligations and that the reseller will make no additional payments with respect to this sale.



Other Significant Transactions Requiring Restatement



During the course of our review of the financial statements for fiscal years 2002, 2003 and the first and second fiscal quarters of 2004, we determined
that other transactions required adjustment in order for our financial statements to conform more properly to Generally Accepted Accounting Principles (GAAP). These adjustments are described below.



Marketing Incentive Programs



We have participated with certain of our distributor and reseller customers
in marketing incentive programs that have resulted in the provision of rebates, credits and discounts to these customers. These transactions were originally recorded as marketing expenses. We have determined that these rebates, credits and discounts
should be accounted for in accordance with Emerging Issues Task Force (EITF) Issue No. 01-09, Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendors Products), as a reduction to
revenues and not as marketing expenses. As a result, for the fiscal years ended September 30, 2002 and 2003, we are reducing revenues by $935,000 and $824,000, respectively, and making offsetting reductions to marketing expenses during the same
periods. The adjustments to record these transactions properly are being made on a quarterly basis. For the three months ended December 31, 2003 and March 31, 2004, we are reducing revenues by $289,000 and $174,000, respectively, and making
offsetting reductions to marketing expenses during these periods. These adjustments do not change our previously reported net loss for any period.



Rent Expense



We determined that we recorded expenses in error relating to a rental obligation for which we previously had accrued a charge in conjunction with an
acquisition. We are correcting this error by reversing (i) $109,000 of operating expenses for fiscal year ended September 30, 2002; (ii) $50,000 of operating expenses for the fiscal year ended September 30, 2003; and (iii) $10,000 and $12,000 of
operating expenses for the three months ended December 31, 2003 and March 31, 2004, respectively. These adjustments will reduce our previously reported net loss or increase our previously reported net income for these periods. These adjustments are
being recorded on a quarterly basis.



Income Tax Expense



We are reducing our income tax expense by $200,000 for the fiscal quarter
ended June 30, 2002 to reflect the receipt of an income tax refund for which there is no associated liability. This adjustment will reduce our net loss for the three months and fiscal year ended June 30, 2002 and September 30, 2002,
respectively.



Inventory



We determined that manufacturing overhead had not been properly applied to
cost of sales and ending inventory for prior fiscal periods. As a result, inventory valuation was (i) understated by $242,000 at September 30, 2002; (ii) overstated by $320,000 at September 30, 2003; and (iii) and overstated by $16,000 for the first
and



60



---

##### Table of Contents

Netopia, Inc. and Subsidiaries



Notes to Consolidated Statements(Continued)



second fiscal quarters of fiscal years 2004. Accordingly, cost of revenues increased/(decreased) by ($242,000), $320,000, and $16,000 for the fiscal years
ended September 30, 2002 and 2003, and for the first and second fiscal quarters of fiscal year 2004, respectively, as a result of these adjustments. The adjustments to properly record manufacturing overhead are being recorded on a quarterly basis,
and this summary describes the annual effect of these adjustments.



We determined that the Reserve for Excess and Obsolete Inventory for prior years was inadequate based on information that was known at the end of these periods. The effect of these adjustments was to decrease the net value of inventory by
$385,000 and $155,000 at September 30, 2002 and 2003, respectively. Cost of Revenues increased/(decreased) by $385,000, ($230,000), and ($155,000) for the years ended September 30, 2002, 2003 and 2004, respectively, as a result of these adjustments.



Amortization of Other Intangible Assets



We determined that the amortization of other intangible assets, with
identifiable lives, related to the acquisitions of Cayman and JadeSail were included incorrectly in operating expenses. We have reclassified the expenses to cost of revenue for fiscal years 2002 and 2003 and for the first quarter of fiscal year
2004. Cost of revenues increased by $288,000 per quarter or $1.2 million for fiscal years ended September 30, 2002 and 2003. For the first quarter of fiscal year 2004, cost of revenues increased by $300,000. Although these adjustments do not impact
our previously reported net loss/income for these periods, they will reduce the gross margins reported for these periods.



Summary



On January 25, 2005, the Audit Committee met with the Companys Interim Senior Vice President and Chief Financial Officer and BPM to review the
effect on the Companys previously issued financial statements of: (i) the findings of the Internal Accounting Review, (ii) the other significant transactions requiring adjustment, as described above, and (iii) and certain other adjustments,
including other revenue and expense transactions that were overstated in certain periods and understated in other periods. While the amounts associated with these other adjustments are relatively small, we believe that it is appropriate to record
them as part of these restatements so that our financial statements are as accurate as possible. The Audit Committee approved the adjustments and resulting restatements to previously issued financial statements.



The net effect of all of the restatement adjustments is to:



| |  |  | decrease our net loss by approximately $23,000 during the fiscal quarter ended March 31, 2004;
| | - |  | ----------------------------------------------------------------------------------------------



| |  |  | increase our net income by approximately $34,000 during the fiscal quarter ended December 31, 2003;
| | - |  | ---------------------------------------------------------------------------------------------------



| |  |  | increase our net loss by approximately $545,000 for the fiscal year ended September 30, 2003; and
| | - |  | -------------------------------------------------------------------------------------------------



| |  |  | increase our net loss by approximately $9,000 for the fiscal year ended September 30, 2002.
| | - |  | -------------------------------------------------------------------------------------------



| |  |  | As described above, as a result of the restatement adjustments, we also will recognize $262,500 of software license revenue in the first fiscal quarter of fiscal year 2005 ended
December 31, 2004, reflecting additional proceeds received during the first fiscal quarter of fiscal year 2005.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



61



---

##### Table of Contents

Netopia, Inc. and Subsidiaries



Notes to Consolidated Statements(Continued)



The following tables reflect the restatement changes on our financial results on a quarterly basis
for the fiscal years ended September 30, 2003 and 2002, and the fiscal quarters ended March 31, 2004 and December 31, 2003:



Effects on Net Loss Resulting from the Restatement Entries



Note that numbers in parentheses represent a decrease in revenue, expenses and net loss.

Numbers with no parentheses represent an increase in revenue, expenses and net loss.



|                                                   |  |                    |      |                                |               |   |      |               |  |               |   |  |   |   |  |   |      |  
|-------------------------------------------------- |  | ------------------ | ---- | ------------------------------ | ------------- | - | ---- | ------------- |  | ------------- | - |  | - | - |  | - | ---- | -
|                                                   |  | Three Months Ended |      | Fiscal YearEnded Sep. 30, 2004 |              
|                                                   |  | Dec. 31, 2003      |      |                                | Mar. 31, 2004 |   |      | Jun. 30, 2004 |  | Sep. 30, 2004 |  
|                                                   |  | (in thousands)     |      |                                |              
|REVENUES:                                          |  |                    |      |                                |               |   |      |               |  |               |   |  |   |   |  |   |      |  
|Broadband equipment                                |  |                    |      |                                |               |   |      |               |  |               |   |  |   |   |  |   |      |  
|Marketing funds reclassification                   |  | $                  | (289 | )                              |               | $ | (174 | )             |  | $             |  |  | $ |  |  | $ | (463 | )
|Broadband software and services                    |  |                    |      |                                |               |   |      |               |  |               |   |  |   |   |  |   |      |  
|Net changes in deferred revenue recognized         |  |                    | (1   | )                              |               |   | 35   |               |  |               |  |  |   |  |  |   | 34   |  
|                                                   |  |                    |      |                                |               |   |      |               |  |               |   |  |   |   |  |   |      |  
|Subtotal                                           |  |                    | (290 | )                              |               |   | (139 | )             |  |               |  |  |   |  |  |   | (429 | )
|                                                   |  |                    |      |                                |               |   |      |               |  |               |   |  |   |   |  |   |      |  
|COST OF REVENUES:                                  |  |                    |      |                                |               |   |      |               |  |               |   |  |   |   |  |   |      |  
|Broadband equipment                                |  |                    |      |                                |               |   |      |               |  |               |   |  |   |   |  |   |      |  
|Amortization expense reclassification              |  |                    | 288  |                                |               |   |     |               |  |               |  |  |   |  |  |   | 288  |  
|Inventory Valuation Adjustments                    |  |                    | (9   | )                              |               |   | 25   |               |  |               |  |  |   |  |  |   | 16   |  
|Correction of expenses                             |  |                    |     |                                |               |   | 15   |               |  |               |  |  |   |  |  |   | 15   |  
|Broadband software and services                    |  |                    |      |                                |               |   |      |               |  |               |   |  |   |   |  |   |      |  
|Amortization expense reclassification              |  |                    | 12   |                                |               |   |     |               |  |               |  |  |   |  |  |   | 12   |  
|                                                   |  |                    |      |                                |               |   |      |               |  |               |   |  |   |   |  |   |      |  
|Subtotal                                           |  |                    | 291  |                                |               |   | 40   |               |  |               |  |  |   |  |  |   | 331  |  
|                                                   |  |                    |      |                                |               |   |      |               |  |               |   |  |   |   |  |   |      |  
|Research and development                           |  |                    |      |                                |               |   |      |               |  |               |   |  |   |   |  |   |      |  
|Correction of lease accrual                        |  |                    | (10  | )                              |               |   | (12  | )             |  |               |  |  |   |  |  |   | (22  | )
|                                                   |  |                    |      |                                |              
|Selling and marketing                              |  |                    |     |                                |               |   |     |               |  |               |  |  |   |  |  |   |     |  
|                                                   |  |                    |      |                                |              
|General and administrative                         |  |                    |      |                                |               |   |      |               |  |               |   |  |   |   |  |   |      |  
|Correction of expenses                             |  |                    | (16  | )                              |               |   | (16  | )             |  |               |  |  |   |  |  |   | (32  | )
|Marketing funds reclassification                   |  |                    | (289 | )                              |               |   | (174 | )             |  |               |  |  |   |  |  |   | (463 | )
|                                                   |  |                    |      |                                |              
|Amortization of intangible assets                  |  |                    |      |                                |               |   |      |               |  |               |   |  |   |   |  |   |      |  
|Amortization expense reclassification              |  |                    | (300 | )                              |               |   |     |               |  |               |  |  |   |  |  |   | (300 | )
|                                                   |  |                    |      |                                |              
|Restructuring costs                                |  |                    |     |                                |               |   |     |               |  |               |  |  |   |  |  |   |     |  
|                                                   |  |                    |      |                                |              
|Integration costs                                  |  |                    |     |                                |               |   |     |               |  |               |  |  |   |  |  |   |     |  
|                                                   |  |                    |      |                                |              
|Acquired in-process research and development       |  |                    |     |                                |               |   |     |               |  |               |  |  |   |  |  |   |     |  
|                                                   |  |                    |      |                                |              
|Impairment of goodwill and other intangible assets |  |                    |     |                                |               |   |     |               |  |               |  |  |   |  |  |   |     |  
|                                                   |  |                    |      |                                |               |   |      |               |  |               |   |  |   |   |  |   |      |  
|Subtotal                                           |  |                    | (615 | )                              |               |   | (202 | )             |  |               |  |  |   |  |  |   | (817 | )
|                                                   |  |                    |      |                                |               |   |      |               |  |               |   |  |   |   |  |   |      |  
|Total Expense                                      |  |                    | (324 | )                              |               |   | (162 | )             |  |               |  |  |   |  |  |   | (486 | )
|                                                   |  |                    |      |                                |              
|Other income (loss), net                           |  |                    |      |                                |               |   |      |               |  |               |   |  |   |   |  |   |      |  
|Loss on impaired securities                        |  |                    |     |                                |               |   |     |               |  |               |  |  |   |  |  |   |     |  
|Other income (expense), net                        |  |                    |     |                                |               |   |     |               |  |               |  |  |   |  |  |   |     |  
|                                                   |  |                    |      |                                |               |   |      |               |  |               |   |  |   |   |  |   |      |  
|Other income (loss), net                           |  |                    |     |                                |               |   |     |               |  |               |  |  |   |  |  |   |     |  
|                                                   |  |                    |      |                                |               |   |      |               |  |               |   |  |   |   |  |   |      |  
|Provision for income taxes                         |  |                    |     |                                |               |   |     |               |  |               |  |  |   |  |  |   |     |  
|                                                   |  |                    |      |                                |              
|Total effect on net loss                           |  | $                  | (34  | )                              |               | $ | (23  | )             |  | $             |  |  | $ |  |  | $ | (57  | )
|                                                   |  |                    |      |                                |               |   |      |               |  |               |   |  |   |   |  |   |      |  



62



---

##### Table of Contents

Netopia, Inc. and Subsidiaries



Notes to Consolidated Statements(Continued)



Effects on Net Loss Resulting from the Restatement Entries



Note that numbers in parentheses represent a decrease in revenue, expenses
and net loss.

Numbers with no parentheses represent an increase in revenue, expenses and net loss.



|                                                   |  |                    |      |   |                               |   |      |              |  |   |              |   |  |   |      |   |  |   |        |  
|-------------------------------------------------- |  | ------------------ | ---- | - | ----------------------------- | - | ---- | ------------ |  | - | ------------ | - |  | - | ---- | - |  | - | ------ | -
|                                                   |  | Three Months Ended |      |   | Fiscal YearEnded Sep. 30,2003 |  
|                                                   |  | Dec. 31,2002       |      |   | Mar. 31,2003                  |   |      | Jun. 30,2003 |  |   | Sep. 30,2003 |   | 
|                                                   |  | (in thousands)     |      |   |                               |  
|REVENUES:                                          |  |                    |      |   |                               |   |      |              |  |   |              |   |  |   |      |   |  |   |        |  
|Broadband equipment                                |  |                    |      |   |                               |   |      |              |  |   |              |   |  |   |      |   |  |   |        |  
|Marketing funds reclassification                   |  | $                  | (190 | ) |                               | $ | (191 | )            |  | $ | (244         | ) |  | $ | (199 | ) |  | $ | (824   | )
|Broadband software and services                    |  |                    |      |   |                               |   |      |              |  |   |              |   |  |   |      |   |  |   |        |  
|Net changes in deferred revenue recognized         |  |                    | (102 | ) |                               |   | (186 | )            |  |   | 105          |   |  |   | (380 | ) |  |   | (563   | )
|                                                   |  |                    |      |   |                               |   |      |              |  |   |              |   |  |   |      |   |  |   |        |  
|Subtotal                                           |  |                    | (292 | ) |                               |   | (377 | )            |  |   | (139         | ) |  |   | (579 | ) |  |   | (1,387 | )
|                                                   |  |                    |      |   |                               |   |      |              |  |   |              |   |  |   |      |   |  |   |        |  
|COST OF REVENUES:                                  |  |                    |      |   |                               |   |      |              |  |   |              |   |  |   |      |   |  |   |        |  
|Broadband equipment                                |  |                    |      |   |                               |   |      |              |  |   |              |   |  |   |      |   |  |   |        |  
|Amortization expense reclassification              |  |                    | 288  |   |                               |   | 288  |              |  |   | 288          |   |  |   | 288  |   |  |   | 1,152  |  
|Inventory Valuation Adjustments                    |  |                    | (87  | ) |                               |   | 303  |              |  |   | 49           |   |  |   | 54   |   |  |   | 319    |  
|Correction of expenses                             |  |                    |     |   |                               |   | 16   |              |  |   |             |   |  |   | (230 | ) |  |   | (214   | )
|Broadband software and services                    |  |                    |      |   |                               |   |      |              |  |   |              |   |  |   |      |   |  |   |        |  
|Amortization expense reclassification              |  |                    |     |   |                               |   |     |              |  |   |             |   |  |   |     |   |  |   |       |  
|                                                   |  |                    |      |   |                               |   |      |              |  |   |              |   |  |   |      |   |  |   |        |  
|Subtotal                                           |  |                    | 201  |   |                               |   | 607  |              |  |   | 337          |   |  |   | 112  |   |  |   | 1,257  |  
|                                                   |  |                    |      |   |                               |   |      |              |  |   |              |   |  |   |      |   |  |   |        |  
|Research and development                           |  |                    |      |   |                               |   |      |              |  |   |              |   |  |   |      |   |  |   |        |  
|Correction of lease accrual                        |  |                    |     |   |                               |   | (15  | )            |  |   | (27          | ) |  |   | (9   | ) |  |   | (51    | )
|                                                   |  |                    |      |   |                              
|Selling and marketing                              |  |                    |      |   |                               |   |      |              |  |   |              |   |  |   |      |   |  |   |        |  
|Correction of expenses                             |  |                    |     |   |                               |   |     |              |  |   |             |   |  |   | (35  | ) |  |   | (35    | )
|                                                   |  |                    |      |   |                              
|General and administrative                         |  |                    |      |   |                               |   |      |              |  |   |              |   |  |   |      |   |  |   |        |  
|Correction of expenses                             |  |                    | (16  | ) |                               |   | (16  | )            |  |   | (16          | ) |  |   | 11   |   |  |   | (37    | )
|Marketing funds reclassification                   |  |                    | (190 | ) |                               |   | (191 | )            |  |   | (244         | ) |  |   | (199 | ) |  |   | (824   | )
|                                                   |  |                    |      |   |                              
|Amortization of intangible assets                  |  |                    |      |   |                               |   |      |              |  |   |              |   |  |   |      |   |  |   |        |  
|Amortization expense reclassification              |  |                    | (288 | ) |                               |   | (288 | )            |  |   | (288         | ) |  |   | (288 | ) |  |   | (1,152 | )
|                                                   |  |                    |      |   |                              
|Restructuring costs                                |  |                    |     |   |                               |   |     |              |  |   |             |   |  |   |     |   |  |   |       |  
|                                                   |  |                    |      |   |                              
|Integration costs                                  |  |                    |     |   |                               |   |     |              |  |   |             |   |  |   |     |   |  |   |       |  
|                                                   |  |                    |      |   |                              
|Acquired in-process research and development       |  |                    |     |   |                               |   |     |              |  |   |             |   |  |   |     |   |  |   |       |  
|                                                   |  |                    |      |   |                              
|Impairment of goodwill and other intangible assets |  |                    |     |   |                               |   |     |              |  |   |             |   |  |   |     |   |  |   |       |  
|                                                   |  |                    |      |   |                               |   |      |              |  |   |              |   |  |   |      |   |  |   |        |  
|Subtotal                                           |  |                    | (494 | ) |                               |   | (510 | )            |  |   | (575         | ) |  |   | (520 | ) |  |   | (2,099 | )
|                                                   |  |                    |      |   |                               |   |      |              |  |   |              |   |  |   |      |   |  |   |        |  
|Total Expense                                      |  |                    | (293 | ) |                               |   | 97   |              |  |   | (238         | ) |  |   | (408 | ) |  |   | (842   | )
|                                                   |  |                    |      |   |                              
|Other income (loss), net                           |  |                    |      |   |                               |   |      |              |  |   |              |   |  |   |      |   |  |   |        |  
|Loss on impaired securities                        |  |                    |     |   |                               |   |     |              |  |   |             |   |  |   |     |   |  |   |       |  
|Other income (expense), net                        |  |                    |     |   |                               |   |     |              |  |   |             |   |  |   |     |   |  |   |       |  
|                                                   |  |                    |      |   |                               |   |      |              |  |   |              |   |  |   |      |   |  |   |        |  
|Other income (loss), net                           |  |                    |     |   |                               |   |     |              |  |   |             |   |  |   |     |   |  |   |       |  
|                                                   |  |                    |      |   |                               |   |      |              |  |   |              |   |  |   |      |   |  |   |        |  
|Provision for income taxes                         |  |                    |     |   |                               |   |     |              |  |   |             |   |  |   |     |   |  |   |       |  
|                                                   |  |                    |      |   |                              
|Total effect on net loss                           |  | $                  | (1   | ) |                               | $ | 474  |              |  | $ | (99          | ) |  | $ | 171  |   |  | $ | 545    |  
|                                                   |  |                    |      |   |                               |   |      |              |  |   |              |   |  |   |      |   |  |   |        |  



63



---

##### Table of Contents

Netopia, Inc. and Subsidiaries



Notes to Consolidated Statements(Continued)



Effects on Net Loss Resulting from the Restatement Entries



Note that numbers in parentheses represent a decrease in revenue, expenses
and net loss.

Numbers with no parentheses represent an increase in revenue, expenses and net loss.



|                                                   |  |                    |      |   |                                |   |      |              |  |   |              |   |  |   |      |   |  |   |        |  
|-------------------------------------------------- |  | ------------------ | ---- | - | ------------------------------ | - | ---- | ------------ |  | - | ------------ | - |  | - | ---- | - |  | - | ------ | -
|                                                   |  | Three Months Ended |      |   | Fiscal Year Ended Sep. 30,2002 |  
|                                                   |  | Dec. 31,2001       |      |   | Mar. 31,2002                   |   |      | Jun. 30,2002 |  |   | Sep. 30,2002 |   | 
|                                                   |  | (in thousands)     |      |   |                                |  
|REVENUES:                                          |  |                    |      |   |                                |   |      |              |  |   |              |   |  |   |      |   |  |   |        |  
|Broadband equipment                                |  |                    |      |   |                                |   |      |              |  |   |              |   |  |   |      |   |  |   |        |  
|Marketing funds reclassification                   |  | $                  | (173 | ) |                                | $ | (169 | )            |  | $ | (216         | ) |  | $ | (389 | ) |  | $ | (947   | )
|Broadband software and services                    |  |                    |      |   |                                |   |      |              |  |   |              |   |  |   |      |   |  |   |        |  
|Net changes in deferred revenue recognized         |  |                    | (25  | ) |                                |   | (151 | )            |  |   | (570         | ) |  |   | 552  |   |  |   | (194   | )
|                                                   |  |                    |      |   |                                |   |      |              |  |   |              |   |  |   |      |   |  |   |        |  
|Subtotal                                           |  |                    | (198 | ) |                                |   | (320 | )            |  |   | (786         | ) |  |   | 163  |   |  |   | (1,141 | )
|                                                   |  |                    |      |   |                                |   |      |              |  |   |              |   |  |   |      |   |  |   |        |  
|COST OF REVENUES:                                  |  |                    |      |   |                                |   |      |              |  |   |              |   |  |   |      |   |  |   |        |  
|Broadband equipment                                |  |                    |      |   |                                |   |      |              |  |   |              |   |  |   |      |   |  |   |        |  
|Amortization expense reclassification              |  |                    | 288  |   |                                |   | 288  |              |  |   | 288          |   |  |   | 288  |   |  |   | 1,152  |  
|Inventory Valuation Adjustments                    |  |                    | (336 | ) |                                |   | 44   |              |  |   | 52           |   |  |   |     |   |  |   | (240   | )
|Correction of expenses                             |  |                    |     |   |                                |   | (3   | )            |  |   | 3            |   |  |   | 384  |   |  |   | 384    |  
|Broadband software and services                    |  |                    |      |   |                                |   |      |              |  |   |              |   |  |   |      |   |  |   |        |  
|Amortization expense reclassification              |  |                    |     |   |                                |   |     |              |  |   |             |   |  |   |     |   |  |   |       |  
|                                                   |  |                    |      |   |                                |   |      |              |  |   |              |   |  |   |      |   |  |   |        |  
|Subtotal                                           |  |                    | (48  | ) |                                |   | 329  |              |  |   | 343          |   |  |   | 672  |   |  |   | 1,296  |  
|                                                   |  |                    |      |   |                                |   |      |              |  |   |              |   |  |   |      |   |  |   |        |  
|Research and development                           |  |                    |      |   |                                |   |      |              |  |   |              |   |  |   |      |   |  |   |        |  
|Correction of lease accrual                        |  |                    | 2    |   |                                |   | (53  | )            |  |   | 86           |   |  |   | (144 | ) |  |   | (109   | )
|                                                   |  |                    |      |   |                               
|Selling and marketing                              |  |                    |      |   |                                |   |      |              |  |   |              |   |  |   |      |   |  |   |        |  
|Correction of expenses                             |  |                    |     |   |                                |   |     |              |  |   | (90          | ) |  |   | 90   |   |  |   |       |  
|                                                   |  |                    |      |   |                               
|General and administrative                         |  |                    |      |   |                                |   |      |              |  |   |              |   |  |   |      |   |  |   |        |  
|Correction of expenses                             |  |                    |     |   |                                |   |     |              |  |   | (16          | ) |  |   | (16  | ) |  |   | (32    | )
|Marketing funds reclassification                   |  |                    | (173 | ) |                                |   | (157 | )            |  |   | (216         | ) |  |   | (389 | ) |  |   | (935   | )
|                                                   |  |                    |      |   |                               
|Amortization of intangible assets                  |  |                    |      |   |                                |   |      |              |  |   |              |   |  |   |      |   |  |   |        |  
|Amortization expense reclassification              |  |                    | (288 | ) |                                |   | (288 | )            |  |   | (288         | ) |  |   | (288 | ) |  |   | (1,152 | )
|                                                   |  |                    |      |   |                               
|Restructuring costs                                |  |                    |     |   |                                |   |     |              |  |   |             |   |  |   |     |   |  |   |       |  
|                                                   |  |                    |      |   |                               
|Integration costs                                  |  |                    |     |   |                                |   |     |              |  |   |             |   |  |   |     |   |  |   |       |  
|                                                   |  |                    |      |   |                               
|Acquired in-process research and development       |  |                    |     |   |                                |   |     |              |  |   |             |   |  |   |     |   |  |   |       |  
|                                                   |  |                    |      |   |                               
|Impairment of goodwill and other intangible assets |  |                    |     |   |                                |   |     |              |  |   |             |   |  |   |     |   |  |   |       |  
|                                                   |  |                    |      |   |                                |   |      |              |  |   |              |   |  |   |      |   |  |   |        |  
|Subtotal                                           |  |                    | (459 | ) |                                |   | (498 | )            |  |   | (524         | ) |  |   | (747 | ) |  |   | (2,228 | )
|                                                   |  |                    |      |   |                                |   |      |              |  |   |              |   |  |   |      |   |  |   |        |  
|Total Expense                                      |  |                    | (507 | ) |                                |   | (169 | )            |  |   | (181         | ) |  |   | (75  | ) |  |   | (932   | )
|                                                   |  |                    |      |   |                               
|Other income (loss), net                           |  |                    |      |   |                                |   |      |              |  |   |              |   |  |   |      |   |  |   |        |  
|Loss on impaired securities                        |  |                    |     |   |                                |   |     |              |  |   |             |   |  |   |     |   |  |   |       |  
|Other income (expense), net                        |  |                    |     |   |                                |   |     |              |  |   |             |   |  |   |     |   |  |   |       |  
|                                                   |  |                    |      |   |                                |   |      |              |  |   |              |   |  |   |      |   |  |   |        |  
|Other income (loss), net                           |  |                    |     |   |                                |   |     |              |  |   |             |   |  |   |     |   |  |   |       |  
|                                                   |  |                    |      |   |                                |   |      |              |  |   |              |   |  |   |      |   |  |   |        |  
|Provision for income taxes                         |  |                    |     |   |                                |   |     |              |  |   | (200         | ) |  |   |     |   |  |   | (200   | )
|                                                   |  |                    |      |   |                               
|Total effect on net loss                           |  | $                  | (309 | ) |                                | $ | 151  |              |  | $ | 405          |   |  | $ | (238 | ) |  | $ | 9      |  
|                                                   |  |                    |      |   |                                |   |      |              |  |   |              |   |  |   |      |   |  |   |        |  



64



---

##### Table of Contents

Netopia, Inc. and Subsidiaries



Notes to Consolidated Statements(Continued)



(3) Restatement of Unaudited Financial Results



The following table reflects our fiscal 2004, 2003 and 2002 unaudited consolidated quarterly financial information, as
previously reported and restated. The details of the restatements are further outlined in Note 2.



|                                                     |  |                                          |        |   |              |   |        |               |  |   |                 |   |  |               |        |                 |  |   |        |  |   |       
|---------------------------------------------------- |  | ---------------------------------------- | ------ | - | ------------ | - | ------ | ------------- |  | - | --------------- | - |  | ------------- | ------ | --------------- |  | - | ------ |  | - | ------
|                                                     |  | Fiscal 2004                             
|                                                     |  |                                          |        |   |              |   |        | Restated      |  |   | PreviouslyFiled |   |  | Restated      |        | PreviouslyFiled
|Three months ended,                                  |  | Sep. 30,2004                             |        |   | Jun. 30,2004 |   |        | Mar. 31, 2004 |  |   | Mar. 31,2004    |   |  | Dec. 31, 2003 |        | Dec. 31,2003   
|                                                     |  | (in thousands; except per share amounts)
|REVENUES:                                            |  |                                          |        |   |              |   |        |               |  |   |                 |   |  |               |        |                 |  |   |        |  |   |       
|Broadband equipment                                  |  | $                                        | 22,276 |   |              | $ | 21,891 |               |  | $ | 17,878          |   |  | $             | 18,052 |                 |  | $ | 23,657 |  | $ | 23,946
|Broadband software and services                      |  |                                          | 3,559  |   |              |   | 3,543  |               |  |   | 3,879           |   |  |               | 3,844  |                 |  |   | 4,652  |  |   | 4,653 
|                                                     |  |                                          |        |   |              |   |        |               |  |   |                 |   |  |               |        |                 |  |   |        |  |   |       
|Total revenues                                       |  |                                          | 25,835 |   |              |   | 25,434 |               |  |   | 21,757          |   |  |               | 21,896 |                 |  |   | 28,309 |  |   | 28,599
|                                                     |  |                                          |        |   |              |   |        |               |  |   |                 |   |  |               |        |                 |  |   |        |  |   |       
|COST OF REVENUES:                                    |  |                                          |        |   |              |   |        |               |  |   |                 |   |  |               |        |                 |  |   |        |  |   |       
|Broadband equipment                                  |  |                                          | 17,471 |   |              |   | 16,757 |               |  |   | 12,573          |   |  |               | 12,533 |                 |  |   | 16,450 |  |   | 16,459
|Broadband software and services                      |  |                                          | 286    |   |              |   | 267    |               |  |   | 231             |   |  |               | 231    |                 |  |   | 208    |  |   | 208   
|Amortization of acquired technology                  |  |                                          | 300    |   |              |   | 300    |               |  |   | 300             |   |  |               | 300    |                 |  |   | 300    |  |   |      
|                                                     |  |                                          |        |   |              |   |        |               |  |   |                 |   |  |               |        |                 |  |   |        |  |   |       
|Total cost of revenues                               |  |                                          | 18,057 |   |              |   | 17,324 |               |  |   | 13,104          |   |  |               | 13,064 |                 |  |   | 16,958 |  |   | 16,667
|                                                     |  |                                          |        |   |              |   |        |               |  |   |                 |   |  |               |        |                 |  |   |        |  |   |       
|GROSS PROFIT                                         |  |                                          | 7,778  |   |              |   | 8,110  |               |  |   | 8,653           |   |  |               | 8,832  |                 |  |   | 11,351 |  |   | 11,932
|                                                     |  |                                          |        |   |              |  
|OPERATING EXPENSES:                                  |  |                                          |        |   |              |   |        |               |  |   |                 |   |  |               |        |                 |  |   |        |  |   |       
|Research and development                             |  |                                          | 3,974  |   |              |   | 3,846  |               |  |   | 4,057           |   |  |               | 4,069  |                 |  |   | 3,951  |  |   | 3,961 
|Research and development project cancellation costs  |  |                                          |       |   |              |   |       |               |  |   |                |   |  |               |       |                 |  |   |       |  |   |      
|Selling and marketing                                |  |                                          | 5,266  |   |              |   | 5,199  |               |  |   | 5,037           |   |  |               | 5,211  |                 |  |   | 5,026  |  |   | 5,315 
|General and administrative                           |  |                                          | 3,556  |   |              |   | 1,184  |               |  |   | 1,172           |   |  |               | 1,188  |                 |  |   | 1,235  |  |   | 1,251 
|                                                     |  |                                          |        |   |              |  
|Amortization of intangible assets                    |  |                                          | 86     |   |              |   | 86     |               |  |   | 87              |   |  |               | 87     |                 |  |   | 86     |  |   | 386   
|Restructuring costs                                  |  |                                          | 999    |   |              |   |       |               |  |   |                |   |  |               |       |                 |  |   |       |  |   |      
|Integration costs                                    |  |                                          |       |   |              |   |       |               |  |   |                |   |  |               |       |                 |  |   |       |  |   |      
|Acquired in-process research and development         |  |                                          |       |   |              |   |       |               |  |   |                |   |  |               |       |                 |  |   |       |  |   |      
|Impairment of goodwill and other intangible assets   |  |                                          |       |   |              |   |       |               |  |   |                |   |  |               |       |                 |  |   |       |  |   |      
|                                                     |  |                                          |        |   |              |   |        |               |  |   |                 |   |  |               |        |                 |  |   |        |  |   |       
|Total operating expenses                             |  |                                          | 13,881 |   |              |   | 10,315 |               |  |   | 10,353          |   |  |               | 10,555 |                 |  |   | 10,298 |  |   | 10,913
|                                                     |  |                                          |        |   |              |   |        |               |  |   |                 |   |  |               |        |                 |  |   |        |  |   |       
|OPERATING INCOME (LOSS)                              |  |                                          | (6,103 | ) |              |   | (2,205 | )             |  |   | (1,700          | ) |  |               | (1,723 | )               |  |   | 1,053  |  |   | 1,019 
|                                                     |  |                                          |        |   |              |  
|Other income (loss), net                             |  |                                          |        |   |              |   |        |               |  |   |                 |   |  |               |        |                 |  |   |        |  |   |       
|Loss on impaired securities                          |  |                                          |       |   |              |   |       |               |  |   |                |   |  |               |       |                 |  |   |       |  |   |      
|Other income (expense), net                          |  |                                          | 31     |   |              |   | (52    | )             |  |   | 77              |   |  |               | 77     |                 |  |   | 168    |  |   | 168   
|                                                     |  |                                          |        |   |              |   |        |               |  |   |                 |   |  |               |        |                 |  |   |        |  |   |       
|Other income (loss), net                             |  |                                          | 31     |   |              |   | (52    | )             |  |   | 77              |   |  |               | 77     |                 |  |   | 168    |  |   | 168   
|                                                     |  |                                          |        |   |              |   |        |               |  |   |                 |   |  |               |        |                 |  |   |        |  |   |       
|Provision for income taxes                           |  |                                          | 13     |   |              |   | 19     |               |  |   | (11             | ) |  |               | (11    | )               |  |   | 57     |  |   | 57    
|NET INCOME (LOSS)                                    |  | $                                        | (6,085 | ) |              | $ | (2,276 | )             |  | $ | (1,612          | ) |  | $             | (1,635 | )               |  | $ | 1,164  |  | $ | 1,130 
|                                                     |  |                                          |        |   |              |   |        |               |  |   |                 |   |  |               |        |                 |  |   |        |  |   |       
|Per share data, net income (loss):                   |  |                                          |        |   |              |   |        |               |  |   |                 |   |  |               |        |                 |  |   |        |  |   |       
|Basic net income (loss) per share                    |  | $                                        | (0.25  | ) |              | $ | (0.09  | )             |  | $ | (0.07           | ) |  | $             | (0.07  | )               |  | $ | 0.05   |  | $ | 0.05  
|                                                     |  |                                          |        |   |              |   |        |               |  |   |                 |   |  |               |        |                 |  |   |        |  |   |       
|Diluted net income (loss) per share                  |  | $                                        | (0.25  | ) |              | $ | (0.09  | )             |  | $ | (0.07           | ) |  | $             | (0.07  | )               |  | $ | 0.04   |  | $ | 0.04  
|                                                     |  |                                          |        |   |              |   |        |               |  |   |                 |   |  |               |        |                 |  |   |        |  |   |       
|Shares used in the computation of net income (loss): |  |                                          |        |   |              |   |        |               |  |   |                 |   |  |               |        |                 |  |   |        |  |   |       
|Shares used in the basic per share calculations      |  |                                          | 24,490 |   |              |   | 24,033 |               |  |   | 23,536          |   |  |               | 23,536 |                 |  |   | 22,236 |  |   | 22,236
|                                                     |  |                                          |        |   |              |   |        |               |  |   |                 |   |  |               |        |                 |  |   |        |  |   |       
|Shares used in the diluted per share calculations    |  |                                          | 24,490 |   |              |   | 24,033 |               |  |   | 23,536          |   |  |               | 23,536 |                 |  |   | 26,020 |  |   | 26,091
|                                                     |  |                                          |        |   |              |   |        |               |  |   |                 |   |  |               |        |                 |  |   |        |  |   |       



65



---

##### Table of Contents

Netopia, Inc. and Subsidiaries



Notes to Consolidated Statements(Continued)



|                                                     |  |                                          |        |   |                  |   |        |              |  |   |                  |   |  |              |        |   |                  |   |        |              |  |   |                  |   |  |   |        |   |  |   |        |  
|---------------------------------------------------- |  | ---------------------------------------- | ------ | - | ---------------- | - | ------ | ------------ |  | - | ---------------- | - |  | ------------ | ------ | - | ---------------- | - | ------ | ------------ |  | - | ---------------- | - |  | - | ------ | - |  | - | ------ | -
|                                                     |  | Fiscal 2003                              |       
|                                                     |  | Restated                                 |        |   | Previously Filed |   |        | Restated     |  |   | Previously Filed |   |  | Restated     |        |   | Previously Filed |   |        | Restated     |  |   | Previously Filed |  
|Three months ended,                                  |  | Sep. 30,2003                             |        |   | Sep. 30,2003     |   |        | Jun. 30,2003 |  |   | Jun. 30,2003     |   |  | Mar. 31,2003 |        |   | Mar. 31,2003     |   |        | Dec. 31,2002 |  |   | Dec. 31,2002     |  
|                                                     |  | (in thousands; except per share amounts) |       
|REVENUES:                                            |  |                                          |        |   |                  |   |        |              |  |   |                  |   |  |              |        |   |                  |   |        |              |  |   |                  |   |  |   |        |   |  |   |        |  
|Broadband equipment                                  |  | $                                        | 20,622 |   |                  | $ | 20,821 |              |  | $ | 17,718           |   |  | $            | 17,962 |   |                  | $ | 14,647 |              |  | $ | 14,838           |   |  | $ | 14,406 |   |  | $ | 14,596 |  
|Broadband software and services                      |  |                                          | 4,294  |   |                  |   | 4,674  |              |  |   | 4,114            |   |  |              | 4,009  |   |                  |   | 4,214  |              |  |   | 4,400            |   |  |   | 4,905  |   |  |   | 5,007  |  
|                                                     |  |                                          |        |   |                  |   |        |              |  |   |                  |   |  |              |        |   |                  |   |        |              |  |   |                  |   |  |   |        |   |  |   |        |  
|Total revenues                                       |  |                                          | 24,916 |   |                  |   | 25,495 |              |  |   | 21,832           |   |  |              | 21,971 |   |                  |   | 18,861 |              |  |   | 19,238           |   |  |   | 19,311 |   |  |   | 19,603 |  
|                                                     |  |                                          |        |   |                  |   |        |              |  |   |                  |   |  |              |        |   |                  |   |        |              |  |   |                  |   |  |   |        |   |  |   |        |  
|COST OF REVENUES:                                    |  |                                          |        |   |                  |   |        |              |  |   |                  |   |  |              |        |   |                  |   |        |              |  |   |                  |   |  |   |        |   |  |   |        |  
|Broadband equipment                                  |  |                                          | 14,330 |   |                  |   | 14,218 |              |  |   | 12,808           |   |  |              | 12,471 |   |                  |   | 11,239 |              |  |   | 10,632           |   |  |   | 10,624 |   |  |   | 10,423 |  
|Broadband software and services                      |  |                                          | 224    |   |                  |   | 224    |              |  |   | 316              |   |  |              | 316    |   |                  |   | 345    |              |  |   | 345              |   |  |   | 429    |   |  |   | 429    |  
|Amortization of acquired technology                  |  |                                          | 288    |   |                  |   | 288    |              |  |   | 288              |   |  |              | 288    |   |                  |   | 288    |              |  |   | 288              |   |  |   | 288    |   |  |   | 288    |  
|                                                     |  |                                          |        |   |                  |   |        |              |  |   |                  |   |  |              |        |   |                  |   |        |              |  |   |                  |   |  |   |        |   |  |   |        |  
|Total cost of revenues                               |  |                                          | 14,842 |   |                  |   | 14,730 |              |  |   | 13,412           |   |  |              | 13,075 |   |                  |   | 11,872 |              |  |   | 11,265           |   |  |   | 11,341 |   |  |   | 11,140 |  
|                                                     |  |                                          |        |   |                  |   |        |              |  |   |                  |   |  |              |        |   |                  |   |        |              |  |   |                  |   |  |   |        |   |  |   |        |  
|GROSS PROFIT                                         |  |                                          | 10,074 |   |                  |   | 10,765 |              |  |   | 8,420            |   |  |              | 8,896  |   |                  |   | 6,989  |              |  |   | 7,973            |   |  |   | 7,970  |   |  |   | 8,463  |  
|                                                     |  |                                          |        |   |                  |   |        |             
|OPERATING EXPENSES:                                  |  |                                          |        |   |                  |   |        |              |  |   |                  |   |  |              |        |   |                  |   |        |              |  |   |                  |   |  |   |        |   |  |   |        |  
|Research and development                             |  |                                          | 3,812  |   |                  |   | 3,821  |              |  |   | 3,764            |   |  |              | 3,791  |   |                  |   | 4,011  |              |  |   | 4,026            |   |  |   | 3,983  |   |  |   | 3,983  |  
|Research and development project cancellation costs  |  |                                          |       |   |                  |   |       |              |  |   |                 |   |  |              |       |   |                  |   |       |              |  |   |                 |   |  |   | 606    |   |  |   | 606    |  
|Selling and marketing                                |  |                                          | 4,845  |   |                  |   | 5,079  |              |  |   | 4,855            |   |  |              | 5,099  |   |                  |   | 4,939  |              |  |   | 5,130            |   |  |   | 5,471  |   |  |   | 5,661  |  
|General and administrative                           |  |                                          | 1,276  |   |                  |   | 1,265  |              |  |   | 961              |   |  |              | 977    |   |                  |   | 1,091  |              |  |   | 1,107            |   |  |   | 1,412  |   |  |   | 1,428  |  
|Amortization of intangible assets                    |  |                                          | 87     |   |                  |   | 375    |              |  |   | 86               |   |  |              | 374    |   |                  |   | 86     |              |  |   | 374              |   |  |   | 86     |   |  |   | 374    |  
|Restructuring costs                                  |  |                                          | (77    | ) |                  |   | (77    | )            |  |   | 130              |   |  |              | 130    |   |                  |   |       |              |  |   |                 |   |  |   | 342    |   |  |   | 342    |  
|Integration costs                                    |  |                                          |       |   |                  |   |       |              |  |   |                 |   |  |              |       |   |                  |   |       |              |  |   |                 |   |  |   |       |   |  |   |       |  
|Acquired in-process research and development         |  |                                          |       |   |                  |   |       |              |  |   |                 |   |  |              |       |   |                  |   |       |              |  |   |                 |   |  |   |       |   |  |   |       |  
|Impairment of goodwill and other intangible assets   |  |                                          |       |   |                  |   |       |              |  |   |                 |   |  |              |       |   |                  |   |       |              |  |   |                 |   |  |   |       |   |  |   |       |  
|                                                     |  |                                          |        |   |                  |   |        |              |  |   |                  |   |  |              |        |   |                  |   |        |              |  |   |                  |   |  |   |        |   |  |   |        |  
|Total operating expenses                             |  |                                          | 9,943  |   |                  |   | 10,463 |              |  |   | 9,796            |   |  |              | 10,371 |   |                  |   | 10,127 |              |  |   | 10,637           |   |  |   | 11,900 |   |  |   | 12,394 |  
|                                                     |  |                                          |        |   |                  |   |        |              |  |   |                  |   |  |              |        |   |                  |   |        |              |  |   |                  |   |  |   |        |   |  |   |        |  
|OPERATING INCOME (LOSS)                              |  |                                          | 131    |   |                  |   | 302    |              |  |   | (1,376           | ) |  |              | (1,475 | ) |                  |   | (3,138 | )            |  |   | (2,664           | ) |  |   | (3,930 | ) |  |   | (3,931 | )
|                                                     |  |                                          |        |   |                  |   |        |             
|Other income (loss), net                             |  |                                          |        |   |                  |   |        |              |  |   |                  |   |  |              |        |   |                  |   |        |              |  |   |                  |   |  |   |        |   |  |   |        |  
|Loss on impaired securities                          |  |                                          |       |   |                  |   |       |              |  |   |                 |   |  |              |       |   |                  |   | (457   | )            |  |   | (457             | ) |  |   |       |   |  |   |       |  
|Other income (expense), net                          |  |                                          | (80    | ) |                  |   | (80    | )            |  |   | (3               | ) |  |              | (3     | ) |                  |   | (5     | )            |  |   | (5               | ) |  |   | (7     | ) |  |   | (7     | )
|                                                     |  |                                          |        |   |                  |   |        |              |  |   |                  |   |  |              |        |   |                  |   |        |              |  |   |                  |   |  |   |        |   |  |   |        |  
|Other income (loss), net                             |  |                                          | (80    | ) |                  |   | (80    | )            |  |   | (3               | ) |  |              | (3     | ) |                  |   | (462   | )            |  |   | (462             | ) |  |   | (7     | ) |  |   | (7     | )
|                                                     |  |                                          |        |   |                  |   |        |              |  |   |                  |   |  |              |        |   |                  |   |        |              |  |   |                  |   |  |   |        |   |  |   |        |  
|Provision for income taxes                           |  |                                          |       |   |                  |   |       |              |  |   |                 |   |  |              |       |   |                  |   |       |              |  |   |                 |   |  |   |       |   |  |   |       |  
|                                                     |  |                                          |        |   |                  |   |        |             
|NET INCOME (LOSS)                                    |  | $                                        | 51     |   |                  | $ | 222    |              |  | $ | (1,379           | ) |  | $            | (1,478 | ) |                  | $ | (3,600 | )            |  | $ | (3,126           | ) |  | $ | (3,937 | ) |  | $ | (3,938 | )
|                                                     |  |                                          |        |   |                  |   |        |              |  |   |                  |   |  |              |        |   |                  |   |        |              |  |   |                  |   |  |   |        |   |  |   |        |  
|Per share data, net income (loss):                   |  |                                          |        |   |                  |   |        |              |  |   |                  |   |  |              |        |   |                  |   |        |              |  |   |                  |   |  |   |        |   |  |   |        |  
|Basic net income (loss) per share                    |  | $                                        | 0.00   |   |                  | $ | 0.01   |              |  | $ | (0.07            | ) |  | $            | (0.08  | ) |                  | $ | (0.19  | )            |  | $ | (0.16            | ) |  | $ | (0.21  | ) |  | $ | (0.21  | )
|                                                     |  |                                          |        |   |                  |   |        |              |  |   |                  |   |  |              |        |   |                  |   |        |              |  |   |                  |   |  |   |        |   |  |   |        |  
|Diluted net income (loss) per share                  |  | $                                        | 0.00   |   |                  | $ | 0.01   |              |  | $ | (0.07            | ) |  | $            | (0.08  | ) |                  | $ | (0.19  | )            |  | $ | (0.16            | ) |  | $ | (0.21  | ) |  | $ | (0.21  | )
|                                                     |  |                                          |        |   |                  |   |        |              |  |   |                  |   |  |              |        |   |                  |   |        |              |  |   |                  |   |  |   |        |   |  |   |        |  
|Shares used in the computation of net income (loss): |  |                                          |        |   |                  |   |        |              |  |   |                  |   |  |              |        |   |                  |   |        |              |  |   |                  |   |  |   |        |   |  |   |        |  
|Shares used in the basic per share calculations      |  |                                          | 20,790 |   |                  |   | 20,790 |              |  |   | 19,370           |   |  |              | 19,370 |   |                  |   | 19,163 |              |  |   | 19,163           |   |  |   | 18,906 |   |  |   | 18,906 |  
|                                                     |  |                                          |        |   |                  |   |        |              |  |   |                  |   |  |              |        |   |                  |   |        |              |  |   |                  |   |  |   |        |   |  |   |        |  
|Shares used in the diluted per share calculations    |  |                                          | 22,646 |   |                  |   | 22,646 |              |  |   | 19,370           |   |  |              | 19,370 |   |                  |   | 19,163 |              |  |   | 19,163           |   |  |   | 18,906 |   |  |   | 18,906 |  
|                                                     |  |                                          |        |   |                  |   |        |              |  |   |                  |   |  |              |        |   |                  |   |        |              |  |   |                  |   |  |   |        |   |  |   |        |  



66



---

##### Table of Contents

Netopia, Inc. and Subsidiaries



Notes to Consolidated Statements(Continued)



|                                                     |  |                                          |         |   |                 |   |         |              |  |   |                 |   |  |              |        |   |                 |   |        |              |  |   |                 |   |  |   |        |   |  |   |        |  
|---------------------------------------------------- |  | ---------------------------------------- | ------- | - | --------------- | - | ------- | ------------ |  | - | --------------- | - |  | ------------ | ------ | - | --------------- | - | ------ | ------------ |  | - | --------------- | - |  | - | ------ | - |  | - | ------ | -
|                                                     |  | Fiscal 2002                              |        
|                                                     |  | Restated                                 |         |   | PreviouslyFiled |   |         | Restated     |  |   | PreviouslyFiled |   |  | Restated     |        |   | PreviouslyFiled |   |        | Restated     |  |   | PreviouslyFiled |  
|Three months ended,                                  |  | Sep. 30,2002                             |         |   | Sep. 30,2002    |   |         | Jun. 30,2002 |  |   | Jun. 30,2002    |   |  | Mar. 31,2002 |        |   | Mar. 31,2002    |   |        | Dec. 31,2001 |  |   | Dec. 31,2001    |  
|                                                     |  | (in thousands; except per share amounts) |        
|REVENUES:                                            |  |                                          |         |   |                 |   |         |              |  |   |                 |   |  |              |        |   |                 |   |        |              |  |   |                 |   |  |   |        |   |  |   |        |  
|Broadband equipment                                  |  | $                                        | 12,016  |   |                 | $ | 12,405  |              |  | $ | 9,880           |   |  | $            | 10,096 |   |                 | $ | 11,070 |              |  | $ | 11,239          |   |  | $ | 11,638 |   |  | $ | 11,811 |  
|Broadband software and services                      |  |                                          | 5,053   |   |                 |   | 4,501   |              |  |   | 4,898           |   |  |              | 5,468  |   |                 |   | 4,319  |              |  |   | 4,470           |   |  |   | 4,049  |   |  |   | 4,074  |  
|                                                     |  |                                          |         |   |                 |   |         |              |  |   |                 |   |  |              |        |   |                 |   |        |              |  |   |                 |   |  |   |        |   |  |   |        |  
|Total revenues                                       |  |                                          | 17,069  |   |                 |   | 16,906  |              |  |   | 14,778          |   |  |              | 15,564 |   |                 |   | 15,389 |              |  |   | 15,709          |   |  |   | 15,687 |   |  |   | 15,885 |  
|                                                     |  |                                          |         |   |                 |   |         |              |  |   |                 |   |  |              |        |   |                 |   |        |              |  |   |                 |   |  |   |        |   |  |   |        |  
|COST OF REVENUES:                                    |  |                                          |         |   |                 |   |         |              |  |   |                 |   |  |              |        |   |                 |   |        |              |  |   |                 |   |  |   |        |   |  |   |        |  
|Broadband equipment                                  |  |                                          | 9,656   |   |                 |   | 8,984   |              |  |   | 7,795           |   |  |              | 7,452  |   |                 |   | 7,969  |              |  |   | 7,640           |   |  |   | 7,047  |   |  |   | 7,095  |  
|Broadband software and services                      |  |                                          | 175     |   |                 |   | 175     |              |  |   | 154             |   |  |              | 154    |   |                 |   | 146    |              |  |   | 146             |   |  |   | 164    |   |  |   | 164    |  
|Amortization of acquired technology                  |  |                                          | 288     |   |                 |   | 288     |              |  |   | 288             |   |  |              | 288    |   |                 |   | 288    |              |  |   | 288             |   |  |   | 288    |   |  |   | 288    |  
|                                                     |  |                                          |         |   |                 |   |         |              |  |   |                 |   |  |              |        |   |                 |   |        |              |  |   |                 |   |  |   |        |   |  |   |        |  
|Total cost of revenues                               |  |                                          | 10,119  |   |                 |   | 9,447   |              |  |   | 8,237           |   |  |              | 7,894  |   |                 |   | 8,403  |              |  |   | 8,074           |   |  |   | 7,499  |   |  |   | 7,547  |  
|                                                     |  |                                          |         |   |                 |   |         |              |  |   |                 |   |  |              |        |   |                 |   |        |              |  |   |                 |   |  |   |        |   |  |   |        |  
|GROSS PROFIT                                         |  |                                          | 6,950   |   |                 |   | 7,459   |              |  |   | 6,541           |   |  |              | 7,670  |   |                 |   | 6,986  |              |  |   | 7,635           |   |  |   | 8,188  |   |  |   | 8,338  |  
|                                                     |  |                                          |         |   |                 |   |         |             
|OPERATING EXPENSES:                                  |  |                                          |         |   |                 |   |         |              |  |   |                 |   |  |              |        |   |                 |   |        |              |  |   |                 |   |  |   |        |   |  |   |        |  
|Research and development                             |  |                                          | 4,337   |   |                 |   | 4,481   |              |  |   | 4,632           |   |  |              | 4,546  |   |                 |   | 4,295  |              |  |   | 4,348           |   |  |   | 4,150  |   |  |   | 4,148  |  
|Research and development project cancellation costs  |  |                                          |        |   |                 |   |        |              |  |   |                |   |  |              |       |   |                 |   |       |              |  |   |                |   |  |   |       |   |  |   |       |  
|Selling and marketing                                |  |                                          | 5,729   |   |                 |   | 6,028   |              |  |   | 5,898           |   |  |              | 6,204  |   |                 |   | 5,818  |              |  |   | 5,975           |   |  |   | 5,955  |   |  |   | 6,128  |  
|General and administrative                           |  |                                          | 1,674   |   |                 |   | 1,690   |              |  |   | 1,450           |   |  |              | 1,466  |   |                 |   | 1,267  |              |  |   | 1,267           |   |  |   | 973    |   |  |   | 973    |  
|                                                     |  |                                          |         |   |                 |   |         |             
|Amortization of intangible assets                    |  |                                          | 86      |   |                 |   | 374     |              |  |   | 86              |   |  |              | 374    |   |                 |   | 86     |              |  |   | 374             |   |  |   | 86     |   |  |   | 374    |  
|Restructuring costs                                  |  |                                          |        |   |                 |   |        |              |  |   |                |   |  |              |       |   |                 |   |       |              |  |   |                |   |  |   | 482    |   |  |   | 482    |  
|Integration costs                                    |  |                                          |        |   |                 |   |        |              |  |   |                |   |  |              |       |   |                 |   |       |              |  |   |                |   |  |   | 309    |   |  |   | 309    |  
|Acquired in-process research and development         |  |                                          |        |   |                 |   |        |              |  |   |                |   |  |              |       |   |                 |   | 1,908  |              |  |   | 1,908           |   |  |   | 2,150  |   |  |   | 2,150  |  
|Impairment of goodwill and other intangible assets   |  |                                          | 9,146   |   |                 |   | 9,146   |              |  |   |                |   |  |              |       |   |                 |   |       |              |  |   |                |   |  |   |       |   |  |   |       |  
|                                                     |  |                                          |         |   |                 |   |         |              |  |   |                 |   |  |              |        |   |                 |   |        |              |  |   |                 |   |  |   |        |   |  |   |        |  
|Total operating expenses                             |  |                                          | 20,972  |   |                 |   | 21,719  |              |  |   | 12,066          |   |  |              | 12,590 |   |                 |   | 13,374 |              |  |   | 13,872          |   |  |   | 14,105 |   |  |   | 14,564 |  
|                                                     |  |                                          |         |   |                 |   |         |              |  |   |                 |   |  |              |        |   |                 |   |        |              |  |   |                 |   |  |   |        |   |  |   |        |  
|OPERATING INCOME (LOSS)                              |  |                                          | (14,022 | ) |                 |   | (14,260 | )            |  |   | (5,525          | ) |  |              | (4,920 | ) |                 |   | (6,388 | )            |  |   | (6,237          | ) |  |   | (5,917 | ) |  |   | (6,226 | )
|                                                     |  |                                          |         |   |                 |   |         |             
|Other income (loss), net                             |  |                                          |         |   |                 |   |         |              |  |   |                 |   |  |              |        |   |                 |   |        |              |  |   |                 |   |  |   |        |   |  |   |        |  
|Loss on impaired securities                          |  |                                          | (1,543  | ) |                 |   | (1,543  | )            |  |   |                |   |  |              |       |   |                 |   | (1,400 | )            |  |   | (1,400          | ) |  |   |       |   |  |   |       |  
|Other income (expense), net                          |  |                                          | 29      |   |                 |   | 29      |              |  |   | 54              |   |  |              | 54     |   |                 |   | 80     |              |  |   | 80              |   |  |   | 156    |   |  |   | 156    |  
|                                                     |  |                                          |         |   |                 |   |         |              |  |   |                 |   |  |              |        |   |                 |   |        |              |  |   |                 |   |  |   |        |   |  |   |        |  
|Other income (loss), net                             |  |                                          | (1,514  | ) |                 |   | (1,514  | )            |  |   | 54              |   |  |              | 54     |   |                 |   | (1,320 | )            |  |   | (1,320          | ) |  |   | 156    |   |  |   | 156    |  
|                                                     |  |                                          |         |   |                 |   |         |              |  |   |                 |   |  |              |        |   |                 |   |        |              |  |   |                 |   |  |   |        |   |  |   |        |  
|Provision for income taxes                           |  |                                          |        |   |                 |   |        |              |  |   | (200            | ) |  |              |       |   |                 |   |       |              |  |   |                |   |  |   |       |   |  |   |       |  
|NET INCOME (LOSS)                                    |  | $                                        | (15,536 | ) |                 | $ | (15,774 | )            |  | $ | (5,271          | ) |  | $            | (4,866 | ) |                 | $ | (7,708 | )            |  | $ | (7,557          | ) |  | $ | (5,761 | ) |  | $ | (6,070 | )
|                                                     |  |                                          |         |   |                 |   |         |              |  |   |                 |   |  |              |        |   |                 |   |        |              |  |   |                 |   |  |   |        |   |  |   |        |  
|Per share data, net income (loss):                   |  |                                          |         |   |                 |   |         |              |  |   |                 |   |  |              |        |   |                 |   |        |              |  |   |                 |   |  |   |        |   |  |   |        |  
|Basic net income (loss) per share                    |  | $                                        | (0.83   | ) |                 | $ | (0.84   | )            |  | $ | (0.28           | ) |  | $            | (0.26  | ) |                 | $ | (0.42  | )            |  | $ | (0.41           | ) |  | $ | (0.32  | ) |  | $ | (0.34  | )
|                                                     |  |                                          |         |   |                 |   |         |              |  |   |                 |   |  |              |        |   |                 |   |        |              |  |   |                 |   |  |   |        |   |  |   |        |  
|Diluted net income (loss) per share                  |  | $                                        | (0.83   | ) |                 | $ | (0.84   | )            |  | $ | (0.28           | ) |  | $            | (0.26  | ) |                 | $ | (0.42  | )            |  | $ | (0.41           | ) |  | $ | (0.32  | ) |  | $ | (0.34  | )
|                                                     |  |                                          |         |   |                 |   |         |              |  |   |                 |   |  |              |        |   |                 |   |        |              |  |   |                 |   |  |   |        |   |  |   |        |  
|Shares used in the computation of net income (loss): |  |                                          |         |   |                 |   |         |              |  |   |                 |   |  |              |        |   |                 |   |        |              |  |   |                 |   |  |   |        |   |  |   |        |  
|Shares used in the basic per share calculations      |  |                                          | 18,822  |   |                 |   | 18,822  |              |  |   | 18,648          |   |  |              | 18,648 |   |                 |   | 18,255 |              |  |   | 18,255          |   |  |   | 18,092 |   |  |   | 18,092 |  
|                                                     |  |                                          |         |   |                 |   |         |              |  |   |                 |   |  |              |        |   |                 |   |        |              |  |   |                 |   |  |   |        |   |  |   |        |  
|Shares used in the diluted per share calculations    |  |                                          | 18,822  |   |                 |   | 18,822  |              |  |   | 18,648          |   |  |              | 18,648 |   |                 |   | 18,255 |              |  |   | 18,255          |   |  |   | 18,092 |   |  |   | 18,092 |  
|                                                     |  |                                          |         |   |                 |   |         |              |  |   |                 |   |  |              |        |   |                 |   |        |              |  |   |                 |   |  |   |        |   |  |   |        |  



67



---

##### Table of Contents

Netopia, Inc. and Subsidiaries



Notes to Consolidated Statements(Continued)



(4) Acquisitions



JadeSail Systems, Inc. In October 2003, the Company acquired JadeSail Systems, Inc. (JadeSail), a provider of Internet Protocol (IP)
services management and network equipment provisioning software. The Company and JadeSail, a California corporation, consummated the merger (the Merger) whereby Sailaway Merger Sub, Inc., a California corporation and a wholly-owned subsidiary of
Netopia, merged with and into JadeSail pursuant to an Agreement and Plan of Merger and Reorganization dated as of October 3, 2003. JadeSail survived the Merger as a wholly owned subsidiary of Netopia. Netopia has incorporated the JadeSail technology
into its NBBS platform, thereby increasing functionality of the NBBS platform.



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



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



|                              |  |                |       |   |                     |   |            |  |        
|----------------------------- |  | -------------- | ----- | - | ------------------- | - | ---------- |  | -------
|                              |  | Amount         |       |   | Annual amortization |   | UsefulLife
|                              |  | (in thousands) |       |  
|Cash                          |  | $              | 42    |   |                     |   | n/a        |  | n/a    
|Accounts payable              |  |                | (42   | ) |                     |   | n/a        |  | n/a    
|Identified intangible assets: |  |                |       |   |                     |   |            |  |        
|Developed product technology  |  |                | 246   |   |                     |   | 49         |  | 5 years
|Goodwill                      |  |                | 1,149 |   |                     |   | n/a        |  | n/a    
|                              |  |                |       |   |                     |   |            |  |        
|Total purchase price          |  | $              | 1,395 |   |                     | $ | 49         |  |        
|                              |  |                |       |   |                     |   |            |  |        



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.



68



---

##### Table of Contents

Netopia, Inc. and Subsidiaries



Notes to Consolidated Statements(Continued)



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 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.



69



---

##### Table of Contents

Netopia, Inc. and Subsidiaries



Notes to Consolidated Statements(Continued)



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.



(5) Goodwill and Other Intangible Assets



The Companys intangible assets at September 30, 2004 consist primarily
of goodwill acquired in connection with the acquisitions of JadeSail and WebOrder, which the Company is not amortizing, other intangible assets acquired in connection with the JadeSail and Cayman acquisition, which the Company is amortizing on a
straight-line basis over their estimated useful lives and a marketing licenses which the Company is amortizing over the term of the licenses.



70



---

##### Table of Contents

Netopia, Inc. and Subsidiaries



Notes to Consolidated Statements(Continued)



Goodwill is tested annually and whenever events or circumstances occur indicating that goodwill may
be impaired. Based on the Companys analysis, the Company concluded that due to the planned closure of our German subsidiary in the first quarter of fiscal 2005, the goodwill associated with that entity of $0.5 million was impaired and thus
written off as part of restructuring costs at September 30, 2004. We reviewed the events and circumstances pertaining to our Jadeasail and Weborder goodwill which has been allocated to our broadband software and services reporting unit and have
concluded that there was no impairment of such goodwill under SFAS No. 142 for fiscal year 2004.



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 broadband software and services-reporting unit. To complete the first step of the analysis, the Company discounted the cash flows generated by its broadband software and services 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 Broadband software and services-reporting unit
was found to be greater than its carrying amount.



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 Broadband software and services 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.



The following chart details the Companys goodwill allocated to the broadband software and services reporting unit as of September 30, 2004, 2003 and
2002 (there is no goodwill allocated to the broadband equipment reporting unit):



|                                 |  |                 |  |                             |     |                                   |   |                           |  |   |                             |   |  |   |      
|-------------------------------- |  | --------------- |  | --------------------------- | --- | --------------------------------- | - | ------------------------- |  | - | --------------------------- | - |  | - | -----
|                                 |  | Acquisitiondate |  | Balance atSeptember 30,2003 |     | Goodwill acquiredduring theperiod |   | Goodwillimpairmentcharges |  |   | Balance atSeptember 30,2004
|                                 |  |                 |  | (in thousands)             
|Broadband software and services: |  |                 |  |                             |     |                                   |   |                           |  |   |                             |   |  |   |      
|JadeSail                         |  | Oct-03          |  | $                           |    |                                   | $ | 1,149                     |  | $ |                            |   |  | $ | 1,149
|WebOrder                         |  | Mar-00          |  |                             | 519 |                                   |   |                          |  |   |                            |   |  |   | 519  
|netOctopus                       |  | Dec-98          |  |                             | 465 |                                   |   |                          |  |   | (465                        | ) |  |   |     
|                                 |  |                 |  |                             |     |                                   |   |                           |  |   |                             |   |  |   |      
|Total                            |  |                 |  | $                           | 984 |                                   | $ | 1,149                     |  | $ | (465                        | ) |  | $ | 1,668
|                                 |  |                 |  |                             |     |                                   |   |                           |  |   |                             |   |  |   |      



|                                 |  |                 |  |                             |     |                                   |   |                           |  |                             |   |  |   |    
|-------------------------------- |  | --------------- |  | --------------------------- | --- | --------------------------------- | - | ------------------------- |  | --------------------------- | - |  | - | ---
|                                 |  | Acquisitiondate |  | Balance atSeptember 30,2002 |     | Goodwill acquiredduring theperiod |   | Goodwillimpairmentcharges |  | Balance atSeptember 30,2003
|                                 |  |                 |  | (in thousands)             
|Broadband software and services: |  |                 |  |                             |     |                                   |   |                           |  |                             |   |  |   |    
|WebOrder                         |  | Mar-00          |  | $                           | 519 |                                   | $ |                          |  | $                           |  |  | $ | 519
|netOctopus                       |  | Dec-98          |  |                             | 465 |                                   |   |                          |  |                             |  |  |   | 465
|                                 |  |                 |  |                             |     |                                   |   |                           |  |                             |   |  |   |    
|Total                            |  |                 |  | $                           | 984 |                                   | $ |                          |  | $                           |  |  | $ | 984
|                                 |  |                 |  |                             |     |                                   |   |                           |  |                             |   |  |   |    



71



---

##### Table of Contents

Netopia, Inc. and Subsidiaries



Notes to Consolidated Statements(Continued)



|                                 |  |                 |  |                             |       |                                   |   |                           |  |   |                             |   |  |   |    
|-------------------------------- |  | --------------- |  | --------------------------- | ----- | --------------------------------- | - | ------------------------- |  | - | --------------------------- | - |  | - | ---
|                                 |  | Acquisitiondate |  | Balance atSeptember 30,2001 |       | Goodwill acquiredduring theperiod |   | Goodwillimpairmentcharges |  |   | Balance atSeptember 30,2002
|                                 |  |                 |  | (in thousands)             
|Broadband software and services: |  |                 |  |                             |       |                                   |   |                           |  |   |                             |   |  |   |    
|WebOrder                         |  | Mar-00          |  | $                           | 573   |                                   | $ |                          |  | $ | (54                         | ) |  | $ | 519
|Starnet                          |  | Oct-99          |  |                             | 1,820 |                                   |   |                          |  |   | (1,820                      | ) |  |   |   
|netOctopus                       |  | Dec-98          |  |                             | 365   |                                   |   | 100                       |  |   |                            |   |  |   | 465
|                                 |  |                 |  |                             |       |                                   |   |                           |  |   |                             |   |  |   |    
|Total                            |  |                 |  | $                           | 2,758 |                                   | $ | 100                       |  | $ | (1,874                      | ) |  | $ | 984
|                                 |  |                 |  |                             |       |                                   |   |                           |  |   |                             |   |  |   |    



At September 30, 2004,
the Companys other intangible assets consisted of developed product technology, sales channel relationships related to the Companys acquisition of Cayman, and marketing license. The Company did not test its long-lived assets and other
intangible assets for impairment during the fiscal year ended September 30, 2004, 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 2003 and 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.



The following chart details the Companys other intangible assets, by
reporting unit, as of September 30, 2004, 2003 and 2002:



|                                 |  |                  |  |                               |       |                                                    |   |                      |  |   |                               |   |  |   |      
|-------------------------------- |  | ---------------- |  | ----------------------------- | ----- | -------------------------------------------------- | - | -------------------- |  | - | ----------------------------- | - |  | - | -----
|                                 |  | Acquisition date |  | Balance at September 30, 2003 |       | Other intangible assets acquired during the period |   | Amortization expense |  |   | Balance at September 30, 2004
|                                 |  |                  |  | (in thousands)               
|Broadband equipment:             |  |                  |  |                               |       |                                                    |   |                      |  |   |                               |   |  |   |      
|Acquired technology              |  | Oct-03           |  | $                             |      |                                                    | $ | 246                  |  | $ | (49                           | ) |  | $ | 197  
|Acquired technology              |  | Oct-01           |  |                               | 4,386 |                                                    |   |                     |  |   | (1,152                        | ) |  |   | 3,234
|Sales channel relationships      |  | Oct-01           |  |                               | 690   |                                                    |   |                     |  |   | (345                          | ) |  |   | 345  
|Subtotal                         |  |                  |  |                               | 5,076 |                                                    |   | 246                  |  |   | (1,546                        | ) |  |   | 3,776
|                                 |  |                  |  |                               |      
|Broadband software and services: |  |                  |  |                               |       |                                                    |   |                      |  |   |                               |   |  |   |      
|Marketing license                |  | Jan-03           |  |                               | 175   |                                                    |   | 123                  |  |   | (58                           | ) |  |   | 240  
|Subtotal                         |  |                  |  |                               | 175   |                                                    |   | 123                  |  |   | (58                           | ) |  |   | 240  
|                                 |  |                  |  |                               |       |                                                    |   |                      |  |   |                               |   |  |   |      
|Total                            |  |                  |  | $                             | 5,251 |                                                    | $ | 369                  |  | $ | (1,604                        | ) |  | $ | 4,016
|                                 |  |                  |  |                               |       |                                                    |   |                      |  |   |                               |   |  |   |      



|                                 |  |                  |  |                               |       |                                                    |   |                      |  |   |                               |   |  |   |      
|-------------------------------- |  | ---------------- |  | ----------------------------- | ----- | -------------------------------------------------- | - | -------------------- |  | - | ----------------------------- | - |  | - | -----
|                                 |  | Acquisition date |  | Balance at September 30, 2002 |       | Other intangible assets acquired during the period |   | Amortization expense |  |   | Balance at September 30, 2003
|                                 |  |                  |  | (in thousands)               
|Broadband equipment:             |  |                  |  |                               |       |                                                    |   |                      |  |   |                               |   |  |   |      
|Acquired technology              |  | Oct-01           |  |                               | 5,538 |                                                    |   |                     |  |   | (1,152                        | ) |  |   | 4,386
|Sales channel relationships      |  | Oct-01           |  |                               | 1,035 |                                                    |   |                     |  |   | (345                          | ) |  |   | 690  
|Subtotal                         |  |                  |  |                               | 6,573 |                                                    |   |                     |  |   | (1,497                        | ) |  |   | 5,076
|                                 |  |                  |  |                               |      
|Broadband software and services: |  |                  |  |                               |       |                                                    |   |                      |  |   |                               |   |  |   |      
|Marketing license                |  | Jul-99           |  |                               | 138   |                                                    |   |                     |  |   | (138                          | ) |  |   |     
|Marketing license                |  | Jan-03           |  |                               |      |                                                    |   | 700                  |  |   | (525                          | ) |  |   | 175  
|Subtotal                         |  |                  |  |                               | 138   |                                                    |   | 700                  |  |   | (663                          | ) |  |   | 175  
|                                 |  |                  |  |                               |       |                                                    |   |                      |  |   |                               |   |  |   |      
|Total                            |  |                  |  | $                             | 6,711 |                                                    | $ | 700                  |  | $ | (2,160                        | ) |  | $ | 5,251
|                                 |  |                  |  |                               |       |                                                    |   |                      |  |   |                               |   |  |   |      



72



---

##### Table of Contents

Netopia, Inc. and Subsidiaries



Notes to Consolidated Statements(Continued)



|                                 |  |                  |  |                               |     |                                                    |   |                      |  |   |                               |   |  |   |      
|-------------------------------- |  | ---------------- |  | ----------------------------- | --- | -------------------------------------------------- | - | -------------------- |  | - | ----------------------------- | - |  | - | -----
|                                 |  | Acquisition date |  | Balance at September 30, 2001 |     | Other intangible assets acquired during the period |   | Amortization expense |  |   | Balance at September 30, 2002
|                                 |  |                  |  | (in thousands)               
|Broadband equipment:             |  |                  |  |                               |     |                                                    |   |                      |  |   |                               |   |  |   |      
|Acquired technology              |  | Oct-01           |  |                               |    |                                                    |   | 6,690                |  |   | (1,152                        | ) |  |   | 5,538
|Sales channel relationships      |  | Oct-01           |  |                               |    |                                                    |   | 1,380                |  |   | (345                          | ) |  |   | 1,035
|Subtotal                         |  |                  |  |                               |    |                                                    |   | 8,070                |  |   | (1,497                        | ) |  |   | 6,573
|                                 |  |                  |  |                               |    
|Broadband software and services: |  |                  |  |                               |     |                                                    |   |                      |  |   |                               |   |  |   |      
|Marketing license                |  | Jul-99           |  |                               | 668 |                                                    |   |                     |  |   | (530                          | ) |  |   | 138  
|Subtotal                         |  |                  |  |                               | 668 |                                                    |   |                     |  |   | (530                          | ) |  |   | 138  
|                                 |  |                  |  |                               |     |                                                    |   |                      |  |   |                               |   |  |   |      
|Total                            |  |                  |  | $                             | 668 |                                                    | $ | 8,070                |  | $ | (2,027                        | ) |  | $ | 6,711
|                                 |  |                  |  |                               |     |                                                    |   |                      |  |   |                               |   |  |   |      



Estimated amortization
expense for the next five years related to the Companys other intangible assets as of September 30, 2004 is as follows:



|                                 |  |                |       |      |   |       |  |      |     |      |   |        |  |   |   |  |   |      
|-------------------------------- |  | -------------- | ----- | ---- | - | ----- |  | ---- | --- | ---- | - | ------ |  | - | - |  | - | -----
|Fiscal years ended September 30, |  | 2005           |       | 2006 |   | 2007  |  | 2008 |     | 2009 |   | Totals
|                                 |  | (in thousands)
|Broadband equipment:             |  |                |       |      |   |       |  |      |     |      |   |        |  |   |   |  |   |      
|Acquired technology              |  | $              | 50    |      | $ | 49    |  | $    | 49  |      | $ | 49     |  | $ |  |  | $ | 197  
|Sales channel relationships      |  |                | 1,498 |      |   | 1,498 |  |      | 583 |      |   |       |  |   |  |  |   | 3,579
|                                 |  |                |       |      |   |       |  |      |     |      |   |        |  |   |   |  |   |      
|Subtotal                         |  |                | 1,548 |      |   | 1,547 |  |      | 632 |      |   | 49     |  |   |  |  |   | 3,776
|                                 |  |                |       |      |   |       |  |      |     |      |   |        |  |   |   |  |   |     
|Broadband software and services: |  |                |       |      |   |       |  |      |     |      |   |        |  |   |   |  |   |     
|Marketing license                |  |                | 100   |      |   | 100   |  |      | 40  |      |   |       |  |   |  |  |   | 240  
|                                 |  |                |       |      |   |       |  |      |     |      |   |        |  |   |   |  |   |      
|Total                            |  | $              | 1,648 |      | $ | 1,647 |  | $    | 672 |      | $ | 49     |  | $ |  |  | $ | 4,016
|                                 |  |                |       |      |   |       |  |      |     |      |   |        |  |   |   |  |   |      



(6) Inventories, Net



Inventories, net consisted of the following:



|                                 |  |                |       |      |   |       |  |   |      
|-------------------------------- |  | -------------- | ----- | ---- | - | ----- |  | - | -----
|Fiscal years ended September 30, |  | 2004           |       | 2003 |   | 2002 
|                                 |  | (in thousands)
|Raw materials                    |  | $              | 1,595 |      | $ | 1,175 |  | $ | 3,646
|Work in process                  |  |                | 448   |      |   | 213   |  |   | 85   
|Finished goods                   |  |                | 4,237 |      |   | 4,350 |  |   | 2,482
|                                 |  |                |       |      |   |       |  |   |      
|Inventories, net                 |  | $              | 6,280 |      | $ | 5,738 |  | $ | 6,213
|                                 |  |                |       |      |   |       |  |   |      



(7) 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 broadband software and services 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.



73



---

##### Table of Contents

Netopia, Inc. and Subsidiaries



Notes to Consolidated Statements(Continued)



Warranty liability consisted of the following:



|                                     |  |                  |      |   |                             |   |                 |  |   |               |   |  |   |      |  
|------------------------------------ |  | ---------------- | ---- | - | --------------------------- | - | --------------- |  | - | ------------- | - |  | - | ---- | -
|                                     |  | Beginningbalance |      |   | Cost ofWarrantyReplacements |   | Warrantyaccrued |  |   | Endingbalance |  
|                                     |  | (in thousands)   |     
|Fiscal year ended September 30, 2004 |  | $                | (197 | ) |                             | $ | 552             |  | $ | (491          | ) |  | $ | (136 | )
|                                     |  |                  |      |  
|Fiscal year ended September 30, 2003 |  | $                | (323 | ) |                             | $ | 369             |  | $ | (243          | ) |  | $ | (197 | )
|                                     |  |                  |      |  
|Fiscal year ended September 30, 2002 |  | $                | (151 | ) |                             | $ | 93              |  | $ | (265          | ) |  | $ | (323 | )



(8) Furniture, Fixtures and
Equipment



Furniture, fixtures and equipment consisted of
the following:



|                                          |  |                |         |   |      |   |        |      |  |   |         |  
|----------------------------------------- |  | -------------- | ------- | - | ---- | - | ------ | ---- |  | - | ------- | -
|Fiscal years ended September 30,          |  | 2004           |         |   | 2003 |   |        | 2002 | 
|                                          |  | (in thousands) |        
|Manufacturing tooling                     |  | $              | 1,060   |   |      | $ | 897    |      |  | $ | 1,191   |  
|Machinery and equipment                   |  |                | 2,924   |   |      |   | 2,541  |      |  |   | 2,290   |  
|Furniture and fixtures                    |  |                | 1,808   |   |      |   | 1,800  |      |  |   | 2,801   |  
|Computers                                 |  |                | 7,612   |   |      |   | 7,187  |      |  |   | 8,935   |  
|Leasehold improvements                    |  |                | 350     |   |      |   | 302    |      |  |   | 407     |  
|                                          |  |                |         |   |      |   |        |      |  |   |         |  
|Total furniture, fixtures and equipment   |  |                | 13,754  |   |      |   | 12,727 |      |  |   | 15,624  |  
|Accumulated depreciation and amortization |  |                | (11,060 | ) |      |   | (8,987 | )    |  |   | (10,093 | )
|                                          |  |                |         |   |      |   |        |      |  |   |         |  
|Net furniture, fixtures and equipment     |  | $              | 2,694   |   |      | $ | 3,740  |      |  | $ | 5,531   |  
|                                          |  |                |         |   |      |   |        |      |  |   |         |  



(9) Income Taxes



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



|                                 |  |                |        |   |          |   |        |          |  |   |         |  
|-------------------------------- |  | -------------- | ------ | - | -------- | - | ------ | -------- |  | - | ------- | -
|                                 |  |                |        |   | Restated |   |        | Restated | 
|Fiscal years ended September 30, |  | 2004           |        |   | 2003     |   |        | 2002     | 
|                                 |  | (in thousands) |       
|Domestic                         |  | $              | (8,931 | ) |          | $ | (8,988 | )        |  | $ | (34,660 | )
|Foreign                          |  |                | 200    |   |          |   | 123    |          |  |   | 184     |  
|                                 |  |                |        |   |          |   |        |          |  |   |         |  
|Total                            |  | $              | (8,731 | ) |          | $ | (8,865 | )        |  | $ | (34,476 | )
|                                 |  |                |        |   |          |   |        |          |  |   |         |  



74



---

##### Table of Contents

Netopia, Inc. and Subsidiaries



Notes to Consolidated Statements(Continued)



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



|                                 |  |                |    |          |   |          |  |   |      |  
|-------------------------------- |  | -------------- | -- | -------- | - | -------- |  | - | ---- | -
|                                 |  |                |    | Restated |   | Restated | 
|Fiscal years ended September 30, |  | 2004           |    | 2003     |   | 2002     | 
|                                 |  | (in thousands) |   
|Current                          |  |                |    |          |   |          |  |   |      |  
|Federal                          |  | $              |   |          | $ |         |  | $ | (200 | )
|State                            |  |                |   |          |   |         |  |   |     |  
|Foreign                          |  |                | 78 |          |   | 63       |  |   | 50   |  
|                                 |  |                |    |          |   |          |  |   |      |  
|Subtotal                         |  |                | 78 |          |   | 63       |  |   | (150 | )
|                                 |  |                |   
|Deferred                         |  |                |    |          |   |          |  |   |      |  
|Federal                          |  | $              |   |          | $ |         |  | $ |     |  
|State                            |  |                |   |          |   |         |  |   |     |  
|Subtotal                         |  |                |   |          |   |         |  |   |     |  
|                                 |  |                |    |          |   |          |  |   |      |  
|                                 |  |                |   |          |   |         |  |   |     |  
|                                 |  |                |    |          |   |          |  |   |      |  
|Total                            |  | $              | 78 |          | $ | 63       |  | $ | (150 | )
|                                 |  |                |    |          |   |          |  |   |      |  



Income tax expense
(benefit) related to continuing operations differs from the amounts computed by applying the statutory income tax rate of 34% for 2004, 2003 and 2002 to pretax loss as a result of the following:



|                                          |  |                |        |   |          |   |        |          |  |   |        |  
|----------------------------------------- |  | -------------- | ------ | - | -------- | - | ------ | -------- |  | - | ------ | -
|                                          |  |                |        |   | Restated |   |        | Restated | 
|Fiscal years ended September 30,          |  | 2004           |        |   | 2003     |   |        | 2002     | 
|                                          |  | (in thousands) |       
|Computed expected benefit of 34%        |  | $              | (2,969 | ) |          | $ | (3,014 | )        |  | $ | (1,172 | )
|Losses not benefited                      |  |                | 2,978  |   |          |   | 2,997  |          |  |   | 11,117 |  
|Goodwill impairment                       |  |                |       |   |          |   |       |          |  |   | 619    |  
|Other                                     |  |                | 69     |   |          |   | 80     |          |  |   | (164   | )
|                                          |  |                |        |   |          |   |        |          |  |   |        |  
|Provision for (benefit from) income taxes |  | $              | 78     |   |          | $ | 63     |          |  | $ | 10,400 |  
|                                          |  |                |        |   |          |   |        |          |  |   |        |  



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



|                                 |  |                |         |   |          |   |         |          |  |   |         |  
|-------------------------------- |  | -------------- | ------- | - | -------- | - | ------- | -------- |  | - | ------- | -
|                                 |  |                |         |   | Restated |   |         | Restated | 
|Fiscal years ended September 30, |  | 2004           |         |   | 2003     |   |         | 2002     | 
|                                 |  | (in thousands) |        
|Reserves and accruals            |  | $              | 1,805   |   |          | $ | 1,136   |          |  | $ | 729     |  
|Research and other credits       |  |                | 6,859   |   |          |   | 4,837   |          |  |   | 4,296   |  
|Tangible and intangible assets   |  |                | 10,513  |   |          |   | 9,960   |          |  |   | 9,361   |  
|Net operating losses (NOLs)      |  |                | 39,135  |   |          |   | 29,531  |          |  |   | 25,702  |  
|                                 |  |                |         |   |          |   |         |          |  |   |         |  
|Subtotal                         |  | $              | 58,312  |   |          | $ | 45,464  |          |  | $ | 40,088  |  
|Less: valuation allowance        |  |                | (58,312 | ) |          |   | (45,464 | )        |  |   | (40,088 | )
|                                 |  |                |         |   |          |   |         |          |  |   |         |  
|Net deferred tax assets          |  |                |        |   |          |   |        |          |  |   |        |  
|                                 |  |                |         |   |          |   |         |          |  |   |         |  



The net change in the
total valuation allowance for the years ended September 30, 2004 and 2003 was an increase of $12.8 million and $5.4 million, respectively.



75



---

##### Table of Contents

Netopia, Inc. and Subsidiaries



Notes to Consolidated Statements(Continued)



At September 30, 2004, the Company believed that based upon available evidence, there was sufficient
uncertainty regarding the ability to realize its deferred tax assets to warrant a full valuation allowance. The factors considered included the relative shorter life cycles in the high technology industry and the uncertainty of longer-term taxable
income estimates.



At September 30, 2004, the Company had net
operating loss carry-forwards of approximately $107.0 million for federal tax purposes and $54.8 million for state tax purposes. If not earlier utilized, the federal net operating loss carryforwards will expire in various years from 2018 through
2024 and the state net operating loss carryforwards will expire in various years from 2005 through 2015.



At September 30, 2004, the Company also had research credit carry-forwards of approximately $4.7 million for federal tax purposes and $2.8 million for
state tax purposes. If not earlier utilized, the federal research credit carry-forwards will expire in various years beginning 2006 through 2024. 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, 2004, the Company also had minimum tax credit carry-forwards of approximately $0.1 million for federal tax purposes and $0.2 million for
state tax purposes. These credits carry forward until utilized.



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



(10) 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, 2004.



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



76



---

##### Table of Contents

Netopia, Inc. and Subsidiaries



Notes to Consolidated Statements(Continued)



the Board of Directors. Incentive stock options may be granted at not less than 100% of the fair market value per share and non-statutory stock options may
be granted at not less than 85% of the fair market value per share at the date of grant as determined by the Board of Directors or the Compensation Committee, except for options granted to a person owning greater than 10% of the total combined
voting power of all classes of stock of the Company, for which the exercise price of the options must be not less than 110% of the fair market value. Included in the 1996 Plan is a provision for the automatic grant of non-statutory options to
non-employee directors of the Company. The current provisions relating to the automatic grant of options to directors are described below.



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



77



---

##### Table of Contents

Netopia, Inc. and Subsidiaries



Notes to Consolidated Statements(Continued)



Companys Annual Meeting of Stockholders in January 2003. As amended, the Automatic Option Grant Programs provide that each non-employee director who is
first elected or appointed on or after the date of the 2003 Annual Meeting of Stockholders will receive the grant of an option to purchase 50,000 shares of common stock. The Automatic Option Grant Programs also provide for the grant on the date of
each annual stockholder meeting beginning with the 2003 Annual Meeting of Stockholders of (a) an option to purchase 15,000 shares of common stock to each non-employee director, and (b) an additional option to purchase 5,000 shares of common stock to
each non-employee director who is a member of the Audit Committee of the Companys Board of Directors.



As of September 30, 2004, the Company had 5,971,110 shares subject to outstanding options and 1,055,569 shares available for grant.



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



|                                     |  |                     |   |  |                                 |      
|------------------------------------ |  | ------------------- | - |  | ------------------------------- | -----
|Stock options                        |  | Shares under option |   |  | Weighted average exercise price
|Outstanding as of September 30, 2001 |  | 3,268,128           |   |  | $                               | 5.92 
|Options granted                      |  | 4,723,330           |   |  |                                 | 3.71 
|Options exercised                    |  | (99,231             | ) |  |                                 | 3.19 
|Options cancelled                    |  | (721,889            | ) |  |                                 | 7.39 
|                                     |  |                     |   |  |                                 |      
|Outstanding as of September 30, 2002 |  | 7,170,338           |   |  |                                 | 4.35 
|Options granted                      |  | 1,867,750           |   |  |                                 | 3.31 
|Options exercised                    |  | (556,505            | ) |  |                                 | 2.82 
|Options cancelled                    |  | (847,843            | ) |  |                                 | 4.07 
|                                     |  |                     |   |  |                                 |      
|Outstanding as of September 30, 2003 |  | 7,633,740           |   |  |                                 | 4.24 
|Options granted                      |  | 577,500             |   |  |                                 | 7.34 
|Options exercised                    |  | (1,784,347          | ) |  |                                 | 3.29 
|Options cancelled                    |  | (455,783            | ) |  |                                 | 11.95
|                                     |  |                     |   |  |                                 |      
|Outstanding as of September 30, 2004 |  | 5,971,110           |   |  |                                 | 4.59 
|                                     |  |                     |   |  |                                 |      
|Exercisable                          |  | 4,118,975           |   |  | $                               | 4.62 
|                                     |  |                     |   |  |                                 |      



The fair market value,
based upon the Black-Scholes option valuation model, of the options granted during fiscal years 2004, 2003 and 2002 were $6.73, $3.15 and $2.75, respectively.



78



---

##### Table of Contents

Netopia, Inc. and Subsidiaries



Notes to Consolidated Statements(Continued)



The following table summarizes information with respect to the Companys stock options
outstanding at September 30, 2004:



|                         |  |                                             |  |                                                      |  |                                  |        |                                             |           |                                  |   |       
|------------------------ |  | ------------------------------------------- |  | ---------------------------------------------------- |  | -------------------------------- | ------ | ------------------------------------------- | --------- | -------------------------------- | - | ------
|                         |  | Options outstanding                         |  | Options exercisable                                 
|Range of exercise prices |  | Number outstanding as of September 30, 2004 |  | Weighted- average remaining contractual life (years) |  | Weighted- average exercise price |        | Number exercisable as of September 30, 2004 |           | Weighted- average exercise price
|$  1.200 - $  2.020      |  | 685,376                                     |  | 8.40                                                 |  | $                                | 1.454  |                                             | 489,295   |                                  | $ | 1.298 
|2.035 -     3.600        |  | 719,587                                     |  | 7.32                                                 |  |                                  | 3.162  |                                             | 519,358   |                                  |   | 3.218 
|3.610 -     3.700        |  | 471,728                                     |  | 7.36                                                 |  |                                  | 3.699  |                                             | 264,237   |                                  |   | 3.699 
|3.800 -     3.800        |  | 1,026,876                                   |  | 8.68                                                 |  |                                  | 3.800  |                                             | 353,128   |                                  |   | 3.800 
|3.844 -     4.250        |  | 812,980                                     |  | 6.79                                                 |  |                                  | 4.110  |                                             | 657,916   |                                  |   | 4.134 
|4.260 -     5.531        |  | 495,228                                     |  | 5.02                                                 |  |                                  | 4.848  |                                             | 446,311   |                                  |   | 4.880 
|5.550 -     5.550        |  | 703,101                                     |  | 7.26                                                 |  |                                  | 5.550  |                                             | 699,402   |                                  |   | 5.550 
|5.625 -     6.750        |  | 660,028                                     |  | 5.17                                                 |  |                                  | 6.132  |                                             | 498,710   |                                  |   | 6.241 
|6.813 -   44.250         |  | 382,806                                     |  | 7.22                                                 |  |                                  | 10.800 |                                             | 177,030   |                                  |   | 10.519
|48.000 -   48.000        |  | 13,400                                      |  | 5.34                                                 |  |                                  | 48.000 |                                             | 13,400    |                                  |   | 48.000
|                         |  |                                             |  |                                                      |  |                                  |        |                                             |           |                                  |   |       
|                         |  | 5,971,110                                   |  | 7.16                                                 |  | $                                | 4.587  |                                             | 4,118,787 |                                  | $ | 4.620 
|                         |  |                                             |  |                                                      |  |                                  |        |                                             |           |                                  |   |       



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 3,500,000 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 1,141,324 in fiscal year 2004,
756,190 in fiscal year 2003 and 429,180 in fiscal year 2002. As of September 30, 2004, 3,238,945 shares have been issued under the Purchase Plan and 261,731 shares were reserved for future issuance under the plan.



Statement of Financial Accounting Standard No. 123



Information regarding net income and net income per share, as adjusted, is
required by SFAS 123, which requires that the information be determined as if the Company had accounted for its employee stock options granted under the fair value method. 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 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 per share weighted average estimated fair value for employee stock options granted during fiscal years 2004, 2003 and 2002 was $6.73, $3.15
and $2.75, respectively.



The following are the estimates used
in conjunction with the Black-Scholes option-pricing model:



|                          |  |           |   |  |           |   |  |           |  
|------------------------- |  | --------- | - |  | --------- | - |  | --------- | -
|Years ended September 30, |  | 2004      |   |  | 2003      |   |  | 2002      |  
|Expected volatility       |  | 344.91    | % |  | 174.10    | % |  | 110.30    | %
|Risk-free interest rate   |  | 2.89      | % |  | 3.27      | % |  | 2.63      | %
|Expected dividend yield   |  |          |   |  |          |   |  |          |  
|Estimated life            |  | 3.3 Years |   |  | 4.0 Years |   |  | 3.6 Years |  



79



---

##### Table of Contents

Netopia, Inc. and Subsidiaries



Notes to Consolidated Statements(Continued)



The weighted average estimated fair value of shares granted under the employee qualified stock
purchase plan was $2.36 per share during fiscal year 2004, $2.51 during fiscal 2003 and $3.12 during fiscal 2002. These were estimated using the Black-Scholes option-pricing model, based on the following assumptions:



|                          |  |           |   |  |           |   |  |           |  
|------------------------- |  | --------- | - |  | --------- | - |  | --------- | -
|Years ended September 30, |  | 2004      |   |  | 2003      |   |  | 2002      |  
|Expected volatility       |  | 150.56    | % |  | 124.01    | % |  | 110.63    | %
|Risk-free interest rate   |  | 2.89      | % |  | 3.38      | % |  | 3.43      | %
|Expected dividend yield   |  |          |   |  |          |   |  |          |  
|Estimated life            |  | 2.0 Years |   |  | 2.0 Years |   |  | 2.0 Years |  



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.



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.



(11)
Commitments and Contingencies



Leases. The Company
conducts its operations in leased facilities 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. In addition, the table reflects purchase obligations. Purchase obligations are comprised purchase commitments with our contract manufacturers. Our primary contract manufacturers procure component
inventory on our behalf based on our production orders. We are obligated to purchase component inventory that the contract manufacturer procures in accordance with the orders, unless cancellation is given within applicable lead times. 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   |        |     
|Contractual obligations    |  | 2005           |        | 2006 |   | 2007 |  | 2008 |     | 2009 |   | Thereafter |  | Totals
|                           |  | (in thousands) |        |     
|Purchase obligations       |  | $              | 14,739 |      | $ |     |  | $    |    |      | $ |           |  | $      |  |  | $ |  |  | $ | 14,739
|Property lease obligations |  |                | 1,291  |      |   | 938  |  |      | 966 |      |   | 650        |  |        |  |  |   |  |  |   | 3,845 
|                           |  |                |        |      |   |      |  |      |     |      |   |            |  |        |   |  |   |   |  |   |      
|                           |  |                |        |      |   |      |  |      |     |      |   |            |  |        |   |  |   |   |  |   |       
|Totals                     |  | $              | 16,030 |      | $ | 938  |  | $    | 966 |      | $ | 650        |  | $      |  |  | $ |  |  | $ | 18,584
|                           |  |                |        |      |   |      |  |      |     |      |   |            |  |        |   |  |   |   |  |   |       



Total rental expense
for all operating leases amounted to $1.4 million, $1.6 million and $2.0 million for fiscal years 2004, 2003 and 2002, respectively.



80



---

##### Table of Contents

Netopia, Inc. and Subsidiaries



Notes to Consolidated Statements(Continued)



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:



|                          |  |                |     |      |   |      |  |      |   |      |   |            |  |        |   |  |   |   |  |   |    
|------------------------- |  | -------------- | --- | ---- | - | ---- |  | ---- | - | ---- | - | ---------- |  | ------ | - |  | - | - |  | - | ---
|September 30,             |  | 2005           |     | 2006 |   | 2007 |  | 2008 |   | 2009 |   | thereafter |  | Totals
|                          |  | (in thousands) |     |     
|Payments under term loans |  | $              | 104 |      | $ |     |  | $    |  |      | $ |           |  | $      |  |  | $ |  |  | $ | 104
|                          |  |                |     |      |   |      |  |      |   |      |   |            |  |        |   |  |   |   |  |   |    
|Totals                    |  | $              | 104 |      | $ |     |  | $    |  |      | $ |           |  | $      |  |  | $ |  |  | $ | 104
|                          |  |                |     |      |   |      |  |      |   |      |   |            |  |        |   |  |   |   |  |   |    



Litigation. We
are named as a defendant in an action pending in the United States Bankruptcy Court for the Northern District of California entitled E. Lynn Schoenmann, trustee of NorthPoint Communications, Inc. v. Netopia. In this action commenced on
January 11, 2003, the trustee of the bankruptcy estate of NorthPoint Communications, Inc. (NorthPoint) is seeking to recover approximately $1.2 million that NorthPoint paid to us within the 90 day preference period before NorthPoint
filed for bankruptcy in January 2001. NorthPoints trustee is claiming that NorthPoint was insolvent at the time it made these payments, and that therefore the payments are recoverable preferences within the meaning of the Bankruptcy Code. We
believe that we have defenses to the claims asserted by NorthPoints trustee, and we intend to continue to defend ourselves vigorously. We do not believe that the outcome of this lawsuit is likely to harm our business seriously.



In August 2004, the first of four purported class action complaints,
Valentin Serafimov, on behalf of himselfand all others similarly situated, v. Netopia, Inc., Alan B. Lefkof and William D. Baker, was filed in the United States District Court for the Northern District of California. The
complaint alleged violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended. The complaint alleged that during the purported class period, November 6, 2003 and July 6, 2004, we made materially false, misleading and
incomplete statements and issued false and misleading reports regarding our earnings, product costs, and sales to foreign customers. The other three complaints that subsequently were filed made additional related claims based on the same
announcements and allegations of misstatements. As provided in the Private Securities Litigation Reform Act of 1995, the plaintiffs in these actions filed motions to consolidate and to appoint lead plaintiff and lead plaintiff counsel. On December
3, 2004, the court issued an order consolidating the cases under the name In reNetopia, Inc. Securities Litigation, and appointing a lead plaintiff and plaintiffs counsel. The lead plaintiff has not filed its consolidated
amended complaint. We believe that we have strong defenses to the claims asserted in the complaints as initially filed. We intend to defend the case vigorously.



In August 2004, the first of four purported derivative actions, Freeport Partners, LLC, Derivatively on Behalf of Nominal Defendant Netopia, Inc.,
v. Alan B. Lefkof, William D. Baker, Reese M. Jones, Harold S. Wills, Robert Lee and Netopia, Inc., was filed in the United States District Court for the Northern District of California. Two purported derivative actions are pending in the United
States District Court for the Northern District of California, and two related purported derivative actions are pending in the Superior Court of California for the County of Alameda. These actions make claims against our officers and directors
arising out of the same announcements and alleged misstatements described above in connection with the purported class actions. In November 2004, the derivative plaintiffs agreed to coordinate the four derivative actions. The parties have agreed to
a stay of the federal derivative actions, which was ordered by the court in January 2005. The state actions have been consolidated under the name In re Netopia, Inc. Derivative Litigation. The plaintiffs have not filed their consolidated
amended complaint. We believe that we have strong defenses to the claims asserted in the complaints as initially filed. We intend to defend the cases vigorously.



On October 29, 2004, we were advised by the Securities and Exchange Commission that an informal inquiry previously commenced
by the Securities and Exchange Commission had become the subject of a formal order of investigation. This investigation is to determine whether the federal securities laws have been violated. We



81



---

##### Table of Contents

Netopia, Inc. and Subsidiaries



Notes to Consolidated Statements(Continued)



cooperated fully with the informal inquiry, and we are cooperating fully with the formal investigation. Responding to the formal investigation will likely
continue to require significant attention and resources of management. If the Securities and Exchange Commission elects to pursue an enforcement action, the defense against this type of action could be costly and require additional management
resources. If we were unsuccessful in defending against this or other investigations or proceedings, we could face civil or criminal penalties that would seriously harm our business and results of operations.



In January 2005, we were notified by the Occupational Health and Safety
Administration (OSHA) that Netopia was named in an administrative complaint filed by two former employees alleging violations of Section 806 of the Corporate and Criminal Fraud Accountability Act of 2002, 18 U.S.C. § 1514A, also known as the
Sarbanes-Oxley Act. The former employees allege the Company terminated them in retaliation for their participation in the Internal Accounting Review conducted by the audit committee. We filed a response to the complaint on January 21, 2005 with
OSHA. (The Internal Accounting Review is described below in greater detail in Item 7, Managements Discussion and Analysis of Financial Condition and Results of Operation.) The agency has not determined whether it will conduct an investigation
into this matter. We believe that we have strong defenses and intend to defend the complaint vigorously.



Defending against the securities class action and derivative actions will likely require significant attention and resources of management and, regardless
of the outcome, result in significant legal expense. If our defenses ultimately are unsuccessful, or if we are unable to achieve a favorable settlement, we could be liable for large damage awards that could seriously harm our business and results of
operation. While we have provided notice of the securities class action and derivative actions to our directors and officers liability insurance carriers, the insurance carriers have not agreed to pay for our legal expenses incurred in defending
against these actions or agreed that they are responsible to pay any damages that ultimately could be awarded to the plaintiffs. Furthermore, we have only a limited amount of insurance, and even if our insurers agree to make payments under the
policies, the damage awards or settlements may be greater than the amount of insurance, and we would in all cases be liable for any amounts in excess of our insurance policy limits.



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



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.



(12) 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.



82



---

##### Table of Contents

Netopia, Inc. and Subsidiaries



Notes to Consolidated Statements(Continued)



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



|                               |  |                    |        |   |                               |   |        |               |  |   |                    |   |  |                               |        |   |       |   |        |                    |  |   |                               |   |  |       |        |   |  |   |        |   |  |   |         |  
|------------------------------ |  | ------------------ | ------ | - | ----------------------------- | - | ------ | ------------- |  | - | ------------------ | - |  | ----------------------------- | ------ | - | ----- | - | ------ | ------------------ |  | - | ----------------------------- | - |  | ----- | ------ | - |  | - | ------ | - |  | - | ------- | -
|                               |  | 2004               |        |   | Restated 2003                 |   |        | Restated 2002 | 
|                               |  | Broadbandequipment |        |   | BroadbandSoftware andServices |   |        | Total         |  |   | Broadbandequipment |   |  | BroadbandSoftware andServices |        |   | Total |   |        | Broadbandequipment |  |   | BroadbandSoftware andServices |   |  | Total |       
|                               |  | ($ in thousands)   |       
|Revenue                        |  | $                  | 85,702 |   |                               | $ | 15,633 |               |  | $ | 101,335            |   |  | $                             | 67,393 |   |       | $ | 17,527 |                    |  | $ | 84,920                        |   |  | $     | 44,604 |   |  | $ | 18,319 |   |  | $ | 62,923  |  
|Cost of revenues               |  |                    | 64,403 |   |                               |   | 1,040  |               |  |   | 65,443             |   |  |                               | 50,153 |   |       |   | 1,314  |                    |  |   | 51,467                        |   |  |       | 33,619 |   |  |   | 639    |   |  |   | 34,258  |  
|                               |  |                    |        |   |                               |   |        |               |  |   |                    |   |  |                               |        |   |       |   |        |                    |  |   |                               |   |  |       |        |   |  |   |        |   |  |   |         |  
|Gross profit                   |  |                    | 21,299 |   |                               |   | 14,593 |               |  |   | 35,892             |   |  |                               | 17,240 |   |       |   | 16,213 |                    |  |   | 33,453                        |   |  |       | 10,985 |   |  |   | 17,680 |   |  |   | 28,665  |  
|Gross margin                   |  |                    | 25     | % |                               |   | 93     | %             |  |   | 35                 | % |  |                               | 26     | % |       |   | 93     | %                  |  |   | 39                            | % |  |       | 25     | % |  |   | 97     | % |  |   | 46      | %
|Unallocated operating expenses |  |                    |        |   |                               |   |        |               |  |   | 44,847             |   |  |                               |        |   |       |   |        |                    |  |   | 41,766                        |   |  |       |        |   |  |   |        |   |  |   | 60,517  |  
|                               |  |                    |        |   |                               |   |        |               |  |   |                    |   |  |                               |        |   |       |   |        |                    |  |   |                               |   |  |       |        |   |  |   |        |   |  |   |         |  
|Operating loss                 |  |                    |        |   |                               |   |        |               |  | $ | (8,955             | ) |  |                               |        |   |       |   |        |                    |  | $ | (8,313                        | ) |  |       |        |   |  |   |        |   |  | $ | (31,852 | )
|                               |  |                    |        |   |                               |   |        |               |  |   |                    |   |  |                               |        |   |       |   |        |                    |  |   |                               |   |  |       |        |   |  |   |        |   |  |   |         |  



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 2004, 2003 and 2002
is as follows:



|                                 |  |                  |         |  |      |   |  |      |        |  |                                    |   |  |      |        |  |      |   |  |     |   |  |     |   |  |     |  
|-------------------------------- |  | ---------------- | ------- |  | ---- | - |  | ---- | ------ |  | ---------------------------------- | - |  | ---- | ------ |  | ---- | - |  | --- | - |  | --- | - |  | --- | -
|                                 |  |                  |         |  |      |   |  |      |        |  | Increase (decrease) fromprior year |  
|Fiscal years ended September 30, |  | 2004             |         |  | 2003 |   |  | 2002 |        |  | 2004                               |   |  | 2003 |        |  | 2002 |  
|                                 |  | ($ in thousands) |         |  |      |   |  |      |        |  |                                    |  
|Europe                           |  | $                | 41,480  |  | 40   | % |  | $    | 24,785 |  | 29                                 | % |  | $    | 10,544 |  | 17   | % |  | 67  | % |  | 135 | % |  | 12  | %
|Canada                           |  |                  | 612     |  | 1    | % |  |      | 883    |  | 1                                  | % |  |      | 1,046  |  | 2    | % |  | -31 | % |  | -16 | % |  | -10 | %
|Asia Pacific and other           |  |                  | 2,549   |  | 3    | % |  |      | 1,599  |  | 2                                  | % |  |      | 1,602  |  | 2    | % |  | 59  | % |  | 0   | % |  | 56  | %
|                                 |  |                  |         |  |      |   |  |      |        |  |                                    |   |  |      |        |  |      |   |  |     |   |  |     |   |  |     |  
|Subtotal international revenue   |  |                  | 44,641  |  | 44   | % |  |      | 27,267 |  | 32                                 | % |  |      | 13,192 |  | 21   | % |  | 64  | % |  | 107 | % |  | 14  | %
|United States                    |  |                  | 56,694  |  | 56   | % |  |      | 57,653 |  | 68                                 | % |  |      | 49,731 |  | 79   | % |  | -2  | % |  | 16  | % |  | -24 | %
|                                 |  |                  |         |  |      |   |  |      |        |  |                                    |   |  |      |        |  |      |   |  |     |   |  |     |   |  |     |  
|Total revenues                   |  | $                | 101,335 |  |      |   |  | $    | 84,920 |  |                                    |   |  | $    | 62,923 |  |      |   |  | 19  | % |  | 35  | % |  | -19 | %
|                                 |  |                  |         |  |      |   |  |      |        |  |                                    |   |  |      |        |  |      |   |  |     |   |  |     |   |  |     |  



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 2004, 2003 and 2002 accounted for 10% or more of total revenues.



|                                |  |                  |        |  |      |   |  |      |        |  |    |   |  |   |       |  |    |  
|------------------------------- |  | ---------------- | ------ |  | ---- | - |  | ---- | ------ |  | -- | - |  | - | ----- |  | -- | -
|Fiscal year ended September 30, |  | 2004             |        |  | 2003 |   |  | 2002 |       
|                                |  | ($ in thousands) |       
|Swisscom                        |  | $                | 19,031 |  | 19   | % |  | $    | 13,359 |  | 16 | % |  | $ |      |  |   | %
|SBC                             |  |                  | 10,348 |  | 10   | % |  |      | 9,276  |  | 11 | % |  |   | 3,222 |  | 5  | %
|BellSouth                       |  |                  | 10,111 |  | 10   | % |  |      | 3,148  |  | 4  | % |  |   | 4,031 |  | 6  | %
|Covad                           |  |                  | 7,869  |  | 8    | % |  |      | 12,760 |  | 15 | % |  |   | 8,481 |  | 13 | %
|Ingram Micro                    |  | $                | 3,861  |  | 4    | % |  | $    | 5,346  |  | 6  | % |  | $ | 7,970 |  | 13 | %



83



---

##### Table of Contents

Netopia, Inc. and Subsidiaries



Notes to Consolidated Statements(Continued)



No other customers during the fiscal years ended September 30, 2004, 2003 and 2002 accounted for 10%
or more of the Companys total revenues. For fiscal year 2004, there were five customers that each individually represented at least 4% of the Companys revenue and in the aggregate, accounted for 51% of the Companys total revenues.
For fiscal year 2003, there were five customers who each individually represented at least 4% of the Companys revenues and in the aggregate, accounted for 52% of the Companys total revenues. For fiscal year 2002, there were four
customers that each individually represented at least 5% of the Companys revenues and in the aggregate, accounted for 36% 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, |  | 2004             |       |  | 2003 |   |  | 2002 |      
|                                |  | ($ in thousands) |      
|Swisscom                        |  | $                | 3,565 |  | 20   | % |  | $    | 4,680 |  | 29 | % |  | $ |      |  | 0  | %
|BellSouth                       |  |                  | 2,229 |  | 13   | % |  |      |      |  | 0  | % |  |   |      |  | 0  | %
|SBC                             |  |                  | 1,778 |  | 10   | % |  |      | 931   |  | 6  | % |  |   | 1,236 |  | 12 | %
|Eircom                          |  |                  | 1,947 |  | 11   | % |  |      |      |  | 0  | % |  |   |      |  | 0  | %
|Covad                           |  |                  | 1,107 |  | 6    | % |  |      | 1,133 |  | 7  | % |  |   | 1,144 |  | 12 | %
|Ingram Micro                    |  | $                | 818   |  | 5    | % |  | $    | 704   |  | 4  | % |  | $ | 1,480 |  | 15 | %



(13) 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 2004, 2003 and 2002, MegaPath purchased
$1.3 million, $1.3 million and $0.9 million, respectively, of the Companys products. At September 30, 2004, MegaPaths accounts receivable with the Company was $.06 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, 2004 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 2004, 2003 and 2002 and did
not account for any accounts receivable at September 30, 2004. 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 the Companys resulting ownership interest in Everdream after Everdreams
subsequent financings.



84



---

##### Table of Contents

Netopia, Inc. and Subsidiaries



Notes to Consolidated Statements(Continued)



(14) 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 September 30, 2004, the Company recorded a restructuring charge of approximately $1.0 million, primarily consisting of
employee termination costs, wind down costs associated with the closure of the German office including intangible costs. Details of the restructuring charge are as follows:



|                                          |  |                             |     |            |   |                     |  |   |                     |   |  |        |      |   |  |   |      |  
|----------------------------------------- |  | --------------------------- | --- | ---------- | - | ------------------- |  | - | ------------------- | - |  | ------ | ---- | - |  | - | ---- | -
|                                          |  | Severanceand RelatedCharges |     | Facilities |   | FixedAssetWrite-off |  |   | IntangibleWrite-off |   |  | Totals |     
|                                          |  | (in thousands)              |    
|Accrued liabilities at September 30, 2003 |  | $                           | 15  |            | $ |                    |  | $ |                    |   |  | $      |     |   |  | $ | 15   |  
|Restructuring charges                     |  |                             | 458 |            |   | 27                  |  |   | 49                  |   |  |        | 465  |   |  |   | 999  |  
|Amount paid                               |  |                             |    |            |   |                    |  |   |                    |   |  |        |     |   |  |   |     |  
|Non-cash charges                          |  |                             |    |            |   |                    |  |   | (49                 | ) |  |        | (465 | ) |  |   | (514 | )
|                                          |  |                             |     |            |   |                     |  |   |                     |   |  |        |      |   |  |   |      |  
|Accrued liabilities at September 30, 2004 |  | $                           | 473 |            | $ | 27                  |  | $ |                    |   |  | $      |     |   |  | $ | 500  |  



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 two 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.)



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.



(15) Credit Facility



On June 28, 2004, the Company amended its credit facility agreement with Silicon Valley Bank, which resulted in an extension and amendments to the
tangible net worth covenant. The new covenant requires that the Company must maintain a minimum tangible net worth of $34 million plus 50% of the Companys net income in each fiscal quarter commencing with the first fiscal quarter ending
September 30, 2004 and shall continue effective thereafter, as well as amending Collection of Accounts, Filing of the Transaction Reports, Limits on the Revolving Loans, Collateral Monitoring Fee and Interest Rate on the Loans as noted below. The
Company must also 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 April 30, 2003, and each month ending thereafter.



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 1.00% per annum. As provided in the June 28, 2004 amendment, as long
as no Default or Event of Default has occurred and is continuing, and as long as the Company maintains profitability as of the end of each fiscal quarter within the two-consecutive-fiscal-quarter-period most recently ended, the Credit Facility will
bear interest equal to Silicon Valley Banks prime rate only. At September 30, 2004, the prime rate for Silicon Valley Bank was 4.0%. The Company may borrow under the Credit Facility in order to finance



85



---

##### Table of Contents

Netopia, Inc. and Subsidiaries



Notes to Consolidated Statements(Continued)



working capital requirements for new products and customers, and otherwise for general corporate purposes in the normal course of business.



As of September 30, 2004, the Company had no outstanding borrowings under the
Credit Facility and had a borrowing availability of approximately $8.4 million.



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 per month, commencing on March 1, 2003 and continuing until paid in full. As of September 30, 2004 the remaining balance was $41,667 of Term Loan A, which is expected to be repaid within 12-months, is recorded as a
current liability on the Companys June 30, 2004 condensed consolidated balance sheet. Term Loan A bears interest at a rate equal to Silicon Valley Banks prime rate plus 0.75% per annum. As provided in the November 26, 2003 amendment, as
long as no Default or Event of Default has occurred and is continuing, and as long as the Company maintains profitability as of the end of each fiscal quarter, Term Loan A will bear interest equal to Silicon Valley Banks prime rate
only. At September 30, 2004, the Silicon Valley Banks prime rate for Term Loan A was 4.0%. 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 per month, commencing on March 1, 2003 and continuing until paid in full. The remaining balance of $62,500 of Term Loan B, which is expected to be repaid within 12-months, is recorded as a
current liability on the Companys September 30, 2004 condensed consolidated balance sheet. Term Loan B bears interest at a rate equal to Silicon Valley Banks prime rate plus 1.00% per annum. As provided in the November 26, 2003 amendment, as
long as no Default or Event of Default has occurred and is continuing, and as long as the Company maintains profitability as of the end of each fiscal quarter, Term Loan B will bear interest at a rate equal to Silicon Valley Banks prime
rate only. At September 30, 2004, the Silicon Valley Banks prime rate for Term Loan B was 4.0%. Upon the repayment of any portion of Term Loan B, such portion may not be re-borrowed.



(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, |  | 2004           |     |   | 2003 |   |      | 2002 | 
|                                 |  | (in thousands) |    
|Interest income                  |  | $              | 199 |   |      | $ | 183  |      |  | $ | 468    |  
|Interest expense                 |  |                | (34 | ) |      |   | (161 | )    |  |   | (25    | )
|Loss on impaired securities      |  |                |    |   |      |   | (457 | )    |  |   | (2,943 | )
|Other expense                    |  |                | 59  |   |      |   | (117 | )    |  |   | (124   | )
|                                 |  |                |     |   |      |   |      |      |  |   |        |  
|Total other income (loss), net   |  | $              | 224 |   |      | $ | (552 | )    |  | $ | (2,624 | )
|                                 |  |                |     |   |      |   |      |      |  |   |        |  



86



---

##### Table of Contents

Netopia, Inc. and Subsidiaries



Notes to Consolidated Statements(Continued)



(17) Subsequent Events



On September 30, 2004, the audit committee of the Company engaged Burr, Pilger & Mayer LLP as the Companys
independent accountant.



On October 20, 2004, the Company
announced that quotations for its common stock would appear in the National Daily Quotations Journal, effective October 20, 2004. The Companys trading symbol is NTPA.PK.



On October 21, 2004, the Company announced the resignation of William D. Baker as the Companys Senior Vice President,
Finance and Operations, and Chief Financial Officer and the appointment of Mark H. Perry as the Companys Interim Senior Vice President and Chief Financial Officer.



On October 29, 2004, we were advised by the Securities and Exchange Commission that the previously-disclosed informal
inquiry that the Securities and Exchange Commission commenced to determine whether the federal securities laws have been violated has become the subject of a formal order of investigation. We have cooperated fully with the informal inquiry, and
intend to continue to cooperate fully with the formal investigation.



ScheduleValuation and Qualifying Accounts



|                                     |  |                            |     |                                       |   |            |  |                       |       |  |   |    
|------------------------------------ |  | -------------------------- | --- | ------------------------------------- | - | ---------- |  | --------------------- | ----- |  | - | ---
|Description                          |  | Balance atBeginning ofYear |     | Charged(credited) tocosts andexpenses |   | Deductions |  | Balance at Endof Year
|                                     |  | (in thousands)            
|Allowance for doubtful accounts:     |  |                            |     |                                       |   |            |  |                       |       |  |   |    
|Fiscal year ended September 30, 2004 |  | $                          | 124 |                                       | $ | 138        |  | $                     | 151   |  | $ | 111
|Fiscal year ended September 30, 2003 |  |                            | 105 |                                       |   | 97         |  |                       | 78    |  |   | 124
|Fiscal year ended September 30, 2002 |  |                            | 513 |                                       |   | 637        |  |                       | 1,045 |  |   | 105
|                                     |  |                            |     |                                      
|Allowance for returns and rebates:   |  |                            |     |                                       |   |            |  |                       |       |  |   |    
|Fiscal year ended September 30, 2004 |  | $                          | 66  |                                       | $ | 309        |  | $                     | 258   |  | $ | 117
|Fiscal year ended September 30, 2003 |  |                            | 474 |                                       |   | 223        |  |                       | 631   |  |   | 66 
|Fiscal year ended September 30, 2002 |  |                            | 128 |                                       |   | 349        |  |                       | 3     |  |   | 474



87



---

##### Table of Contents

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



On September 10, 2004, the Companys independent registered public accounting firm, KPMG LLP (KPMG), resigned effective as of such date.



The reports of KPMG on the Companys consolidated financial
statements for the fiscal years ended September 30, 2003 and 2002 did not contain an adverse opinion or disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope or accounting principles.



During the fiscal years ended September 30, 2003 and 2002, and the subsequent
interim period from October 1, 2003 through September 10, 2004, (i) there were no disagreements between the Company and KPMG on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure, which
disagreements, if not resolved to the satisfaction of KPMG, would have caused KPMG to make reference to the subject matter of the disagreement(s) in connection with its report on the consolidated financial statements for such periods, other than as
described in item (1) in the next paragraph and (ii) there were no reportable events as such term is defined in Item 304(a)(1)(v) of Regulation S-K, other than as described in item (2) in the next paragraph.



(1) Prior to KPMGs resignation, KPMG requested on September 8, 2004
that the Companys audit committee provide KPMG with certain information, and the audit committee and KPMG were engaged in an ongoing discussion concerning such information, which consists of documents over which the Company had asserted
privilege as a basis for not providing KPMG with access to such documents. This matter had not been resolved at the time of KPMGs resignation. According to KPMG, if all or some portion of such information were not provided as requested,
KPMGs auditors report would have included an audit scope limitation with respect to this matter. (2) Prior to its resignation, KPMG had advised the Companys audit committee that information provided by the audit committee, if
further investigated, (i) might materially impact the fairness or reliability of its previously issued audit reports and the underlying financial statements and (ii) might cause it to be unwilling to rely on managements representations.
Because KPMG resigned before conducting such further investigation, it did not reach any conclusions and accordingly they were not resolved to KPMGs satisfaction at the time of its resignation.



On September 30, 2004, the audit committee of the board of directors of the
Company engaged Burr, Pilger & Mayer LLP (BPM) as the Companys independent registered public accountant. BPM has audited the Companys consolidated financial statements for the fiscal years ended September 30, 2004, 2003
and 2002. The independent forensic accountant assisting the audit committee in the Internal Accounting Review previously had retained BPM to collect certain financial data regarding the Companys and to conduct specified review procedures
relating to the data.



ITEM 9A. CONTROLS AND PROCEDURES



As of September 30, 2004, 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 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.



As described in Item 7, Managements Discussion and Analysis of Financial Condition and Results of Operations, and Note 2 of Notes to Consolidated Financial Statement, as a result of the Internal Accounting Review, we are restating our
financial statements for the fiscal years ended September 30, 2002 and 2003, and



88



---

##### Table of Contents

our interim financial statements for the fiscal quarters ended December 31, 2003 and March 31, 2004. As a result of the Internal Accounting Review commenced
in July 2004, the filing of both our Report on Form 10-Q for the third fiscal quarter ended June 30, 2004 and this Annual Report on Form 10-K have been delayed beyond the designated filing deadlines.



In response to the matters discovered in connection with the Internal
Accounting Review, we have taken steps to strengthen control processes and procedures to identify, rectify and prevent the recurrence of the circumstances that resulted in our determination to restate prior period financial statements. In addition
to the changes in internal controls listed below, we intend to correct the identified weaknesses in our internal controls and procedures that led to the restatements by taking the following steps, among others:



| |  |  | Making changes in our personnel, including the appointment of a new senior sales executive and a new Interim Chief Financial Officer;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Continuing to improve the quality and experience of in-house finance personnel with extensive software revenue recognition experience;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Conducting and continuing to develop internal training programs for affected employees on applicable policies and procedures and sending finance personnel to external training and
continuing education programs;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Continuing to improve the operational procedures for software transactions to ensure that proper documentation has been prepared and approved prior to recording revenue in
accordance with the principles of Statement of Position (SOP) 97-2, Software Revenue Recognition, as amended.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



We believe changes to our system of internal controls and our disclosure controls and procedures will be adequate to provide reasonable assurance that the
objectives of these controls will be met. We intend to review and evaluate the design and effectiveness of our disclosure controls and procedures on an ongoing basis and to improve our controls and procedures over time and to correct any
deficiencies that we may discover in the future. Our goal is to ensure that our senior management has timely access to all material financial and non-financial information concerning our business. While we believe the present design of our
disclosure controls and procedures is effective to achieve our goal, future events affecting our business may cause us to modify our disclosure controls and procedures. Furthermore, because of the inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that all control issues, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can
occur because of simple error or mistake.



We are in the
process of implementing the requirements of Section 404 of the Sarbanes-Oxley Act of 2002 that requires our management to assess the effectiveness of our internal controls over financial reporting and include an assertion in our annual report as to
the effectiveness of our controls. Subsequently, our independent auditors, Burr Pilger & Mayer LLP, will be required to attest to whether our assessment of our internal controls over financial reporting is fairly stated in all material respects
and separately report on whether it believes we maintained, in all material respects, effective internal controls over financial reporting as of September 30, 2005. We are in the process of performing the system and process documentation, evaluation
and testing required for management to make this assessment and for the auditors to provide its attestation report. We have not completed this process or its assessment, and this process will require significant amounts of management time and
resources. In the course of evaluation and testing, management may identify deficiencies that will need to be addressed and remediated.



89



---

##### Table of Contents

PART III



ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT



Directors and Executive Officers



See the information set forth in Part I, Item 4A with respect to our executive officers. Our directors, and their ages as of January 31, 2005, are as follows:



|                   |  |     |  |                         |  |                                                   
|------------------ |  | --- |  | ----------------------- |  | --------------------------------------------------
|Name               |  | Age |  | First became a Director |  | Positions and Offices Held with the Company       
|Alan B. Lefkof     |  | 51  |  | August 1991             |  | Director, President and Chief Executive Officer(1)
|Reese M. Jones     |  | 46  |  | March 1987              |  | Director                                          
|Robert Lee         |  | 56  |  | November 2001           |  | Director(2)(3)                                    
|David F. Marquardt |  | 55  |  | December 1990           |  | Director(4)                                       
|Howard T. Slayen   |  | 57  |  | April 2003              |  | Director(2)                                       
|Harold S. Wills    |  | 62  |  | April 2001              |  | Chairman of the Board of Directors(2)(3)(4)       

---

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

|(2) | Member of the Audit Committee
|--- | -----------------------------

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

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



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



Reese M. Jones. Mr. Jones, founder of Netopia, served as Chairman of the Board of Directors of Netopia from March 1987 through October 2004. Mr. Jones served as Chief Executive Officer of Netopia until Mr. Lefkof was appointed Chief
Executive Officer in November 1994. Mr. Jones is a private investor and business consultant who currently serves on the Board of Directors of a number of privately held companies. Mr. Jones received a B.A. in biophysics from the University of
California at Berkeley in 1982.



Robert Lee. Mr. Lee has
been a director of Netopia since November 2001. Having retired after a 26 year career at Pacific Bell, now part of SBC Communications, Mr. Lee is a private investor and business consultant who currently serves on the Board of Directors of Blue
Shield of California, BroadVision, Inc. and Interland, Inc. as well as a number of privately held companies and non-profit organizations. From 1972 to 1998, Mr. Lee served in various executive capacities at Pacific Bell, most recently as a corporate
Executive Vice President and President of Business Communications. Mr. Lee received a B.S. in electrical engineering from University of Southern California in 1970 and an M.B.A. from University of California at Berkeley in 1972.



David F. Marquardt. Mr. Marquardt has been a director of Netopia since
December 1990. Mr. Marquardt is a founding General Partner of August Capital, formed in 1995, and has been a General Partner of various private venture capital partnerships since August 1980. Mr. Marquardt currently serves on the Board of Directors
of Microsoft Corporation, Tumbleweed Communications, AutoTradeCenter, Inc., Seagate Technology and a number of privately held companies. Mr. Marquardt received a B.S. in mechanical engineering from Columbia University in 1973 and an M.B.A. from
Stanford University in 1978.



Howard T. Slayen. Mr.
Slayen has been a director of Netopia since April 2003. Mr. Slayen served as a corporate finance partner in the San Francisco and San Jose, California offices of PricewaterhouseCoopers until his retirement in 1999. During his thirty-one year career
at PricewaterhouseCoopers, Mr. Slayen also served as partner in charge of the Financial Advisory Services practice for the Western United States and as tax partner in charge for the San Francisco, San Jose, and Houston, Texas offices of the legacy
firm of Coopers & Lybrand. A private investor and business consultant after his retirement, Mr. Slayen currently serves on the Board of



90



---

##### Table of Contents

Directors of Lantronix, Inc., and a number of privately held companies. Mr. Slayen received a B.A. in economics and accounting from Claremont McKenna College
in 1968 and a J.D. from Boalt Hall School of Law, University of California at Berkeley, in 1971.



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



Board Meetings



During the fiscal year ended September 30, 2004, the Board held six meetings. No director listed above who served on the
Board in fiscal year 2004 attended fewer than 75% of the meetings of the Board and any committee on which he served, except for Mr. Jones, who attended four of the six meetings of the Board. Mr. Jones does not serve on any committees of the Board.
The Board has determined that with the exception of Mr. Lefkof, each of the current directors is independent as defined in the applicable Nasdaq Stock Market listing standards. The Board has an Audit Committee, Compensation Committee,
Nominating Committee, and Stock Option Committee.



Audit Committee



During the fiscal year ended September 30, 2004, the
Audit Committee of the Board of Directors (the Audit Committee) held nine meetings and did not act by written consent in lieu of a meeting on any occasion. The Audit Committee reviews, acts on and reports to the Board of Directors with
respect to various auditing and accounting matters, including the selection of the Companys independent auditors, the scope of the independent auditors service and annual audit fees to be paid to the Companys independent auditors,
the performance of the Companys independent auditors and the accounting practices of the Company. The chair of the Audit Committee is Mr. Slayen, and the other members of the Audit Committee are Messrs. Lee and Wills. The Board of Directors
has determined that each member of the Audit Committee is independent as described in applicable Nasdaq listing standards. The Board of Directors has also determined that Mr. Slayen is an audit committee financial expert as described in
applicable rules and regulations of the Securities and Exchange Commission. A copy of the Audit Committees charter is publicly available on the Corporate Governance section of the Companys website at http://www.netopia.com.



Compensation Committee



During the fiscal year ended September 30, 2004, the Compensation Committee
acted by written consent four times. The Compensation Committee sets salaries and other compensation arrangements for officers and other key employees of the Company, administers the Companys stock option, stock purchase and stock bonus plans,
and advises the Board on general aspects of the Companys compensation and benefit policies. For additional information concerning the Compensation Committee, see Report of the Compensation Committee on Executive Compensation,
Executive Compensation and Other Matters and Compensation Committee Interlocks and Insider Participation. The members of the Compensation Committee during the 2004 fiscal year were Messrs. Marquardt and Wills.



Stock Option Committee



During the fiscal year ended September 30, 2004, the Stock Option Committee acted by written consent six times. The Board
has delegated to the Stock Option Committee the authority to approve the grant to non-officer employees and other individuals of stock options in amounts less than 10,000 shares. The sole member of the Stock Option Committee during the 2004 fiscal
year was Mr. Lefkof.



91



---

##### Table of Contents

Nominating Committee and Stockholder Director Nominations



During the fiscal year ended September 30, 2004, the Nominating Committee of
the Board of Directors (the Nominating Committee) acted by written consent one time. The Nominating Committee recommends nominees for the Board. The Nominating Committee will consider nominees recommended by stockholders for election as
directors, but has not adopted formal procedures to be followed by stockholders in submitting such recommendations. The Nominating Committee has recommended the election of each of the nominated directors. The members of the Nominating Committee
during the 2004 fiscal year were Messrs. Lee and Wills.



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



Section 16(a) Beneficial Ownership Reporting
Compliance



Section 16(a) of the Securities Exchange Act
of 1934 requires the Companys executive officers, directors and persons who beneficially own more than 10% of the Companys Common Stock to file initial reports of ownership and reports of changes in ownership with SEC. Such persons are
required by SEC regulations to furnish the Company with copies of all Section 16(a) forms filed by such persons. Based solely on the Companys review of such forms furnished to the Company and written representations from certain reporting
persons, the Company believes that all filing requirements applicable to the Companys executive officers, directors and more than 10% stockholders were complied with during fiscal 2004, except that as a result of a clerical error, Howard T.
Slayen, a director, filed a Form 4 one day later than required.



Code of
Ethics



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



92



---

##### Table of Contents

ITEM 11. EXECUTIVE COMPENSATION



The following Summary Compensation Table sets forth the compensation earned for fiscal years 2004, 2003 and 2002 for services rendered in all capacities to the Company and its subsidiaries by the Companys Chief Executive Officer and
the four other most highly compensated officers who were serving as executive officers as of September 30, 2004 and one former officer, for each of whom total earned salary and bonus for fiscal year 2004 exceeded $100,000 (collectively, the
Named Officers). Bonus payments shown with respect to services performed in each fiscal year were paid in the subsequent fiscal year.



Summary Compensation Table



|                                                                                               |  |              |  |                         |  |                    |                                 |  |                
|---------------------------------------------------------------------------------------------- |  | ------------ |  | ----------------------- |  | ------------------ | ------------------------------- |  | ---------------
|Name and Principal Position                                                                    |  | Fiscal Year  |  | Annual Compensation (1) |  |                    | Long-TermCompensation Awards   
|                                                                                               |  | Salary($)(1) |  | Bonus($)                |  |                    | Securities UnderlyingOptions(#)
|Alan B. Lefkof President and Chief Executive Officer                                           |  | 200420032002 |  | 332,350309,400308,018   |  | 0020,000           |                                 |  | 0250,000240,000
|                                                                                               |  |              |  |                        
|William D. Baker (2) Senior Vice President, Finance andOperations, and Chief Financial Officer |  | 200420032002 |  | 201,625190,000188,887   |  | 0021,000           |                                 |  | 070,00070,000  
|                                                                                               |  |              |  |                        
|Brooke A. Hauch Senior Vice President, Professional Services                                   |  | 200420032002 |  | 201,625190,000187,577   |  | 0013,000           |                                 |  | 0100,00085,000 
|                                                                                               |  |              |  |                        
|Jayant Kadambi (3) Vice President, Research and Development                                    |  | 200420032002 |  | 185,000170,000157,858   |  | 0013,000           |                                 |  | 0125,000116,224
|                                                                                               |  |              |  |                        
|David A. Kadish Senior Vice President, General Counsel and Secretary                           |  | 200420032002 |  | 218,150197,600195,700   |  | 030,00025,000      |                                 |  | 0200,000255,000
|                                                                                               |  |              |  |                        
|Thomas A. Skoulis (4) Former Senior Vice President and General Manager                         |  | 200420032002 |  | 195,434190,000176,625   |  | 49,05763,52583,635 | (5)(5)(5)                       |  | 0135,000150,000

---

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

|(2) | Mr. Baker resigned effective October 29, 2004.
|--- | ----------------------------------------------

|(3) | Mr. Kadambi ceased to be an executive officer on October 1, 2004.
|--- | -----------------------------------------------------------------

|(4) | Mr. Skouliss employment terminated on September 20, 2004.
|--- | ----------------------------------------------------------

|(5) | Includes commissions earned in the amount of $49,057 for fiscal year 2004 through September 20, 2004, and in the amount of $63,525 and $63,635 for fiscal years 2003 and 2002,
respectively. In addition to the amounts shown, upon termination of employment on September 20, 2004, Mr. Skoulis received a payment in the amount of $28,614 for accrued but unused vacation in accordance with applicable law.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



93



---

##### Table of Contents

Option Grants in Last Fiscal Year



No stock options or stock appreciation rights were granted to any of the Named Officers during the fiscal year ended
September 30, 2004.



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



The following table sets
forth information concerning option exercises in fiscal year 2004 and option holdings as of September 30, 2004 with respect to each of the Named Officers. No stock appreciation rights were outstanding at the end of that year.



|                      |  |                              |  |                                                               |  |                                                                            |  |                                                                      |  |               |  |        
|--------------------- |  | ---------------------------- |  | ------------------------------------------------------------- |  | -------------------------------------------------------------------------- |  | -------------------------------------------------------------------- |  | ------------- |  | -------
|                      |  | SharesAcquired onExercise(#) |  | Value Realized(Market Priceat Exercise LessExercise Price)($) |  | Number of Securities UnderlyingUnexercised Options atSeptember 30, 2004(#) |  | Value of Unexercised In-the-Money Options atSeptember 30, 2004($)(1)
|Name                  |  |                              |  | Exercisable                                                   |  | Unexercisable                                                              |  | Exercisable                                                          |  | Unexercisable
|Alan B. Lefkof        |  | 40,000                       |  | 481,192                                                       |  | 554,875                                                                    |  | 228,125                                                              |  | 1,021,841     |  | 679,969
|William D. Baker (2)  |  | 63,000                       |  | 689,076                                                       |  | 96,375                                                                     |  | 100,625                                                              |  | 332,116       |  | 324,394
|Brooke A. Hauch       |  | 56,776                       |  | 523,717                                                       |  | 169,038                                                                    |  | 89,061                                                               |  | 369,675       |  | 265,402
|Jayant Kadambi (3)    |  | 79,839                       |  | 788,626                                                       |  | 67,948                                                                     |  | 120,937                                                              |  | 230,317       |  | 369,252
|David A. Kadish       |  | 118,850                      |  | 1,301,757                                                     |  | 248,025                                                                    |  | 168,125                                                              |  | 517,748       |  | 509,856
|Thomas A. Skoulis (4) |  | 5,000                        |  | 75,380                                                        |  | 324,938                                                                    |  | 0                                                                    |  | 639,062       |  | 0      

---

|(1) | Based on the fair market value per share of the Companys Common Stock at September 30, 2004 ($6.83) less the exercise price payable for such shares.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Mr. Baker resigned effective October 29, 2004, and all then-unexercisable options expired on that date.
|--- | -------------------------------------------------------------------------------------------------------

|(3) | Mr. Kadambi ceased to be an executive officer on October 1, 2004.
|--- | -----------------------------------------------------------------

|(4) | Mr. Skouliss employment terminated on September 20, 2004, and all then-unexercisable options expired on that date.
|--- | -------------------------------------------------------------------------------------------------------------------



Director Compensation



Until January 1, 2005, except for grants of stock options, members of the Companys Board of Directors have not
received compensation for their services as directors, other than reimbursement of any actual travel and living expenses incurred in connection with attending meetings of the Board of Directors and meetings of the Audit Committee. Directors of the
Company currently are eligible to receive options under the Companys 1996 Stock Option Plan and 2002 Equity Incentive Plan. The Automatic Option Grant Program that is part of the 1996 Stock Option Plan and 2002 Equity Incentive Plan provides
for the grant of an option to purchase 50,000 shares of Common Stock upon a non-employee directors initial election or appointment to the Board. The Automatic Option Grant Program also provides for the grant on the date of each annual
stockholder meeting of (a) an option to purchase 15,000 shares of Common Stock to each non-employee director and (b) an additional option to purchase 5,000 shares of Common Stock to each non-employee director who is a member of the Audit Committee.
After the pool of shares available under the 1996 Stock Option Plan for automatic option grants is exhausted, grants under the Automatic Option Grant Program will thereafter be made out of the 2002 Equity Incentive Plan. All grants under the
Automatic Option Grant Program have exercise prices equal to the fair market value of the underlying stock on the date of grant.



During the fiscal year ended September 30, 2004, Messrs. Jones, Lee, Marquardt, Slayen and Wills each received grants of an option to purchase 15,000
shares under the Automatic Option Grant Program of the 1996 Stock Option Plan on January 30, 2004, the date of the 2004 annual stockholder meeting. As members of the Audit Committee, Messrs. Lee, Slayen and Wills each received grants of an option to
purchase 5,000 shares under the Automatic Option Grant Program of the 1996 Stock Option Plan on January 30, 2004, the date of the 2004 annual stockholder meeting.



94



---

##### Table of Contents

Effective January 1, 2005, by resolution adopted by the Board of Directors on December 30, 2004, in
addition to the grants of stock options as described above, the Board agreed to pay non-employee directors an annual retainer as follows: Chairman of the Board, $25,000; Chairman of the Audit Committee, $20,000; other Directors, $15,000. The
retainer will be paid in four equal installments payable at the end of each calendar quarter, commencing with the quarter ending March 31, 2005.



Employment Contracts, Termination of Employment and Change in Control Arrangements



The Compensation Committee, as plan administrator of all of our existing equity compensation plans as of September 30, 2004,
including the Farallon Computing, Inc. 1987 Restated Stock Option Plan, the Netopia, Inc. 1996 Stock Option Plan, the Netopia, Inc. 2000 Stock Incentive Plan, and the Netopia, Inc. 2002 Equity Incentive Plan (collectively, the Option
Plans), has the authority to provide for accelerated vesting of the shares of Common Stock subject to outstanding options held by the Named Officers and any other executive officer in connection with certain changes in control of the Company
or the subsequent termination of the officers employment following the change in control event.



None of the Named Officers have employment agreements with the Company, and their employment may be terminated at any time. However, the Company has
entered into agreements with Messrs. Lefkof and Kadish and with Ms. Hauch which provide for acceleration of vesting of option shares as if the officer remained employed for twelve additional months in the event the officers employment is
involuntarily terminated during the 12 month period following certain acquisitions or changes in control of the Company. In addition, Mr. Kadish will receive severance pay equal to twelve (12) months salary and the full target bonus for the fiscal
year in which the officers employment is terminated; Mr. Lefkof and Ms. Hauch will receive severance pay equal to six (6) months salary upon any such termination and the full target bonus for the fiscal year in which the officers
employment is terminated.



On October 21, 2004, Mr. Baker
resigned as the Companys Senior Vice President, Finance and Operations, and Chief Financial Officer, effective October 29, 2004. On October 21, 2004, the Company and William D. Baker entered into a Consulting Agreement. The term of the
Consulting Agreement is for a six month period that commenced on November 1, 2004 and continues through April 30, 2005. Under the terms of the Consulting Agreement, Mr. Baker has agreed to assist the Company with respect to its financial reporting
and the transition to a new permanent principal accounting and financial officer. Mr. Baker is compensated at the rate of $17,125 per month during the term of the Consulting Agreement, and does not receive any other compensation or benefits.



Mr. Skoulis did not receive any severance payments or other
compensation or benefits following his termination of employment effective September 20, 2004.



Compensation Committee Interlocks and Insider Participation



The Compensation Committee of the Companys Board of Directors, as of September 30, 2004, consisted of Messrs. Marquardt and Wills. Neither Mr.
Marquardt nor Mr. Wills was at any time during the fiscal year ended September 30, 2004, or at any other time, an officer or employee of the Company. No member of the Compensation Committee serves as a member of the board of directors or
compensation committee of any entity that has one or more executive officers serving as a member of the Companys Board of Directors or Compensation Committee.



Report of the Compensation Committee on Executive Compensation



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



95



---

##### Table of Contents

The Compensation Committee is comprised of non-employee directors and acts periodically to evaluate the
effectiveness of the compensation program in linking Company performance and executive pay. In addition, the Compensation Committee is consulted to approve the compensation package of a newly hired executive or of an executive whose scope of
responsibility has changed significantly. The Committee has the authority to establish the level of base salary payable to the Chief Executive Officer (CEO) and to administer the Companys various stock incentive plans. In addition,
the Committee has the responsibility for approving the individual bonus program to be in effect for the CEO. The CEO has the authority to establish the level of base salary payable to all other employees of the Company, including all executive
officers, subject to the approval of the Committee. In addition, the CEO has the responsibility for approving the bonus programs to be in effect for all other executive officers and other key employees each fiscal year, subject to the approval of
the Committee. The Committee reviewed but made no changes to the CEOs compensation proposals for the officers.



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



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



BASE SALARY. The base salary for each executive officer is set at the
time of hire based on individual negotiation, and any subsequent increases are awarded pursuant to annual merit raises on the basis of personal performance.



ANNUAL CASH BONUSES. The Company did not implement a formal bonus program for fiscal year 2004. However, in past years, the Company has established
a bonus target for each executive officer, including the CEO, tied to achievement of the Companys revenue and profit goals and which, in certain years, would also be tied to individual performance. For fiscal year 2004, the Company failed to
achieve its financial performance targets. As a result, the Companys CEO and the Companys executive officers were not awarded bonuses.



LONG-TERM INCENTIVE COMPENSATION. Generally, a significant stock option grant is made in the year that an officer commences employment and grants
typically of lesser amounts are made periodically. Generally, the size of each grant is set at a level that the Committee deems appropriate, to create a meaningful opportunity for stock ownership based upon the individuals position with the
Company, the individuals potential for future responsibility and promotion, the individuals performance in the recent period and the number of unvested options held by the individual at the time of the new grant. The relative weight
given to each of these factors will vary from individual to individual at the Committees discretion based on the recommendation made by the CEO to the Committee. In fiscal year 2004, no stock option grants were awarded to any executive officer
because each of the executive officers had received a larger award in fiscal year 2003 than in prior years to provide an incentive for the officers to improve the Companys performance. The options



96



---

##### Table of Contents

granted in fiscal year 2003 vest in periodic installments over a four-year period, contingent upon the executive officers continued employment with the
Company. Accordingly, the option will provide a return to the executive officer only if the officer remains an employee of the Company, and then only if the market price of the Common Stock appreciates over the option term.



CEO COMPENSATION. Mr. Lefkof, the Companys President and CEO,
received an increase in annual base salary in fiscal year 2004 pursuant to an annual merit raise. As stated above, in fiscal year 2004 the Company failed to achieve its financial performance targets. As a result, the Companys CEO did not
receive any bonus. Options were not granted to the CEO in fiscal year 2004 based on the same factors as for the other executive officers.



TAX LIMITATION. Under applicable Federal tax law, the Company will not be allowed a Federal income tax deduction for compensation paid to certain
executive officers to the extent that compensation exceeds $1 million per officer in any year. This limitation has been in effect for all fiscal years of the Company ending after the Companys initial public offering. The stockholders approved
the Companys 1996 Stock Option Plan and 2002 Equity Incentive Plan, which include provisions that limit the maximum number of shares of Common Stock for which any one participant may be granted stock options over a three-year period and
two-year period respectively. Accordingly, any compensation deemed paid to an executive officer when he exercises an option under the 1996 Stock Option Plan and 2002 Equity Incentive Plan with an exercise price equal to the fair market value of the
option shares on the grant date will generally qualify as performance-based compensation that will not be subject to the $1 million limitation. However, options granted under the 2000 Stock Incentive Plan does not qualify as performance-based
compensation and will be subject to the $1 million limitation. Since it is not expected that the cash compensation to be paid to the Companys executive officers for fiscal year 2005 will exceed the $1 million limit per officer, the Committee
will defer any decision on whether to limit the dollar amount of the cash compensation payable to the Companys executive officers to the $1 million cap.



Submitted by the Compensation Committee of

the Netopia Board of Directors:



David F. Marquardt

Harold S. Wills



97



---

##### Table of Contents

STOCK PERFORMANCE GRAPH



The graph set forth below compares the cumulative total stockholder return on the Companys Common Stock for the five
year period commencing on September 30, 1999 and ending on September 30, 2004, with the cumulative total return of (i) the Nasdaq Stock Market (U.S.) Index and (ii) the Nasdaq Telecommunications Index, over the same period. This graph assumes the
investment of $100.00 on September 30, 1999 in the Common Stock, the Nasdaq Stock Market (U.S.) Index and the Nasdaq Telecommunications Index, and assumes the reinvestment of dividends, if any.



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



COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*

AMONG NETOPIA, INC., THE NASDAQ STOCK MARKET (U.S.) INDEX

AND THE NASDAQ TELECOMMUNICATIONS INDEX



LOGO



|* | $100 invested on 9/30/99 in stock or index-including reinvestment of dividends.
|- | -------------------------------------------------------------------------------

| | Fiscal year ending September 30.
| | --------------------------------



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



98



---

##### Table of Contents

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



Beneficial Ownership Table



The following table sets forth, as of January 28, 2005, certain information with respect to shares beneficially owned by (i) each person who is known by
the Company to be the beneficial owner of more than five percent (5%) of the Companys outstanding shares of Common Stock, (ii) each of the Companys directors and the executive officers named in the Summary Compensation Table in Item 11,
above, and (iii) all current directors and executive officers as a group.



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



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



|                                                                        |  |                                                     |  |                     |  
|----------------------------------------------------------------------- |  | --------------------------------------------------- |  | ------------------- | -
|                                                                        |  | Shares Beneficially Owned as of January 28, 2005(1) | 
|Beneficial Owner*                                                       |  | Number of Shares                                    |  | Percentage of Class |  
|Alan B. Lefkof (2)                                                      |  | 669,450                                             |  | 2.62                | %
|William D. Baker (3)                                                    |  | 0                                                   |  | **                  |  
|Brooke A. Hauch (4)                                                     |  | 199,349                                             |  | **                  |  
|Jayant Kadambi (5)                                                      |  | 101,063                                             |  | **                  |  
|David A. Kadish (6)                                                     |  | 310,041                                             |  | 1.23                | %
|Thomas A. Skoulis (7)                                                   |  | 2,015                                               |  | **                  |  
|Resse M. Jones (8)                                                      |  | 1,007,778                                           |  | 4.03                | %
|Robert Lee (9)                                                          |  | 63,750                                              |  | **                  |  
|David F. Marquardt (10)                                                 |  | 184,986                                             |  | **                  |  
|Howard T. Slayen (11)                                                   |  | 35,500                                              |  | **                  |  
|Harold S. Wills (12)                                                    |  | 46,250                                              |  | **                  |  
|All current directors and executive officers as a group (12 people)(13) |  | 2,774,255                                           |  | 10.45               | %

---

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

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

|(1) | The number of shares of Common Stock deemed outstanding includes shares issuable pursuant to stock options that may be exercised within 60 days of January 28, 2005.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Includes 604,875 shares issuable upon the exercise of stock options held by Alan B. Lefkof and 65,111 shares held by the Lefkof Family Trust over which Alan B. Lefkof has shared
voting and investment authority.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | William D. Baker resigned effective October 29, 2004.
|--- | -----------------------------------------------------

|(4) | Includes 189,349 shares issuable upon the exercise of stock options held by Brooke A. Hauch.
|--- | --------------------------------------------------------------------------------------------



99



---

##### Table of Contents

|(5) | Includes 94,198 shares issuable upon the exercise of stock options held by Jayant Kadambi. Mr. Kadambi ceased to be an executive officer on October 1, 2004.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------

|(6) | Includes 283,026 shares issuable upon the exercise of stock options held by David A. Kadish.
|--- | --------------------------------------------------------------------------------------------

|(7) | Thomas A. Skouliss employment terminated on September 20, 2004.
|--- | ----------------------------------------------------------------

|(8) | Includes 85,500 shares issuable upon the exercise of stock options held by Reese M. Jones.
|--- | ------------------------------------------------------------------------------------------

|(9) | Includes 63,750 shares issuable upon the exercise of stock options held by Robert Lee.
|--- | --------------------------------------------------------------------------------------

|(10) | Includes 115,500 shares issuable upon the exercise of stock options held by David F. Marquardt.
|---- | -----------------------------------------------------------------------------------------------

|(11) | Includes 500 shares held in a retirement account and 2,500 shares held by a family partnership over which Howard T. Slayen has voting and investment authority, and 32,500 shares
issuable upon the exercise of stock options held by Howard T. Slayen.
|---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(12) | Includes 46,250 shares issuable upon the exercise of stock options held by Harold S. Wills.
|---- | -------------------------------------------------------------------------------------------

|(13) | Includes 1,655,622 shares issuable upon the exercise of stock options held by all current executive officers and directors.
|---- | ---------------------------------------------------------------------------------------------------------------------------



Equity Compensation Plan Information



The following table provides information about our Common Stock that may be
issued upon the exercise of options, warrants and rights under all of our existing equity compensation plans as of September 30, 2004, including the Farallon Computing, Inc. 1987 Restated Stock Option Plan, the Netopia, Inc. 1996 Stock Option Plan,
the Netopia, Inc. 2000 Stock Incentive Plan, and the Netopia, Inc. 2002 Equity Incentive Plan, but except as noted below excluding the Netopia, Inc. 1996 Employee Stock Purchase Plan.



|                                                           |  |                                                                                                  |           |  |                                                                                 |              |                                                                                                                                                 |                        |       
|---------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------ | --------- |  | ------------------------------------------------------------------------------- | ------------ | ----------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------- | ------
|Plan category                                              |  | (a) Number of securities to be issued upon exercise of outstanding options, warrants, and rights |           |  | (b) Weighted- average exercise price ofoutstanding options, warrants and rights |              | (c) Number of securities remaining available for future issuance under equity
compensation plans (excluding securities reflected in column (a)) |                       
|Equity compensation plans approved by security holders     |  | 22,3753,384,3371,642,082                                                                         | (1)(2)(3) |  | $                                                                               | 4.245.014.36 |                                                                                                                                                 | 213,714739,817261,731 | (4)(5)
|Equity compensation plans not approved by security holders |  | 922,316                                                                                          | (6)       |  |                                                                                 | 3.46         |                                                                                                                                                 | 102,038                |       
|                                                           |  |                                                                                                  |           |  |                                                                                 |              |                                                                                                                                                 |                        |       
|                                                           |  | 5,971,110                                                                                        |           |  |                                                                                 |              |                                                                                                                                                 | 1,317,300              | (5)   
|                                                           |  |                                                                                                  |           |  |                                                                                 |              |                                                                                                                                                 |                        |       

---

|(1) | Granted under the 1987 Restated Stock Option Plan.
|--- | --------------------------------------------------

|(2) | Granted under the 1996 Stock Option Plan.
|--- | -----------------------------------------

|(3) | Granted under the 2002 Equity Incentive Plan.
|--- | ---------------------------------------------

|(4) | The number of shares remaining available for issuance under the 2002 Equity Incentive Plan automatically increases on the first trading day of each calendar year by an amount equal
to four and three-quarter percent (4.75%) of the shares of Common Stock outstanding on December 31 of the immediately preceding calendar year, up to a maximum annual increase of 1,000,000 shares.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) | Total shown includes the 261,731 shares of Common Stock available for issuance under the 1996 Employee Stock Purchase Plan. Excluding the shares available for issuance under the
1996 Employee Stock Purchase Plan, a total of 1,055,569 shares of Common Stock are available for grant under the Option Plans as of September 30, 2004.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(6) | Granted under the 2000 Stock Incentive Plan.
|--- | --------------------------------------------



On October 18, 2000, the Board of Directors approved the 2000 Stock Incentive Plan, pursuant to which non-qualified stock options may be granted to our
employees, officers and directors. The purpose of the 2000 Stock Incentive Plan is to promote our success by linking the personal interests of our employees, officers and



100



---

##### Table of Contents

directors to those of our shareholders and by providing participants with an incentive for outstanding performance. As initially approved, awards granted to
officers may not exceed in the aggregate forty percent (40%) of all shares that are reserved for grant under the 2000 Stock Incentive Plan. However, officers and directors will not receive any additional awards under the 2000 Stock Incentive Plan.
All options granted under the 2000 Stock Incentive Plan have exercise prices equal to the fair market value of the underlying stock on the date of grant. As of September 30, 2004, the Company had reserved 1,900,000 shares of Common Stock for
issuance under the 2000 Stock Incentive Plan, and 102,038 shares remained available for future grants. Options currently outstanding under the 2000 Stock Incentive Plan vest ratably over two or four-year periods beginning at the grant date and
expire ten years from the date of grant. The 2000 Stock Incentive Plan is not required to be and has not been approved by the Companys stockholders. The Companys officers and directors hold an aggregate of 77,400 options outstanding
under the 2000 Stock Incentive Plan.



ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS



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



The Companys bylaws provide that the Company shall indemnify its directors and officers to the fullest extent
permitted by Delaware law, including in circumstances in which indemnification is otherwise discretionary under Delaware law. The Company has entered into indemnification agreements with its executive officers and directors containing provisions
that may require the Company, among other things, to indemnify such officers and directors against certain liabilities that may arise by reason of their status or service as directors or officers and to advance their expenses incurred as a result of
any proceeding against them as to which they could be indemnified. Pursuant to these agreements, the Company has advanced or plans to advance or indemnify certain directors and officers for fees and expenses incurred by them in connection with the
SEC formal order of investigation to determine whether the federal securities laws have been violated, and in connection with other related legal proceedings, including the federal securities class action and the derivative actions described in Item
3 of its consolidated financial statements, related legal proceedings and other matters.



During the fiscal year ended September 30, 2004, there were no transactions, or series of similar transactions, or any proposed transactions, or series of similar transactions, to which we or any of our subsidiaries
was or is to be a party, in which the amount involved exceeds $60,000, and in which any of the following persons had, or will have, a direct or indirect material interest: (1) any of our directors or executive officers, (2) any nominee for election
as one of our directors, (3) any security holder we known to own of record or beneficially more than five percent of our voting securities, and (4) any member of the immediate family of any of the foregoing persons.



101



---

##### Table of Contents

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES



The following table presents fees for professional audit services rendered by KPMG LLP for the audit of our annual financial statements for 2003, and fees billed for other services rendered by KPMG LLP. As previously
disclosed, KPMG LLP resigned as our independent accountant effective September 10, 2004.



|                                 |  |                |     |      |   |    
|-------------------------------- |  | -------------- | --- | ---- | - | ---
|Fiscal years ended September 30, |  | 2004           |     | 2003
|                                 |  | (in thousands)
|Audit fees (1)                   |  | $              | 157 |      | $ | 189
|Audit related fees(2)            |  |                | 15  |      |   | 30 
|                                 |  |                |     |      |   |    
|                                 |  |                | 172 |      |   | 219
|Tax fees(3)                      |  |                | 34  |      |   | 97 
|All other fees(4)                |  |                |    |      |   | 2  
|                                 |  |                |     |      |   |    
|Total fees                       |  | $              | 206 |      | $ | 318
|                                 |  |                |     |      |   |    

---

|(1) | This amount represents the aggregate fees billed for professional services rendered by KPMG LLP, the Companys independent auditor until its resignation on September 10, 2004,
for the audit of the Companys annual financial statements, the review of financial statements included in the Companys Form 10-Qs and services normally provided in connection with statutory and regulatory filings and engagements.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | This amount represents the aggregate fees billed for assurance and related services by KPMG LLP that are reasonably related to the performance of the audit and review of financial
statement. This amount primarily represents assistance with and review of the Companys Registration Statement on Form S-3 filed with the SEC on May 7, 2003 and related filings with the SEC.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | This amount represents the aggregate fees billed for professional services rendered by KPMG LLP for tax compliance, tax advice and tax planning.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | This amount represents the aggregate fees billed for products and services provided by KPMG LLP which were not audit, audit-related or tax fees. This amount primarily represents
research and investigation fees with respect to certain payroll and state related issues. KPMG LLP did not perform any services or bill any fees for financial information systems and design implementation for the fiscal year ended September 30,
2004.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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



On September 30, 2004, the Audit Committee engaged Burr, Pilger & Mayer
LLP (BPM) as our registered independent accountant. BPM has audited our consolidated financial statements for the fiscal years ended September 30, 2004, 2003 and 2002. The independent accountant assisting the Audit Committee in
connection with the Internal Accounting Review previously retained BPM to collect certain financial date regarding us and to conduct, at the direction of such independent accounting, specified review procedures relating to the data.



102



---

##### Table of Contents

PART IV



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



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



(b) During the three months ended September 30,
2004, we filed the following reports on Form 8-K:



| |  |  | On September 27, 2004 we filed a Current Report on Form 8-K reporting Item 4, in connection with the change in Registrants Certifying Accountants.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | On September 21, 2004, we filed a Current Report on Form 8-K reporting Item 8, in connection with the appointment of Dano R. Ybarra as Senior Vice President, Sales and Marketing.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | On September 16, 2004, we filed a Current Report on Form 8-K reporting Items 3 and 4, in connection with the delisting from The Nasdaq Stock Market and the resignation of our
independent registered public accountants.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | On August 27, 2004, we filed a Current Report on Form 8-K reporting Item 3, in connection with the receipt of a Nasdaq Staff Determination indication we were subject to delisting.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | On August 20, 2004, we filed a Current Report on Form 8-K reporting Item 5, in connection with the filing of a class action complaint alleging violation of the federal securities
laws.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | On August 17, 2004, we filed a Current Report on Form 8-K reporting Item 5, in connection with the Registrants notice of late filing of the Report on Form 10-Q, for the third
fiscal quarter ended June 30, 2004.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | On July 22, 2004, we filed a Current Report on Form 8-K reporting Item 5, in connection with our financial results for the quarter ended June 30, 2004.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | On July 06, 2004, we filed a Current Report on Form 8-K reporting Item 5, in connection with our preliminary financial results for the quarter ended June 30, 2004.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------



(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.



|              |     |  |                                                                                                                                                    
|------------- | --- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |     |  | Description                                                                                                                                        
|3.1           | (a) |  | Restated and Amended Certificate of Incorporation                                                                                                  
|              |    
|3.2           | (a) |  | Restated and Amended Bylaws of the Registrant                                                                                                      
|              |    
|3.3           | (b) |  | Certificate of Ownership and Merger (Corporate Name Change)                                                                                        
|              |    
|4.1           |     |  | Reference is made to Exhibits 3.1, 3.2 and 3.3                                                                                                     
|              |    
|4.2           | (a) |  | Amended and Restated Investor Rights Agreement, dated March 27, 1992, among the Registrant and the Investors and Founders named therein, as amended
|              |    
|10.1          | (a) |  | Form of Indemnification Agreement entered into between the Registrant and it Directors and Officers                                                
|              |    
|10.2          | (a) |  | 1996 Stock Option Plan and forms of agreements thereunder                                                                                          
|              |    
|10.3          | (a) |  | Employee Stock Purchase Plan                                                                                                                       
|              |    
|10.4          | (b) |  | Office Lease Agreement between the Company and WHLW Real Estate Limited Partnership, dated May 1, 1997                                             



103



---

##### Table of Contents

|              |  |                                                                                                                                                                                                                                                                           
|------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description                                                                                                                                                                                                                                                               
|              | 
|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(i)       |  | Code of Business Conduct and Ethics                                                                                                                                                                                                                                       
|              | 
|23.1          |  | Consent of Burr Pilger & Mayer LLP, Independent Registered Public Accounting Firm                                                                                                                                                                                         
|              | 
|24.1          |  | Power of Attorney (see Signature page)                                                                                                                                                                                                                                    
|              | 
|31.1          |  | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                        
|              | 
|31.2          |  | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                        
|              | 
|32.1          |  | Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                        
|              | 
|32.2          |  | Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                        

---

|(a) | Incorporated by reference to our 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.
|--- | ----------------------------------------------------------------------

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



104



---

##### Table of Contents

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 1st day of February 2005.



By:

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




By:

/s/    MARK H.
PERRYMark H. Perry Interim Senior Vice President and Chief Financial Officer (Principal Accounting Officer)




Dated: February 1, 2005



POWER OF ATTORNEY



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



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



|                                            |  |                                    |  |                 
|------------------------------------------- |  | ---------------------------------- |  | ----------------
|Signature                                   |  | Title                              |  | Date            
|                                            |  |                                   
|/s/    HAROLD S. WILLSHarold S. Wills       |  | Chairman of the Board of Directors |  | February 1, 2005
|                                            |  |                                   
|/s/    REESE M. JONESReese M. Jones         |  | Director                           |  | February 1, 2005
|                                            |  |                                   
|/s/    ROBERT LEERobert Lee                 |  | Director                           |  | February 1, 2005
|                                            |  |                                   
|/s/    DAVID F.
MARQUARDTDavid F.
Marquardt |  | Director                           |  | February 1, 2005
|                                            |  |                                   
|/s/    HOWARD T.
SLAYENHoward T.
Slayen     |  | Director                           |  | February 1, 2005



105