##### Table of Contents

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q



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|x |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- |  | ---------------------------------------------------------------------------------------



For the quarterly period ended June 30, 2003



OR



| ̈ |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- |  | ----------------------------------------------------------------------------------------



For the transition period from  to



Commission file number 0-28450



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Netopia, Inc.

(Exact name of registrant as specified in its charter)



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



Marketplace Tower

6001 Shellmound Street, 4thFloor

Emeryville, California 94608

(Address of principal executive offices, including Zip Code)



(510) 420-7400

(Registrants
telephone number, including area code)



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



Indicate by check mark whether the registrant is an
accelerated filer (as defined in Rule 12b-2 of the Exchange Act).    Yes  x    No ̈



As of June 30, 2003 there were 19,487,435 shares of the Registrants common stock outstanding.



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##### Table of Contents

NETOPIA, INC.

Form 10-Q

Table
of Contents



|               |  |                                                                                                                                    |  | Page
|-------------- |  | ---------------------------------------------------------------------------------------------------------------------------------- |  | ----
|PART I.        |  | FINANCIAL INFORMATION                                                                                                              |  |     
|               |  |                                                                                                                                   
|Item 1.        |  | Unaudited Condensed Consolidated Financial Statements                                                                              |  | 2   
|               |  |                                                                                                                                   
|               |  | Unaudited condensed consolidated balance sheets at June 30, 2003 and September 30, 2002                                            |  | 2   
|               |  |                                                                                                                                   
|               |  | Unaudited condensed consolidated statements of operations for the three and nine months ended June 30, 2003 and 2002, respectively |  | 3   
|               |  |                                                                                                                                   
|               |  | Unaudited condensed consolidated statements of cash flows for the nine months ended June 30, 2003 and 2002                         |  | 4   
|               |  |                                                                                                                                   
|               |  | Notes to unaudited condensed consolidated financial statements                                                                     |  | 5   
|               |  |                                                                                                                                   
|Item 2.        |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                                              |  | 16  
|               |  |                                                                                                                                   
|Item 3.        |  | Quantitative and Qualitative Disclosures About Market Risk                                                                         |  | 36  
|               |  |                                                                                                                                   
|Item 4.        |  | Controls and Procedures                                                                                                            |  | 37  
|               |  |                                                                                                                                   
|PART II.       |  | OTHER INFORMATION                                                                                                                  |  |     
|               |  |                                                                                                                                   
|Item 6.        |  | Exhibits and Reports on Form 8-K                                                                                                   |  | 38  
|               | 
|Signatures     |  | 39                                                                                                                                
|               | 
|Certifications |  |                                                                                                                                   





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##### Table of Contents

PART I. FINANCIAL INFORMATION



Item 1. Unaudited Condensed Consolidated Financial Statements



NETOPIA, INC. AND SUBSIDIARIES

Unaudited Condensed Consolidated Balance Sheets



|                                                                                                                                                                            |  | June 30,2003   |          |   | September 30,2002* |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------- | -------- | - | ------------------ | -
|                                                                                                                                                                            |  | (in thousands) |         
|ASSETS                                                                                                                                                                      |  |                |          |   |                    |  
|Current assets:                                                                                                                                                             |  |                |          |   |                    |  
|Cash and cash equivalents                                                                                                                                                   |  | $              | 23,108   |   |                    | $
|Trade accounts receivable less allowance for doubtful accounts and returnsof $191 and $567 at June 30, 2003 and September 30,
2002, respectively                            |  |                | 15,179   |   |                    |  
|Inventory                                                                                                                                                                   |  |                | 4,690    |   |                    |  
|Prepaid expenses and other current assets                                                                                                                                   |  |                | 1,529    |   |                    |  
|                                                                                                                                                                            |  |                |          |   |                    |  
|Total current assets                                                                                                                                                        |  |                | 44,506   |   |                    |  
|Furniture, fixtures and equipment, net                                                                                                                                      |  |                | 4,154    |   |                    |  
|Acquired technology, net                                                                                                                                                    |  |                | 4,674    |   |                    |  
|Other intangible assets and goodwill, net                                                                                                                                   |  |                | 2,110    |   |                    |  
|Long-term investments                                                                                                                                                       |  |                | 1,032    |   |                    |  
|Deposits and other assets                                                                                                                                                   |  |                | 1,167    |   |                    |  
|                                                                                                                                                                            |  |                |          |   |                    |  
|TOTAL ASSETS                                                                                                                                                                |  | $              | 57,643   |   |                    | $
|                                                                                                                                                                            |  |                |          |   |                    |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                        |  |                |          |   |                    |  
|Current liabilities:                                                                                                                                                        |  |                |          |   |                    |  
|Accounts payable                                                                                                                                                            |  | $              | 10,312   |   |                    | $
|Accrued compensation                                                                                                                                                        |  |                | 2,095    |   |                    |  
|Accrued liabilities                                                                                                                                                         |  |                | 2,180    |   |                    |  
|Deferred revenue                                                                                                                                                            |  |                | 1,327    |   |                    |  
|Borrowings under term loans                                                                                                                                                 |  |                | 250      |   |                    |  
|Other current liabilities                                                                                                                                                   |  |                | 87       |   |                    |  
|                                                                                                                                                                            |  |                |          |   |                    |  
|Total current liabilities                                                                                                                                                   |  |                | 16,251   |   |                    |  
|Long-term liabilities:                                                                                                                                                      |  |                |          |   |                    |  
|Borrowings under credit facility and term loans                                                                                                                             |  |                | 8,667    |   |                    |  
|Other long-term liabilities                                                                                                                                                 |  |                | 350      |   |                    |  
|                                                                                                                                                                            |  |                |          |   |                    |  
|Total liabilities                                                                                                                                                           |  |                | 25,268   |   |                    |  
|                                                                                                                                                                            |  |                |          |   |                    |  
|Commitments and contingencies                                                                                                                                               |  |                |          |   |                    |  
|                                                                                                                                                                            |  |               
|Stockholders equity:                                                                                                                                                       |  |                |          |   |                    |  
|Common stock: $0.001 par value, 50,000,000 shares authorized; 19,487,435 and 18,905,223 shares issued and outstanding at June 30,
2003 and September 30, 2002, respectively |  |                | 19       |   |                    |  
|Additional paid-in capital                                                                                                                                                  |  |                | 148,355  |   |                    |  
|Accumulated deficit                                                                                                                                                         |  |                | (115,999 | ) |                    |  
|                                                                                                                                                                            |  |                |          |   |                    |  
|Total stockholders equity                                                                                                                                                  |  |                | 32,375   |   |                    |  
|                                                                                                                                                                            |  |                |          |   |                    |  
|TOTAL LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                  |  | $              | 57,643   |   |                    | $
|                                                                                                                                                                            |  |                |          |   |                    |  

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|* |  | Derived from the audited consolidated balance sheet dated September 30, 2002 included in the Companys 2002 Annual Report on Form 10-K, as amended. See accompanying notes to
unaudited condensed consolidated financial statements.
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

NETOPIA, INC. AND SUBSIDIARIES

Unaudited Condensed Consolidated Statements of Operations



|                                                    |  | Three months endedJune 30,               |        |   | Nine months endedJune 30, |  
|--------------------------------------------------- |  | ---------------------------------------- | ------ | - | ------------------------- | -
|                                                    |  | 2003                                     |        |   | 2002                      |  
|                                                    |  | (in thousands, except per share amounts) |       
|REVENUES:                                           |  |                                          |        |   |                           |  
|Internet equipment                                  |  | $                                        | 17,962 |   |                           | $
|Web platform licenses and services                  |  |                                          | 4,009  |   |                           |  
|                                                    |  |                                          |        |   |                           |  
|Total revenues                                      |  |                                          | 21,971 |   |                           |  
|                                                    |  |                                          |        |   |                           |  
|COST OF REVENUES:                                   |  |                                          |        |   |                           |  
|Internet equipment                                  |  |                                          | 12,759 |   |                           |  
|Web platform licenses and services                  |  |                                          | 316    |   |                           |  
|                                                    |  |                                          |        |   |                           |  
|Total cost of revenues                              |  |                                          | 13,075 |   |                           |  
|                                                    |  |                                          |        |   |                           |  
|GROSS PROFIT                                        |  |                                          | 8,896  |   |                           |  
|                                                    |  |                                          |        |  
|OPERATING EXPENSES:                                 |  |                                          |        |   |                           |  
|Research and development                            |  |                                          | 3,791  |   |                           |  
|Research and development project cancellation costs |  |                                          |       |   |                           |  
|Selling and marketing                               |  |                                          | 5,099  |   |                           |  
|General and administrative                          |  |                                          | 977    |   |                           |  
|Amortization of intangible assets                   |  |                                          | 374    |   |                           |  
|Restructuring costs, net                            |  |                                          | 130    |   |                           |  
|Integration costs                                   |  |                                          |       |   |                           |  
|Acquired in-process research and development        |  |                                          |       |   |                           |  
|                                                    |  |                                          |        |   |                           |  
|Total operating expenses                            |  |                                          | 10,371 |   |                           |  
|                                                    |  |                                          |        |   |                           |  
|OPERATING LOSS                                      |  |                                          | (1,475 | ) |                           |  
|                                                    |  |                                          |        |  
|Other income (loss), net                            |  |                                          |        |   |                           |  
|Loss on impaired securities                         |  |                                          |       |   |                           |  
|Other income (expense), net                         |  |                                          | (3     | ) |                           |  
|                                                    |  |                                          |        |   |                           |  
|Other income (loss), net                            |  |                                          | (3     | ) |                           |  
|                                                    |  |                                          |        |   |                           |  
|NET LOSS                                            |  | $                                        | (1,478 | ) |                           | $
|                                                    |  |                                          |        |   |                           |  
|Per share data, net loss:                           |  |                                          |        |   |                           |  
|Basic and diluted net loss per share                |  | $                                        | (0.08  | ) |                           | $
|                                                    |  |                                          |        |   |                           |  
|Shares used in the per share calculations           |  |                                          | 19,370 |   |                           |  
|                                                    |  |                                          |        |   |                           |  



See
accompanying notes to unaudited condensed consolidated financial statements.



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##### Table of Contents

NETOPIA, INC. AND SUBSIDIARIES

Unaudited Condensed Consolidated Statements of Cash Flows



|Nine months ended June 30,                                                    |  | 2003           |        |   | 2002 |  
|----------------------------------------------------------------------------- |  | -------------- | ------ | - | ---- | -
|                                                                              |  | (in thousands) |       
|Cash flows from operating activities:                                         |  |                |        |   |      |  
|Net loss                                                                      |  | $              | (8,542 | ) |      | $
|Adjustments to reconcile net loss to net cash used in operating activities:   |  |                |        |   |      |  
|Depreciation and amortization                                                 |  |                | 4,257  |   |      |  
|Charge for in-process research and development                                |  |                |       |   |      |  
|Loss on impaired securities                                                   |  |                | 457    |   |      |  
|Write-off of capitalized software development costs                           |  |                | 273    |   |      |  
|Changes in allowance for doubtful accounts and returns on accounts receivable |  |                | (376   | ) |      |  
|Changes in operating assets and liabilities:                                  |  |                |        |   |      |  
|Trade accounts receivable                                                     |  |                | (4,853 | ) |      |  
|Inventory                                                                     |  |                | 1,569  |   |      |  
|Prepaid expenses and other current assets                                     |  |                | 202    |   |      |  
|Deposits and other assets                                                     |  |                | (789   | ) |      |  
|Accounts payable and accrued liabilities                                      |  |                | 2,538  |   |      |  
|Deferred revenue                                                              |  |                | (947   | ) |      |  
|Other liabilities                                                             |  |                | 239    |   |      |  
|                                                                              |  |                |        |   |      |  
|Net cash used in operating activities                                         |  |                | (5,972 | ) |      |  
|                                                                              |  |                |        |   |      |  
|Cash flows from investing activities:                                         |  |                |        |   |      |  
|Purchase of short-term investments                                            |  |                |       |   |      |  
|Proceeds from the sale of short-term investments                              |  |                |       |   |      |  
|Purchase of long-term investment                                              |  |                | (26    | ) |      |  
|Purchase of furniture, fixtures and equipment                                 |  |                | (1,131 | ) |      |  
|Capitalization of software development costs                                  |  |                | (144   | ) |      |  
|Acquisition of businesses                                                     |  |                |       |   |      |  
|                                                                              |  |                |        |   |      |  
|Net cash used in investing activities                                         |  |                | (1,301 | ) |      |  
|                                                                              |  |                |        |   |      |  
|Cash flows from financing activities:                                         |  |                |        |   |      |  
|Borrowings under credit facility and term loans                               |  |                | 4,489  |   |      |  
|Proceeds from the issuance of common stock                                    |  |                | 870    |   |      |  
|                                                                              |  |                |        |   |      |  
|Net cash provided by financing activities                                     |  |                | 5,359  |   |      |  
|                                                                              |  |                |        |   |      |  
|Net decrease in cash and cash equivalents                                     |  |                | (1,914 | ) |      |  
|Cash and cash equivalents, beginning of period                                |  |                | 25,022 |   |      |  
|                                                                              |  |                |        |   |      |  
|Cash and cash equivalents, end of period                                      |  | $              | 23,108 |   |      | $
|                                                                              |  |                |        |   |      |  
|Supplemental disclosures of non-cash investing and financing activities:      |  |                |        |   |      |  
|Issuance of common stock for acquired in process research and development     |  | $              |       |   |      | $
|                                                                              |  |                |        |   |      |  



See
accompanying notes to unaudited condensed consolidated financial statements



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NETOPIA, INC. AND SUBSIDIARIES

Notes To Unaudited Condensed Consolidated Financial Statements



|(1) |  | Basis of Presentation
|--- |  | ---------------------



The unaudited condensed consolidated financial statements included in this Form 10-Q reflect all adjustments, consisting only of normal recurring
adjustments which in the Companys opinion are necessary to fairly present the Companys consolidated financial position, results of operations and cash flows for the periods presented. These condensed consolidated financial statements
should be read in conjunction with the Companys consolidated financial statements included in the Companys Annual Report on Form 10-K, as amended, and other filings with the United States Securities and Exchange Commission (SEC). The
consolidated results of operations for the period ended June 30, 2003 are not necessarily indicative of the results to be expected for any subsequent quarter or for the entire fiscal year ending September 30, 2003.



|(2) |  | Recent Accounting Pronouncements
|--- |  | --------------------------------



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



In May 2002, the FASB approved for issuance SFAS No. 145, Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and
Technical Corrections. SFAS No. 145 requires gains and losses from extinguishment of debt to be classified as an extraordinary item only if the criteria in Accounting Principles Board (APB) No. 30 have been met. Further, lease modifications with
economic effects similar to sale-leaseback transactions must be accounted for in the same manner as sale-leaseback transactions. The Company has adopted the provisions of SFAS No. 145 required for financial statements issued on or after May 15,
2002. This adoption had no impact on the Companys consolidated financial statements.



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



In November 2002, the FASB issued FASB Interpretation No. (FIN) 45, Guarantors Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. FIN 45 elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees
that it has issued. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The provisions of FIN 45 are applicable on a
prospective basis to guarantees issued or modified after December 31, 2002. Adoption of the disclosure provisions is not expected to have a significant impact on the Companys consolidated financial statements.



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



In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation - Transition and Disclosure, which is effective for fiscal
years ending after December 15, 2002. SFAS No. 148 amends SFAS No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition to the fair value method of accounting for stock-based employee compensation. In
addition, SFAS No. 148 amends the disclosure provisions of SFAS No. 123 to require disclosure of the effects of an entitys accounting policy with respect to stock-based employee compensation on reported net income and earnings per share in
annual and interim financial statements. Adoption of the disclosure provisions did not have a significant impact on the Companys consolidated financial statements.



In January 2003, the FASB issued FIN 46, Consolidation of Variable Interest Entities. FIN 46 addresses the
consolidation by business enterprises of variable interest entities. The pronouncement states that the assets, liabilities, and results of the activities of the variable interest entity should be included in consolidated financial statements with
those of the business enterprise. The provisions of FIN 46 apply immediately to variable interest entities created after January 31, 2003, and to variable interest entities in which an enterprise obtains an interest after that date. The Company does
not maintain any investments in variable interest entities.



In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity, which is effective for financial instruments entered into or modified after May 31, 2003,
and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. SFAS No. 150 establishes standards for how an issuer (an entity that issued a financial instrument or may be required under the terms of a
financial instrument to issue its equity shares) classifies and measures in its statement of financial position certain financial instruments with characteristics of both liabilities and equity. SFAS No. 150 requires that an issuer classify a
financial instrument that is within its scope as a liability (or an asset in some circumstances) because that financial instrument embodies and obligation of the issuer. The Company does not have any financial instruments that are subject to the
provisions of SFAS No. 150.



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



DoBox, Inc. (DoBox). In March 2002, the Company purchased substantially all of the assets and assumed certain liabilities of DoBox, a developer of
broadband gateway parental control, content filtering and family firewall software. The Company purchased DoBox primarily for its technology. 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
condensed consolidated statement of operations.



Cayman Systems, Inc. (Cayman). In October 2001, the Company and Cayman, a Massachusetts corporation, consummated a merger (the Merger) whereby Amazon Merger Corporation, a Delaware corporation and a wholly-owned subsidiary of
Netopia, was merged with and into Cayman pursuant to an Agreement and Plan of Merger and Reorganization (the Merger Agreement) dated as of September 19, 2001, as amended. Cayman, a developer and supplier of business class broadband gateways, has
survived the Merger as a wholly owned subsidiary of Netopia. The Company purchased Cayman primarily for its technology, product and customer base. The Company accounted for the transaction under the purchase method. The aggregate purchase price of
the transaction was $14.9 million, based on the consideration paid at closing.



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Approximately $1.7 million initially was held in escrow to satisfy Caymans indemnification
obligations under the Merger Agreement. Fifty percent (50%) of the escrow amount was released from escrow shortly after the one-year anniversary date of the close of the transaction. Upon the satisfaction of Caymans indemnification
obligations, any remaining amounts will be released from escrow on the two-year anniversary date of the close of the transaction.



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, as follows:



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



In addition to
acquiring the current assets and liabilities, the Company identified certain intangible assets and allocated a portion of the purchase price to acquired in-process research and development projects. These intangible assets included the following:



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



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



| |  |  | Sales channel relationships, which represents the value of Caymans established contractual agreements with its existing customers to which Netopia expected 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, and which was attributed to the Companys
Internet equipment reporting unit. In connection with the Companys annual impairment test required by SFAS No. 142, the Company determined that this amount was fully impaired at August 31, 2002. As a result, the Company recorded a charge of
$7.3 million to its Consolidated Statement of Operations in the fiscal year ended September 30, 2002, representing full impairment of the goodwill acquired in connection with the Cayman acquisition.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The Company determined the value assigned to acquired in-process research
and development by estimating the costs necessary to develop the in-process research and development projects into commercially viable products, estimating the net cash flows resulting from the projects when completed and discounting these net cash
flows to their present value. The Company based the revenue estimates used to value the in-process research and development projects 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 Company used a 28% rate to discount the net cash flows to their present value, 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.



7



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##### Table of Contents

|(4) |  | Intangible Assets
|--- |  | -----------------



The Companys intangible assets at June 30, 2003 consist primarily of identifiable intangible assets acquired in connection with the Cayman
acquisition, which the Company is amortizing on a straight-line basis over their estimated useful lives, and goodwill acquired in connection with the acquisitions of WebOrder and netOctopus which the Company is not amortizing.



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



The Company performed the annual impairment test required by SFAS No. 142 on
August 31, 2002 for its two reporting units. To complete the first step of the analysis, the Company discounted the cash flows generated by its Internet equipment and Web platforms reporting units 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 Companys Internet equipment reporting unit was found to be less than its carrying amount and as a result, the Company recorded a charge
to its Consolidated Statement of Operations in the fiscal year ended September 30, 2002.



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



|                            |  | Acquisition Date |  | Balance atSeptember 30,2002 |       | Identifiable intangible assetsacquired duringthe period |   | Amortization Expense |  | Balance at June 30, 2003
|--------------------------- |  | ---------------- |  | --------------------------- | ----- | ------------------------------------------------------- | - | -------------------- |  | ------------------------
|                            |  |                  |  | (in thousands)             
|Internet equipment:         |  |                  |  |                             |       |                                                         |   |                      |  |                         
|Acquired technology         |  | October 2001     |  | $                           | 5,538 |                                                         | $ |                     |  | $                       
|Sales channel relationships |  | October 2001     |  |                             | 1,035 |                                                         |   |                     |  |                         
|                            |  |                  |  |                             |       |                                                         |   |                      |  |                         
|Subtotal                    |  |                  |  |                             | 6,573 |                                                         |   |                     |  |                         
|Web platforms:              |  |                  |  |                             |       |                                                         |   |                      |  |                         
|Marketing license           |  | July 1999        |  |                             | 138   |                                                         |   |                     |  |                         
|Marketing license           |  | January 2003     |  |                             |      |                                                         |   | 700                  |  |                         
|                            |  |                  |  |                             |       |                                                         |   |                      |  |                         
|Total                       |  |                  |  | $                           | 6,711 |                                                         | $ | 700                  |  | $                       
|                            |  |                  |  |                             |       |                                                         |   |                      |  |                         



The following chart
details the Companys goodwill, by reporting unit, as of June 30, 2003:



|               |  | Acquisition date |  | Balance atSeptember 30,2002 |     | Goodwill acquired duringthe period |   | Goodwill impairment charges |  | Balance at June 30, 2003
|-------------- |  | ---------------- |  | --------------------------- | --- | ---------------------------------- | - | --------------------------- |  | ------------------------
|               |  |                  |  | (in thousands)             
|Web platforms: |  |                  |  |                             |     |                                    |   |                             |  |                         
|WebOrder       |  | March 2000       |  | $                           | 519 |                                    | $ |                            |  | $                       
|NetOctopus     |  | December 1998    |  |                             | 465 |                                    |   |                            |  |                         
|               |  |                  |  |                             |     |                                    |   |                             |  |                         
|Total          |  |                  |  | $                           | 984 |                                    | $ |                            |  | $                       
|               |  |                  |  |                             |     |                                    |   |                             |  |                         



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|(5) |  | Inventory
|--- |  | ---------



Inventory at June 30, 2003 and September 30, 2002 consisted of the following:



|                |  | June 30, 2003  |       | September 30,2002
|--------------- |  | -------------- | ----- | -----------------
|                |  | (in thousands)
|Raw materials   |  | $              | 1,174 |                  
|Work in process |  |                | 89    |                  
|Finished goods  |  |                | 3,427 |                  
|                |  |                |       |                  
|Total           |  | $              | 4,690 |                  
|                |  |                |       |                  



|(6) |  | Warranty Liability
|--- |  | ------------------



Warranty liability is recorded as a component of accrued liabilities on the Companys condensed consolidated balance sheet. Warranty liability for
the periods following adoption of FIN 45 consisted of the following:



|                                     |  | Beginning balance |      |   | Warranty returns |   |        | Warranty replacements |  | Warranty accrued |       |  | Ending balance |     
|------------------------------------ |  | ----------------- | ---- | - | ---------------- | - | ------ | --------------------- |  | ---------------- | ----- |  | -------------- | ----
|                                     |  | (in thousands)    |     
|Three months ended December 31, 2002 |  | $                 | (323 | ) |                  | $ | (286   | )                     |  | $                | 381   |  | $              | (51 
|Three months ended March 31, 2003    |  |                   | (279 | ) |                  |   | (687   | )                     |  |                  | 878   |  |                | (53 
|Three months ended June 30, 2003     |  |                   | (141 | ) |                  |   | (448   | )                     |  |                  | 477   |  |                | (65 
|                                     |  |                   |      |   |                  |   |        |                       |  |                  |       |  |                |     
|Nine months ended June 30, 2003      |  | $                 | (323 | ) |                  | $ | (1,421 | )                     |  | $                | 1,736 |  | $              | (169
|                                     |  |                   |      |   |                  |   |        |                       |  |                  |       |  |                |     



|(7) |  | Per Share Calculation
|--- |  | ---------------------



Basic net loss per share is calculated using the weighted average number of shares of common stock outstanding during the period. Diluted net loss per
share is calculated using 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 the three and nine months ended June 30, 2003 and 2002, because their effect on the loss per share was anti-dilutive.



For the three and nine months ended June 30, 2003, potential dilutive common
shares excluded from the computation of diluted loss per share consisted of options to purchase 7,807,238 shares of common stock with a weighted average exercise price of $4.22. For the three and nine months ended June 30, 2002, potential dilutive
common shares excluded from the computation of diluted loss per share consisted of options to purchase 6,579,350 shares of common stock with a weighted average exercise price of $4.73, and a warrant to purchase 5,000 shares of common stock.



|(8) |  | Stock Based Compensation.
|--- |  | -------------------------



SFAS No. 123, Accounting for Stock-Based Compensation, encourages, but does not require, companies to record compensation cost for stock-based
employee compensation plans based on the fair market value of options granted. We have chosen to account for stock based compensation using the intrinsic value method prescribed in APB No. 25, Accounting for Stock Issued to Employees, and
related interpretations. Accordingly, because the grant price equals the market price on the date of grant for all options we have issued, no compensation expense is recognized for stock options issued to employees. In December 2002, the FASB issued
SFAS No. 148, Accounting for Stock Based Compensation  Transition and Disclosure, which amends SFAS No. 123. SFAS No. 148 requires more prominent and frequent disclosures about the effects of stock-based compensation. We will continue
to account for our stock based compensation according to the provisions of APB No. 25.



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If we elected to use the fair value method of accounting for stock based compensation as prescribed by
SFAS No. 123, the net loss and loss per share for the three and nine months ended June 30, 2003 and 2002 would have been the pro forma amounts as follows:



|                                                               |  | Three months endedJune 30, |        |   | Nine months endedJune 30, |  
|-------------------------------------------------------------- |  | -------------------------- | ------ | - | ------------------------- | -
|                                                               |  | 2003                       |        |   | 2002                      |  
|                                                               |  | (in thousands)             |       
|Net loss  as reported                                         |  | $                          | (1,478 | ) |                           | $
|Stock based compensation expense as prescribed by SFAS No. 123 |  |                            | 1,490  |   |                           |  
|                                                               |  |                            |        |   |                           |  
|Net loss  pro forma                                           |  | $                          | (2,968 | ) |                           | $
|                                                               |  |                            |        |   |                           |  
|Basic and diluted net loss per share  as reported             |  | $                          | (0.08  | ) |                           | $
|                                                               |  |                            |        |   |                           |  
|Basic and diluted net loss per share  pro forma               |  | $                          | (0.15  | ) |                           | $
|                                                               |  |                            |        |   |                           |  



|(9) |  | Stock Option Plans
|--- |  | ------------------



Employee Stock Purchase Plan. An amendment to the Companys Employee Stock Purchase Plan was approved at the Companys Annual Meeting of
Stockholders in January 2003 to (a) increase the number of shares of common stock available for issuance under the plan by 750,000 shares to a total of 3,000,000 shares, and (b) 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.



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



|(10) |  | Segment, Geographic and Significant Customer Information
|---- |  | --------------------------------------------------------



Segment Information. The Company applies the provisions of SFAS No. 131, which 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.



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##### Table of Contents

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



|                               |  | 2003               |        |   | 2002         |  
|------------------------------ |  | ------------------ | ------ | - | ------------ | -
|Three months ended June 30,    |  | Internet equipment |        |   | Web platform |  
|                               |  | ($ in thousands)   |       
|Revenue                        |  | $                  | 17,962 |   |              | $
|Cost of revenues               |  |                    | 12,759 |   |              |  
|                               |  |                    |        |   |              |  
|Gross profit                   |  |                    | 5,203  |   |              |  
|Gross margin                   |  |                    | 29     | % |              |  
|Unallocated operating expenses |  |                    |       |   |              |  
|                               |  |                    |        |   |              |  
|Operating loss                 |  |                    |       |   |              |  
|                               |  |                    |        |   |              |  
|                               |  |                   
|                               |  | 2003               |        |   | 2002         |  
|Nine months ended June 30,     |  | Internet equipment |        |   | Web platform |  
|                               |  | ($ in thousands)   |       
|Revenue                        |  | $                  | 47,396 |   |              | $
|Cost of revenues               |  |                    | 34,390 |   |              |  
|                               |  |                    |        |   |              |  
|Gross profit                   |  |                    | 13,006 |   |              |  
|Gross margin                   |  |                    | 27     | % |              |  
|Unallocated operating expenses |  |                    |       |   |              |  
|                               |  |                    |        |   |              |  
|Operating loss                 |  |                    |       |   |              |  
|                               |  |                    |        |   |              |  



Geographic
Information. The Company sells its products and provides services worldwide through a direct sales force, independent distributors, and value-added resellers. It currently operates in four regions: United States, Europe, Canada, and Asia Pacific
and other. Revenues outside of the United States are primarily export sales denominated in United States dollars. Disaggregated financial information regarding the Companys revenues by geographic region for the three and nine months ended June
30, 2003 and 2002 is as follows:



|                               |  | Three months ended June 30, |        |  | Nine months ended June 30, |  
|------------------------------ |  | --------------------------- | ------ |  | -------------------------- | -
|                               |  | 2003                        |        |  | 2002                       |  
|                               |  | ($ in thousands)            |       
|Europe                         |  | $                           | 6,904  |  | 31                         | %
|Canada                         |  |                             | 174    |  | 1                          | %
|Asia Pacific and other         |  |                             | 221    |  | 1                          | %
|                               |  |                             |        |  |                            |  
|Subtotal international revenue |  |                             | 7,299  |  | 33                         | %
|United States                  |  |                             | 14,672 |  | 67                         | %
|                               |  |                             |        |  |                            |  
|Total revenues                 |  | $                           | 21,971 |  | 100                        | %
|                               |  |                             |        |  |                            |  



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



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##### Table of Contents

Customer Information. The Company sells its products to incumbent local exchange carriers (ILECs),
competitive local exchange carriers (CLECs), distributors, Internet service providers (ISPs) and directly to end-users. Disaggregated financial information regarding the Companys customers who accounted for 10% or more of the Companys
revenues for the three and nine months ended June 30, 2003 and 2002 is as follows:



|                                     |  | Three months ended June 30, |       |  | Nine months ended June 30, |  
|------------------------------------ |  | --------------------------- | ----- |  | -------------------------- | -
|                                     |  | 2003                        |       |  | 2002                       |  
|                                     |  | ($ in thousands)            |      
|SwissCom AG (Swisscom)               |  | $                           | 4,096 |  | 19                         | %
|Covad Communications Company (Covad) |  |                             | 3,297 |  | 15                         |  
|SBC Communications, Inc. (SBC)       |  |                             | 2,870 |  | 13                         |  
|Ingram Micro Inc. (Ingram Micro)     |  |                             | 1,107 |  | 5                          |  
|IBM                                  |  |                             |      |  |                           |  



No other customers
during the three and nine months ended June 30, 2003 and 2002 accounted for 10% or more of the Companys total revenues. For each of the three months ended June 30, 2003 and 2002, there were four customers that each individually represented at
least 5% of the Companys revenues and in the aggregate, accounted for 52% and 45%, respectively, of the Companys total revenues. For each of the nine months ended June 30, 2003 and 2002, there were four customers that each individually
represented at least 5% of the Companys revenues and in the aggregate, accounted for 45% and 37%, respectively, of the Companys total revenues.



The following table sets forth the accounts receivable balances at June 30, 2003 and 2002 for the customers identified above along with such data
expressed as a percentage of total accounts receivable:



|June 30,     |  | 2003             |       |  | 2002 |  
|------------ |  | ---------------- | ----- |  | ---- | -
|             |  | ($ in thousands) |      
|Covad        |  | $                | 2,135 |  | 14   | %
|Swisscom     |  |                  | 3,076 |  | 20   |  
|SBC          |  |                  | 187   |  | 1    |  
|Ingram Micro |  |                  | 731   |  | 5    |  
|IBM          |  |                  | 14    |  | 0    |  



The Company has not
experienced collection difficulties from these customers. The Company generally has collected accounts due from these customers within the terms provided by the Company in the normal course of business.



|(11) |  | Long-Term Investments
|---- |  | ---------------------



In fiscal year 2001, the Company purchased $2.0 million of Series D Preferred Stock in MegaPath Networks Inc. (MegaPath). In fiscal year 2002, the Company
purchased $0.4 million of Series E Preferred Stock in MegaPath. In April 2003, MegaPath completed an additional round of financing in which the Company invested $26,000. The Company currently 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 the three and nine months ended June 30, 2003, MegaPath purchased $0.3 million and $1.1 million, respectively, of the Companys products.
At June 30, 2003, MegaPaths account receivable with the Company was $0.2 million. In fiscal year 2002, the Company recorded a $1.4 million 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 June 30, 2003 due to the fact that the April 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 expertise, products and services that



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enable small and medium size businesses to focus on their core competencies. Everdream did not purchase
any of the Companys products during the three or nine months ended June 30, 2003 and did not account for any accounts receivable at June 30, 2003. In fiscal year 2002, the Company recorded a $1.5 million loss on impaired securities related to
its investment in Everdream. During the three months ended March 31, 2003, the Company recorded a $0.5 million loss on impaired securities, fully impairing the remaining balance of the Companys investment in Everdream. These impairments were
recorded based on valuations used in Everdreams subsequent financings and the Companys resulting ownership interest in Everdream after these financings.



|(12) |  | Restructuring Costs
|---- |  | -------------------



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



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



Detail of the restructuring charge is as follows:



|                         |  | Employeeseverancebenefits |     | Other |   | Total
|------------------------ |  | ------------------------- | --- | ----- | - | -----
|Total charge             |  | $                         | 243 |       | $ | 12   
|Less: Amounts paid       |  |                           | 228 |       |   | 12   
|                         |  |                           |     |       |   |      
|Balance at June 30, 2003 |  | $                         | 15  |       | $ |     
|                         |  |                           |     |       |   |      



During the three
months ended December 31, 2002, the Company recorded a restructuring charge of $0.3 million, primarily consisting of employee severance benefits resulting from a reduction in the Companys workforce, and facility closure costs related to
closure of a sales office in Hong Kong. Detail of the restructuring charge is as follows:



|                         |  | Employeeseverancebenefits |     | Facility closure costs |   | Other |  | Total
|------------------------ |  | ------------------------- | --- | ---------------------- | - | ----- |  | -----
|                         |  | (in thousands)           
|Total charge             |  | $                         | 313 |                        | $ | 25    |  | $    
|Less: Amounts paid       |  |                           | 310 |                        |   | 20    |  |      
|Non-cash charges         |  |                           |    |                        |   |      |  |      
|                         |  |                           |     |                        |   |       |  |      
|Balance at June 30, 2003 |  | $                         | 3   |                        | $ | 5     |  | $    
|                         |  |                           |     |                        |   |       |  |      



During the three
months ended December 31, 2001, 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. During the three months ended June 30, 2003, the Company reversed part of the remaining liability. Detail of the restructuring charge is as follows:



|                                        |  | Employee severance benefits |     | Other |   | Total
|--------------------------------------- |  | --------------------------- | --- | ----- | - | -----
|Total charge                            |  | $                           | 394 |       | $ | 88   
|Less: Amounts paid                      |  |                             | 308 |       |   |     
|Non-cash charges                        |  |                             |    |       |   | 58   
|Reversal due to expiration of liability |  |                             | 57  |       |   |     
|                                        |  |                             |     |       |   |      
|Balance at June 30, 2003                |  | $                           | 29  |       | $ | 30   
|                                        |  |                             |     |       |   |      



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During the three months ended March 31, 2001, the Company recorded a restructuring charge in connection
with a reduction in the Companys workforce of approximately 27 employees and costs to exit certain business activities. The charge consisted of employee severance benefits, costs related to exiting certain Internet portal business activities
and future lease costs for facilities to be abandoned. The Company believes that no liabilities remain outstanding related to this restructuring, and for that reason reversed the remaining liability during the three months ended June 30, 2003.
Detail of the restructuring charge is as follows:



|                                |  | Employee severance benefits |     | Internet portal exit costs |   | Facility costs |  | Total
|------------------------------- |  | --------------------------- | --- | -------------------------- | - | -------------- |  | -----
|                                |  | (in thousands)             
|Total charge                    |  | $                           | 475 |                            | $ | 510            |  | $    
|Less:                           |  |                             |     |                            |   |                |  |      
|Amounts paid                    |  |                             | 344 |                            |   | 97             |  |      
|Non-cash charges                |  |                             | 63  |                            |   | 413            |  |      
|Reversal of remaining liability |  |                             | 68  |                            |   |               |  |      
|                                |  |                             |     |                            |   |                |  |      
|Balance at June 30, 2003        |  | $                           |    |                            | $ |               |  | $    
|                                |  |                             |     |                            |   |                |  |      



|(13) |  | Integration Costs
|---- |  | -----------------



During the three months ended December 31, 2001, the Company recorded a charge of $0.3 million for integration costs incurred in connection with
integrating Caymans customers, systems and operations. Detail of the charge for integration costs is as follows:



|                         |  | Customerintegration communications |     | Systems integration |   | Total
|------------------------ |  | ---------------------------------- | --- | ------------------- | - | -----
|                         |  | (in thousands)                    
|Total charge             |  | $                                  | 269 |                     | $ | 40   
|Less amounts paid        |  |                                    | 269 |                     |   | 40   
|                         |  |                                    |     |                     |   |      
|Balance at June 30, 2003 |  | $                                  |    |                     | $ |     
|                         |  |                                    |     |                     |   |      



|(14) |  | Credit Facility and Term Loans
|---- |  | ------------------------------



Credit Facility. In June 2002, the Company entered into a Loan and Security Agreement with Silicon Valley Bank (the Credit Facility). Pursuant to
the Credit Facility, the Company may borrow up to $15.0 million from time to time from Silicon Valley Bank. The actual amount that can be borrowed at any time is determined using a formula relating to the amount of eligible accounts receivable and
inventory at the borrowing date. On June 12, 2003, the Company and Silicon Valley Bank amended the Credit Facility to extend the term from June 30, 2004 to June 30, 2005. Silicon Valley Bank also agreed to amend the tangible net worth covenant in
the Credit Facility to provide that the Company must maintain a minimum tangible net worth of $20 million plus 50% of the Companys net income in each fiscal quarter through June 2004. The minimum tangible net worth covenant was amended because
the Company had not met the tangible net worth covenant of $23.5 million at April 30, 2003. As part of the June 2003 amendment, Silicon Valley Bank waived the default of this covenant retroactively to April 1, 2003. There is no assurance that
Silicon Valley Bank will waive any future default of this or any other covenant contained in the Credit Facility. The Company must maintain an adjusted quick ratio, as defined as the ratio of (i) the Companys unrestricted cash
maintained at Silicon Valley Bank plus cash equivalents maintained at Silicon Valley Bank plus receivables and investments made on behalf of the Company through Silicon Valley Banks Investment Product Services Division (ISP Division) to
(ii) the Companys current liabilities plus the outstanding principal amount of any obligations less deferred revenues, of not less than 1.25 to 1 from June 2002 through December 31, 2002 and 1.5 to 1 from January 1, 2003 to the end of
the term.



The Credit Facility bears interest at a rate equal
to the prime rate (the rate announced by Silicon Valley Bank as its prime rate) plus 0.75% per annum. At June 30, 2003, the interest rate was 5.0%. The Company may



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borrow under the Credit Facility in order to finance working capital requirements for new products and
customers, and otherwise for general corporate purposes in the normal course of business.



As of June 30, 2003, the Company had outstanding borrowings of $8.5 million, collateralized by the Companys accounts receivable and inventory. This borrowing was recorded as a long-term liability on the
Companys June 30, 2003 condensed consolidated balance sheet based on the loan maturity date of June 27, 2005, which is more than one year from the balance sheet date.



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



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



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



Other income (loss), net consists of losses on impaired securities and other income (expense) which consists primarily of interest income the Company
earns on its cash, cash equivalents and short-term investments, interest expense related to the Companys borrowing under its credit facility and gains and losses on foreign currency transactions. The following table sets forth for the periods
indicated, detail of the Companys other income (loss), net:



|                            |  | Three Months Ended June 30, |     |   | Nine Months Ended June 30, |  
|--------------------------- |  | --------------------------- | --- | - | -------------------------- | -
|                            |  | 2003                        |     |   | 2002                       |  
|                            |  | (in thousands)              |    
|Loss on impaired securities |  | $                           |    |   |                            | $
|                            |  |                             |     |  
|Other income (expense), net |  |                             |     |   |                            |  
|Interest income             |  |                             | 33  |   |                            |  
|Interest expense            |  |                             | (94 | ) |                            |  
|Other income (expense)      |  |                             | 58  |   |                            |  
|                            |  |                             |     |   |                            |  
|Subtotal                    |  |                             | (3  | ) |                            |  
|                            |  |                             |     |   |                            |  
|Total                       |  | $                           | (3  | ) |                            | $
|                            |  |                             |     |   |                            |  



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PART I. FINANCIAL INFORMATION

Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations



Some of the information in this Form 10-Q 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-Q, as well as any cautionary language in this Form 10-Q, 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-Q could seriously harm our business and that, upon the occurrence of any of these events, the trading
price of our common stock could decline.



Overview



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



Broadband Equipment. We have developed a comprehensive line of broadband Internet gateways, which allow the transport of high-speed data over the local copper loop
and enable telecommunications carriers to provide cost-effective and high-speed services over existing infrastructure. Our products support many types of high-speed wide area network (WAN) interfaces, including connectivity for asynchronous DSL
(ADSL), Symmetric High bit-rate Digital Subscriber Loop (SHDSL), symmetric DSL (SDSL), integrated services digital network DSL (IDSL), Ethernet, Cable, T1, Fractional T1, 56K digital dataphone service (DDS), Dual Analog, integrated services digital
network (ISDN), and Wireless Fidelity or Wi-Fi, which is the popular name for 802.11-based technologies that have passed specific certification testing. Our broadband Internet gateway product line includes routers and modems for data services and
integrated access devices (IADs) for combined voice and data services, all of which are designed to deliver high performance, reliability and scalability at a competitive price. We believe a key to our success is comprehensive interoperability with
leading central office equipment and a common firmware platform across all WAN connections. The substantial majority of our revenues are derived from sales of our broadband Internet gateways, in particular our DSL routers and modems. When reading
our consolidated statement of operations, revenues and cost of revenues related to the sale of our broadband Internet equipment are classified as Internet equipment.



Broadband Services. Our service delivery platform includes the netOctopus suite of broadband gateway, PC management and customer
support software solutions, Web eCommerce server software and Timbuktu software solutions. netOctopus server software products enable remote support and centralized management of installed broadband gateways. netOctopus Desktop Support and eCare
software enable broadband service providers and



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traditional enterprises to support their customers by remotely viewing and operating the customers desktop
computer. The Netopia Web eCommerce server solution provides no assembly required Web sites and online stores that we call eSites and eStores, with a wide variety of vertical market content packages to suit many needs, from franchisees
to sole proprietors. Timbuktu software solutions include systems management tools such as remote control, remote computer configuration and file transfer. When reading our consolidated statement of operations, revenues and cost of revenues related
to the sale of our broadband services are classified as Web platform licenses and services.



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



| |  |  | Telecommunication carriers, including incumbent local exchange carriers (ILECs), such as SBC Communications Inc. (SBC), Swisscom AG (Swisscom), BellSouth Telecommunications, Inc.
(BellSouth) and Verizon Communications Inc. (Verizon); competitive local exchange carriers (CLECs), including Covad Communications Company (Covad), McLeodUSA Inc. (McLeod) and NextGenTel; Internet Service Providers (ISPs), including Earthlink, Inc.
(Earthlink), DSL.net, Inc. (DSL.Net) and Integra Telecom, Inc. (Integra Telecom); and Internet Exchange Carriers (IXCs) including Sprint Corporation (Sprint) and WorldCom, Inc. (WorldCom);
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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



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



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



Critical Accounting Policies and Estimates



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



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public release of our financial results. We believe the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of our condensed consolidated financial statements.



Revenue Recognition. We recognize revenue from the sale of broadband Internet equipment at the time of shipment to a third party customer when (a) the price to the
customer is substantially fixed or determinable; (b) the customer is obligated to pay the seller and the obligation is not contingent on resale of the product; (c) the customers obligation to us would not be changed in the event of theft or
physical destruction or damage of the product; and (d) we do not have significant obligations for future performance to directly bring about resale of the product by the customer. At the date of shipment, assuming that the revenue recognition
criteria specified above are met, we provide for an estimate of returns and warranty expense based on historical experience of returns of similar products and warranty costs incurred, respectively.



We recognize software revenue in accordance with Statement of Position (SOP) 97-2,
Software Revenue Recognition, as amended. We generally have multiple element arrangements for our software revenue including software licenses and maintenance. We allocate the arrangement fee to each of the elements based on the residual
method utilizing vendor specific objective evidence (VSOE) for the undelivered elements, regardless of any separate prices stated within the contract for each element. VSOE for maintenance is generally based on the price the customer would pay when
sold separately. Fair value for the delivered elements, primarily software licenses and upgrades, is based on the residual amount of the total arrangement fees after deducting the VSOE for the undelivered elements. Software license revenue is
recognized when a non-cancelable license agreement has been signed or a properly authorized firm purchase order is received and the customer acknowledges an unconditional obligation to pay, the software product has been delivered, there are no
uncertainties surrounding product acceptance, the fees are fixed and determinable, and collection is considered probable. Maintenance revenues, including revenues included in multiple element arrangements, are deferred and recognized ratably over
the related contract period, generally twelve months. We record unearned revenue for software arrangements when cash has been received from the customer and the arrangement does not qualify for revenue recognition under our revenue recognition
policy. We record accounts receivable for software arrangements when the arrangement qualifies for revenue recognition and cash or other consideration has not been received from the customer. We recognize revenue from long-term software development
contracts using the percentage of completion method in accordance with SOP 81-1, Accounting for Performance of Construction-Type and Certain Production-Type Contracts. Under the percentage of completion method, we recognize revenue as work on
the contract progresses.



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 accounts receivable for software
arrangements when the arrangement qualifies for revenue recognition and cash or other consideration has not been received from the customer.



Goodwill. On October 1, 2001, we early adopted SFAS No. 142, which provides that goodwill should not be amortized but instead be tested for impairment annually at
the reporting unit level. The impairment testing is performed in two steps: (i) the determination of impairment, based upon the fair value of a reporting unit as compared to its carrying value, and (ii) if there is an indication of impairment, this
step measures the amount of impairment loss by comparing the implied fair value of goodwill with the carrying amount of that goodwill. We will perform our annual impairment test, as required by SFAS No. 142, in our fiscal fourth quarter. We did not
perform an impairment test during the nine months ended June 30, 2003, as there are no indicators of impairment related to



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the value of our goodwill. As of June 30, 2003, we had approximately $1.0 million of goodwill related to our acquisitions
of WebOrder and netOctopus.



Impairment of Long-Lived Assets, Including
Identifiable Intangibles. We elected to adopt early the provisions of SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, on October 1, 2001. SFAS No. 144 serves to clarify and further define the provisions of
SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of.We evaluate our long-lived assets, including identifiable intangible assets in accordance with SFAS No. 144 and test our long-lived
assets and identifiable intangibles for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the
carrying amount of an asset to the estimated undiscounted future net cash flows expected to be generated by the asset group which represents the lowest level for which identifiable cash flows exist. If an asset group is considered to be impaired,
the impairment to be recognized is measured by the amount by which the carrying amount exceeds the fair value of the assets and is allocated to the long-lived assets of the asset group on a pro rata basis. Fair value is estimated using the
discounted cash flow method. Assets to be disposed of are reported at the lower of carrying values or fair values, less costs of disposal. At June 30, 2003, our identifiable intangible assets consisted of developed product technology, core
technology and sales channel relationships related to the acquisition of Cayman. We did not test our long-lived assets and identifiable intangibles for impairment during the nine months ended June 30, 2003, because there were no events or changes in
circumstances that would indicate that the carrying amount of the asset groups may not be recoverable. As of June 30, 2003, we had $5.8 million of identified intangible assets that are primarily related to our acquisition of Cayman. (See Note 4 of
Notes to Unaudited Condensed Consolidated Financial Statements.)



Accounting
for Stock-based Compensation. We maintain stock option plans under which we may grant incentive stock options and non-statutory stock options.



| |  |  | The 1996 Stock Option Plan provides for the issuance of incentive or non-statutory options to directors, employees, and non-employee consultants. Options are granted at the
discretion of the Board of Directors or the Compensation Committee of the Board of Directors. Incentive stock options may be granted at not less than 100% of the fair market value per share and non-statutory stock options may be granted at not less
than 85% of the fair market value per share at the date of grant as determined by the Board of Directors or the Compensation Committee, except for options granted to a person owning greater than 10% of the total combined voting power of all classes
of stock of the Company, for which the exercise price of the options must be not less than 110% of the fair market value.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The 2000 Stock Incentive Plan provides 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.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The 2002 Equity Incentive Plan provides for the issuance of incentive or non-statutory options, stock awards and other equity awards to directors, employees, and non-employee
consultants. 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.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



SFAS No. 123, Accounting for Stock-Based Compensation,
encourages, but does not require, companies to record compensation cost for stock-based employee compensation plans based on the fair market value of options granted. We account for stock based compensation using the intrinsic value method
prescribed in Accounting Principles



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Board (APB) No. 25, Accounting for Stock Issued to Employees, and related interpretations.
Accordingly, because the grant price equals the market price on the date of grant for options we issue, no compensation expense is recognized for stock options issued to employees. In December 2002, the FASB issued SFAS No. 148, Accounting for
Stock Based Compensation  Transition and Disclosure, which amends SFAS No. 123. SFAS No. 148 requires more prominent and frequent disclosures about the effects of stock-based compensation. We will continue to account for our stock based
compensation according to the provisions of APB No. 25.



Allowance for
Doubtful Accounts. We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. Management specifically analyzes the aging of accounts receivable and also analyzes
historical bad debts, customer concentrations, customer credit-worthiness, current economic trends and changes in customer payment terms, when evaluating the adequacy of the allowance for doubtful accounts in any accounting period. If the financial
condition of our customers or channel partners were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.



Non-Marketable Securities. We periodically make strategic investments in companies whose stock is not currently traded on a stock
exchange and for which no quoted price exists. The cost method of accounting is used to account for these investments, as we do not exert significant influence over these investments. We review these investments for impairment whenever events or
changes in circumstances indicate that the carrying amount of the assets might not be recoverable. Examples of events or changes in circumstances that may indicate to management that an impairment exists may be a significant decrease in the market
value of the company, poor or deteriorating market conditions in the public and private equity capital markets, significant adverse changes in legal factors or within the business climate the company operates, and current period operating or cash
flow losses combined with a history of operating or cash flow losses or projections and forecasts that demonstrate continuing losses associated with the companys future business plans. Impairment indicators identified during the reporting
period could result in a significant write down in the carrying value of the investment if we believe an investment has experienced a decline in value that is other than temporary. These investments had a total carrying value of $1.0 million as of
June 30, 2003, and have been permanently written down a total of $3.4 million from original cost. Also, future adverse changes in market conditions or poor operating results of underlying investments could result in significant additional impairment
charges in the future.



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



Provision for Income Taxes. We did not record an income tax benefit for the three or nine months ended June 30, 2003 or fiscal years 2002, 2001 and 2000 primarily due to continued substantial uncertainty
regarding our ability to realize our deferred tax assets. Based upon available objective evidence, there has been sufficient uncertainty regarding the realizability of our deferred tax assets to warrant a full valuation allowance in our financial
statements. The factors considered included prior losses, inconsistent profits, and lack of carryback potential to realize our deferred tax assets. Based on our estimates for fiscal year 2003 and beyond, we believe the uncertainty regarding the
realizability of our deferred tax assets may diminish to the point where it is more likely than not that our deferred tax assets will be realized. At such point, we would also reverse all or a portion of our valuation allowance which will result in
an income tax benefit.



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



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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 June 30, 2003, our principal source of liquidity included cash, cash equivalents and short-term investments of $23.1 million, a credit facility with a maximum borrowing capacity of $15.0 million from which, at June 30, 2003, we had
outstanding borrowings of $8.5 million and $1.3 million of additional borrowing capacity, and two term loans from which we had amounts outstanding of $0.4 million.



Cash, Cash Equivalents and Short-Term Investments. The following table sets forth our cash, cash equivalents and short-term
investments as of June 30, 2003 and September 30, 2002.



|                                                  |  | June 30, 2003    |        | September 30, 2002 |   | Increase/(decrease) | 
|------------------------------------------------- |  | ---------------- | ------ | ------------------ | - | ------------------- | 
|                                                  |  |                  | $      |                    |   | %                   | 
|                                                  |  | ($ in thousands) |       
|Cash, cash equivalents and short-term investments |  | $                | 23,116 |                    | $ | 25,022              | 



For the nine months ended June 30,
2003, cash and cash equivalents decreased primarily due to the cash used by our operating activities and purchases of capital equipment partially offset by increased borrowings under our credit facility and term loans as well as proceeds from the
issuance of common stock related to activities under our Employee Stock Purchase Program.



| |  |  | Our operating activities excluding the changes in operating assets and liabilities, used $3.9 million to support our net loss;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------



| |  |  | We purchased $1.1 million of capital equipment primarily related to equipment to support our development of new products and enhance the capabilities of our test laboratory as well
as tooling to support the manufacture of our products;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Changes in our operating assets and liabilities used $2.0 million primarily related to a $4.9 million increase of accounts receivable as a large proportion of our sales occurred in
the last month of the quarter, $0.8 million increase in deposits and other assets related to our purchase of a marketing license and a $0.9 million decrease in deferred revenue primarily related to the recognition of revenue for a software
integration project partially offset by an increase of accounts payable and accrued liabilities of $2.5 million and reduction of inventory of $1.6 million.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



This use of cash was partially offset by a net increase in borrowings under our credit facility and term loans of $4.5 million and $0.9
million of cash provided from purchases of our common stock primarily related to activities under our Employee Stock Purchase Program and employee stock option exercises.



As of June 30, 2003, borrowings under our credit facility and term loans totaled $8.9 million. We expect to continue to use our credit
facility along with our existing cash, cash equivalent and short-term investments to support our working capital needs in both the short and long-term. Additionally, we expect our cash, cash equivalents and short-term investments at September 30,
2003 may similar to the balances at June 30, 2003, although these balances are impacted to the extent that we need to purchase additional inventory to build our products or otherwise support our continuing operations. As of June 30, 2003, we did not
have any material commitments for capital expenditures. We will continue to use our credit facility to finance our future growth and fund our ongoing research and development activities during fiscal 2003 and beyond. We believe we have adequate
cash, cash equivalents and borrowing capacity to meet our anticipated capital needs for at least the next twelve months. If we issue additional stock to raise capital, our existing stockholders percentage ownership in Netopia would be reduced.



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



|                               |  | June 30,         |         | September 30, |   | Increase/(decrease) | 
|------------------------------ |  | ---------------- | ------- | ------------- | - | ------------------- | 
|                               |  | 2003             |         | 2002          |   | $                   | 
|                               |  | ($ in thousands) |         |               |   |                     | 
|Trade accounts receivable, net |  | $                | 15,179  |               | $ | 9,950               | 
|Days sales outstanding (DSO)   |  |                  | 63 days |               |   | 54 days             | 



Changes in our trade accounts
receivable, net balances and days sales outstanding are primarily due to the lack of linearity of sales within any period, and collections performance. Our targeted range for DSO is 50 to 60 days. Trade accounts receivable and DSO increased
primarily due to a large proportion of sales occurring in the last month of the three-month period ending June 30, 2003.



Inventory. The following table sets forth our inventory as of June 30, 2003 and September 30, 2002.



|                |  | June 30,         |           | September 30, |   | Increase/(decrease) | 
|--------------- |  | ---------------- | --------- | ------------- | - | ------------------- | 
|                |  | 2003             |           | 2002          |   | $                   | 
|                |  | ($ in thousands) |           |               |   |                     | 
|Inventory       |  | $                | 4,690     |               | $ | 6,259               | 
|Inventory turns |  |                  | 5.8 turns |               |   | 5.8 turns           | 



Inventory consists primarily of raw
material, work in process, and finished goods. Inventory has decreased as a result of increasing visibility into customer orders enabling us to more effectively manage inventory levels as well as our manufacturing providers now purchasing directly
from suppliers certain raw material we used to purchase and consign to the manufacturer which value was carried in our inventory. Inventory levels may increase in the future if our customers do not provide us with accurate information by our
customers, if we do not correctly forecast expected customer demand, or if customers defer or otherwise delay purchases. We may have to borrow against our credit facility to finance any needed inventory increases. We continue to pay close attention
to inventory management 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
outstanding borrowings under our credit facility and term loans as of June 30, 2003 and September 30, 2002.



|                                                |  | June 30,         |       | September 30, |   | Increase/(decrease) | 
|----------------------------------------------- |  | ---------------- | ----- | ------------- | - | ------------------- | 
|                                                |  | 2003             |       | 2002          |   | $                   | 
|                                                |  | ($ in thousands) |       |               |   |                     | 
|Borrowings under credit facility and term loans |  | $                | 8,917 |               | $ | 4,428               | 



Borrowings under our credit facility
increased primarily to support our operating activities and purchases of inventory. We used the term loans, the balance of such are approximately $0.4 million, primarily to purchase capital equipment used to enhance the capabilities of our test
laboratory. (See Note 14 of Notes to Unaudited Condensed Consolidated Financial Statements.)



We believe that the amended terms of the Credit Facility provide adequate access to borrowings to meet our current capital needs.



Commitments



As of June 30, 2003 we had commitments that consisted of facilities and equipment under operating lease agreements expiring at various dates through 2008. 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



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following is a schedule of our future minimum rental payments required under these operating lease agreements that have
initial or remaining non-cancelable lease terms in excess of one year:



|Fiscal years ending September 30,        |  | 2003 (a)       |     | 2004 |   | 2005  |  | 2006 |       | 2007 |   | thereafter |  | Total
|---------------------------------------- |  | -------------- | --- | ---- | - | ----- |  | ---- | ----- | ---- | - | ---------- |  | -----
|                                         |  | (in thousands)
|Facility and operating lease commitments |  | $              | 396 |      | $ | 1,801 |  | $    | 1,336 |      | $ | 770        |  | $    

---

|(a) |  | Commitments for the remaining three months of fiscal year ending September 30, 2003.
|--- |  | ------------------------------------------------------------------------------------



Results of Operations for the Three and Nine Months Ended June 30, 2003 and 2002



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



|                                                    |  | Three months endedJune 30, |        |   | Percentincrease/(decrease) |     |    | Nine months endedJune 30, |      |        | Percentincrease/(decrease) |     
|--------------------------------------------------- |  | -------------------------- | ------ | - | -------------------------- | --- | -- | ------------------------- | ---- | ------ | -------------------------- | ----
|                                                    |  | 2003                       |        |   | 2002                       |     |    |                           | 2003 |        |                            | 2002
|                                                    |  | (in thousands)             |        |   |                            |     |    | (in thousands)            |      |        |                            |     
|REVENUES:                                           |  |                            |        |   |                            |     |    |                           |      |        |                            |     
|Internet equipment                                  |  | $                          | 17,962 |   |                            | 82  | %  |                           | $    | 10,096 |                            |     
|Web platform licenses and services                  |  |                            | 4,009  |   |                            | 18  | %  |                           |      | 5,468  |                            |     
|                                                    |  |                            |        |   |                            |     |    |                           |      |        |                            |     
|Total revenues                                      |  |                            | 21,971 |   |                            | 100 | %  |                           |      | 15,564 |                            |     
|                                                    |  |                            |        |   |                            |     |    |                           |      |        |                            |     
|COST OF REVENUES:                                   |  |                            |        |   |                            |     |    |                           |      |        |                            |     
|Internet equipment                                  |  |                            | 12,759 |   |                            | 58  | %  |                           |      | 7,740  |                            |     
|Web platform licenses and services                  |  |                            | 316    |   |                            | 1   | %  |                           |      | 154    |                            |     
|                                                    |  |                            |        |   |                            |     |    |                           |      |        |                            |     
|Total cost of revenues                              |  |                            | 13,075 |   |                            | 59  | %  |                           |      | 7,894  |                            |     
|                                                    |  |                            |        |   |                            |     |    |                           |      |        |                            |     
|GROSS PROFIT                                        |  |                            | 8,896  |   |                            | 41  | %  |                           |      | 7,670  |                            |     
|                                                    |  |                            |        |   |                            |     |    |                           |      |       
|OPERATING EXPENSES:                                 |  |                            |        |   |                            |     |    |                           |      |        |                            |     
|Research and development                            |  |                            | 3,791  |   |                            | 17  | %  |                           |      | 4,546  |                            |     
|Research and development project cancellation costs |  |                            |       |   |                            |    |    |                           |      |       |                            |     
|Selling and marketing                               |  |                            | 5,099  |   |                            | 24  | %  |                           |      | 6,204  |                            |     
|General and administrative                          |  |                            | 977    |   |                            | 4   | %  |                           |      | 1,466  |                            |     
|Amortization of intangible assets                   |  |                            | 374    |   |                            | 2   | %  |                           |      | 374    |                            |     
|Restructuring cost, net                             |  |                            | 130    |   |                            | 1   | %  |                           |      |       |                            |     
|Integration costs                                   |  |                            |       |   |                            |    |    |                           |      |       |                            |     
|Acquired in-process research and development        |  |                            |       |   |                            |    |    |                           |      |       |                            |     
|                                                    |  |                            |        |   |                            |     |    |                           |      |        |                            |     
|Total operating expenses                            |  |                            | 10,371 |   |                            | 48  | %  |                           |      | 12,590 |                            |     
|                                                    |  |                            |        |   |                            |     |    |                           |      |        |                            |     
|OPERATING LOSS                                      |  |                            | (1,475 | ) |                            | (7  | )% |                           |      | (4,920 | )                          |     
|Other income (loss), net                            |  |                            | (3     | ) |                            | 0   | %  |                           |      | 54     |                            |     
|                                                    |  |                            |        |   |                            |     |    |                           |      |        |                            |     
|NET LOSS                                            |  | $                          | (1,478 | ) |                            | (7  | )% |                           | $    | (4,866 | )                          |     
|                                                    |  |                            |        |   |                            |     |    |                           |      |        |                            |     



REVENUES



Internet Equipment. Broadband Internet equipment
revenues increased for the three and nine months ended June 30, 2003 from the three and nine months ended June 30, 2002 primarily due to increased sales volumes of our ADSL broadband Internet equipment to ILEC customers, both in the United States
and Europe, who serve the market for business and residential-class ADSL Internet services. Sales volumes increased primarily as a result of increased purchases by SBC and Swisscom, as we continue to penetrate the ADSL market for business and
residential-class products. This increase was partially offset by reduced sales to Ingram Micro and BellSouth as well as declining average selling prices primarily as a result of the mix of products sold, price competition from foreign and domestic
competitors and customer driven demands. The mix of broadband Internet equipment sales is changing as we begin entering the residential ADSL market. Residential-class products and ADSL products generally have lower average selling prices than
similar business-class products. We expect that we will continue to experience declining average selling prices, primarily as a result of the changing mix of products sold and price competition from both foreign and



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domestic suppliers. We believe that increased sales volumes to current and new customers will offset these declines. The
following table sets forth our volumes and average selling prices, excluding accessories, for the periods indicated:



|                       |  | Three months endedJune 30, |         | Percentincrease/(decrease) |   |        | Nine months endedJune 30, |     | Percentincrease/(decrease) | 
|---------------------- |  | -------------------------- | ------- | -------------------------- | - | ------ | ------------------------- | --- | -------------------------- | 
|                       |  | 2003                       |         | 2002                       |   |        | 2003                      |     | 2002                       | 
|Product volumes        |  |                            | 147,327 |                            |   | 40,245 |                           | 266 | %                          | 
|Average selling prices |  | $                          | 122     |                            | $ | 251    |                           | (51 | )%                         | 



Web Platform Licenses and
Services. Web platforms revenues decreased for the three months ended June 30, 2003 from the three months ended June 30, 2002 primarily due to reduced volume license sales of our Timbuktu and netOctopus Enterprise software products, partially
offset by revenues related to a software integration project with one specific customer which we did not have during the three months ended June 30, 2002.



Web platforms revenues decreased for the nine months ended June 30, 2003 from the nine months ended June 30, 2002 primarily due to reduced volume license and shrink-wrap
sales of our Timbuktu and netOctopus Enterprise software products, partially offset by revenues related to a software integration project with one specific customer which we did not have during the nine months ended June 30, 2002, as well as
increased recurring revenue related to our eSite and eStore products.



Customer Information



We sell our products
primarily to ILECs, CLECs, distributors, ISPs and directly to end-users. The following table sets forth for the periods indicated, our customers who have represented greater than 10% of our revenues in such period, along with such data expressed as
a percentage of total revenues as well as the change from the prior year. No other customers for the three and nine months ended June 30, 2003 and 2002 accounted for 10% or more of total revenues.



|             |  | Three months endedJune 30, |       |  | Percentincrease/(decrease) |   |  | Nine months endedJune 30, |       |  | Percentincrease/(decrease) |     
|------------ |  | -------------------------- | ----- |  | -------------------------- | - |  | ------------------------- | ----- |  | -------------------------- | ----
|             |  | 2003                       |       |  | 2002                       |   |  |                           | 2003  |  |                            | 2002
|             |  | (in thousands)             |       |  |                            |   |  | (in thousands)            |       |  |                            |     
|Swisscom     |  | $                          | 4,096 |  | 19                         | % |  | $                         |      |  |                           |     
|Covad        |  |                            | 3,297 |  | 15                         |   |  |                           | 1,859 |  | 12                         | %   
|SBC          |  |                            | 2,870 |  | 13                         |   |  |                           | 265   |  | 2                          |     
|Ingram Micro |  |                            | 1,107 |  | 5                          |   |  |                           | 2,015 |  | 13                         |     
|IBM          |  |                            |      |  |                           |   |  |                           | 1,699 |  | 11                         |     



Including the greater than 10%
customers in the table above, the following table sets forth the number of customers who each individually represented at least 5% of our revenues for the three and nine months ended June 30, 2003 and 2002.



|                         |  | Three months endedJune 30, |   |  | Nine months endedJune 30, |  
|------------------------ |  | -------------------------- | - |  | ------------------------- | -
|                         |  | 2003                       |   |  | 2002                      |  
|Number of customers      |  | 4                          |   |  | 4                         |  
|Percent of total revenue |  | 52                         | % |  | 45                        | %



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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:



|                               |  | Three months endedJune 30, |        |  | Percentincrease/ (decrease) |   |  | Nine months endedJune 30, |        |  | Percentincrease/ (decrease) |     
|------------------------------ |  | -------------------------- | ------ |  | --------------------------- | - |  | ------------------------- | ------ |  | --------------------------- | ----
|                               |  | 2003                       |        |  | 2002                        |   |  |                           | 2003   |  |                             | 2002
|                               |  | (in thousands)             |        |  |                             |   |  | (in thousands)            |        |  |                             |     
|Europe                         |  | $                          | 6,904  |  | 31                          | % |  | $                         | 3,336  |  | 22                          | %   
|Canada                         |  |                            | 174    |  | 1                           | % |  |                           | 163    |  | 1                           | %   
|Asia Pacific and other         |  |                            | 221    |  | 1                           | % |  |                           | 355    |  | 2                           | %   
|                               |  |                            |        |  |                             |   |  |                           |        |  |                             |     
|Subtotal international revenue |  |                            | 7,299  |  | 33                          | % |  |                           | 3,854  |  | 25                          | %   
|United States                  |  |                            | 14,672 |  | 67                          | % |  |                           | 11,710 |  | 75                          | %   
|                               |  |                            |        |  |                             |   |  |                           |        |  |                             |     
|Total revenues                 |  | $                          | 21,971 |  | 100                         | % |  | $                         | 15,564 |  | 100                         | %   
|                               |  |                            |        |  |                             |   |  |                           |        |  |                             |     



International revenues increased for
the three and nine months ended June 30, 2003 from the three and nine months ended June 30, 2002 primarily due to increased sales of our ADSL broadband equipment to new European customers, Swisscom in particular. Revenues from the United States
increased for the three and nine months ended June 30, 2003 from the three and nine months ended June 30, 2002 primarily due to increased sales volumes of our ADSL broadband equipment to SBC.



COST OF REVENUES



Cost of revenues consists primarily of material costs related to our contract manufacturing
operations and manufacturing variances. Total cost of revenues increased for the three and nine months ended June 30, 2003 from the three and nine months ended June 30, 2002 primarily as a result of increased sales of our ADSL broadband Internet
equipment and costs related to our software integration project.



Gross Margin



Our total gross margin decreased
to 41% for the three months ended June 30, 2003 from 49% for the three months ended June 30, 2002, and decreased to 41% for the nine months ended June 30, 2003 from 50% for the nine months ended June 30, 2002 primarily due to increased sales of
lower margin ADSL broadband Internet equipment and a lower percentage of higher margin Web platforms revenue in the total revenue mix.



Internet Equipment. Broadband Internet equipment gross margin increased to 29% for the three months ended June 30, 2003 from 23% for the three months ended June
30, 2002 primarily as a result of economies of scale and increased overhead absorption created by higher unit volumes flowing through our inventory. Broadband Internet equipment gross margin decreased to 27% for the nine months ended June 30, 2003
from 30% for the nine months ended June 30, 2002 primarily due to increased sales of lower margin ADSL products, declining average selling prices as a result of product mix and price competition as well as pricing strategies as we enter new markets
and expand our customer base. The primary factors influencing our Internet equipment gross margin are product mix, our ability to drive down cost of revenues based on negotiations with our vendors and increased volumes, and the timing of these cost
reductions relative to market pricing conditions.



Web Platform Licenses and
Services. Web platforms gross margin decreased to 92% for the three months and nine months ended June 30, 2003 from 97% for the three months and nine months ended June 30, 2002 primarily due to engineering labor costs associated with the
software integration project for one specific customer. Excluding the effects of this project, Web platforms gross margin was 96% for the three and nine months ended June 30, 2003.



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



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



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



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



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



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



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



RESEARCH AND DEVELOPMENT



Research and development expenses consist primarily of employee related expenses, depreciation and amortization, development related
expenses such as product prototyping, design and testing, and overhead allocations. Research and development expenses decreased for the three and nine months ended June 30, 2003 from the three and nine months ended June 30, 2002 primarily due to the
transfer of employee costs associated with our software integration project from research and development expenses to Web platform cost of revenues as well as decreased headcount and employee related expenses. For the three months ended June 30,
2003, we transferred $0.2 million of employee costs, which represents approximately 8 full-time equivalent employees during such period, from research and development expenses to Web platform cost of revenues. In addition, for the three months ended
June 30, 2003, our average research and development headcount decreased by approximately 15 employees from the three months ended June 30, 2002, resulting in approximately $0.4 million in reduced employee related expenses. For the nine months ended
June 30, 2003, we transferred $0.6 million of employee costs, which represents approximately 7 full-time equivalent employees during such period, from research and development expenses to Web platform cost of revenues. In addition, for the nine
months ended June 30, 2003, our average research and development headcount decreased by approximately 9 employees from the nine months ended June 30, 2002, resulting in approximately $0.5 million in reduced employee related expenses.



We expect to continue to devote substantial resources to product and technological
development. We expect research and development costs may increase in absolute dollars for the remainder of fiscal year 2003 and into fiscal year 2004 as we continue to develop new and enhanced products and services. We believe our process for
developing software is essentially completed concurrently with the establishment of technological feasibility, and we have not capitalized any internal software development costs to date.



RESEARCH AND DEVELOPMENT PROJECT CANCELLATION COSTS



For the nine months ended June 30, 2003, research and development project cancellation costs
consist primarily of material and equipment costs associated with our joint development efforts with Siemens AG (Siemens) and Proxim, Inc. to develop a wireless IAD for sale to AT&T Corp. (AT&T) to serve AT&Ts anticipated roll-out of
voice-over-DSL services. As a result of AT&T not accepting the final product developed by Siemens and canceling its plans to deploy these voice-over-DSL services on its network, there was no longer a customer or market into which we could sell
the product under development.



SELLING AND
MARKETING



Selling and marketing expenses consist primarily of salary and
commission expense for our sales force, travel and entertainment, advertising and promotional expenses, product marketing, customer service and support costs. Selling and marketing expenses decreased for the three and nine months ended June 30, 2003
from the three and nine months ended June 30, 2002 primarily due to decreased headcount and employee related expenses as well as decreased travel and entertainment expenses as a result of our restructurings and expense control efforts. For the three
months ended June 30, 2003, our average selling and marketing headcount decreased by approximately 26 employees from the three months ended June 30, 2002, resulting in approximately $1.0 million in reduced employee related expenses. For the nine
months ended June 30, 2003, our average selling and marketing headcount decreased by approximately 25 employees from the nine months ended June 30, 2002, resulting in approximately $2.1 million in reduced employee related expenses.



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We expect selling and marketing expenses may increase during the remainder of fiscal year 2003 and into fiscal year 2004
as result of increased headcount and employee related expenses.



GENERAL AND ADMINISTRATIVE



General and
administrative expenses consist primarily of employee related expenses, provisions for doubtful accounts and legal, accounting and insurance costs. General and administrative expenses decreased for the three months ended June 30, 2003 from the three
months ended June 30, 2002 primarily due to our $0.3 million write-off of WorldComs account receivable during the three months ended June 30, 2002 after WorldCom filed for protection under the Bankruptcy Act as well as decreased headcount and
employee related expenses as a result of our restructurings and expense control efforts. For the three months June 30, 2003, our average general and administrative headcount decreased by approximately 12 employees from the three months ended June
30, 2002, resulting in approximately $0.2 million in reduced employee related expenses.



General and administrative expenses decreased for the nine months ended June 30, 2003 from the nine months ended June 30, 2002 primarily due to:



| |  |  | Reduced bad debt expense of approximately $0.3 million as a result the recovery of bad debts previously written-off;
| | - |  | --------------------------------------------------------------------------------------------------------------------



| |  |  | Decreased headcount and employee related expenses as a result of our restructurings and expense control efforts. For the nine months June 30, 2003, our average general and
administrative headcount decreased by approximately 6 employees from the nine months ended June 30, 2002, resulting in approximately $0.2 million in reduced employee related expenses; and
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | $0.2 million reduction in the use of contractors.
| | - |  | -------------------------------------------------



These reductions were partially offset by $0.3 million of increased costs related to the relocation of our corporate headquarters from Alameda, California to Emeryville,
California as well as $0.2 million of increased insurance costs.



We expect
general and administrative expenses will remain at current levels for the remainder of fiscal year 2003 and into fiscal year 2004.



AMORTIZATION OF INTANGIBLE ASSETS



Amortization of intangible assets represents the amortization of intangible assets with identifiable lives related to our acquisition of Cayman. (See Notes 3 and 4 of
Notes to Unaudited Condensed Consolidated Financial Statements.)



RESTRUCTURING COSTS



During the three months
ended June 30, 2003, we recorded a net restructuring charge of approximately $0.1 million. This net charge consisted of restructuring costs of $0.3 million primarily for employee severance benefits related to a reduction in our workforce during the
three months ended June 30, 2003 and the reversal of $0.2 million of liabilities we had accrued in connection with our restructurings during the three months ended March 31, and December 31, 2001. (See Note 12 of Notes To Unaudited Condensed
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 acquisition of Cayman during the three months ended December 31, 2001 and DoBox during the three months ended March 31, 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. (See Note 3 of Notes to Unaudited Condensed Consolidated Financial Statements.)



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OTHER INCOME (LOSS), NET



Other income (loss), net consists of losses on impaired securities and other income (expenses), which consists of interest income we earn on
our cash, cash equivalents and short-term investments, interest expense and gains and losses on foreign currency transactions. Included in other income (loss) for the nine months ended June 30, 2003 is a $0.5 million loss on impaired securities,
fully impairing our investment in Everdream. Included in other income (loss) for the nine months ended June 30, 2002 is a $1.4 million loss on impaired securities, impairing our investment in MegaPath. (See Notes 11 and 15 of Notes to Unaudited
Condensed Consolidated Financial Statements.)



Risk Factors



The following risk factors should be considered carefully in evaluating our business
because such factors may have a significant impact on our business, operating results and financial condition. As a result of the risk factors set forth below and elsewhere in this Form 10-Q, and the risks discussed in our other filings with the
United States Securities and Exchange Commission, our actual results could differ materially from those projected in any forward-looking statements.



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



As a result of continuing capital expenditure requirements and operating
expenses in all areas of our business, our failure to increase our revenues or sufficiently reduce our operating expenses will result in continuing losses and negative cash flow. We incurred net losses of $1.5 million and $8.5 million for the three
and nine months ended June 30, 2003 and have incurred losses from continuing operations of $34.3 million, $41.7 million and $17.6 million for fiscal years ended September 30, 2002, 2001 and 2000, respectively. We used $1.9 million of cash during the
nine months ended June 30, 2003. We used $10.7 million and $2.1 million of cash during fiscal years ended September 30, 2002 and 2001, respectively. Our cash, cash equivalents and short-term investments, including $8.9 million of cash borrowed from
under our credit facility and term loans, totaled $23.1 million at June 30, 2003. Even if we reach profitability and maintain positive cash flow, we may not be able to sustain or increase profitability or cash flow on a quarterly or annual basis.



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



We must continue to enhance and expand our product and service offerings in order to maintain our competitive position and to increase our market share. As a result and
due to our net losses and use of cash, the continuing operations of our business may require substantial capital infusions. Whether or when we can achieve cash flow levels sufficient to support our operations cannot be accurately predicted. Unless
such cash flow levels are achieved, we may require additional borrowings or the sale of debt or equity securities, sale of non-strategic assets, or some combination thereof, to provide funding for our operations. We believe we have adequate cash,
cash equivalents and borrowing capacity to meet our anticipated capital needs for at least the next twelve months. However, if we are unable to obtain additional funds to finance our operations when needed, our financial condition and operating
results would be materially adversely affected and we would not be able to operate our business.



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



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



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



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



| |  |  | The ability of Competitive Local Exchange Carriers, or CLECs, to obtain required capital resources;
| | - |  | ---------------------------------------------------------------------------------------------------



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



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



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



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



Demand for DSL services has exceeded the ability of certain telecommunications carriers and Internet Service Providers, or ISPs, to deploy services in a timely manner and to provide satisfactory customer service. We
offer to carriers and service provider customers the opportunity to bundle basic DSL connectivity with value-added features that enable the provider to bundle differentiated features and services that we believe can justify higher recurring revenues
from end users. These features and services include dial backup, VPNs, remote management and configuration, and 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 do not continue to initiate or expand their deployment of DSL and other broadband services, our revenues could decline and our business could be significantly harmed.



We expect our revenues to become increasingly dependent on our ability to sell our
broadband Internet equipment to ILECs, and we may incur losses if we cannot successfully market and sell our products through ILEC channels.



Incumbent Local Exchange Carriers, or ILECs, have been aggressively marketing DSL services principally focusing on residential services. Prior to our acquisition of
Cayman, we had not sold meaningful quantities of our broadband Internet equipment to ILECs in the United States. As a result of our acquisition of Cayman, we have expanded our customer base to include two ILEC customers, SBC and BellSouth, to which
we previously had not sold our broadband Internet equipment. We have committed resources that are working to expand our sales in the ILEC channel both domestically and internationally. There continue to be barriers associated with such sales
including, but not limited to, lengthy product evaluation cycles, the ability to dislodge competitors whose products are currently being utilized, long-term product deployment cycles and intense price pressures. ILECs currently obtain equipment from
our competitors, such as Thomson Corporation (Thomson), Siemens (through its Efficient Networks subsidiary), Westell Technologies, Inc. (Westell), ZyXEL Communications Co. (ZyXEL), Linksys Group Inc. (Linksys) and 2Wire, Inc. (2Wire), which have
proven to be strong competitors. There is no guarantee we will be successful in retaining the customers acquired in connection with our acquisition of Cayman or otherwise in successfully expanding our presence in the ILEC market. If we fail to
penetrate further the ILEC market for our products and services, our business may be materially and adversely affected.



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



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



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



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



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



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



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



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



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



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



We rely
on a small number of customers for a large portion of our revenues. For the three months ended June 30, 2003, there were four customers that each individually represented at least 5% of our revenues and in the aggregate accounted for 52% of our
total revenues. For the fiscal year ended September 30, 2002, there were four customers that each individually represented at least 5% of our revenues and in the aggregate accounted for 36% of our total revenues. Our revenues will decline and our
business may be significantly harmed if one or more of our significant customers stop buying our products, or reduce or delay purchases of our products.



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 international customers,
mainly in Europe. For the three months ended June 30, 2003 and the fiscal year ended September 30, 2002, our international sales represented 33% and 21%, respectively, of total sales. We expect sales to international customers to continue to
comprise a significant portion of our revenues. For the past two fiscal years, sales of broadband Internet equipment products to some of our European customers who are members of the European Union have been denominated in the Euro. For our
international sales that continue to be denominated in United States dollars, fluctuations in currency exchange rates could cause our products and services to become relatively more expensive to our foreign customers, which could lead to decreased
sales of our products and services. In addition, changes in the value of the Euro relative to the United States dollar could adversely affect our operating results to the extent we do not adequately hedge sales denominated in the Euro.



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



In the market for broadband Internet equipment, we primarily compete with Thomson, Cisco Systems, Inc. (Cisco), Siemens (through its Efficient Networks subsidiary),
Linksys, 2Wire, Westell, and ZyXEL.



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



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



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 with the June 30, 2003 quarter, our revenues have ranged from $15.6 million to $22.0 million, and our net quarterly loss has ranged from $1.5 million to $21.1 million. As a result, we believe that period-to-period
comparisons of our operating results are not necessarily meaningful. Investors should not rely on the results of any one quarter or series of quarters as an indication of our future performance.



It is likely that in some future quarter, quarters or year our operating results will be
below the expectations of securities analysts or investors. In such event, the market price of our common stock may decline significantly. In



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addition to the uncertainties and risks described elsewhere under this Risk Factors heading, variations in
our operating results will likely be caused by factors related to the operation of our business, including:



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



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



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



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



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



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



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



DSL services compete with a variety of different broadband services,
including cable, satellite and other wireless technologies. Many of these technologies compete effectively with DSL services. If any technology competing with DSL technology is more reliable, faster, less expensive, reaches more customers or has
other advantages over DSL technology, then the demand for our DSL products and services and our revenues and gross margins will decrease. There is no guarantee we will be able to develop and introduce products for these competing technologies.



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



All of our broadband Internet products rely on special semiconductor chips that we purchase from fewer than five suppliers. We do not have volume purchase contracts with
any of our suppliers and they could cease selling to us at any time. If we are unable to obtain a sufficient quantity of these semiconductor chips in a timely manner for any reason, sales of our broadband Internet products could be delayed or
halted. Further, we could also be forced to redesign our broadband Internet products and qualify new suppliers of semiconductor chip sets. The resulting stoppage or delay in selling our products and the expense of redesigning our products would
adversely affect our business.



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



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



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stoppage or delay in selling our products and the expense of redesigning our broadband Internet equipment would seriously
harm our reputation and business.



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



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



We have recently developed and introduced a new broadband services platform that enables
network operations centers of broadband service providers the ability to remotely manage, support, and troubleshoot installed broadband gateways, thereby providing the potential for reducing support costs. We believe this service delivery platform
can assist us in differentiating our products and services from those of our competitors. However, this platform and the underlying technology are relatively new, and we cannot provide any assurance that, when deployed in mass scale, the platform
will perform as expected, there are no hidden bugs or defects, or it will be widely adopted by the customers to whom we are marketing the platform.



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



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



The majority of our Web platforms revenues are derived from the sale of software products
for corporate help desks, including Timbuktu and eCare. For the three months ended June 30, 2003 and the fiscal year ended September 30, 2002, revenues from these help desk applications were 57% and 55%, respectively, of total revenues for our Web
platform products. We anticipate that the market for Timbuktu will grow more slowly than the market for our other Web platforms products and services. In addition, we rely on a small number of licensees of our Web platforms to promote the use of our
Web platforms for building web sites and stores. As a result, we derive the majority of the recurring revenues from our Web platforms products from fewer than five customers. The extent and nature of the promotions by licensees of our Web platforms
are outside of our control. If licensees of our eSite and eStore Web platforms do not successfully promote web sites and stores to their customers, we will not generate continued recurring revenues. If these customers were to choose a competitive
platform, this could lead to reduced revenues and adversely impact our results.



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



We depend on our servers, networking hardware and software infrastructure, and third-party service and maintenance of these items to provide reliable, high-performance
hosting for eSite and eStore customers. In addition, our servers are located at third-party facilities. Failure or poor performance by third parties with which we contract for maintenance services could also lead to interruption or deterioration of
our eStie and eStore hosting services. Additionally, a slowdown or failure of our systems for any reason could also lead to interruption or deterioration of our eSite and eStore hosting services. In such a circumstance, our hosting revenue may
decline. In



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addition, if our eSite and eStore hosting services are interrupted, perform poorly, or are unreliable, we are at risk of
litigation from our customers, the outcome of which could harm our business.



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



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



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



Our future performance depends on the continued service of our senior management, product
development and sales personnel, particularly Alan Lefkof, our President and Chief Executive Officer. None of our employees is bound by an employment agreement, and we do not carry key person life insurance. The loss of the services of one or more
of our key personnel could seriously harm our business. Competition for qualified personnel in our industry and geographic location is intense. Although we believe our personnel turnover rate is consistent with industry norms, our future success
depends on our continuing ability to attract, hire, train and retain a substantial number of highly skilled managerial, technical, sales, marketing and customer support personnel. In addition, new hires frequently require extensive training before
they achieve desired levels of productivity.



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



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



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



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



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



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



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



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



A small number of stockholders hold a large portion of our common stock. Our Chairman of the Board owned approximately 5.2% of our common stock outstanding at June 30,
2003. In addition, based on information contained in filings with the United States Securities and Exchange Commission, three institutional investors owned approximately 9.2%, 7.9% and 3.6%, respectively, of our common stock outstanding at March 31,
2003. To the extent one or more of these large stockholders decides to sell substantial amounts of our common stock in the public market over a short period of time, based on the historic trading volumes, we expect the market price of our common
stock could fall.



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



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



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



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



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.
| | - |  | ------------------------------------------------------------------------------------------



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



A third party may have difficulty acquiring us, even if doing so would be beneficial to our stockholders.



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



PART I. FINANCIAL INFORMATION

Item 3. 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 June 30, 2003 and 2002. All of our investments mature in twelve months or less.



|                                                       |  | June 30, 2003  |       |                   | June 30, 2002 |                      
|------------------------------------------------------ |  | -------------- | ----- | ----------------- | ------------- | ---------------------
|Principal (notional) amounts in United States dollars: |  | Cost basis     |       | Fair market value |               | Average interest rate
|                                                       |  | (in thousands) |       |                   |               |                      
|Cash equivalents  fixed rate (a)                      |  | $              | 9,747 |                   | $             | 9,747                
|Short-term investments  fixed rate (b)                |  |                |      |                   |               |                     
|                                                       |  |                |       |                   |               |                      
|                                                       |  | $              | 9,747 |                   | $             | 9,747                
|                                                       |  |                |       |                   |               |                      

---

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

|(b) |  | Short-term investments represent the portion of our investment portfolio that mature in greater than or equal to 90 days.
|--- |  | -------------------------------------------------------------------------------------------------------------------------



Our market interest rate risk for our investment portfolio relates primarily to changes in
the United States short-term prime interest rate. These changes impact the price and yield of our short-term investments. We minimize this risk by following a policy of portfolio diversification. Our market interest rate risk for borrowings under
our Credit Facility relates primarily to the rate we are charged by Silicon Valley Bank for our credit facility. The Credit Facility bears interest at a rate equal to the prime rate (the rate announced by Silicon Valley Bank as its prime
rate) plus 0.75% per annum. At June 30, 2003, the interest rate was 5.0%. To the extent we borrow heavily against our accounts receivable and inventory and Silicon Valley Bank were to increase its Prime Rate, our interest expense would
increase and it would cost us more to borrow against the credit facility.



Foreign Currency Exchange Risk



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



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exchange rate as of June 30, 2003 and the accounts receivable at June 30, 2002 are valued at the United States/Euro
exchange rate as of June 30, 2002. The carrying value approximates fair value at June 30, 2003 and 2002.



|                                                       |  | June 30, 2003   |       | June 30, 2002
|------------------------------------------------------ |  | --------------- | ----- | -------------
|Principal (notional) amounts in United States dollars: |  | Carrying amount |       | Exchange rate
|                                                       |  | (in thousands)  |       |              
|Accounts receivable denominated in Euros               |  | $               | 1,820 |              



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



|                                       |  | June 30, 2003   |     | June 30, 2002
|-------------------------------------- |  | --------------- | --- | -------------
|Principal (notional) amounts in Euros: |  | Carrying amount |     | Spot rate    
|                                       |  | (in thousands)  |     |              
|Currency exchange forward contract # 1 |  | $               | 473 |              
|Currency exchange forward contract # 2 |  |                 |    |              
|Currency exchange forward contract # 3 |  |                 |    |              
|Currency exchange forward contract # 4 |  |                 |    |              
|Currency exchange forward contract # 5 |  |                 |    |              



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.



PART I. FINANCIAL INFORMATION

Item 4. Controls and Procedures



As of the end of
the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our President and Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design
and operation of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)).



Based upon this evaluation, our President and Chief Executive Officer and our Chief Financial Officer concluded that, as of June 30, 2003, our disclosure controls and
procedures were adequate to ensure that information required to be disclosed in the reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the United States Securities
and Exchange Commission rules and forms.



During the period covered by this
report, there have been no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.



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PART II. OTHER INFORMATION

Item 6. Exhibits and Reports on Form 8-K



|(a) |  | Exhibits
|--- |  | --------



|ExhibitNumber |  | Description                                                                                                          
|------------- |  | ---------------------------------------------------------------------------------------------------------------------
|              | 
|10.15         |  | Limited Waiver and Amendment to Loan Documents entered into between Silicon Valley Bank and Netopia, Inc.            
|              | 
|31.1          |  | Certification of President and Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002     
|              | 
|31.2          |  | Certification of Principal Financial and Accounting Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|              | 
|32.1          |  | Certification of President and Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002     
|              | 
|32.2          |  | Certification of Principal Financial and Accounting Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002



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



| |  |  | On April 30, 2003, we filed a Form 8-K reporting Item 7  Financial Statements and Exhibits and Item 9  Regulation FD Disclosure, furnishing a copy of the press release
announcing our financial results for the quarter ended March 31, 2003.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | On April 29, 2003, we filed a Form 8-K reporting Item 5  Other Events and Item 7  Financial Statements and Exhibits, announcing the appointment of Howard T. Slayen to
our Board of Directors and providing a copy of the press release announcing the appointment.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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SIGNATURE



Pursuant to the requirements of the
Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



|Date: August 1, 2003 |  |  |  | NETOPIA, INC.
|-------------------- |  |  |  | -------------
|                     |  |  |  | (Registrant) 
|                     |  |  |  |              
|                     |  |  |  |              
|                     |  |  |  |              
|                     |  |  |  |              
|                     |  |  |  |              
|                     |  |  |  |              
|                     |  |  |  |              
|                     |  |  |  |              



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