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FORM 10-Q

|x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
|- | ----------------------------------------------------------------------------------------
|  |                                                                                         
|  | For the quarterly period ended June 30, 2002                                            
|  |                                                                                         
|  | OR                                                                                      
|  |                                                                                         
|o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

|For the transition period from ________ to ________                                                          
|-------------------------------------------------------------------------------------------------------------
|                                                                                                             
|Commission file number 0-28450                                                                               
|                                                                                                             
|Netopia, Inc.                                                                                                
|(Exact name of registrant as specified in its charter)                                                       
|                                                                                                             
|Delaware                                                                                                     
|(State or other jurisdiction ofincorporation or organization)                                                
|                                                                                                             
|2470 Mariner Square LoopAlameda, California 94501(Address of principal executive offices, including Zip Code)
|                                                                                                             
|                                                                                                             
|(510) 814-5100                                                                                               
|(Registrants telephone number, including area code)                                                         
|                                                                                                             

Indicate by ü 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   ü   No   __________

As of June 30, 2002 there were
18,659,237 shares of the Registrants common stock outstanding.

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|NETOPIA, INC.     |  |                                                                                                                    
|----------------- |  | -------------------------------------------------------------------------------------------------------------------
|Form 10-Q         |  |                                                                                                                    
|Table of Contents |  | Page                                                                                                               
|                 
|                  |  |                                                                                                                    
|PART I.           |  | FINANCIAL INFORMATION                                                                                              
|                  |  |                                                                                                                    
|Item 1.           |  | Unaudited Condensed Consolidated Financial Statements                                                              
|                  |  |                                                                                                                    
|                  |  | Condensed consolidated balance sheets at June 30, 2002 (unaudited)and September 30, 2001 (audited)                 
|                  |  |                                                                                                                    
|                  |  | Unaudited condensed consolidated statements of operations for the three and ninemonths ended June 30, 2002 and 2001
|                  |  |                                                                                                                    
|                  |  | Unaudited condensed consolidated statements of cash flows for the three and ninemonths ended June 30, 2002 and 2001
|                  |  |                                                                                                                    
|                  |  | Notes to unaudited condensed consolidated financial statements                                                     
|                  |  |                                                                                                                    
|Item 2.           |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                              
|                  |  |                                                                                                                    
|Item 3.           |  | Quantitative and Qualitative Disclosures About Market Risk                                                         
|                  |  |                                                                                                                    
|PART II.          |  | OTHER INFORMATION                                                                                                  
|                  |  |                                                                                                                    
|Item 6.           |  | Exhibits and Reports on Form 8-K                                                                                   
|                  |  |                                                                                                                    
|SIGNATURE         |  |                                                                                                                    
|                  |  |                                                                                                                    
|                  |  |                                                                                                                    

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|PART I. |  | FINANCIAL INFORMATION                                 |  | 
|------- |  | ----------------------------------------------------- |  | 
|Item 1. |  | Unaudited Condensed Consolidated Financial Statements |  | 
|       

NETOPIA, INC. AND SUBSIDIARIESCondensed Consolidated Balance Sheets

|                                                                                                                                          |  | June 30,                                          |         | September 30, |  
|----------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------------- | ------- | ------------- | -
|                                                                                                                                          |  | 2002                                              |         | 2001          |  
|                                                                                                                                          |  |                                                   |         |               |  
|                                                                                                                                          |  | (unaudited)                                       |         | (audited)     |  
|                                                                                                                                          |  | (in thousands, except share andper share amounts)
|Assets                                                                                                                                    |  |                                                   |         |               |  
|Current assets:                                                                                                                           |  |                                                   |         |               |  
|Cash and cash equivalents                                                                                                                 |  | $                                                 | 22,352  |               | $
|Short -term investments                                                                                                                   |  |                                                   | 4,009   |               |  
|Trade accounts receivable less allowance for doubtful accounts and returns      of $1,458 at June 30, 2002 and $641 at
September 30, 2001 |  |                                                   | 9,442   |               |  
|Inventories, net                                                                                                                          |  |                                                   | 5,907   |               |  
|Prepaid expenses and other current assets                                                                                                 |  |                                                   | 1,218   |               |  
|                                                                                                                                          |  |                                                   |         |               |  
|Total current assets                                                                                                                      |  |                                                   | 42,928  |               |  
|Furniture, fixtures and equipment, net                                                                                                    |  |                                                   | 5,912   |               |  
|Intangible assets, net                                                                                                                    |  |                                                   | 18,514  |               |  
|Long-term investments                                                                                                                     |  |                                                   | 3,006   |               |  
|Deposits and other assets                                                                                                                 |  |                                                   | 1,837   |               |  
|                                                                                                                                          |  |                                                   |         |               |  
|                                                                                                                                          |  | $                                                 | 72,197  |               | $
|                                                                                                                                          |  |                                                   |         |               |  
|Liabilities and Stockholders Equity                                                                                                      |  |                                                   |         |               |  
|Current liabilities:                                                                                                                      |  |                                                   |         |               |  
|Accounts payable                                                                                                                          |  | $                                                 | 6,337   |               | $
|Accrued compensation                                                                                                                      |  |                                                   | 2,388   |               |  
|Accrued liabilities                                                                                                                       |  |                                                   | 2,795   |               |  
|Deferred revenue                                                                                                                          |  |                                                   | 1,850   |               |  
|Other current liabilities                                                                                                                 |  |                                                   | 177     |               |  
|                                                                                                                                          |  |                                                   |         |               |  
|Total current liabilities                                                                                                                 |  |                                                   | 13,547  |               |  
|Long-term liabilities:                                                                                                                    |  |                                                   |         |               |  
|Borrowings under credit facility                                                                                                          |  |                                                   | 3,000   |               |  
|Other long-term liabilities                                                                                                               |  |                                                   | 128     |               |  
|                                                                                                                                          |  |                                                   |         |               |  
|Total long-term liabilities                                                                                                               |  |                                                   | 3,128   |               |  
|                                                                                                                                          |  |                                                   |         |               |  
|Total liabilities                                                                                                                         |  |                                                   | 16,675  |               |  
|                                                                                                                                          |  |                                                   |         |               |  
|Commitments and contingencies                                                                                                             |  |                                                   |         |               |  
|                                                                                                                                          |  |                                                   |         |               |  
|Stockholders equity:                                                                                                                     |  |                                                   |         |               |  
|Common stock: $0.001 par value, 50,000,000 shares authorized;      18,659,237 and 18,076,812 shares issued a nd outstanding
at            |  |                                                   |         |               |  
|June 30, 2002 and September 30, 2001, respectively                                                                                        |  |                                                   | 19      |               |  
|Additional paid-in capital                                                                                                                |  |                                                   | 147,186 |               |  
|Accumulated deficit                                                                                                                       |  |                                                   | (91,683 | )             |  
|                                                                                                                                          |  |                                                   |         |               |  
|Total stockholders equity                                                                                                                |  |                                                   | 55,522  |               |  
|                                                                                                                                          |  |                                                   |         |               |  
|                                                                                                                                          |  | $                                                 | 72,197  |               | $
|                                                                                                                                          |  |                                                   |         |               |  

See accompanying notes to unaudited condensed consolidated financial statements.

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NETOPIA, INC. AND SUBSIDIARIESUnaudited Condensed Consolidated Statements of Operations

|                                                    |  | Three months ended                       |        |   | Nine months ended |  
|--------------------------------------------------- |  | ---------------------------------------- | ------ | - | ----------------- | -
|                                                    |  | June 30,                                 |        |   | June 30,          |  
|                                                    |  |                                          |        |   |                   |  
|                                                    |  | 2002                                     |        |   | 2001              |  
|                                                    |  |                                          |        |   |                   |  
|                                                    |  | (in thousands, except per share amounts) |       
|Revenues:                                           |  |                                          |        |   |                   |  
|Internet equipment                                  |  | $                                        | 10,096 |   |                   | $
|Web platform licenses and services                  |  |                                          | 5,468  |   |                   |  
|                                                    |  |                                          |        |   |                   |  
|Total revenues                                      |  |                                          | 15,564 |   |                   |  
|                                                    |  |                                          |        |   |                   |  
|Cost of revenues:                                   |  |                                          |        |   |                   |  
|Internet equipment                                  |  |                                          | 7,740  |   |                   |  
|Web platform licenses and services                  |  |                                          | 154    |   |                   |  
|                                                    |  |                                          |        |   |                   |  
|Total cost of revenues                              |  |                                          | 7,894  |   |                   |  
|                                                    |  |                                          |        |   |                   |  
|                                                    |  |                                          |        |   |                   |  
|Gross profit                                        |  |                                          | 7,670  |   |                   |  
|                                                    |  |                                          |        |   |                   |  
|Operating expenses:                                 |  |                                          |        |   |                   |  
|Research and development                            |  |                                          | 4,546  |   |                   |  
|Selling and marketing                               |  |                                          | 6,204  |   |                   |  
|General and administrative                          |  |                                          | 1,466  |   |                   |  
|Restructuring costs                                 |  |                                          |       |   |                   |  
|Integration costs                                   |  |                                          |       |   |                   |  
|Terminated merger costs                             |  |                                          |       |   |                   |  
|Acquired in-process research and development        |  |                                          |       |   |                   |  
|Amortization of intangible assets                   |  |                                          | 374    |   |                   |  
|                                                    |  |                                          |        |   |                   |  
|Total operating expenses                            |  |                                          | 12,590 |   |                   |  
|                                                    |  |                                          |        |   |                   |  
|                                                    |  |                                          |        |   |                   |  
|Operating loss                                      |  |                                          | (4,920 | ) |                   |  
|                                                    |  |                                          |        |   |                   |  
|Other income:                                       |  |                                          |        |   |                   |  
|Loss on impaired securities                         |  |                                          |       |   |                   |  
|Other income, net                                   |  |                                          | 54     |   |                   |  
|                                                    |  |                                          |        |   |                   |  
|Total other income, net                             |  |                                          | 54     |   |                   |  
|                                                    |  |                                          |        |   |                   |  
|                                                    |  |                                          |        |   |                   |  
|Loss from continuing operations before              |  |                                          |        |   |                   |  
|cumulative effect from adoption of Staff Accounting |  |                                          |        |   |                   |  
|Bulletin 101                                        |  |                                          | (4,866 | ) |                   |  
|                                                    |  |                                          |        |   |                   |  
|Cumulative effect from adoption of Staff Accounting |  |                                          |        |   |                   |  
|Bulletin 101                                        |  |                                          |       |   |                   |  
|                                                    |  |                                          |        |   |                   |  
|                                                    |  |                                          |        |   |                   |  
|Net loss                                            |  | $                                        | (4,866 | ) |                   | $
|                                                    |  |                                          |        |   |                   |  
|                                                    |  |                                          |        |   |                   |  
|Per share data, net loss:                           |  |                                          |        |   |                   |  
|Basic and diluted net loss per share                |  | $                                        | (0.26  | ) |                   | $
|                                                    |  |                                          |        |   |                   |  
|Shares used in the per share calculations           |  |                                          | 18,648 |   |                   |  
|                                                    |  |                                          |        |   |                   |  

See accompanying notes to unaudited condensed consolidated financial statements.

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NETOPIA, INC. AND SUBSIDIARIESUnaudited Condensed Consolidated Statements of Cash Flows

|                                                                                          | Nine months ended
|----------------------------------------------------------------------------------------- | -----------------
|                                                                                          | June 30,         
|                                                                                          |                  
|                                                                                          | 2002             
|                                                                                          |                  
|                                                                                          | (in thousands)   
|Cash flows from operating activities:                                                     |                  
|Net loss                                                                                  | $                
|Adjustments to reconcile net loss to net cash provided by (used in) operating activities: |                  
|Depreciation and amortization                                                             |                  
|Charge for acquired in-process research and development                                   |                  
|Unrealized loss on impaired securities                                                    |                  
|Changes in allowance for doubtful accounts and returns on trade accounts receivable       |                  
|Changes in operating assets and liabilities:                                              |                  
|Trade accounts receivable                                                                 |                  
|Inventories                                                                               |                  
|Prepaid expenses and other current assets                                                 |                  
|Deposits and other assets                                                                 |                  
|Accounts payable and accrued liabilities                                                  |                  
|Deferred revenue                                                                          |                  
|Other liabilities                                                                         |                  
|                                                                                          |                  
|Net cash used in operating activities                                                     |                  
|                                                                                          |                  
|                                                                                          |                  
|Cash flows from investing activities:                                                     |                  
|Purchase of furniture, fixtures and equipment                                             |                  
|Capitalization of software development costs                                              |                  
|Acquisition of intangibles                                                                |                  
|Purchase of long-term investment                                                          |                  
|Purchase of short-term investments                                                        |                  
|Proceeds from the sale and maturity of short-term investments                             |                  
|                                                                                          |                  
|Net cash provided by (used in) investing activities                                       |                  
|                                                                                          |                  
|                                                                                          |                  
|Cash flows from financing activities:                                                     |                  
|Borrowings under credit facility                                                          |                  
|Proceeds from the issuance of common stock, net                                           |                  
|                                                                                          |                  
|Net cash provided by financing activities                                                 |                  
|                                                                                          |                  
|                                                                                          |                  
|Net decrease in cash and cash equivalents                                                 |                  
|Cash and cash equivalents, beginning of period                                            |                  
|                                                                                          |                  
|Cash and cash equivalents, end of period                                                  | $                
|                                                                                          |                  
|                                                                                          |                  
|Supplemental disclosures of noncash investing and financing activities:                   |                  
|Issuance of common stock equivalents for consulting services                              | $                
|                                                                                          |                  
|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 SUBSIDIARIESNotes 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 and other filings with the United States Securities and Exchange Commission (SEC). The consolidated results of operations
for the period ended June 30, 2002 are not necessarily indicative of the results to be expected for any subsequent quarter or for the entire fiscal year ending September 30, 2002.

(2)       Recent Accounting Pronouncements

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

In July 2001, the FASB issued SFAS
No. 142, Goodwill and Other Intangible Assets. SFAS No. 142 requires that goodwill resulting from a business combination no longer be amortized to earnings, but instead be reviewed for impairment on at least an annual basis and be expensed
against earnings when the implied fair value of a reporting unit is less than its carrying amount. The Company elected to early adopt SFAS No. 142 as of October 1, 2001. For goodwill resulting from business combinations prior to July 1, 2001,
amortization of such goodwill continued through September 30, 2001, but ceased commencing on October 1, 2001. For business combinations occurring on or after July 1, 2001, the associated goodwill will not be amortized. The Company has completed its
tests for goodwill impairment and found that no impairment existed as of October 1, 2001. See Note 7 of Notes to Unaudited Condensed Consolidated Financial Statements. Going forward, the Company will perform the annual impairment test required by
SFAS No. 142 in its fiscal fourth quarter.

In August 2001 the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets. 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. SFAS No. 144 does not apply to goodwill
and other intangible assets that are not amortized. SFAS No. 144 is effective for fiscal years beginning after December 15, 2001. The Company expects to adopt SFAS No. 144 effective October 1, 2002. The effect of adopting this statement is not
expected to have a material effect on the Companys consolidated financial position or results of operations.

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

In June 2002, the FASB approved for issuance SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. SFAS No. 146 addresses accounting and reporting for costs
associated with exit and disposal activities and supersedes Emerging Issues Task Force No. 94-3 (EITF 94-3), Liability Recognition for Certain

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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.

(3)          Inventories

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

|                | June 30,       |       | September 30,
|--------------- | -------------- | ----- | -------------
|                | 2002           |       | 2001         
|                |                |       |              
|                | (in thousands)
|                |                |       |              
|Raw materials   | $              | 4,126 |              
|Work in process |                | 57    |              
|Finished goods  |                | 1,724 |              
|                |                |       |              
|                | $              | 5,907 |              
|                |                |       |              

(4)          Net Loss Per
Share

Basic net loss per share (EPS) is based on the weighted average number of shares of common stock outstanding during the period. Diluted
EPS is based on the weighted average number of shares of common stock outstanding during the period and dilutive common equivalent shares from options and warrants outstanding during the period. Potentially dilutive common equivalent shares have
been excluded from the computation of diluted EPS for the three and nine months ended June 30, 2002 and 2001 since their effect on EPS is antidilutive due to the losses incurred in each period. The following table sets forth the computation of basic
and diluted net loss per share:

|                                                    | Three months ended |                                          | Nine months ended | 
|--------------------------------------------------- | ------------------ | ---------------------------------------- | ----------------- | 
|                                                    | June 30,           |                                          | June 30,          | 
|                                                    |                    |                                          |                  
|                                                    | 2002               |                                          | 2001              | 
|                                                    |                    |                                          |                   | 
|                                                    |                    | (in thousands, except per share amounts) |                  
|                                                    |                    |                                          |                   | 
|Net loss                                            | $                  | (4,866                                   | )                 | 
|Weighted average number of common stock outstanding |                    | 18,648                                   |                   | 
|Basic and diluted net loss per share                | $                  | (0.26                                    | )                 | 

Potentially dilutive common equivalent shares which
were excluded from the computation of diluted EPS consisted of options to purchase common stock totaling 6,579,350 shares for the three and nine months ended June 30, 2002; 3,322,895 shares for the three and nine months ended June 30, 2001; and a
warrant to purchase common stock totaling 5,000 shares for the three and nine months ended June 30, 2001.

(5)          Segment,
Geographic and Significant Customer Information

Segment Information

The methodology for determining the segment 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

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

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

|                               | Three months ended June 30,
|------------------------------ | ---------------------------
|                               |                            
|                               |                            
|                               |                            
|                               | Internet                   
|                               | Equipment                  
|                               |                            
|                               | (in thousands)             
|                               |                            
|Revenue                        | $                          
|Cost of revenues               |                            
|                               |                            
|Gross profit                   |                            
|Gross margin                   |                            
|Unallocated operating expenses |                            
|                               |                            
|Operating loss                 |                            
|                               |                            

|                               | Nine months ended June 30,
|------------------------------ | --------------------------
|                               |                           
|                               |                           
|                               |                           
|                               | Internet                  
|                               | Equipment                 
|                               |                           
|                               | (in thousands)            
|                               |                           
|Revenue                        | $                         
|Cost of revenues               |                           
|                               |                           
|Gross profit                   |                           
|Gross margin                   |                           
|Unallocated operating expenses |                           
|                               |                           
|Operating loss                 |                           
|                               |                           

Geographic Information

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

|                               | Three months ended June 30, |        | Nine months ended June 30,
|------------------------------ | --------------------------- | ------ | --------------------------
|                               |                             |        |                           
|                               | 2002                        |        | 2001                      
|                               |                             |        |                           
|                               | (in thousands)             
|                               |                             |        |                           
|Europe                         | $                           | 3,336  | 21                        
|Canada                         |                             | 163    | 1                         
|Asia Pacific and other         |                             | 355    | 2                         
|                               |                             |        |                           
|Subtotal international revenue |                             | 3,854  | 24                        
|United States                  |                             | 11,710 | 75                        
|                               |                             |        |                           
|Total revenues                 | $                           | 15,564 | 100                       
|                               |                             |        |                           

Customer Information

Historically, the Company has sold its products to competitive local exchange carriers (CLECs), distributors, incumbent local exchange carriers (ILECs),
Internet service providers (ISPs) and directly to end-users.

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Disaggregated financial information regarding the Companys customers who accounted for 10% or more of the Companys revenue is as
follows:

|                           |                | Three months ended June 30, |  |    |   | Nine months ended June 30, |  
|-------------------------- | -------------- | --------------------------- |  | -- | - | -------------------------- | -
|                           |                |                             | 
|                           |                | 2002                        |  |    |   | 2001                       |  
|                           |                |                             |  |    |   |                            |  
|                           | (in thousands)
|                           |                |                             |  |    |   |                            |  
|Ingram Micro               | $              | 2,015                       |  | 13 | % |                            | $
|Covad Communications       |                | 1,859                       |  | 12 |   |                            |  
|IBM                        |                | 1,699                       |  | 11 |   |                            |  
|Rhythms NetConnections [a] |                |                            |  |   |   |                            |  

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

No other customers during the three and nine months ended June 30, 2002 and 2001 accounted for 10% or more of the Companys total revenues. The
following table sets forth the accounts receivable balance for the customers identified above along with such data expressed as a percentage of total accounts receivable:

|                       | Accounts receivable balances at
|---------------------- | -------------------------------
|                       | June 30,                       
|                       |                                
|                       |                                
|                       |                                
|                       | (in thousands)                 
|                       |                                
|Ingram Micro           | $                              
|Covad Communications   |                                
|IBM                    |                                
|Rhythms NetConnections |                                

(6)          Acquisitions

DoBox, Inc. (DoBox)

On March 29, 2002, the Company closed a transaction to purchase
substantially all of the assets and assume certain liabilities of DoBox, a developer of broadband gateway parental control, content filtering and family firewall software. The Company accounted for the acquisition under the purchase method. The
aggregate purchase price of the transaction was $1.7 million, based upon consideration paid at closing. The aggregate purchase price included:

| | 300,000 shares of the Companys common stock which were valued using the average of the closing price of the Companys common stock. The average was determined over a 5
day period, three days prior to and two days subsequent to the closing of the acquisition;
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| | $0.1 million in cash in severance benefits to DoBox employees that were not retained; and                                                                                                                                                                          
| 
| | $0.1 million in cash for the Companys transaction costs including legal, accounting and other professional services.                                                                                                                                              

The Company also assumed certain other liabilities of DoBox.

The
Company allocated the entire purchase price of DoBox, as supported by an independent third-party valuation analysis, to acquired in-process research and development on the basis that the purchase of DoBox did not constitute the purchase of a
business, as defined by Emerging Issues Task Force 98-3 (EITF 98-3). EITF 98-3 states:

| | A business is a self-sustaining set of activities and assets conducted and managed for the purpose of providing a return to investors. A business consists of (a) inputs,
(b) processes applied to those inputs, and (c) resulting outputs that are used to generate revenues. For a transferred set of activities and assets to be a business, it must contain all of the inputs and processes necessary for it to continue to
conduct normal
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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| | operations after the transferred set is separated from the transferor, which includes the ability to sustain a revenue stream by providing its outputs
customers.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------

The Company concluded that DoBox was not producing any outputs as it did not have any products it was
selling to generate revenues. EITF 98-3 mentions that if any of the excluded items necessary to produce outputs will only require a minor level of investment (financial or otherwise), the transferred set is capable of continuing normal operations
and is a business. At the time of the acquisition, there was significant research, development and testing that remained before a product could be released and sold. As the acquisition did not qualify as a business it was, therefore, a purchase of
assets.

Due to the fact that the DoBox did not have any customers and there was a significant level of research and development that remained
to produce a product, it was determined that the Company was essentially purchasing inprocess research and development. As such, the Company charged to expense the excess of the purchase price paid over the net tangible assets of DoBox.

Cayman Systems, Inc. (Cayman)

On October 11, 2001, the Company and
Cayman, a Massachusetts corporation, consummated a merger (the Merger) whereby Amazon Merger Corporation, a Delaware corporation and a wholly-owned subsidiary of Netopia (Merger Sub), was merged with and into Cayman pursuant to an Agreement and Plan
of Merger and Reorganization (the Merger Agreement) dated as of September 19, 2001, as amended. Cayman, a developer and supplier of business class broadband gateways, has survived the Merger as a wholly-owned subsidiary of Netopia.

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

| | $6.0 million in cash in exchange for all of Caymans outstanding equity, including in-the-money stock options;           
|- | -------------------------------------------------------------------------------------------------------------------------
| 
| | $4.2 million in cash in exchange for all of Caymans outstanding convertible debt;                                       
| 
| | $2.4 million in cash to satisfy an outstanding credit line of Cayman;                                                    
| 
| | $0.9 million in cash in fees to Caymans investment bankers, attorneys and accountants;                                  
| 
| | $0.7 million in cash for the Companys transaction costs including legal, accounting and other professional services; and
| 
| | $0.7 million cash in severance benefits to Cayman employees that were not retained.                                      

The Company also assumed certain other liabilities of Cayman.

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

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

|                                             |                |        |              |  | Annual |       | Useful
|-------------------------------------------- | -------------- | ------ | ------------ |  | ------ | ----- | ------
|                                             | Amount         |        | amortization |  | life  
|                                             |                |        |              |  |       
|                                             | (in thousands) |        |             
|                                             |                |        |              |  |        |       |       
|Current assets                               | $              | 4,514  |              |  |        | n/a   |       
|Long-term assets                             |                | 895    |              |  |        | n/a   |       
|Current liabilities                          |                | (9,512 | )            |  |        | n/a   |       
|Identified intangible assets:                |                |        |              |  |        |       |       
|Developed product technology                 |                | 1,120  |              |  | $      | 224   |       
|Core technology leveraged                    |                | 5,570  |              |  |        | 928   |       
|Sales channel relationships                  |                | 1,380  |              |  |        | 345   |       
|Goodwill                                     |                | 8,763  |              |  |        | n/a   |       
|Acquired in-process research and development |                | 2,150  |              |  |        | n/a   |       
|                                             |                |        |              |  |        |      
|Total purchase price                         | $              | 14,880 |              |  | $      | 1,497 |       
|                                             |                |        |              |  |        |      

The allocation of the total purchase price of Cayman to its individual assets
offset by liabilities was supported by an independent third party-valuation analysis. In addition to the current assets and liabilities that were acquired, certain intangible assets were identified and a portion of the purchase price was allocated
to acquired in-process research and development projects. These identified intangible assets are as follows:

| | Developed product technology, which represents the value of Caymans proprietary know-how that is technologically feasible as of the acquisition date;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| | Core technology leveraged, which represents the value of Caymans research and development projects in process that are leveraged off of Caymans previously developed
products and technology;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| 
| | Sales channel relationships, which represents the value of Caymans established relationships with its ILEC and cable company customers to whom Netopia expects to continue to
sell products; and                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| 
| | Goodwill, which represents the excess of the Cayman purchase price over the fair value of the underlying net identifiable assets. Included in goodwill is $2.5 million, representing
the fair value of the assembled workforce. Pursuant to SFAS No. 141, Business Combinations, the value of such assembled workforce should not be reported separately from goodwill. Also included in goodwill is a $1.2 million liability to fully
reserve the excess space at the Cayman facilities resulting from the termination of employees whose positions were determined to be redundant subsequent to the closing of the Cayman acquisition and $1.2 million related to recording the fair value of
Cayman inventory purchase commitments. The Company believes that the amount allocated to goodwill appropriately reflects the market value of the amount of purchase price over the fair value of the underlying net identifiable assets based upon the
value in the expansion of th e Companys product offerings and expected synergies resulting from the acquisition.

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

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

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

The rate utilized to discount the net cash flows to
their present value was 28% which Netopia 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.

For comparative purposes the following summary, prepared on an unaudited pro forma basis, reflects the condensed consolidated statements of operations of
the Company for the three and nine months ended June 30, 2002 and 2001, giving effect to the Cayman acquisition and assuming that Cayman had been acquired as of the beginning of the periods presented:

|                                                        | Three months ended                       |        | Nine months ended
|------------------------------------------------------- | ---------------------------------------- | ------ | -----------------
|                                                        | June 30,                                 |        | June 30,         
|                                                        |                                          |        |                  
|                                                        | 2002                                     |        |                  
|                                                        |                                          |        |                  
|                                                        | (in thousands, except per share amounts)
|                                                        |                                          |        |                  
|Revenue  as reported                                   | $                                        | 15,564 |                  
|Revenue  pro forma                                     | $                                        | 15,564 |                  
|                                                        |                                          |        |                  
|Net loss  as reported                                  | $                                        | (4,866 | )                
|Net loss  pro forma                                    | $                                        | (4,866 | )                
|                                                        |                                          |        |                  
|Basic and diluted net loss per share  as reported      | $                                        | (0.26  | )                
|Basic and diluted net loss per share  pro forma        | $                                        | (0.26  | )                
|                                                        |                                          |        |                  
|Shares used in the per share calculations  as reported |                                          | 18,648 |                  
|Shares used in the per share calculations  pro forma   |                                          | 18,648 |                  

The pro forma revenue figures set forth above for the three and nine months
ended June 30, 2001 have been adjusted to include $6.6 million and $13.8 million, respectively, of Cayman revenue for such periods.

The pro
forma net loss figure set forth above for the nine months ended June 30, 2002 has been adjusted to exclude the $2.2 million charge for acquired in-process research and development related to the Cayman acquisition. The pro forma net loss figures set
forth above for the three and nine months ended June 30, 2001 have been adjusted to include $0.3 million and $1.1 million, respectively, for amortization of intangible assets related to the Cayman acquisition for each period.

These pro forma results are not necessarily indicative of what would have occurred if the Cayman acquisition had been in effect for the periods presented.
In addition, they are not intended to be a projection of future results and do not reflect any synergies that might have been achieved from the combined operations during the periods presented.

(7)          Intangible Assets

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.

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In accordance with SFAS No. 142, the Company completed the transitional impairment test of intangible assets during
the three months ended March 31, 2002. That effort, and preliminary assessments of the Companys identifiable intangible assets, indicate no adjustment was required upon adoption of this pronouncement. The impairment testing is performed in two
steps: (i) the determination of impairment, based upon the fair value of a reporting unit as compared to its carrying value, and (ii) if there is an impairment, this step measures the amount of impairment loss by comparing the implied fair value of
goodwill with the carrying amount of that goodwill. The Company will perform its annual impairment test, as required by SFAS No. 142, in its fiscal fourth quarter.

The Companys intangible assets consist primarily of amounts allocated to identifiable intangible assets and goodwill in connection with the Companys acquisitions.

Detail of the Companys identifiable intangible assets as of June 30, 2002 is as follows:

|       | Identifiable   | 
|------ | -------------- | 
|       | Balance at     | 
|       | Acquisition    | 
|       | date           | 
|       |                | 
|       | (in thousands)
|       |                | 
|Cayman | October 2001   | 

Aggregate amortization expense of
intangible assets was $0.4 million and $1.1 million for the three and nine months ended June 30, 2002. There was no impairment loss recorded during the three or nine months ended June 30, 2002.

Detail of the Companys goodwill as of June 30, 2002 is as follows:

|                     |               |  | Balance at    |       | Goodwill        |   | Balance at
|-------------------- | ------------- |  | ------------- | ----- | --------------- | - | ----------
|                     | Acquisition   |  | September 30, |       | acquired during |   | June 30,  
|                     | date          |  | 2001          |       | the period      |   | 2002      
|                     |               |  |               |       |                 |   |           
|                     |               |  |               |       |                 |   |           
|Cayman               | October 2001  |  | $             |      |                 | $ | 8,763     
|WebOrder             | March 2000    |  |               | 572   |                 |   | (54       
|Starnet Technologies | October 1999  |  |               | 1,821 |                 |   |          
|netOctopus           | December 1998 |  |               | 365   |                 |   | 100       
|                     |               |  |               |       |                 |   |           
|                     |               |  | $             | 2,758 |                 | $ | 8,809     
|                     |               |  |               |       |                 |   |           

The following table reflects the consolidated results adjusted as
though the adoption of SFAS No. 142 occurred at the beginning of the nine-month period ended June 30, 2001:

|                                      |                                               | Three months ended                       |        | Nine months ended
|------------------------------------- | --------------------------------------------- | ---------------------------------------- | ------ | -----------------
|                                      |                                               | June 30,                                 |        | June 30,         
|                                      |                                               |                                          |        |                  
|                                      |                                               | 2002                                     |        | 2001             
|                                      |                                               |                                          |        |                  
|                                      |                                               | (in thousands, except per share amounts)
|Net loss:                             |                                               |                                          |        |                  
|                                      | As reported                                   | $                                        | (4,866 | )                
|                                      | Amortization of goodwill                      |                                          |       |                  
|                                      |                                               |                                          |        |                  
|                                      | Adjusted net loss                             | $                                        | (4,866 | )                
|                                      |                                               |                                          |        |                  
|Basic and diluted net loss per share: |                                               |                                          |        |                  
|                                      | As reported                                   | $                                        | (0.26  | )                
|                                      | Amortization of goodwill                      |                                          |       |                  
|                                      |                                               |                                          |        |                  
|                                      | Adjusted basic and diluted net loss per share | $                                        | (0.26  | )                
|                                      |                                               |                                          |        |                  

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(8)      Restructuring Costs

During the three months ended December 31, 2001, the Company recorded a restructuring charge of $0.5 million in connection with a reduction in the Companys workforce of approximately 24 people
whose positions were determined to be redundant subsequent to the closing of the Cayman acquisition. The charge consisted primarily of employee severance benefits. Details of the restructuring charge is as follows (in thousands):

|Total charge             | $ | 482
|------------------------ | - | ---
|Less:                    |   |    
|Amounts paid             |   | 287
|Non-cash charges         |   | 58 
|                         |  
|Balance at June 30, 2002 | $ | 137
|                         |  

(9)       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. Details of the charge for integration costs is as follows:

|                         |                |                |  |   |             |  |   |      
|------------------------ | -------------- | -------------- |  | - | ----------- |  | - | -----
|                         |                | Customer       |  |   |             |  |   |      
|                         |                | integration    |  |   | Systems     |  |   |      
|                         |                | Communications |  |   | integration |  |   | Total
|                         |                |                |  |   |             |  |   |      
|                         | (in thousands)
|                         |                |                |  |   |             |  |   |      
|Total charge             | $              | 269            |  | $ | 40          |  | $ | 309  
|Less amounts paid        |                | 269            |  |   | 16          |  |   | 285  
|                         |                |                |  |   |             |  |   |      
|Balance at June 30, 2001 | $              |               |  | $ | 24          |  | $ | 24   
|                         |                |                |  |   |             |  |   |      

(10)       Long-Term Investments

During the three months ended December 31, 2000, the Company purchased $2.0 million of Series D Preferred stock in MegaPath. MegaPath offers high-speed DSL access and
eCommerce and Web hosting services to small and medium size businesses. During fiscal year 2000, MegaPath had purchased the Companys broadband Internet equipment and licensed certain of our Web platforms products. During the three months ended
March 31, 2002, the Company recorded a $1.4 million unrealized loss on impaired securities related to its investment in MegaPath. This impairment was recorded in connection with the recent valuation of MegaPath based upon its most recent round of
financing. During the three months ended June 30, 2002, the Company purchased $0.4 million of Series E Preferred stock in MegaPath. Although there is no public market for MegaPaths stock, the Company believes that the market value of its
investment in Serie s D and Series E Preferred shares is not less than $1.0 million at June 30, 2002.

During the three months ended September
30, 2000, the Company purchased $2.0 million of Series C Preferred Stock in Everdream. Everdream provides outsourced information technology (IT) expertise, products and services that enable small and medium size businesses to focus on their core
competencies. In April 2000, the Company entered into an agreement with Everdream to host a co-branded version of the Companys eStore platform for Everdreams customers. Although there is no public market for Everdreams stock, the
Company believes that the market value of these shares is not less than $2.0 million.

(11)       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 2002 to
increase the number of shares of common stock available for issuance under the plan by 650,000 shares.

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(12)       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 term of the Credit Facility is two years. The Company must maintain an adjusted quick ratio 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. Additionally, for the first year, the Company must maintain a tangible net worth of not less than $32.0 million. On or before the first anniversary date of the Credit Facility, the minimum tangible net worth covenant will be
reset for the second year of the 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. The credit limit is determined
based on a formula related to the amount of accounts receivable and inventory at any particular time. The Company may borrow under the Credit Facility in order to finance working capital requirements for new products and customers, and otherwise for
general corporate purposes in the normal course of business.

As of June 30, 2002, the Company had borrowed $3.0 million under the Credit
Facility and had recorded the borrowing as a long-term liability on its June 30, 2002 condensed consolidated balance sheet.

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|PART I.     FINANCIAL INFORMATIONItem 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, expect, anticipate, believe, estimate 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 listed in this Form 10-Q, as well as any cautionary langua ge 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 Internet gateways and service delivery software. Our products are designed to enable our telecommunication carrier customers to create and offer expanded
broadband service offerings focused on the needs of distributed enterprises, small and medium size businesses, and residential users. These service offerings allow our customers to lower their support costs and increase their average revenue per
user thereby increasing their profitability.

Our broadband Internet gateway products consist principally of DSL routers, smart modems and
integrated access devices (IADs) which enable the transmission of data and/or voice over DSL networks as well as Cable Ethernet, T1/Frame Relay, integrated services digital network (ISDN) and dual analog routers. Our service delivery software
platform includes our broadband eService technology which enables remote support and centralized management of installed broadband gateways, eCare which enables telecommunication carrier and service providers to support customers by remotely viewing
and operating the customers computer, eSite and eStore hosting, Timbuktu remote control software and netOctopus systems management software.

We primarily sell our products to:

| |  | Telecommunication carriers, such as: incumbent local exchange carriers (ILECs), such as SBC, BellSouth and Verizon; competitive local exchange carriers (CLECs), such as Covad, McLeod and
NextGenTel; Internet service providers (ISPs), such as Business Telecommunications and Onsite Access; and Internet Exchange Carriers (IXCs) such as AT&T, Sprint and WorldCom;
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  |  |                                                                                                                                                                                                                                                                                                                                                                          
| |  | Distributors, such as Ingram Micro, Softway and Tech Data;                                                                                                                                                                                                                                                                                                               
|  |  |                                                                                                                                                                                                                                                                                                                                                                          
| |  | Cable companies; and                                                                                                                                                                                                                                                                                                                                                     
|  |  |                                                                                                                                                                                                                                                                                                                                                                          
| |  | Directly to end-users.                                                                                                                                                                                                                                                                                                                                                   

Historically, we have depended upon the ability
of our customers to offer broadband services successfully and become sustainable businesses. Several of our customers have incurred operating losses and negative cash flows as they attempted to establish their networks and operations, filed for
protection under the Bankruptcy Act or ceased operations. Most notably, Covad, which currently is our largest CLEC customer, filed a voluntary petition under the Bankruptcy Act in August 2001 as part of a capital restructuring plan. Covad emerged
from bankruptcy in December 2001. Additionally, Covad has announced that it has adequate cash to allow it to become cash flow positive by the latter half of 2003. Additionally, WorldCom, Inc. announced on July 21, 2002 that WorldCom and
substantially all of its active U.S. subsidiaries filed voluntary petitions for reorganization under Chapter 11 of the United States Bankruptcy Code. As a result of bankruptcy proceedings commenced by WorldCom, we recorded a $0.3 million provision
for doubtful accounts in June 2002, 100% of the outstanding accounts receivable owed by WorldCom. During the quarter ended June 30, 2002, we recorded $0.3 million in revenues from Internet equipment sales to WorldCom. For the nine months ended June
30, 2002, we recorded $0.7 million in revenues from Internet

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equipment sales to WorldCom. On July 22, 2002, the Bankruptcy Court approved interim financing that WorldCom believes should provide sufficient funds to
continue operations. WorldCom also has finalized agreements for a debtor-in-possession (DIP) credit facility. We have not received or shipped any orders from WorldCom subsequent to its bankruptcy filings.

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 r eadily apparent from other sources. Actual results may differ from these estimates due to actual outcomes being
different from those on which we based our assumptions. These estimates and judgments are reviewed by management on an ongoing basis and by the Audit Committee at the end of each quarter prior to the public release of our financial results. We
believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our condensed consolidated financial statements.

Revenue Recognition

We recognize revenue from the sale of Internet equipment when persuasive evidence
of an arrangement exists, delivery has occurred, the fees are fixed or determinable, and collectibility is probable. We recognize revenue from the sale of Web platform licenses and services in accordance with Statement of Position (SOP) 97-2,Software Revenue Recognition, as amended. In general, software license revenues are recognized when a non-cancelable license agreement has been signed and the customer acknowledges an unconditional obligation to pay, the software product has
been delivered, there are no uncertainties surrounding product acceptance, the fees are fixed and determinable, and collection is considered probable; professional services revenues are recognized as such services are performed; and maintenance
revenues, including revenues bundled with software agreements which entitle the customers to technical support and future unspecified enhancements to the Companys products, are deferred and recognized ratably over the related contract period,
generally twelve months. Revenues recognized from multiple-element software arrangements are allocated to each element of the arrangement based on the specific objective evidence of the fair values of the elements, such as software products,
upgrades, enhancements, post contract customer support, installation, or training. 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.

Goodwill and Other Identifiable Intangible Assets

On October 1, 2001, we early
adopted SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 142 provides that goodwill should not be amortized but instead be tested for impairment annually at the reporting unit level. In accordance with SFAS No. 142, we completed
the transitional impairment test of intangible assets during the three months ended March 31, 2002. That effort, and preliminary assessments of our identifiable intangible assets, indicate no adjustment was required upon adoption of this
pronouncement. The impairment testing is performed in two steps: (i) the determination of impairment, based upon the fair value of a reporting unit as compared to its carrying value, and (ii) if there is an impairment, this step measures the amount
of impairment loss by comparing the implied fair value of goodwill with the carrying amount of that goodwill. As of June 30, 2002, the carrying value of our goodwi ll and other intangible assets was $18.5 million. We will perform our annual
impairment test, as required by SFAS No. 142, in our fiscal fourth quarter.

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Allowance for Doubtful Accounts

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

Non-Marketable Securities

We periodically make strategic
investments in companies whose stock is not currently traded on a stock exchange and for which no quoted price exists. The cost method of accounting is used to account for these investments as we hold a non-material ownership percentage. We review
these investments for impairment when events or changes in circumstances indicate that the carrying amount of the assets might not be recoverable. Examples of events or changes in circumstances that may indicate to management that an impairment
exists may be a significant decrease in the market value of the company, poor or deteriorating market conditions in the public and private equity capital markets, significant adverse changes in legal factors or within the business climate the
company operates, and current period operating or cash flow losses combined with a history of operating or cash flow losses or projections and forecasts that de monstrate 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 carrying value of $3.0 million as of June 30, 2002, and have been permanently written down a total of $1.4 million from original cost. Also, future adverse changes in market conditions or poor operating results of underlying
investments could result in significant 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 and nine months
ended June 30, 2002 and 2001 primarily due to continued substantial uncertainty regarding our ability to realize our deferred tax assets. Based upon available objective evidence, there has been sufficient uncertainty regarding the realizability of
our deferred tax assets to warrant a 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 2002 and beyond, we believe the uncertainty regarding the realizability of our deferred tax assets may diminish to the point where it is more likely than not that our deferred tax assets will be realized. At such point, we would also
reverse all or a portion of our valuation allowance which will result in an income tax benefit.

Available-for-Sale Securities

We classify certain of our cash equivalents and all our investments as available-for-sale. The securities are carried at 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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Results of Operations for the Three and Nine Months Ended June 30, 2002 and 2001

The following table sets forth for the periods indicated, certain statement of operations data, such data expressed as a percentage of revenues as well as the change from the same period in the
prior year.

|                                                                                                              | Three months ended |        | Percent   |      |            | Nine months ended |        | Percent   |     
|------------------------------------------------------------------------------------------------------------- | ------------------ | ------ | --------- | ---- | ---------- | ----------------- | ------ | --------- | ----
|                                                                                                              | June 30,           |        | increase/ |      |            | June 30,          |        | increase/ |     
|                                                                                                              |                    |        |           |      |            |                   |        |           |     
|                                                                                                              | 2002               |        | 2001      |      | (decrease) |                   |        | 2002      |     
|                                                                                                              |                    |        |           |      |            |                   |        |           |     
|                                                                                                              | (in thousands)     |        |           |      |            | (in thousands)    |        |           |     
|Revenues:                                                                                                     |                    |        |           |      |            |                   |        |           |     
|Internet equipment                                                                                            | $                  | 10,096 |           | 65%  |            | $                 | 14,478 |           | 76% 
|Web platform licenses and services                                                                            |                    | 5,468  |           | 35%  |            |                   | 4,483  |           | 24% 
|                                                                                                              |                    |        |           |      |            |                   |        |           |     
|Total revenues                                                                                                |                    | 15,564 |           | 100% |            |                   | 18,961 |           | 100%
|                                                                                                              |                    |        |           |      |            |                   |        |           |     
|Cost of revenues:                                                                                             |                    |        |           |      |            |                   |        |           |     
|Internet equipment                                                                                            |                    | 7,740  |           | 50%  |            |                   | 9,653  |           | 51% 
|Web platform licenses and services                                                                            |                    | 154    |           | 1%   |            |                   | 182    |           | 1%  
|                                                                                                              |                    |        |           |      |            |                   |        |           |     
|Total cost of revenues                                                                                        |                    | 7,894  |           | 51%  |            |                   | 9,835  |           | 52% 
|                                                                                                              |                    |        |           |      |            |                   |        |           |     
|                                                                                                              |                    |        |           |      |            |                   |        |           |     
|Gross profit                                                                                                  |                    | 7,670  |           | 49%  |            |                   | 9,126  |           | 48% 
|                                                                                                              |                    |        |           |      |            |                   |        |           |     
|Operating expenses:                                                                                           |                    |        |           |      |            |                   |        |           |     
|Research and development                                                                                      |                    | 4,546  |           | 29%  |            |                   | 3,444  |           | 18% 
|Selling and marketing                                                                                         |                    | 6,204  |           | 40%  |            |                   | 6,577  |           | 35% 
|General and administrative                                                                                    |                    | 1,466  |           | 9%   |            |                   | 2,010  |           | 11% 
|Restructuring costs                                                                                           |                    |       |           |     |            |                   |       |           |    
|Integration costs                                                                                             |                    |       |           |     |            |                   |       |           |    
|Terminated merger costs                                                                                       |                    |       |           |     |            |                   |       |           |    
|Acquired in-process research and                                                                              |                    |        |           |      |            |                   |        |           |     
|development                                                                                                   |                    |       |           |     |            |                   |       |           |    
|Amortization of intangible assets                                                                             |                    | 374    |           | 2%   |            |                   | 2,996  |           | 16% 
|                                                                                                              |                    |        |           |      |            |                   |        |           |     
|Total operating expenses                                                                                      |                    | 12,590 |           | 80%  |            |                   | 15,027 |           | 80% 
|                                                                                                              |                    |        |           |      |            |                   |        |           |     
|                                                                                                              |                    |        |           |      |            |                   |        |           |     
|Operating loss                                                                                                |                    | (4,920 | )         | (31% | )          |                   | (5,901 | )         | (32%
|                                                                                                              |                    |        |           |      |            |                   |        |           |     
|Other income (loss):                                                                                          |                    |        |           |      |            |                   |        |           |     
|Loss on impaired securities                                                                                   |                    |       |           |     |            |                   |       |           |    
|Other income, net                                                                                             |                    | 54     |           | 0%   |            |                   | 509    |           | 3%  
|                                                                                                              |                    |        |           |      |            |                   |        |           |     
|Total other income (loss), net                                                                                |                    | 54     |           | 0%   |            |                   | 509    |           | 3%  
|                                                                                                              |                    |        |           |      |            |                   |        |           |     
|                                                                                                              |                    |        |           |      |            |                   |        |           |     
|Loss from continuing operations   before cumulative effect from   adoption of Staff Accounting   Bulletin 101 |                    | (4,866 | )         | (31% | )          |                   | (5,392 | )         | (29%
|                                                                                                              |                    |        |           |      |            |                   |        |           |     
|Cumulative effect from adoption of Staff                                                                      |                    |        |           |      |            |                   |        |           |     
|Accounting Bulletin 101                                                                                       |                    |       |           |     |            |                   |       |           |    
|                                                                                                              |                    |        |           |      |            |                   |        |           |     
|Net loss                                                                                                      | $                  | (4,866 | )         | (31% | )          | $                 | (5,392 | )         | (29%
|                                                                                                              |                    |        |           |      |            |                   |        |           |     

REVENUE

Broadband Internet
Equipment

For the three and nine months ended June 30, 2002, broadband Internet equipment revenue decreased due to declining average
selling prices of our broadband Internet equipment, particularly our DSL routers, partially offset by increased sales volumes. For the three months ended June 30, 2002, broadband Internet equipment sales volumes increased 15% and average selling
prices decreased 40% from the three months ended June 30, 2001. For the nine months ended June 30, 2002, broadband Internet equipment sales volumes increased 3% and average selling prices declined 30% from the nine months ended June 30,
2001.

For the three months ended June 30, 2002, sales volumes have increased primarily as a result of increased sales of our asynchronous
digital subscriber line (ADSL) routers to a new customer in Europe. For the nine months ended June 30, 2002, sales volumes have increased primarily as a result of increased sales of our ADSL routers to the new

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customer in Europe and BellSouth and SBC in the United States, customers we acquired in connection with the acquisition of Cayman in October 2001. These
increases were partially offset by declining sales to many of our CLEC customers in the United States such as Covad, Rhythms, McLeod and Network Telephone, as a result of their financial and operational difficulties. Our average selling prices have
declined primarily due to price competition and pricing strategies, as well as an increased percentage of sales of our ADSL routers which have a lower average selling price than our other DSL routers. We expect sales volumes may increase in future
quarters and average selling prices will continue to decline as a result of price competition, pricing strategies and the introduction of lower priced products.

Web Platform Licenses and Services

For the three months ended June 30, 2002, Web platforms revenue increased
primarily due to the volume license of our new Timbuktu Ed software, Timbuktu Pro specifically designed and enhanced for the education market, and netOctopus by one customer as well as increased recurring revenue and services related to the
licensing and hosting of our eSite and eStore products. For the nine months ended June 30, 2002, Web platforms revenue decreased due to reduced license sales of our eSite and eStore products and reduced volume license sales of Timbuktu Pro as a
result of companies reducing their information technology (IT) spending due to the current macro-economic environment and as a result of the financial difficulties encountered by many of the .com customers to whom we licensed our eSite
and eStore products. This decrease was partially offset by increased recurring revenue and services related to the lice nsing and hosting of our eSite and eStore products.

Customer Information

Historically, we have sold our products primarily to CLECs, distributors, ILECs, ISPs
and directly to end-users. The following table sets forth for the periods indicated, our customers who have represented greater than 10% of our revenues in such period, along with such data expressed as a percentage of total revenues as well as the
change from the same period in the prior year:

|                           | Three months ended June 30, |       | Percent   |    | Nine months ended June 30, |  | Percent       
|-------------------------- | --------------------------- | ----- | --------- | -- | -------------------------- |  | --------------
|                           |                             |       | increase/ |    |                            |  | increase/     
|                           | 2002                        |       | 2001      |    | (decrease)                 |  | 2002          
|                           |                             |       |           |    |                            |  |               
|                           | (in thousands)              |       |           |    |                            |  | (in thousands)
|                           |                             |       |           |    |                            |  |               
|Ingram Micro               | $                           | 2,015 |           | 13 | %                          |  | $             
|Covad Communications       |                             | 1,859 |           | 12 |                            |  |               
|IBM                        |                             | 1,699 |           | 11 |                            |  |               
|Rhythms NetConnections [a] |                             |      |           |   |                            |  |               
|                          
|                           |                            

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

No other customers during the three and nine months ended June 30, 2002 and 2001 accounted for 10% or more of our total revenues. The following table sets forth for the
periods indicated, the number of customers who each individually represented at least 5% of our revenues:

|                                                                                      | Three months endedJune 30, |    | Nine months endedJune 30,
|------------------------------------------------------------------------------------- | -------------------------- | -- | -------------------------
|                                                                                      |                            |    |                          
|                                                                                      | 2002                       |    | 2001                     
|                                                                                      |                            |    |                          
|                                                                                      |                            |    |                          
|Number of customers who each individually represented at     least 5% of our revenues |                            | 4  |                          
|Percent of total revenue                                                              |                            | 45 | %                        

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Geographic Information

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

|                               | Three months ended |        |           |     |            | Nine months ended |           |        |     
|------------------------------ | ------------------ | ------ | --------- | --- | ---------- | ----------------- | --------- | ------ | ----
|                               | June 30,           |        | Percent   |     | June 30,   |                   | Percent  
|                               |                    |        | increase/ |     |            |                   | increase/
|                               | 2002               |        | 2001      |     | (decrease) |                   | 2002      |        | 2001
|                               |                    |        |           |     |            |                   |           |        |     
|                               | (in thousands)     |        |           |     |            | (in thousands)    |           |        |     
|                               |                    |        |           |     |            |                   |           |        |     
|Europe                         | $                  | 3,336  |           | 21  | %          |                   | $         | 1,310  |     
|Canada                         |                    | 163    |           | 1   | %          |                   |           | 263    |     
|Asia Pacific and other         |                    | 355    |           | 2   | %          |                   |           | 210    |     
|                               |                    |        |           |     |            |                   |           |        |     
|Subtotal international revenue |                    | 3,854  |           | 24  | %          |                   |           | 1,783  |     
|United States                  |                    | 11,710 |           | 76  | %          |                   |           | 17,178 |     
|                               |                    |        |           |     |            |                   |           |        |     
|Total revenue                  | $                  | 15,564 |           | 100 | %          |                   | $         | 18,961 |     
|                               |                    |        |           |     |            |                   |           |        |     

COST OF REVENUES

Cost of revenues consist primarily of material costs related to our contract manufacturing operations and manufacturing variances. Total cost of revenues decreased for the three and nine
months ended June 30, 2002 from the three and nine months ended June 30, 2001 primarily as a result of declining material costs for our broadband Internet equipment. Material costs are declining as a result of product redesigns, the increased use of
contract manufacturing operations in Asia where our products can be manufactured less expensively than in the United States and declining component costs.

For the three months ended June 30, 2002, our total gross margin increased to 49% from 48% for the three months ended June 30, 2001. For the nine months ended June 30, 2002, our total
gross margin increased to 50% from 49% for the nine months ended June 30, 2001. Our gross margins increased for the three and nine month periods primarily as a result of the increased proportion of revenues from our higher margin Web platforms
products and declining product costs partially offset by declining average selling prices.

Broadband Internet equipment gross
margin decreased to 23% for the three months ended June 30, 2002 from 33% for the three months ended June 30, 2001. For the nine months ended June 30, 2002, our broadband Internet equipment gross margins decreased to 30% from 34% for the nine months
ended June 30, 2001 due to declining average selling prices as a result of price competition and pricing strategies as we enter new markets and expand our customer base, delayed product transitions, increased sales of lower margin ADSL products as
well as reduced sales of dedicated router products which carry a higher gross margin than our DSL products.

Web platforms gross
margin increased to 97% for the three months ended June 30, 2002 from 96% for the three months ended June 30, 2001 due to the volume license of Timbuktu Pro and netOctopus by one customer as well as increased recurring revenue and services related
to the licensing and hosting of our eSite and eStore products. Such products have a higher margin than the shrink-wrap versions of our Web platform products. For the nine months ended June 30, 2002, Web platform gross margin increased to 97% from
96% for the nine months ended June 30, 2001 as a result of our ability to reduce our costs related to supporting and provisioning our eSite and eStore products.

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

| |  | The mix of Internet equipment and Web platforms products sold;
|- |  | --------------------------------------------------------------
| |  | Pricing strategies;                                           
| |  | Standard cost changes;                                        

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| |  | New versions of existing products; and                                    
|- |  | --------------------------------------------------------------------------
| |  | External market factors, including, but not limited to, price competition.

RESEARCH AND DEVELOPMENT

Research and development expenses consist primarily of employee related expenses, depreciation and amortization, development related expenses
such as product prototyping, design and testing, and overhead allocations. Research and development expenses increased for the three and nine months ended June 30, 2002 from the three and nine months ended June 30, 2001 primarily due to:

| |  | Increased research and development headcount and employee related expenses as a result of our acquisitions of Cayman in October 2001 and DoBox in March 2002 and their research and
development staff; and
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Increased depreciation expense as a result of increased capital purchases related to development of our broadband Internet equipment and the acquisitions of Cayman's and DoBox's development
assets.     

These increases were partially offset by reduced product prototyping and design expenses. Additionally,
the use of third party contractors was reduced for the nine months ended June 30, 2002 from the nine months ended June 30, 2001.

We expect to continue to devote substantial resources to product and technological development. We expect research and development costs may increase in absolute dollars for the
remainder of fiscal year 2002 and into fiscal year 2003 as we continue to expand the breadth and depth of our product offerings. We believe our process for developing software is essentially completed concurrently with the establishment of
technological feasibility, and we have not capitalized any internal software development costs to date. However, during the nine months ended June 30, 2002 and 2001, we capitalized $47,000 and $0.9 million, respectively, of software development
costs incurred subsequent to the delivery of a working model, under a development agreement with third parties.

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, 2002 from the three and nine months ended June 30, 2001 primarily due to:

| |  | Decreased sales and marketing headcount and employee related expenses as well as decreased travel and entertainment expenses as a result of our restructuring in October 2001;
and
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Decreased marketing programs and activities.                                                                                                                                      

We expect
selling and marketing expenses may increase in absolute dollars for the remainder of fiscal year 2002 as we try to expand the channels through which we sell our products and increase the number of customers to whom we sell our products.

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 and nine months ended June 30, 2002 from the three and nine months ended
June 30, 2001 primarily due to reduced provisions for doubtful accounts for outstanding accounts receivable owed by customers that filed voluntary petitions under the Bankruptcy Act and many of which ceased operations. Included in general and
administrative expense for the three and nine months ended June 30, 2002 is $0.3 million of provisions for doubtful accounts for the outstanding accounts receivable of WorldCom. For the three and nine months ended June 30, 2001, general and
administrative expense includes $0.9 million and $2.8 million (of which $1.7 million was related to the outstanding accounts receivable of NorthPoint Communications), respectively, of provisions for doubtful accounts.

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Excluding the provisions for doubtful accounts, general and administrative expenses: increased 4% to $1.2
million for the three months ended June 30, 2002 from $1.1 million for the three months ended June 30, 2001; decreased 8% to $3.4 million for the nine months ended June 30, 2002 from $3.7 million for the nine months ended June 30, 2001.

During the three months ended December 31, 2001, in a private transaction whereby we sold our claim the the NorthPoint bankruptcy
proceedings, we recovered approximately $0.2 million of the $1.7 million NorthPoint receivable for which we had recorded a provision for doubtful accounts in the three months ended December 31, 2000. We expect general and administrative expenses
will remain relatively unchanged for the remainder of fiscal year 2002.

RESTRUCTURING COSTS

During the three months ended December 31, 2001, we recorded a charge for restructuring costs of $0.5 million in connection with a reduction in the Companys workforce of
approximately 24 people whose positions were determined to be redundant subsequent to the closing of the Cayman acquisition. The charge consisted primarily of employee severance benefits. (See Note 8 of Notes To Unaudited Condensed Consolidated
Financial Statements.)

INTEGRATION COSTS

During the three months
ended December 31, 2001, we recorded a charge of $0.3 million for integration costs incurred in connection with integrating Caymans customers, systems and operations. (See Note 9 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 acquisitions of Cayman and DoBox 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 6 of Notes To Unaudited Condensed Consolidated Financial Statements.)

AMORTIZATION OF GOODWILL AND OTHER INTANGIBLE ASSETS

For the three and nine months ended June 30,
2002, we amortized the amounts allocated to intangible assets with identifiable lives related to our acquisition of Cayman. (See Note 6 of Notes To Unaudited Condensed Consolidated Financial Statements.)

For the three and nine months June 30, 2001, amortization of goodwill and other intangible assets represents the amortization of such amounts allocated to goodwill
and other intangible assets related to our acquisitions of WebOrder, StarNet, Serus and netOctopus.

We adopted the provisions of
SFAS No. 142 on October 1, 2001, and as such, will no longer amortize the amounts allocated to goodwill and other intangible assets with undeterminable lives related to our acquisitions of WebOrder, StarNet and netOctopus, nor will we amortize the
amounts allocated to goodwill and other intangible assets with undeterminable lives related to our acquisition of Cayman. (See Note 2 of Notes To Unaudited Condensed Consolidated Financial Statements.)

OTHER INCOME (LOSS)

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

For the nine months ended June 30, 2002, loss on impaired securities reflects the other than temporary decline in the value of our investment in
MegaPath. For the nine months ended June 30, 2001, loss on impaired securities reflects the loss of our investment in NorthPoint.

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Other income, net decreased for the three and nine months ended June 30, 2002 from the three and nine
months ended June 30, 2001 due to our reduced cash, cash equivalents and short-term investments as a result of the cash used to acquire Cayman, to support our operating activities and purchases of furniture, fixtures and equipment combined with a
reduction in interest rates from the prior fiscal year.

PROVISION FOR INCOME TAXES

We did not record an income tax benefit for the three and nine months ended June 30, 2002 and 2001 primarily due to continued substantial uncertainty regarding our ability to realize our
deferred tax assets. Based upon available objective evidence, there has been sufficient uncertainty regarding the realizability of our deferred tax assets to warrant a 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 outlook for fiscal year 2002 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.

CUMULATIVE EFFECT FROM ADOPTION OF STAFF ACCOUNTING BULLETING 101

In December
1999, the SEC issued SAB 101, Revenue Recognition in Financial Statements. SAB 101 provides guidance on applying generally accepted accounting principles to revenue recognition issues in financial statements. We adopted SAB 101 in the three
months ended December 31, 2000 and recorded a $1.6 million charge to our condensed consolidated statement of operations and $1.6 million in deferred revenue to our balance sheet. (See Note 2 of Notes To Unaudited Condensed Consolidated Financial
Statements.)

Liquidity and Capital Resources

We have
funded our operations to date primarily through the public offerings of our common stock. As of June 30, 2002, our principal source of liquidity included cash, cash equivalents and short-term investments of $26.3 million and a $15.0 million credit
facility from which we borrowed $3.0 million in the three months ended June 30, 2002.

During the three months ended June 30, 2002,
we entered into a Loan and Security Agreement with Silicon Valley Bank (the Credit Facility) to enable us to maintain our working capital at levels sufficient to accommodate future business opportunities. Pursuant to the Credit Facility,
we may borrow up to $15.0 million from time to time from Silicon Valley Bank. The credit limit is determined based on a formula related to the amount of accounts receivable and inventory at any particular time. The term of the Credit Facility is two
years. We may borrow under the Credit Facility in order to finance working capital requirements for new products and customers, and otherwise for general corporate purposes in the normal course of business. The Credit Facility includes provisions
and covenants that we believe are customary for secured receivables-based financing agreements.

OPERATING ACTIVITIES

Our operating activities used $3.0 million of cash for the nine months ended June 30, 2002. This use of cash was primarily due to supporting the loss generated by our regular operating
activities, increased accounts receivable and decreased deferred revenue. The use of cash is partially offset by non-cash charges for depreciation and amortization, acquired in-process research and development, and unrealized loss on impaired
securities as well as decreased inventory levels and increased accounts payable.

Our operating activities used $3.3 million of
cash for the nine months ended June 30, 2001. This use of cash was primarily due to supporting the loss generated by our regular operating activities, paying the expenses related to our terminated merger with Proxim as well as the reduction of our
accounts payable and other liabilities. These costs were partially offset by increased accounts receivable collections and non-cash charges for depreciation and amortization and unrealized loss on impaired securities.

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INVESTING ACTIVITIES

Our investing
activities used $14.1 million of cash for the nine months ended June 30, 2002 primarily due to our acquisition of Cayman in October 2001 and purchases of furniture, fixtures and equipment and short-term investments as well as an additional long-term
investment in MegaPath, partially offset by proceeds realized from the sale and maturity of short-term investments.

Our investing
activities provided $0.8 million of cash for the nine months ended June 30, 2001 primarily due to proceeds realized from the sale and maturity of short-term investments, partially offset by the purchase of such short-term investments, the purchase
of capital equipment and a long-term investment in MegaPath.

During the three months ended December 31, 2000, we purchased $2.0
million of Series D Preferred Stock in MegaPath. MegaPath offers high-speed DSL access and eCommerce and Web hosting services to small and medium size businesses. During fiscal year 2000, MegaPath had purchased the Companys broadband Internet
equipment and licensed certain of our Web platforms products. During the three months ended March 31, 2002, we recorded a $1.4 million unrealized loss on impaired securities related to our investment in MegaPath. This impairment was recorded in
connection with the recent valuation of MegaPath based upon its most recent round of financing.

During April 2002, we made an
additional investment in MegaPath by purchasing $0.4 million of MegaPaths Series E Preferred Stock.

FINANCING ACTIVITIES

Our financing activities provided $3.8 million and $1.5 million for the nine months ended June 30, 2002 and 2001, respectively. The cash provided by financing activities for the nine
months ended June 30, 2002 is due to $3.0 million of borrowings under our credit facility and $0.8 million from activity in our employee stock purchase program and the exercise of employee stock options. The cash provided by financing activities for
the nine months ended June 30, 2001 is due to activity in our employee stock purchase program and the exercise of employee stock options.

We currently depend on our existing cash, cash equivalents, short-term investments and credit facility to meet our needs for working capital which we believe will adequately meet our
cash needs for working capital and capital expenditures for the next twelve months. We do not utilize any off-balance sheet financing arrangements. We may require additional capital to finance our future growth and fund our ongoing research and
development activities during fiscal 2002 and beyond. If we issue additional stock to raise capital, the percentage ownership in Netopia of our existing stockholders would be reduced. Additional financing may not be available when needed and, if
such financing is available, it may not be available on terms we believe favorable.

From time to time, in the ordinary course of
business, we may evaluate potential acquisitions of businesses, products and technologies. Accordingly, a portion of our cash may be used to acquire or invest in complementary businesses or products, to obtain the right to use complementary
technologies, to obtain additional presence on the Internet or to support additional advertising and promotional campaigns. In the past, our acquisitions and divestitures have involved numerous risks, including the use of significant amounts of our
cash, diversion of the attention of our management from our core business, loss of our key employees and significant expenses and write-offs. For example, in December 1998, we acquired netOctopus and Serus, in October 1999, we acquired StarNet, in
March 2000, we acquired WebOrder, in October 2001, we acquired Cayman and in March 2002, we acquired the assets of DoBox. The succes s of these acquisitions depend upon our ability to retain the customers and employees acquired and timely and
successfully develop, manufacture and gain market acceptance for the products acquired. If we engage in additional acquisitions or divestitures in future periods, we may not be able to adequately address these risks and our business may be
harmed.

Commitments

We have material commitments that
consist of facilities and equipment under operating lease agreements expiring at various dates through 2005. These commitments and obligations are reflected in our financial statements

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once goods or services have been received or payments related to the obligations become due. The following is a schedule of our future minimum rental payments
required under these operating lease agreements that have initial or remaining non-cancelable lease terms in excess of one year (in thousands):

|Year ending September 30,    |  |   |      
|---------------------------- |  | - | -----
|                             |  |   |      
|2002                         |  | $ | 904  
|2003                         |  |   | 1,519
|2004                         |  |   | 972  
|2005                         |  |   | 476  
|thereafter                   |  |   |     
|                             |  |   |      
|Total minimum lease payments |  | $ | 3,871
|                             |  |   |      

Risk Factors

In addition to other information in this Form 10-Q, the following risk factors should be considered carefully in evaluating our business because such factors currently 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 SEC, actual results could differ
materially from those projected in any forward-looking statements.

Substantial sales of our broadband Internet equipment will not occur unless telecommunications carriers initiate
substantial deployment of DSL services.

The success of our broadband Internet equipment depends upon whether
telecommunications carriers deploy DSL and other broadband technologies and upon the timing of the deployment of such technologies. Factors that will impact such deployment include:

| |  | A prolonged approval process by service providers, including laboratory tests, technical trials, marketing trials, initial commercial deployment and full commercial
deployment; 
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The development of a viable business model for DSL and other broadband services, including the capability to market, sell, install and maintain DSL and other broadband services;
| |  | The ability of our CLEC customers 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 telecommunications carriers and ISPs to deploy services in a timely manner and to provide satisfactory customer service. We offer to carriers and service provider customers the opportunity to bundle basic DSL connectivity with
value-added features that enable the provider to bundle differentiated services that will justify higher recurring revenues from end users. These features include dial backup, VPN, voice over DSL, remote management and configuration, content
filtering and eSite or eStore hosting. We can offer no assurance that our strategy of enabling bundled service offerings will be widely accepted. If telecommunications carriers do not expand their deployment of DSL and other broadband services, or
if additional telecommunications carriers do not offer DSL and other broadband services on a timely basis, then our business, financial condition and results of operations will be seriously harmed.

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

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ILECs have been aggressively marketing DSL services principally focusing on residential services. Prior
to the 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 the channels through which we sell our products to
include ILEC customers, such as SBC and BellSouth, and Comcast, a cable provider, and have committed resources that are focused on expanding our presence in the ILEC channel both domestically and internationally in response to changing market
conditions. There continue to be barriers associated with such sales including, but not limited to, lengthy product evaluation cycles, the ability to dislodge competitors whose products are currently being utilized, a long-term contract cycle and
intense price pressures. ILECs currently obtain equipment from our competito rs, such as Alcatel, Siemens (through its Efficient Networks subsidiary), Westell, ZyXEL and 2Wire, who 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 our ability to successfully expand our presence in the ILEC market. If we fail to retain the customers acquired in connection with our acquisition of
Cayman or fail to successfully penetrate the ILEC market for our products and services, our business may be materially and adversely affected.

The DSL market, and the channels
through which we historically have sold our DSL products, has experienced significant business difficulties during the past year, which have negatively affected our business and operating results.

Prior to our acquisition of Cayman in October 2001, our most significant customers have been CLECs and ISPs. Since the middle of calendar year 2000, CLECs have
experienced significant business difficulties due to an inability to obtain financing to continue to build out their networks. The difficulties of these customers have materially and adversely affected our operating results, causing a significant
decline in the price of our common stock. During the last eighteen months, three of our CLEC customers, Covad, Rhythms, and NorthPoint have demonstrated the following market difficulties:

| |  | Covad, our largest customer in fiscal year 2001, has reduced its breadth of network build-out and significantly scaled back its operations. In addition, Covad filed a voluntary
petition under the Bankruptcy Act in August 2001 as part of a capital restructuring plan. In November 2001, Covad announced that it had secured an agreement with SBC to provide Covad with $150 million in funding. Covad emerged from bankruptcy in
December 2001 upon closing the SBC funding. Additionally, Covad has announced that this funding is expected to provide the cash that it believes will allow it to become cash flow positive by the latter half of 2003;                                                                                                                                                                                                                                                 
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Rhythms announced in January 2001 its intention to reduce the number of markets in which it offers services and significantly scaled back its operations. In addition, Rhythms filed a voluntary
petition under the Bankruptcy Act in August 2001, and ceased normal operations during September 2001. In December 2001, WorldCom purchased Rhythms' key DSL assets. As a result, WorldCom has been delivering service to customers on the Rhythms
network. On July 21, 2002, WorldCom and substantially all of its active U.S. subsidiaries filed voluntary petitions for reorganization under Chapter 11 of the United States Bankruptcy Code. There is no certainty that WorldCom will continue to
purchase our equipment for deployment on the Rhythms network, and there is no certainty that WorldCom will continue to operate the Rhythms network as a result of the pending bankruptcy proceedings; and
| |  | NorthPoint voluntarily filed for protection under the Bankruptcy Act in January 2001 and subsequently ceased operations during March 2001.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     

Like the CLECs, ISPs also have struggled in the past year. Most ISPs have had significant difficulties in differentiating their services from the services provided
by their competitors. As a result, the lack of differentiation has led to significant erosion in the prices charged to customers. Many of our ISP customers such as Mpower Communications, PSINet, Onsite Access and Business Telecommunications, have
all experienced business difficulties and some have filed for bankruptcy or ceased operations. PSINet, which had been one of our key ISP customers for the past three years, filed a voluntary petition under the Bankruptcy Act in June 2001, and most
of its Canadian subsidiaries filed for protection under similar Canadian statutes. The pricing pressure for ISPs continues to date, and, accordingly, sales of our products to ISPs remain difficult. The financing market for CLECs and ISPs has
remained diffi cult and has been largely closed in calendar years 2001 and 2002, resulting in significantly decreased sales to CLECs and ISPs and write-offs of outstanding accounts receivable.

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If we are unable to retain the customers and/or employees and complete the projects acquired in connection with our acquisition of Cayman, our business
would be seriously harmed.

We have attempted to expand the channels through which and markets to which we sell our products
through our acquisition of Cayman, a privately held developer and supplier of business class broadband gateways consisting primarily of ADSL and cable Ethernet routers. Previously, we had focused on serving the small and medium size business market
primarily through the CLEC channels through which we have historically derived a substantial portion of our revenue. The Cayman acquisition expanded our customer base to include Caymans existing base of ILEC customers, such as SBC and
BellSouth, and Comcast, a leading cable provider. If we are unable to retain the customers and/or employees acquired, maintain the quality of the products we acquired and timely and successfully develop, manufacture and gain market acceptance of the
products which were under development at the time of the acquisition, our busi ness will be seriously harmed. For example, we received no revenues from SBC in either of the three month periods ended March 31 and June 30, 2002 as a result of
SBCs on-hand inventory levels and planned transition to new products offered by vendors of broadband Internet equipment. The Cayman acquisition has involved numerous risks, including the use of significant amounts of our cash, diversion of the
attention of our management from our core business and significant expenses and write-offs. Incremental acquisition related charges including in-process research and development will adversely impact our profitability. Additionally, we may have to
record additional acquisition related charges, including the impairment of goodwill, which would adversely impact our profitability. (See Note 6 of Notes to Consolidated Financial Statements.)

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

Our revenues will decline and we may incur losses if we lose one or more of our significant customers or if our customers reduce or delay purchases of our products. For the nine months
ended June 30, 2002, there were four customers who each individually represented at least 5% of our revenues and in the aggregate, accounted for 37% of our total revenues. In this period, sales to Ingram Micro, Covad, Innotrac and IBM represented
approximately 13%, 11%, 8% and 5%, respectively, of our total revenues.

We have a history of losses and negative cash flow from operations. We may incur losses and negative cash
flow from operations in the future.

Our failure to significantly increase our revenues or sufficiently reduce our operating
expenses will result in continuing losses. We incurred losses from continuing operations of $18.5 million for the nine months ended June 30, 2002 and have incurred losses from continuing operations of $41.7 million, $17.6 million and $7.9 million
for fiscal years 2001, 2000 and 1999, respectively. Our operations used $3.0 million of cash for the nine months ended June 30, 2002 and have used $5.8 million of cash for fiscal year 2001, provided $0.1 million of cash for fiscal year 2000 and used
$8.4 million of cash for fiscal 1999. Even if we reach profitability and maintain positive cash flow from operations, we may not be able to sustain or increase profitability or cash flow from operations on a quarterly or annual basis.

We may incur negative cash flow in the future particularly to the extent we complete any acquisition opportunities. As a result of continuing
substantial capital expenditures and product development, sales, marketing and administrative expenses, we will need to generate significant revenues to maintain positive cash flow from operations.

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. As a result, we believe that period-to-period comparisons of our
operating results are not necessarily meaningful. Investors should not rely on the results of any one quarter or series of quarters as an indication of our future performance.

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It is likely that in some future quarter or quarters 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. 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;                                                                                                                                                                                                                                                              
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Decreases or delays in purchases by significant customers, or loss of customers such as Covad, Ingram Micro, SBC or BellSouth;                                                                                                                                                                                                                          
| |  | Increased price competition for our broadband Internet equipment products;                                                                                                                                                                                                                                                                              
| |  | Our ability to license, and the timing of licenses, of our Web platforms products;                                                                                                                                                                                                                                                                      
| |  | The growth rate in the number of eSites and eStores that are built using our Web platforms products from which we derive revenues;                                                                                                                                                                                                                      
| |  | 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
products as a percentage of our total revenues and increased sales of lower margin ADSL products within our family of broadband Internet equipment products.
| |  | Shifts in the channel fulfilling demand from small, medium and distributed enterprises for DSL services to entities with whom we do not have historical relationships;                                                                                                                                                                                  
| |  | The price and availability of chip sets and other components for our DSL products;                                                                                                                                                                                                                                                                      
| |  | The timing and size of expenses, including operating expenses and expenses of developing new products and product enhancements; and                                                                                                                                                                                                                     
| |  | Our ability to attract and retain key personnel.                                                                                                                                                                                                                                                                                                        

These variations may
also be caused by factors related to the development of the market for broadband Internet equipment, the market for our Web platforms products and the competition we face in these markets, including:

| |  | The ability of CLECs to obtain required capital resources;                                                                                                              
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The timing, rate and ability of telecommunications service providers to deploy DSL and other broadband services;                                                        
| |  | Anticipated price and promotion competition in the market for broadband Internet equipment and Web platforms products;                                                  
| |  | The level of market penetration of our broadband Internet equipment and Web platforms products relative to those of our competitors;                                    
| |  | The timing and rate of deployment of alternative high-speed data transmission technologies, such as cable and high-speed wireless data transmission; and                
| |  | Anticipated increases in competition among producers of eCommerce products, including the impact of products that are available from some of our competitors at no cost.

These variations may also be caused by other factors affecting our business, many of which are substantially outside of the control
of our management, including:

| |  | Foreign currency and exchange rate fluctuations which may make our dollar-denominated products more expensive in those foreign markets where we sell our products in United States
dollars or could expose us to currency rate fluctuation risks to the extent we do not adequately hedge these foreign currency sales;
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Costs associated with future litigation, including securities litigation or litigation relating to the use or ownership of intellectual property;                                                                                                                                                                      
| |  | Acquisition costs or other non-recurring charges in connection with the acquisition of companies, products or technologies; and                                                                                                                                                                                        
| |  | General global economic conditions that could adversely affect sales to our customers.                                                                                                                                                                                                                                 

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Because the markets for our products and services are intensely competitive and some of our competitors are larger and better established, 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 Alcatel, Cisco, Siemens (through its Efficient Networks subsidiary), Lucent, Linksys, 2Wire, Westell, and
ZyXEL.

In the market for our Web platforms products, we primarily compete with Trellix, Computer Associates, Intel, Microsoft,
Vector Networks, Stac Software, Symantec, and Tivoli Systems (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 Pro 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 significa
nt market share. We also expect that competition will increase as a result of industry consolidation.

Our limited operating history in broadband gateways makes it difficult to
evaluate our prospects.

Our broadband Internet equipment products are relatively new. These products are at an early stage of
development in a relatively new, rapidly evolving and intensely competitive market. We may not correctly anticipate market requirements, including requirements for performance, price, features and compatibility with other broadband equipment. We may
not be able to rapidly introduce innovative new products that meet these market requirements. It is possible that the market for broadband Internet equipment products will develop in a manner that we do not anticipate. Our competitors have already
introduced broadband products, some of which may compete effectively against our broadband Internet equipment products. Such developments could render our broadband Internet equipment products obsolete.

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

We have released a line of IADs designed to allow for voice and data services over a single DSL line. To date, service providers, including ILECs and CLECs, have not deployed such
combined services broadly and the market has grown more slowly than anticipated. Unless such products and services are broadly deployed, our integrated voice and data products and combined services may not have a meaningful commercial impact, which
could result in significant variations in our future operating results

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.

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We purchase the semiconductor chips for our DSL products from a limited number of suppliers.

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

Substantially all of our circuit boards are manufactured by a limited number of contract manufacturers.

Substantially all of our broadband Internet equipment includes circuit boards that are manufactured by a limited number of contract manufacturers. Additionally,
certain of our broadband Internet equipment products are assembled and packaged by these contract manufacturers. If supplies of circuit boards or broadband Internet equipment products from these contract manufacturers are interrupted for any reason,
we will incur significant losses until we can arrange for alternative sources. Any such interruption may seriously harm our reputation and business.

We may be unable to obtain
components for our broadband Internet equipment from independent contractors and specialized suppliers.

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. We generally do not
have guaranteed supply arrangements with these third parties and they could cease selling components to us at any time. Moreover, the ability of independent contractors and specialized suppliers to provide us with sufficient components for our
broadband Internet equipment also depends on our ability to accurately forecast our future requirements. If we are unable to timely obtain a sufficient quantity of components from independent contractors or specialized suppliers for any reason,
sales of our broadband Internet equipment could be delayed or halted. In addition, we may be required to pay premiums for components purchased from other ve ndors should our regular independent contractors and specialized suppliers be unable to
timely provide us with sufficient quantity of components. To the extent we pay any premiums, our gross margins and operating results would be harmed. Further, we could also be forced to redesign our broadband Internet equipment and qualify new
suppliers of components. The resulting stoppage or delay in selling our products and the expense of redesigning our broadband Internet equipment would seriously harm our reputation and business. In addition, we anticipate that it will be necessary
for us to establish relationships with additional component suppliers in the future. If we are unsuccessful in establishing these relationships, we may not be able to obtain sufficient components in some future period.

We need to develop, introduce and market new and enhanced products in a timely manner to remain competitive.

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 that provide increasingly higher levels of performance, reliability and compatibility. We will need to continue to integrate our DSL router technology with the architectures of leading central
office equipment providers in order to enhance the reliability, ease-of-use and management functions of each of our DSL products. Currently, our router products are fully integrated with Copper Mountain central office access concentrators and are
interoperable with Alcatel, Cisco, Ericsson, Lucent Technologies, Nortel, Nokia, Orckit, Paradyne, Siemens, and Zhone central office access concentrators. However, we may not be able to successfully develop, introduce, enhance or market these
or other products 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 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

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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. It is possible that the market for broadband Internet equipment will develop in a manner that we do not anticipate.

We
may engage in acquisitions or divestitures that involve numerous risks, including the use of cash and the diversion of management attention.

In the past, we have engaged in both acquisitions and divestitures. For example, in December 1998, we acquired netOctopus and Serus, in October 1999, we acquired StarNet, in March 2000,
we acquired WebOrder, in October 2001, we acquired Cayman and in March 2002, we acquired the assets of DoBox. We also entered into an agreement and plan of reorganization in January 2001 under which we agreed to be acquired by Proxim. This agreement
was mutually terminated in March 2001. In addition, in August 1998, we sold our LAN Division. We may continue to acquire companies, technologies or products or to sell or discontinue some of our technologies or products in future periods. In the
past, our acquisitions and divestitures have involved numerous risks, including the use of significant amounts of our cash, diversion of the attention of our management from our core business, loss of our key employees and significan t expenses and
write-offs. For example, in the six months ended March 31, 2002, we recorded a charge for acquired in-process research and development of $4.1 million related to our acquisitions of DoBox and Cayman and in September 2001, for example, we recorded a
$16.4 million charge for impairment of goodwill and other intangible assets related to our acquisitions of WebOrder, StarNet and Serus. Incremental acquisition related charges including in-process research and development and amortization of
goodwill and other intangibles or divestitures of profitable technologies or products could adversely impact our profitability. The success of these acquisitions depends upon our ability to retain the customers and key employees, and timely and
successfully develop, manufacture and gain market acceptance for the products we acquired. If we engage in additional acquisitions or divestitures in future periods, we may not be able to address these risks and our business may be
harmed.

Our revenues will not grow and we may incur losses if we cannot successfully introduce, market and sell our Web platforms products.

The majority of our Web platforms revenues are derived from the sale of Timbuktu Pro. We anticipate that the market for Timbuktu Pro will grow more slowly than the
market for our other Web platforms products and services. In addition, we rely on licensees of our Web platforms to promote the use of our Web platforms for building eSites and eStores. 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 our eSite and eStore Web platforms, we will not generate recurring revenues from royalties on eSites and eStores promoted by
licensees of our Web platforms.

To be successful, use of our Web platforms must become widespread, and this will require us to expand our sales and distribution channels, which we
may be unable to do.

Growth in revenues from our Web platforms will be heavily dependent on recurring fees from eSites and
eStores created by licensees. Accordingly, to be successful, our Web platforms must become widely used. If we are unable to expand our sales and distribution channels to establish the widespread use of our Web platforms, it is possible that
competing products could become widely used, reducing the likelihood that we will generate significant revenues from our Web platforms.

If hosting services for our Web platforms
perform poorly, our reputation will be damaged 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 eSite and eStore hosting and eSupport services for our customers. In addition, our servers are located at third-party facilities.
Failure or poor performance by third parties with whom we contract to maintain our servers, hardware and software, could lead to interruption or deterioration of our eSite and eStore hosting and eSupport services. Additionally, a slowdown or failure
of our systems due to an increase in the use of the eSites and eStores we currently host, or due to damage or destruction of our systems for any reason, or the possibility of rolling blackouts could also lead to interruption or deterioration
of

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our eSite and eStore hosting and eSupport services. If there is an interruption or a deterioration of our eSite and eStore hosting and eSupport services, our
reputation would be seriously harmed and, consequently, sales of our products and services would decrease. If such circumstances do arise in some future period, in order to retain current customers and attract new customers, we may have to provide
our eSite and eStore hosting and eSupport services at a subsidized price or even at no cost. In addition, if our eSite and eStore hosting or eSupport services are interrupted, perform poorly, or are unreliable, we are at risk of litigation from our
customers.

We may 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 these products are generally sold at lower gross margins than our Web platforms products, this will likely result in a decrease in our overall gross margins. Further, we expect that the market for broadband Internet
equipment, in particular DSL products, will become increasingly competitive and that we will be forced to lower the prices we charge for our broadband Internet equipment in the future. As the average selling price of our routers declines, our gross
margins related to such products, as well as our overall gross margins, are likely to decline.

We derive a substantial portion of the recurring revenues from our Web platforms
products from a small number of large customers.

We derive a substantial portion of the recurring revenues from our Web
platforms products from a small number of large customers. If these customers were to choose a competitive platform or are unable to market the platform successfully to their customers, this could lead to reduced revenues and adversely impact our
results.

Our Web platforms products have a lengthy sales cycle.

We derive a substantial portion of our Web platforms revenue from a small number of customers, and the sales cycle for licenses of Web platforms products may be long. Licenses of Web
platforms products are typically closed in the final weeks of the quarter and the timing of these licenses may cause our quarterly results to vary. Our inability to obtain customer commitments or delays in such commitments due to the lengthy sales
cycles would reduce our revenues and adversely impact our results.

A substantial portion of our revenues are derived from sales to international customers.

A substantial portion of our revenues is derived from sales to European and other international customers. We expect sales to international
customers to continue to comprise a significant portion of our revenues. In the past, our international sales have typically been denominated in United States dollars. Beginning in our fiscal third quarter of 2000, sales of broadband Internet
equipment products to our European customers who are members of the European Union have been denominated in the Euro. All other international sales are denominated in United States dollars. 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. This could lead to decreased profitability of our products and services. In
addition, changes in the value of the Eu ro relative to the United States dollar could adversely affect our operating results to the extent we do not hedge sales denominated in the Euro.

There are risks associated with international operations.

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.                                                  

We must also customize
our products for local markets. Further, if we establish significant operations overseas, we may incur costs that would be difficult to reduce quickly because of employee-related laws and practices in those countries.

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

In the past, we have experienced a seasonal reduction in our revenues in the three months ended September 30, our fiscal fourth quarter, primarily due to European vacation schedules that
typically result in reduced economic activity in Europe during such periods. We anticipate that this trend will continue.

Our success depends on retaining our current key personnel
and attracting additional key personnel.

Our future performance depends on the continued service of our senior management,
product development and sales personnel, particularly Alan Lefkof, our President and Chief Executive Officer. None of our employees are bound by an employment agreement, and we do not carry key person life insurance. The loss of the services of one
or more of our key personnel could seriously harm our business. 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. Competition for qualified personnel is intense, and we may fail to retain our key employees or to attract or retain
other highly qualified personnel.

Our intellectual property may not be adequately protected, and our products may infringe upon the intellectual property rights of third
parties.

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.

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.

For example, in selling our Timbuktu Pro software, we often rely on license cards that are included in our products and are not signed by licensees. Therefore,
such licenses may be unenforceable under the laws of certain jurisdictions. In addition, the laws of some foreign countries where our products are or may be manufactured or sold, particularly developing countries including various countries in Asia,
such as the Peoples Republic of China, do not protect our proprietary rights as fully as do the laws of the United States.

We may not be able to license necessary software,
firmware and hardware designs from third parties.

We rely upon certain software, firmware and hardware designs that we license
from third parties, including firmware that is integrated with our internally developed firmware and used in our products to perform key functions. We cannot be certain that these third-party licenses will continue to be available to us on
commercially

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reasonable terms. The loss of, or inability to maintain, such licenses could result in shipment delays or reductions until equivalent firmware is developed,
identified, licensed and integrated which would seriously harm our business.

Our customers may return our products to us for replacement or refund.

We provide end users of our products with a limited warranty on our broadband Internet equipment and our Timbuktu Pro software. We permit end
users to return our broadband Internet equipment and Timbuktu Pro for replacements or for refund of the full purchase price if the products do not perform as warranted. Our other Web platforms products are provided on an as is basis, and
we generally do not offer a warranty on this product. End users of our eSites and eStores generally can discontinue their service at any time at no cost. In the past, we have not encountered material warranty claims. In the future, if warranty
claims exceed our reserves for such claims, our business would be seriously harmed. Additionally, we attempt to further limit our liability to end users through disclaimers of special, consequential and indirect damages and similar provisions.
However, we cannot assure you that such limitations of liability will be legally enforceable.

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. We cannot assure you that, despite our testing, defects will not be found in new products or new versions of products following commercial release. 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. In addition, we would be at risk of product liability litigation for financial or other damages to our customers because of defects in our products.
Although we attempt to limit our liability to end users through disclaimers of special, consequential and indirect damages and similar provisions, we cannot assure you that such limitations of liability will be legally enforceable.

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

We have a limited number of stockholders that hold a large portion of our common stock. To the extent our large stockholders sell substantial amounts of our common stock in the public
market, the market price of our common stock could fall.

Our industry may become subject to changes in tariffs and regulations.

Our industry and industries on which our business depends may be affected by changes in tariffs and regulations. For example, we depend on telecommunications
service providers for sales of our broadband gateway products, and companies in the telecommunications industry must comply with numerous regulations and pay numerous tariffs. If our industry or industries on which we depend become subject to
increases in tariffs and regulations that lead to corresponding increases in the cost of doing our business or doing business with us, our revenues could decline. 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 could adversely affect our business.

Our operations are vulnerable to interruption by fire, earthquake, power loss, telecommunications failure 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, we do not carry sufficient business interruption insurance to compensate us for losses that may occur and any losses or damages incurred by us could have a material adverse effect on our
business.

We may find it difficult to raise needed capital in the future, which could significantly harm our business.

We may require substantial capital to finance our future growth and fund our ongoing research and development activities. Our capital requirements will depend on many factors,
including:

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| |  | Acceptance of and demand for our products;                                            
|- |  | --------------------------------------------------------------------------------------
| |  | The number and timing of acquisitions;                                                
| |  | The costs of developing new products;                                                 
| |  | The costs associated with expansion; and                                              
| |  | The extent to which we invest in new technology and research and development projects.

If we issue additional stock or other instruments to raise capital, the percentage ownership in Netopia of existing stockholders would be reduced. Additional financing may not be
available when needed and, if such financing is available, it may not be available on terms favorable to us.

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 the following factors,
some of which are beyond our control:

| |  | Variations in our quarterly operating results;                                                                                                                                                        
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Changes in securities analysts' estimates of our financial performance;                                                                                                                               
| |  | Changes in market valuations of similar companies;                                                                                                                                                    
| |  | Announcements by us or our competitors of technological innovations, new products or enhancements, significant contracts, acquisitions, strategic partnerships, joint ventures or capital
commitments;
| |  | Losses of major customers, major projects with major customers or the failure to complete significant licensing transactions;                                                                         
| |  | Additions or departures of key personnel;                                                                                                                                                             
| |  | Fluctuations in the stock market price and volume, which are particularly common among highly volatile securities of companies in our industry;                                                       
| |  | General conditions in the broadband communications industry, in particular the DSL market, or the domestic and worldwide economies;                                                                   
| |  | Decreases or delays in purchases by significant customers;                                                                                                                                            
| |  | A shortfall in revenue or earnings from securities analysts' expectations or other announcements by securities analysts;                                                                              
| |  | Our ability to protect and exploit our intellectual property or defend against the intellectual property rights of others; and                                                                        
| |  | Developments in our relationships with customers, distributors and suppliers.                                                                                                                         

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

We are at risk of securities class action litigation due to the expected volatility of our stock price.

In the past, securities class action litigation has often been brought against a company following periods of volatility in the market price of its securities. In the future, we may be a
target of similar litigation. Securities litigation could result in substantial costs and divert managements attention and resources.

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

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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
INFORMATIONItem 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. 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. Beginning in our fiscal third quarter of 2000, sales to European
countries that are members of the European Union have been denominated in the Euro. In order to reduce our exposure resulting from currency fluctuations, we have entered into currency exchange forward contracts. These contracts guarantee a pr
edetermined exchange rate at the time the contract is purchased. We do not enter into currency exchange contracts for speculative or trading purposes.

Interest Rate
Risk

The table below presents the market value and related weighted-average interest rates for our investment portfolio at
June 30, 2002 and 2001. All of our investments mature in twelve months or less.

|                                        |  | June 30, 2002  |        | June 30, 2001
|--------------------------------------- |  | -------------- | ------ | -------------
|                                        |  |                |        |              
|                                        |  |                |        |              
|Principal (notional) amounts in         |  | Cost           |        | market       
|United States dollars:                  |  | basis          |        | value        
|                                        |  |                |        |              
|                                        |  | (in thousands) |        |              
|                                        |  |                |        |              
|Cash equivalents - fixed rate [a]       |  | $              | 11,106 |              
|Short-term investments - fixed rate [b] |  |                | 3,978  |              
|                                        |  |                |        |              
|                                        |  | $              | 15,084 |              
|                                        |  |                |        |              
|                                        |  |                |        |              

|[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 which mature in greater than or equal to 90 days.

Our market interest rate risk 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.

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, 2002 and 2001. These accounts receivable are valued at
the United States/Euro exchange rate as of June 30, 2002 and 2001, respectively. The carrying value approximates fair value at June 30, 2002 and 2001.

|                                         | June 30, 2002  |          | June 30, 2001
|---------------------------------------- | -------------- | -------- | -------------
|                                         |                |          |              
|Principal (notional) amounts in          | Carrying       | Exchange |              
|United States dollars:                   | amount         | rate     |              
|                                         |                |          |              
|                                         | (in thousands) |          |              
|                                         |                |          |              
|Accounts receivable denominated in Euros | $              | 1,050    |              

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The table below presents the carrying value of our currency exchange forward contracts, in United States
dollars, at June 30, 2002 and 2001. The carrying value approximates fair value at June 30, 2002 and 2001.

|                                | June 30, 2002  |     | June 30, 2001
|------------------------------- | -------------- | --- | -------------
|                                |                |     |              
|Principal (notional) amounts in | Carrying       |     | Spot         
|Euros:                          | amount         |     | rate         
|                                |                |     |              
|                                | (in thousands) |     |              
|                                |                |     |              
|Currency exchange forward       |                |     |              
|contract # 1                    | $              | 23  |              
|Currency exchange forward       |                |     |              
|contract # 2                    | $              | 201 |              
|Currency exchange forward       |                |     |              
|contract # 3                    | $              | 131 |              
|Currency exchange forward       |                |     |              
|contract # 4                    | $              | 275 |              
|Currency exchange forward       |                |     |              
|contract # 5                    | $              | 274 |              

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 II.       
OTHER INFORMATION              
|-----------------------------------------------
|Item 6.       
Exhibits and Reports on Form 8-K
|                                               

|[a] | Exhibits                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |                                                                               
|--- | ---------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------
|    |                                                                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |                                                                               
|    | Exhibit                                                                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |                                                                               
|    | Number                                                                                   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         | Description                                                                   
|    |                                                                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |                                                                               
|    | 10.13                                                                                    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         | Silicon Valley Bank Loan and Security Agreement entered into on June 27, 2002.
|    |                                                                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |                                                                               
|[b] | During the three months ended June 30, 2002, we filed the following reports on Form 8-K:
|    |                                                                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |                                                                               
|    |                                                                                         | On June 27, 2002, we filed a report on Form 8-K reporting: Item 5 - Other Events announcing Netopia has entered into a Loan and Security Agreement with Silicon Valley Bank effective June 27, 2002
(the "Credit Facility"). Netopia may borrow under the Credit Facility in order to finance working capital requirements for new products and customers, and otherwise for general corporate purposes in the normal course of business. The Credit Facility
includes provisions and covenants that Netopia believes are customary for secured receivables-based financing agreements.

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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 14, 2002 | NETOPIA, INC.                                      | 
|--------------------- | -------------------------------------------------- | 
|                      | (Registrant)                                       | 
|                      |                                                    | 
|                      |                                                    | 
|                      |                                                    | 
|                      |                                                    | 
|                      | By: /s/ William D. Baker                           | 
|                      |                                                    | 
|                      | William D. Baker                                   | 
|                      | Senior Vice President, Finance and Operations, and
|                      | Chief Financial Officer                           

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