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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q/A



(Amendment No. 1)



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

| |  | SECURITIES EXCHANGE ACT OF 1934
| |  | -------------------------------



| |  |  | For the quarterly period ended December 31, 2002
| |  |  | ------------------------------------------------



OR



| ̈ |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
|- |  | --------------------------------------------------------

| |  | SECURITIES EXCHANGE ACT OF 1934
| |  | -------------------------------



| |  |  | For the transition period from to
| |  |  | ---------------------------------



Commission file number 0-28450



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Netopia, Inc.

(Exact name of registrant as specified in its charter)



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



Marketplace Tower

6001 Shellmound Street, 4thFloor

Emeryville, California 94608

(Address of principal executive offices, including Zip Code)



(510) 420-7400

(Registrants
telephone number, including area code)



---



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



As of December 31, 2002 there were 18,906,973 shares of the Registrants
common stock outstanding.



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##### Table of Contents

NETOPIA, INC.

Form 10-Q/A



Table of Contents



|                                 |  |                                                                                                                 |  | Page
|-------------------------------- |  | --------------------------------------------------------------------------------------------------------------- |  | ----
|                                 | 
|PART I.    FINANCIAL INFORMATION |  |                                                                                                                
|                                 |  |                                                                                                                
|Item 1.                          |  | Unaudited Condensed Consolidated Financial Statements                                                           |  | 2   
|                                 |  |                                                                                                                
|                                 |  | Unaudited condensed consolidated balance sheets at December 31, 2002 and September 30, 2002                     |  | 2   
|                                 |  |                                                                                                                
|                                 |  | Unaudited condensed consolidated statements of operations for the three months ended December 31, 2002 and 2001 |  | 3   
|                                 |  |                                                                                                                
|                                 |  | Unaudited condensed consolidated statements of cash flows for the three months ended December 31, 2002 and 2001 |  | 4   
|                                 |  |                                                                                                                
|                                 |  | Notes to unaudited condensed consolidated financial statements                                                  |  | 5   
|                                 |  |                                                                                                                
|Item 2.                          |  | Management's Discussion and Analysis of Financial Condition and Results of Operations                           |  | 13  
|                                 |  |                                                                                                                
|Item 4.                          |  | Controls and Procedures                                                                                         |  | 33  
|                                 | 
|PART II.    OTHER INFORMATION    |  |                                                                                                                
|                                 |  |                                                                                                                
|Item 6.                          |  | Exhibits and Reports on Form 8-K                                                                                |  | 34  
|                                 | 
|Signatures                       |  | 35                                                                                                             
|                                 | 
|Certifications                   |  | 36                                                                                                             



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EXPLANATORY NOTE



This Quarterly Report on Form 10-Q/A amends the following Items of our previously-filed Quarterly Report on Form 10-Q for the quarter ended December 31, 2002: Part I,
Items 1, 2 and 4; and Part II, Item 6.



|PART I. |  | FINANCIAL INFORMATION
|------- |  | ---------------------

|Item 1. |  | Unaudited Condensed Consolidated Financial Statements
|------- |  | -----------------------------------------------------



NETOPIA, INC. AND SUBSIDIARIES

Unaudited Condensed Consolidated Balance Sheets



|                                                                                                                                                |  | December 31, 2002 |          |   | September 30, 2002* |  
|----------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------- | -------- | - | ------------------- | -
|                                                                                                                                                |  | (in thousands)    |         
|ASSETS                                                                                                                                          |  |                   |          |   |                     |  
|Current assets:                                                                                                                                 |  |                   |          |   |                     |  
|Cash and cash equivalents                                                                                                                       |  | $                 | 24,291   |   |                     | $
|Trade accounts receivable less allowance for doubtful accounts and returns of $547 and $567 at December 31 and September 30, 2002,
respectively |  |                   | 10,623   |   |                     |  
|Inventory                                                                                                                                       |  |                   | 8,200    |   |                     |  
|Prepaid expenses and other current assets                                                                                                       |  |                   | 1,279    |   |                     |  
|                                                                                                                                                |  |                   |          |   |                     |  
|Total current assets                                                                                                                            |  |                   | 44,393   |   |                     |  
|Furniture, fixtures and equipment, net                                                                                                          |  |                   | 5,015    |   |                     |  
|Acquired technology, net                                                                                                                        |  |                   | 5,250    |   |                     |  
|Other intangible assets and goodwill, net                                                                                                       |  |                   | 1,933    |   |                     |  
|Long-term investments                                                                                                                           |  |                   | 1,463    |   |                     |  
|Deposits and other assets                                                                                                                       |  |                   | 1,425    |   |                     |  
|                                                                                                                                                |  |                   |          |   |                     |  
|TOTAL ASSETS                                                                                                                                    |  | $                 | 59,479   |   |                     | $
|                                                                                                                                                |  |                   |          |   |                     |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                            |  |                   |          |   |                     |  
|Current liabilities:                                                                                                                            |  |                   |          |   |                     |  
|Accounts payable                                                                                                                                |  | $                 | 10,391   |   |                     | $
|Accrued compensation                                                                                                                            |  |                   | 2,355    |   |                     |  
|Accrued liabilities                                                                                                                             |  |                   | 2,702    |   |                     |  
|Deferred revenue                                                                                                                                |  |                   | 1,694    |   |                     |  
|Other current liabilities                                                                                                                       |  |                   | 52       |   |                     |  
|                                                                                                                                                |  |                   |          |   |                     |  
|Total current liabilities                                                                                                                       |  |                   | 17,194   |   |                     |  
|Long-term liabilities:                                                                                                                          |  |                   |          |   |                     |  
|Borrowings under credit facility                                                                                                                |  |                   | 6,000    |   |                     |  
|Other long-term liabilities                                                                                                                     |  |                   | 174      |   |                     |  
|                                                                                                                                                |  |                   |          |   |                     |  
|Total liabilities                                                                                                                               |  |                   | 23,368   |   |                     |  
|                                                                                                                                                |  |                   |          |   |                     |  
|Commitments and contingencies                                                                                                                   |  |                   |          |   |                     |  
|Stockholders equity:                                                                                                                           |  |                   |          |   |                     |  
|Common stock: $0.001 par value, 50,000,000 shares authorized;                                                                                   |  |                   |          |   |                     |  
|18,906,973 and 18,905,223 shares issued and outstanding at December 31 and September 30, 2002, respectively                                     |  |                   | 19       |   |                     |  
|Additional paid-in capital                                                                                                                      |  |                   | 147,487  |   |                     |  
|Accumulated deficit                                                                                                                             |  |                   | (111,395 | ) |                     |  
|Total stockholders equity                                                                                                                      |  |                   | 36,111   |   |                     |  
|                                                                                                                                                |  |                   |          |   |                     |  
|TOTAL LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                      |  | $                 | 59,479   |   |                     | $
|                                                                                                                                                |  |                   |          |   |                     |  



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



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NETOPIA, INC. AND SUBSIDIARIES

Unaudited Condensed Consolidated Statements of Operations



|Three months ended December 31,                     |  | 2002                                    |        |   | 2001 |  
|--------------------------------------------------- |  | --------------------------------------- | ------ | - | ---- | -
|                                                    |  | (in thousands, except per shareamounts) |       
|REVENUES:                                           |  |                                         |        |   |      |  
|Internet equipment                                  |  | $                                       | 14,596 |   |      | $
|Web platform licenses and services                  |  |                                         | 5,007  |   |      |  
|                                                    |  |                                         |        |   |      |  
|Total revenues                                      |  |                                         | 19,603 |   |      |  
|                                                    |  |                                         |        |   |      |  
|COST OF REVENUES:                                   |  |                                         |        |   |      |  
|Internet equipment                                  |  |                                         | 10,711 |   |      |  
|Web platform licenses and services                  |  |                                         | 429    |   |      |  
|                                                    |  |                                         |        |   |      |  
|Total cost of revenues                              |  |                                         | 11,140 |   |      |  
|                                                    |  |                                         |        |   |      |  
|GROSS PROFIT                                        |  |                                         | 8,463  |   |      |  
|OPERATING EXPENSES:                                 |  |                                         |        |   |      |  
|Research and development                            |  |                                         | 3,983  |   |      |  
|Research and development project cancellation costs |  |                                         | 606    |   |      |  
|Selling and marketing                               |  |                                         | 5,661  |   |      |  
|General and administrative                          |  |                                         | 1,428  |   |      |  
|Amortization of intangible assets                   |  |                                         | 374    |   |      |  
|Restructuring costs                                 |  |                                         | 342    |   |      |  
|Acquired in-process research and development        |  |                                         |       |   |      |  
|Integration costs                                   |  |                                         |       |   |      |  
|                                                    |  |                                         |        |   |      |  
|Total operating expenses                            |  |                                         | 12,394 |   |      |  
|                                                    |  |                                         |        |   |      |  
|OPERATING LOSS                                      |  |                                         | (3,931 | ) |      |  
|Other income (loss), net                            |  |                                         | (7     | ) |      |  
|                                                    |  |                                         |        |   |      |  
|NET LOSS                                            |  | $                                       | (3,938 | ) |      | $
|                                                    |  |                                         |        |   |      |  
|Per share data, net loss:                           |  |                                         |        |   |      |  
|Basic and diluted net loss per share                |  | $                                       | (0.21  | ) |      | $
|                                                    |  |                                         |        |   |      |  
|Common shares used in the per share calculations    |  |                                         | 18,906 |   |      |  
|                                                    |  |                                         |        |   |      |  



See accompanying notes
to unaudited condensed consolidated financial statements.



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NETOPIA, INC. AND
SUBSIDIARIES

Unaudited Condensed Consolidated Statements of Cash Flows



|Three months ended December 31,                                                           |  | 2002           |        |   | 2001 |  
|----------------------------------------------------------------------------------------- |  | -------------- | ------ | - | ---- | -
|                                                                                          |  | (in thousands) |       
|Cash flows from operating activities:                                                     |  |                |        |   |      |  
|Net loss                                                                                  |  | $              | (3,938 | ) |      | $
|Adjustments to reconcile net loss to net cash provided by (used in) operating activities: |  |                |        |   |      |  
|Depreciation and amortization                                                             |  |                | 1,438  |   |      |  
|Charge for in-process research and development                                            |  |                |       |   |      |  
|Write-off of capitalized software development costs                                       |  |                | 16     |   |      |  
|Changes in allowance for doubtful accounts and returns on accounts receivable             |  |                | (20    | ) |      |  
|Changes in operating assets and liabilities:                                              |  |                |        |   |      |  
|Trade accounts receivable                                                                 |  |                | (653   | ) |      |  
|Inventories                                                                               |  |                | (1,941 | ) |      |  
|Prepaid expenses and other current assets                                                 |  |                | 452    |   |      |  
|Deposits and other assets                                                                 |  |                | (129   | ) |      |  
|Accounts payable and accrued liabilities                                                  |  |                | 3,390  |   |      |  
|Deferred revenue                                                                          |  |                | (540   | ) |      |  
|Other liabilities                                                                         |  |                | (1     | ) |      |  
|                                                                                          |  |                |        |   |      |  
|Net cash provided by (used in) operating activities                                       |  |                | (1,926 | ) |      |  
|                                                                                          |  |                |        |   |      |  
|Cash flows from investing activities:                                                     |  |                |        |   |      |  
|Purchase of short-term investments                                                        |  |                |       |   |      |  
|Proceeds from the sale of short-term investments                                          |  |                |       |   |      |  
|Purchase of furniture, fixtures and equipment                                             |  |                | (379   | ) |      |  
|Acquisition of businesses                                                                 |  |                |       |   |      |  
|                                                                                          |  |                |        |   |      |  
|Net cash used in investing activities                                                     |  |                | (379   | ) |      |  
|                                                                                          |  |                |        |   |      |  
|Cash flows from financing activities:                                                     |  |                |        |   |      |  
|Borrowings under credit facility                                                          |  |                | 1,572  |   |      |  
|Proceeds from the issuance of common stock                                                |  |                | 2      |   |      |  
|                                                                                          |  |                |        |   |      |  
|Net cash provided by financing activities                                                 |  |                | 1,574  |   |      |  
|                                                                                          |  |                |        |   |      |  
|Net decrease in cash and cash equivalents                                                 |  |                | (731   | ) |      |  
|Cash and cash equivalents, beginning of quarter                                           |  |                | 25,022 |   |      |  
|                                                                                          |  |                |        |   |      |  
|Cash and cash equivalents, end of quarter                                                 |  | $              | 24,291 |   |      | $
|                                                                                          |  |                |        |   |      |  



See accompanying notes
to unaudited condensed consolidated financial statements



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NETOPIA, INC. AND SUBSIDIARIES

Notes To Unaudited Condensed Consolidated Financial Statements



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



The unaudited condensed consolidated financial statements included in this Form 10-Q reflect all adjustments, consisting only of normal recurring
adjustments which in the Companys opinion are necessary to fairly present the Companys consolidated financial position, results of operations and cash flows for the periods presented. These condensed consolidated financial statements
should be read in conjunction with the Companys consolidated financial statements included in the Companys Annual Report on Form 10-K and other filings with the United States Securities and Exchange Commission (SEC). The consolidated
results of operations for the period ended December 31, 2002 are not necessarily indicative of the results to be expected for any subsequent quarter or for the entire fiscal year ending September 30, 2003.



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



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



In 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 adopted early SFAS No. 144 effective October 1, 2001. This adoption had no impact on the Companys consolidated financial statements.



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



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



In November 2002, the FASB issued FASB Interpretation No. (FIN) 45, Guarantors Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. FIN 45 elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its



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obligations under certain guarantees that it has issued. It also clarifies that a guarantor is required
to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The provisions of FIN 45 are applicable on a prospective basis to guarantees issued or modified after December 31,
2002 and are not expected to have a significant impact on the Companys consolidated financial statements. The disclosure requirements have been adopted by the Company.



In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based CompensationTransition and
Disclosure, which is effective for fiscal years ending after December 15, 2002. SFAS No. 148 amends SFAS No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition to the fair value method of accounting
for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure provisions of SFAS No. 123 to require disclosure in the summary of significant accounting policies of the effects of an entitys accounting policy with
respect to stock-based employee compensation on reported net income and earnings per share in annual and interim financial statements. This adoption had no impact on the Companys consolidated financial statements.



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



The Companys intangible assets at December 31, 2002 consist primarily of identifiable intangible assets acquired in connection with the Cayman
acquisition, which the Company is amortizing on a straight-line basis over their estimated useful lives, and goodwill acquired in connection with the acquisitions of WebOrder and netOctopus which the Company is not amortizing.



On July 1, 2001, the Company adopted SFAS No. 141, Business
Combinations, and on October 1, 2001, the Company early adopted SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires that the



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purchase method of accounting be used for all business combinations and that certain acquired intangible
assets be recognized as assets apart from goodwill. SFAS No. 142 provides that goodwill should not be amortized but instead be tested for impairment annually at the reporting unit level.



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



Detail of the Companys identifiable intangible assets, by reporting
unit, as of December 31, 2002 is as follows:



|                            |  | Acquisition date |  | Balance atSeptember 30,2002 |       | Identifiable intangible assetsacquired duringthe period |   | Amortization expense |  | Balance at December 31,2002
|--------------------------- |  | ---------------- |  | --------------------------- | ----- | ------------------------------------------------------- | - | -------------------- |  | ---------------------------
|                            |  |                  |  | (in thousands)             
|Internet equipment:         |  |                  |  |                             |       |                                                         |   |                      |  |                            
|Acquired technology         |  | October 2001     |  | $                           | 5,538 |                                                         | $ |                     |  | $                          
|Sales channel relationships |  | October 2001     |  |                             | 1,035 |                                                         |   |                     |  |                            
|                            |  |                  |  |                             |       |                                                         |   |                      |  |                            
|Subtotal                    |  |                  |  |                             | 6,573 |                                                         |   |                     |  |                            
|Web platforms:              |  |                  |  |                             |       |                                                         |   |                      |  |                            
|Marketing license           |  | July 1999        |  |                             | 138   |                                                         |   |                     |  |                            
|                            |  |                  |  |                             |       |                                                         |   |                      |  |                            
|Total                       |  |                  |  | $                           | 6,711 |                                                         | $ |                     |  | $                          
|                            |  |                  |  |                             |       |                                                         |   |                      |  |                            



Detail of the
Companys goodwill, by reporting unit, as of December 31, 2002 is as follows:



|               |  | Acquisition date |  | Balance atSeptember 30,2002 |     | Goodwill acquired duringthe period |   | Goodwill impairment charges |  | Balance at December 31,2002
|-------------- |  | ---------------- |  | --------------------------- | --- | ---------------------------------- | - | --------------------------- |  | ---------------------------
|               |  |                  |  | (in thousands)             
|Web platforms: |  |                  |  |                             |     |                                    |   |                             |  |                            
|WebOrder       |  | March 2000       |  | $                           | 519 |                                    | $ |                            |  | $                          
|netOctopus     |  | December 1998    |  |                             | 465 |                                    |   |                            |  |                            
|               |  |                  |  |                             |     |                                    |   |                             |  |                            
|               |  |                  |  | $                           | 984 |                                    | $ |                            |  | $                          
|               |  |                  |  |                             |     |                                    |   |                             |  |                            
|Total goodwill |  |                  |  | $                           | 984 |                                    | $ |                            |  | $                          
|               |  |                  |  |                             |     |                                    |   |                             |  |                            



|(5) |  | Balance sheet accounts
|--- |  | ----------------------



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(a) Inventory consisted of the following:



|                |  | December 31,2002 |       | September 30,2002
|--------------- |  | ---------------- | ----- | -----------------
|                |  | (in thousands)  
|Raw materials   |  | $                | 3,105 |                  
|Work in process |  |                  | 210   |                  
|Finished goods  |  |                  | 4,885 |                  
|                |  |                  |       |                  
|                |  | $                | 8,200 |                  
|                |  |                  |       |                  



(b) Warranty
liability for the period consisted of the following:



|                                     |  | Beginning balance |      |   | Warranty returns |   |      | Warranty replacements |  | Warranty accrued |     |  | Ending Balance |    
|------------------------------------ |  | ----------------- | ---- | - | ---------------- | - | ---- | --------------------- |  | ---------------- | --- |  | -------------- | ---
|                                     |  | (in thousands)    |     
|Three months ended December 31, 2002 |  | $                 | (323 | ) |                  | $ | (286 | )                     |  | $                | 381 |  | $              | (51



|(6) |  | Per Share Calculations
|--- |  | ----------------------



Basic net loss per share is based on the weighted average number of shares of common stock outstanding during the period. Diluted net loss per share is
based on the weighted average number of shares of common stock outstanding during the period plus potential dilutive shares from options and warrants outstanding using the treasury stock method. All potential dilutive common shares have been
excluded from the computation of the diluted loss per share for the three months ended December 31, 2002 and 2001, as their effect on the loss per share was anti-dilutive. Potential dilutive common shares excluded from the computation of diluted
loss per share consisted of options to purchase common stock totaling 7,169,913 shares, with a weighted average exercise price of $4.31, and 5,249,656 shares, with a weighted average exercise price of $5.38, for the three months ended December 31,
2002 and 2001, respectively; and a warrant to purchase common stock totaling 5,000 shares for the three months ended December 31, 2001.



|(7) |  | Segment, Geographic and Significant Customer Information
|--- |  | --------------------------------------------------------



Segment Information. The Company has adopted the provisions of SFAS No. 131, which establishes standards for the reporting by public business
enterprises of information about operating segments, products and services, geographic areas, and major customers. The methodology for determining the information reported is based on the organization of operating segments and the related
information that the Chief Operating Decision Maker (CODM) uses for operational decisions and assessing financial performance. Netopias Chief Executive Officer (CEO) is considered the Companys CODM. For purposes of making operating
decisions and assessing financial performance, the Companys CEO reviews financial information presented on a consolidated basis accompanied by disaggregated information for revenues and gross margins by product group as well as revenues by
geographic region and by customer. Operating expenses and assets are not disaggregated by product group for purposes of making operating decisions and assessing financial performance.



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



|                                |  | 2002               |        |   | 2001         |  
|------------------------------- |  | ------------------ | ------ | - | ------------ | -
|Three months ended December 31, |  | Internet equipment |        |   | Web platform |  
|                                |  | ($ in thousands)   |       
|Revenue                         |  | $                  | 14,596 |   |              | $
|Cost of revenues                |  |                    | 10,711 |   |              |  
|                                |  |                    |        |   |              |  
|Gross profit                    |  | $                  | 3,885  |   |              | $
|Gross margin                    |  |                    | 27     | % |              |  
|Unallocated operating expenses  |  |                    |        |   |              |  
|                                |  |                    |        |   |              |  
|Operating loss                  |  |                    |        |   |              |  
|                                |  |                    |        |   |              |  



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Geographic Information. The Company sells its products and provides services worldwide through a
direct sales force, independent distributors, and value-added resellers. It currently operates in four regions: United States, Europe, Canada, and Asia Pacific and other. Revenues outside of the United States are primarily export sales denominated
in United States dollars. Disaggregated financial information regarding the Companys revenues by geographic region for the three months ended December 31, 2002 and 2001 is as follows:



|Three months ended December 31, |  | 2002             |        |  | 2001 |  
|------------------------------- |  | ---------------- | ------ |  | ---- | -
|                                |  | ($ in thousands) |       
|Europe                          |  | $                | 4,431  |  | 23   | %
|Canada                          |  |                  | 229    |  | 1    | %
|Asia Pacific and other          |  |                  | 402    |  | 2    | %
|                                |  |                  |        |  |      |  
|Subtotal international revenue  |  |                  | 5,062  |  | 26   | %
|United States                   |  |                  | 14,541 |  | 74   | %
|                                |  |                  |        |  |      |  
|Total revenues                  |  | $                | 19,603 |  | 100  | %
|                                |  |                  |        |  |      |  



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



Customer Information. Historically, the Company has sold its products to ILECs, competitive local exchange carriers (CLECs), distributors, Internet service providers (ISPs) and directly to end-users. Disaggregated financial
information regarding the Companys customers who accounted for 10% or more of the Companys revenue for the three months ended December 31, 2002 and 2001 is as follows:



|Three months ended December 31,          |  | 2002             |       |  | 2001 |  
|---------------------------------------- |  | ---------------- | ----- |  | ---- | -
|                                         |  | ($ in thousands) |      
|Covad Communications Company (Covad) (a) |  | $                | 2,585 |  | 13   | %
|SBC Communications, Inc. (SBC)           |  |                  | 2,570 |  | 13   | %
|Ingram Micro Inc. (Ingram Micro)         |  |                  | 1,417 |  | 7    | %

---

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



No other customers during the three months ended December 31, 2002 and 2001 accounted for 10% or more of the Companys total revenues. For the three
months ended December 31, 2002, there were six customers who each individually represented at least 5% of the Companys revenues and in the aggregate, accounted for 50% of the Companys total revenues. For the three months ended December
31, 2001, there were four customers who each individually represented at least 5% of the Companys revenues and in the aggregate, accounted for 40% 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:



|Three months ended December 31, |  | 2002             |       |  | 2001 |  
|------------------------------- |  | ---------------- | ----- |  | ---- | -
|                                |  | ($ in thousands) |      
|Covad                           |  | $                | 277   |  | 3    | %
|SBC                             |  |                  | 1,317 |  | 12   | %
|Ingram Micro                    |  |                  | 1,209 |  | 11   | %



The Company has
generally not experienced collection difficulties related to the customers identified above. Amounts due the Company from these customers are generally collected within the terms provided by the Company in the normal course of business.





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##### Table of Contents

|(8) |  | Long-Term Investments
|--- |  | ---------------------



In fiscal year 2001, the Company purchased $2.0 million of Series D Preferred stock in MegaPath Networks Inc. (MegaPath). MegaPath offers high-speed DSL
access and eCommerce and Web hosting services to small and medium size businesses. During the three months ended December 31, 2002, MegaPath purchased $0.4 million of the Companys products and during fiscal years 2002 and 2001, MegaPath
purchased $0.9 million and $0.1 million, respectively, of the Companys products. At December 31, 2002, MegaPaths accounts receivable with the Company was $0.2 million. In fiscal year 2002, the Company recorded a $1.4 million unrealized
loss on impaired securities related to its investment in MegaPath. This impairment was recorded in connection with the valuation of MegaPath in its most recent round of financing in which the Company purchased $0.4 million of Series E Preferred
Stock. The Company currently owns approximately 4.0% of MegaPath. Although there is no public market for MegaPaths stock, the Company believes that the market value of its investment in Series D and Series E Preferred shares is not less than
the Companys $1.0 million carrying value at December 31, 2002.



In fiscal year 2000, the Company purchased $2.0 million of Series C Preferred Stock in Everdream Corporation (Everdream). Everdream provides outsourced information technology (IT) expertise, products and services that enable small and
medium size businesses to focus on their core competencies. During fiscal year 2000, the Company entered into an agreement with Everdream to host a co-branded version of the Companys eStore platform for Everdreams customers. Everdream
did not purchase any of the Companys products during the three months ended December 31, 2002 or during fiscal year 2002 and did not account for any accounts receivable at December 31, 2002. During fiscal years 2001 and 2000, Everdream
purchased $5,000 and $0.1 million, respectively, of the Companys products. In fiscal year 2002, the Company recorded a $1.5 million unrealized loss on impaired securities related to its investment in Everdream. This impairment was recorded in
connection with the valuation of Everdream based upon its most recent round of financing. The Company currently owns approximately 2.5% of Everdream. Although there is no public market for Everdreams stock, the Company believes that the market
value of these shares is not less than the Companys $0.5 million carrying value at December 31, 2002.



|(9) |  | Restructuring Costs
|--- |  | -------------------



The Companys policy is to maintain accruals relating to restructurings for up to two years unless the Company has had definitive closure of the
specific liabilities accrued prior to the two-year final review date. Detail of the Companys remaining liabilities relating to its restructuring activities is as follows:



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



|                             |  | Employeeseverancebenefits |     | Facility closure costs |   | Other |  | Total
|---------------------------- |  | ------------------------- | --- | ---------------------- | - | ----- |  | -----
|                             |  | (in thousands)           
|Total charge                 |  | $                         | 313 |                        | $ | 25    |  | $    
|Less: Amounts paid           |  |                           | 287 |                        |   |      |  |      
|Non-cash charges             |  |                           |    |                        |   |      |  |      
|                             |  |                           |     |                        |   |       |  |      
|Balance at December 31, 2002 |  | $                         | 26  |                        |   | 25    |  | $    
|                             |  |                           |     |                        |   |       |  |      



During the three
months ended December 31, 2001, the Company recorded a restructuring charge of $0.5 million primarily consisting of employee severance benefits related to 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. Details of the restructuring charge is as follows:



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|                             |  | Employeeseverancebenefits |     | Other |   | Total
|---------------------------- |  | ------------------------- | --- | ----- | - | -----
|Total charge                 |  | $                         | 394 |       | $ | 88   
|Less: Amounts paid           |  |                           | 304 |       |   |     
|Non-cash charges             |  |                           |    |       |   | 58   
|                             |  |                           |     |       |   |      
|Balance at December 31, 2002 |  | $                         | 90  |       | $ | 30   
|                             |  |                           |     |       |   |      



During the three
months ended March 31, 2001, the Company recorded a restructuring charge in connection with a reduction in the Companys workforce of approximately 27 people and costs to exit certain business activities. The charge consisted of employee
severance benefits, costs related to exiting certain Internet portal business activities and future lease costs associated with facilities to be abandoned. Details of the restructuring charge is as follows:



|                             |  | Employeeseverancebenefits |     | Internetportal exitcosts |   | Facility costs |  | Total
|---------------------------- |  | ------------------------- | --- | ------------------------ | - | -------------- |  | -----
|                             |  | (in thousands)           
|Total charge                 |  | $                         | 475 |                          | $ | 510            |  | $    
|Less:                        |  |                           |     |                          |   |                |  |      
|Amounts paid                 |  |                           | 344 |                          |   | 97             |  |      
|Non-cash charges             |  |                           | 63  |                          |   | 413            |  |      
|                             |  |                           |     |                          |   |                |  |      
|Balance at December 31, 2002 |  | $                         | 68  |                          | $ |               |  | $    
|                             |  |                           |     |                          |   |                |  |      

|(10) |  | 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:



|                             |  | Customerintegration communications |     | Systems integration |   | Total
|---------------------------- |  | ---------------------------------- | --- | ------------------- | - | -----
|                             |  | (in thousands)                    
|Total charge                 |  | $                                  | 269 |                     | $ | 40   
|Less amounts paid            |  |                                    | 269 |                     |   | 17   
|                             |  |                                    |     |                     |   |      
|Balance at December 31, 2002 |  | $                                  |    |                     | $ | 23   
|                             |  |                                    |     |                     |   |      



|(11) |  | Credit Facility
|---- |  | ---------------



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



Through June 2003, the Company must maintain a tangible net worth of not less than $32.0 million; the minimum tangible net
worth covenant will be reset for the second year of the Credit Facility. On December 9, 2002, Silicon Valley Bank waived the Companys default of the tangible net worth covenant at September 30, 2002 and on February 11, 2003, Silicon Valley
Bank waived the Companys default of the tangible net worth



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covenant at December 31, 2002. Additionally, the Company has been notified by Silicon Valley Bank that
the tangible net worth covenant has been reduced to $23.5 million for the remainder of the term of the Credit Facility. There is no assurance that Silicon Valley Bank will waive any future default of this or any other covenant contained in the
Credit Facility agreement.



The Credit Facility bears interest
at a rate equal to the prime rate (the rate announced by Silicon Valley Bank as its prime rate) plus 0.75% per annum. At December 31, 2002, the interest rate was 5.0%. The Company may borrow under the Credit Facility in order to finance
working capital requirements for new products and customers, and otherwise for general corporate purposes in the normal course of business.



As of December 31, 2002, the Company had outstanding borrowings of $6.0 million, collateralized by the Companys accounts receivable and inventory.
This borrowing was recorded as a long-term liability on the Companys December 31, 2002 consolidated balance sheet based upon the contractual repayment terms that exceed one year from the balance sheet date. As of December 31, 2002, $1.4
million was available under the Credit Facility.



|(12) |  | Other Income (Loss), Net
|---- |  | ------------------------



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



|Three months ended December 31, |  | 2002           |     |   | 2001 |  
|------------------------------- |  | -------------- | --- | - | ---- | -
|                                |  | (in thousands) |    
|Interest income                 |  | $              | 73  |   |      | $
|Interest expense                |  |                | (66 | ) |      |  
|Other income (expense)          |  |                | (14 | ) |      |  
|                                |  |                |     |   |      |  
|Total                           |  | $              | (7  | ) |      | $
|                                |  |                |     |   |      |  



|PART I. |  | FINANCIAL INFORMATION
|------- |  | ---------------------

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



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



Overview



We develop, market and support broadband equipment, software and services that enable our
carrier and broadband service provider customers to simplify and enhance the delivery of broadband services to their residential and small and medium size business customers. Our product and service offerings enable carriers and broadband service
providers to (i) deliver to their customers feature-rich modems, routers and gateways, (ii) utilize software that allows remote management of equipment located at their customers premises, and (iii) provide value-added
services to enhance revenue generation. Our broadband modems, routers and gateways are installed by customers of carriers and broadband service providers in order to obtain faster access to the Internet than is possible with dial-up



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connections. These bundled service offerings often include digital subscriber line (DSL) or broadband cable equipment
bundled with backup, bonding, virtual private networking or VPN that allows more secure communications over the Internet, firewall protection, parental controls, Web content filtering, combined voice and data services, hosting of web sites that we
call eSites, and hosting of web stores that we call eStores. Our netOctopus suite of server software products enable remote support and centralized management of installed broadband gateways, allowing carriers and broadband service providers to
provide support to their customers on a remote basis. We also offer Timbuktu and eCare software products for help desk customers. These products allow business help desks to provide support on a remote basis when computer users experience problems
with their desktop or laptop computers.



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



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



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



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



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



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



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



Historically, we have depended upon the ability of our customers to successfully offer broadband services, in particular DSL services. Prior to our acquisition of Cayman Systems, Inc. (Cayman), our largest customers
were CLECs. Many CLECs have incurred operating losses and negative cash flows as they attempted to establish their networks and operations, and many have filed for protection under the Bankruptcy Act or ceased operations. Most



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notably, Covad, which currently is our largest CLEC customer and was our largest customer during the quarter ended
December 31, 2002, emerged from bankruptcy in December 2001 and has announced that it has adequate cash to allow it to become cash flow positive by the latter half of 2003.



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



Critical Accounting Policies and Estimates



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



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



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



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recognize revenue from long-term software development contracts using the percentage of completion method in accordance
with SOP 81-1, Accounting for Performance of Construction-Type and Certain Production-Type Contracts. Under the percentage of completion method, we recognize revenue as work on the contract progresses.



Goodwill and Other Identifiable Intangible Assets. On October 1, 2001, we early
adopted SFAS No. 142, which provides that goodwill should not be amortized but instead be tested for impairment annually at the reporting unit level. The impairment testing is performed in two steps: (i) the determination of impairment, based upon
the fair value of a reporting unit as compared to its carrying value, and (ii) if there is an indication of impairment, this step measures the amount of impairment loss by comparing the implied fair value of goodwill with the carrying amount of that
goodwill. In accordance with SFAS No. 142, we completed the transitional impairment test of intangible assets during the three months ended March 31, 2002. That effort, and preliminary assessments of our identifiable intangible assets, indicated no
adjustment was required upon adoption of the pronouncement. We performed the annual impairment test required by SFAS No. 142 on August 31, 2002 for our two reporting units. At August 31, 2002, the implied fair value of the Internet
equipment-reporting unit was found to be less than its carrying amount and as a result, we recorded a charge to our Consolidated Statement of Operations for the fiscal year ended September 30, 2002. We will continue to perform our annual impairment
test, as required by SFAS No. 142, in our fiscal fourth quarter. We did not perform an impairment test during the three months ended December 31, 2002, as there are no indicators of impairment related to the value of our goodwill. As of December 31,
2002, we had approximately $1.0 million of goodwill related to our acquisitions of WebOrder and netOctopus.



Impairment of Long-Lived Assets, Including Identifiable Intangibles. We elected to adopt early the provisions of SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, on October
1, 2001. SFAS No. 144 serves to clarify and further define the provisions of SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of.We evaluate our long-lived assets, including
identifiable intangible assets in accordance with SFAS No. 144 and test our long-lived assets and identifiable intangibles for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be
recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the estimated undiscounted future net cash flows expected to be generated by the asset group which represents the lowest
level for which identifiable cash flows exist. If an asset group is considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount exceeds the fair value of the assets and is allocated to the
long-lived assets of the asset group on a pro rata basis. Fair value is estimated using the discounted cash flow method. Assets to be disposed of are reported at the lower of carrying values or fair values, less costs of disposal. At December 31,
2002, our identifiable intangible assets consisted of developed product technology, core technology and sales channel relationships related to the acquisition of Cayman. We did not test our long-lived assets and identifiable intangibles for
impairment during the three months ended December 31, 2002, because there were no events or changes in circumstances that would indicate that the carrying amount of the asset groups may not be recoverable. As of December 31, 2002, we had $6.2
million of identified intangible assets that are related to our acquisition of Cayman.



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



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



| |  |  | The 2000 Stock Incentive Plan provides for issuance of non-statutory options and restricted stock to employees, officers, directors, consultants, independent contractors and
advisors of the Company or any subsidiary of the Company. Options and restricted stock awards granted under the 2000 Plan are granted at the discretion of the Board of Directors or the Compensation Committee of the Board of Directors. The 2000 Plan
is not a stockholder approved stock option plan and is intended to comply with the exception for broadly based option plans in which a majority of the participants are rank and file employees not officers
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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or directors, and a majority of the grants are made to such employees. Only nonqualified stock options
that do not qualify as incentive stock options within the meaning of Section 422(b) of the Code may be granted under this Plan. The Board of Directors or the Compensation Committee will determine the exercise price of an option when the option is
granted and may be not less than the par value of the shares on the date of grant.



| |  |  | The 2002 Equity Incentive Plan provides for the issuance of incentive or non-statutory options, stock awards and other equity awards to directors, employees, and non-employee
consultants. The 2002 Plan is a successor to the 1996 Plan. Options and other awards are granted at the discretion of the Board of Directors or the Compensation Committee of the Board of Directors. Incentive stock options may be granted at not less
than 100% of the fair market value per share and non-statutory stock options may be granted at not less than 85% of the fair market value per share at the date of grant as determined by the Board of Directors or the Compensation Committee.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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



Non-Marketable Securities. We periodically make strategic investments in companies whose stock is not currently traded on a stock exchange and for which no quoted
price exists. The cost method of accounting is used to account for these investments, as we do not exert significant influence over these investments. We review these investments for impairment when events or changes in circumstances indicate that
the carrying amount of the assets might not be recoverable. Examples of events or changes in circumstances that may indicate to management that an impairment exists may be a significant decrease in the market value of the company, poor or
deteriorating market conditions in the public and private equity capital markets, significant adverse changes in legal factors or within the business climate the company operates, and current period operating or cash flow losses combined with a
history of operating or cash flow losses or projections and forecasts that demonstrate continuing losses associated with the companys future business plans. Impairment indicators identified during the reporting period could result in a
significant write down in the carrying value of the investment if we believe an investment has experienced a decline in value that is other than temporary. These investments had a total carrying value of $1.5 million as of December 31, 2002, and
have been permanently written down a total of $2.9 million from original cost during the fiscal year ended September 30, 2002. Also, future adverse changes in market conditions or poor operating results of underlying investments could result in
significant additional impairment charges in the future.



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



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Provision for Income Taxes. We did not record an income tax benefit for the three months ended December 31, 2002
or fiscal years 2002, 2001 and 2000 primarily due to continued substantial uncertainty regarding our ability to realize our deferred tax assets. Based upon available objective evidence, there has been sufficient uncertainty regarding the
realizability of our deferred tax assets to warrant a full valuation allowance in our financial statements. The factors considered included prior losses, inconsistent profits, and lack of carryback potential to realize our deferred tax assets. Based
on our estimates for fiscal year 2003 and beyond, we believe the uncertainty regarding the realizability of our deferred tax assets may diminish to the point where it is more likely than not that our deferred tax assets will be realized. At such
point, we would also reverse all or a portion of our valuation allowance which will result in an income tax benefit.



Available-for-Sale Securities. We classify certain of our cash equivalents and all our 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.



Liquidity and Capital
Resources



The following sections discuss the effects of changes in our
balance sheets, cash flows and commitments on our liquidity and capital resources. As of December 31, 2002, our principal source of liquidity included cash, cash equivalents and short-term investments of $24.3 million and a credit facility with a
maximum borrowing capacity of $15.0 million from which we had outstanding borrowings of $6.0 million and an additional $1.4 million available based upon our inventory and accounts receivable balances at December 31, 2002.



Cash, Cash Equivalents and Short-Term Investments. The following table sets forth our
cash, cash equivalents and short-term investments as of December 31 and September 30, 2002.



|                                                  |  | December 31,2002 |        | September 30, 2002 |   | Increase/(decrease) |  
|------------------------------------------------- |  | ---------------- | ------ | ------------------ | - | ------------------- | -
|                                                  |  |                  |        | $                  |   |                     | %
|                                                  |  | ($ in thousands) |       
|Cash, cash equivalents and short-term investments |  | $                | 24,291 |                    | $ | 25,022              |  



For the three months ended December
31, 2002, cash, cash equivalents and short-term investments decreased primarily due to the cash used by our operating activities and purchases of capital equipment. Our operating activities, excluding the changes in operating assets and liabilities,
used $2.5 million and we purchased $0.4 million of capital equipment which was partially offset by net borrowings under our credit facility of $1.6 million and changes in operating assets and liabilities of $0.6 million, primarily related to an
increase of accounts payable and other liabilities partially offset by increased purchases of inventory.



As of December 31, 2002, borrowings under our credit facility totaled $6.0 million and we were in default of the tangible net worth covenant as set forth in the credit facility. As of February 11, 2003, Silicon Valley
Bank waived our default of the tangible net worth covenant at December 31, 2002. Additionally, we have been notified by Silicon Valley Bank that the tangible net worth covenant has been reduced to $23.5 million for the remainder of the term of the
credit facility. There is no assurance that Silicon Valley Bank will waive any future default of this or any other covenant contained in the Credit Facility agreement. We expect to continue to use our credit facility along with our existing cash,
cash equivalent and short-term investments to support our working capital needs in both the short and long-term. Additionally, our cash, cash equivalents and short-term investments at March 31, 2003 will be less than the balances at December 31,
2002 as we repay the outstanding borrowings from under our credit facility, purchase additional inventory to build our products and use our existing cash and cash equivalents to support our continuing operations. As of December 31, 2002, we did not
have any material commitments for capital expenditures. As a result of our net losses and use of cash, the continuing operations of our business may require additional capital. We believe we have adequate cash, cash equivalents and borrowing
capacity to meet our anticipated capital needs for at



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least the next twelve months. If we issue additional stock to raise capital, our existing stockholders percentage
ownership in Netopia would be reduced.



Trade Accounts Receivable, Net.
The following table sets forth our trade accounts receivables, net as of December 31 and September 30, 2002.



|                               |  | December 31,2002 |         | September 30, 2002 |   | Increase/(decrease) | 
|------------------------------ |  | ---------------- | ------- | ------------------ | - | ------------------- | 
|                               |  |                  |         | $                  |   | %                   | 
|                               |  | ($ in thousands) |        
|Trade accounts receivable, net |  | $                | 10,623  |                    | $ | 9,950               | 
|Days sales outstanding (DSO)   |  |                  | 49 days |                    |   | 54 days             | 



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



Inventory. The following table sets forth our
inventory as of December 31 and September 30, 2002.



|                |  | December 31,2002 |           | September 30, 2002 |   | Increase/(decrease) | 
|--------------- |  | ---------------- | --------- | ------------------ | - | ------------------- | 
|                |  |                  |           | $                  |   | %                   | 
|                |  | ($ in thousands) |          
|Inventory       |  | $                | 8,200     |                    | $ | 6,259               | 
|Inventory turns |  |                  | 6.0 turns |                    |   | 5.8 turns           | 



Inventory consists primarily of raw
materials, work in process, and finished goods. Inventory has increased in anticipation of orders for our new ADSL broadband Internet gateways and inventory turns have improved primarily as a result of increased sales and inventory management
efforts. Inventory levels may increase in the near future if we cannot correctly forecast expected customer demand or as a result of customer purchase deferrals or delays. We may have to further borrow against our credit facility to finance expected
inventory increases. Inventory management remains an area of focus as we balance the need to maintain adequate inventory levels to ensure competitive lead times against the risk of inventory obsolescence because of rapidly changing technology and
customer requirements.



Borrowings Under Credit Facility. The following
table sets forth the outstanding borrowings under our credit facility as of the December 31 and September 30, 2002.



|                                 |  | December 31,2002 |       | September 30, 2002 |   | Increase/(decrease) | 
|-------------------------------- |  | ---------------- | ----- | ------------------ | - | ------------------- | 
|                                 |  |                  |       | $                  |   | %                   | 
|                                 |  | ($ in thousands) |      
|Borrowings under credit facility |  | $                | 6,000 |                    | $ | 4,428               | 



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



Through June 2003, we must maintain a
tangible net worth of not less than $32.0 million; the minimum tangible net worth covenant will be reset for the second year of the Credit Facility. On December 9, 2002, Silicon Valley Bank



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waived our default of the tangible net worth covenant at September 30, 2002 and on February 11, 2003, Silicon Valley Bank
waived our default of the tangible net worth covenant at December 31, 2002. Additionally, we have been notified by Silicon Valley Bank that the tangible net worth covenant has been reduced to $23.5 million for the remainder of the term of the Credit
Facility. There is no assurance that Silicon Valley Bank will waive any future default of this or any other covenant contained in the Credit Facility agreement.



The Credit Facility bears interest at a rate equal to the prime rate (the rate announced by Silicon Valley Bank as its prime rate) plus 0.75% per annum. At
December 31, 2002, the interest rate was 5.0% and the borrowing was recorded as a long-term liability on the December 31, 2002 consolidated balance sheet based upon the contractual repayment terms that exceed one year from the balance sheet date. We
may borrow under the Credit Facility in order to finance working capital requirements for new products and customers, and otherwise for general corporate purposes in the normal course of business. We believe that the terms of the credit facility,
including the ceiling on borrowing amounts, provide adequate access to borrowings to meet and exceed our current capital needs. However, we believe that even without access to borrowings from Silicon Valley Bank, we have sufficient cash and cash
equivalents to meet ongoing operating expenses and capital requirements. As of December 31, 2002, based upon our inventory and accounts receivable balances, an additional $1.4 million was available under the Credit Facility.



Commitments



As of December 31, 2002, we had commitments that consisted of facilities and equipment under
operating lease agreements expiring at various dates through 2008. These commitments and obligations are reflected in our financial statements once goods or services have been received or payments related to the obligations become due. The following
is a schedule of our future minimum rental payments required under these operating lease agreements that have initial or remaining non-cancelable lease terms in excess of one year:



|Fiscal years ending September 30,        |  | 2003 (a)       |       | 2004 |   | 2005  |  | 2006 |       | 2007 |   | thereafter |  | Total
|---------------------------------------- |  | -------------- | ----- | ---- | - | ----- |  | ---- | ----- | ---- | - | ---------- |  | -----
|                                         |  | (in thousands)
|Facility and operating lease commitments |  | $              | 1,083 |      | $ | 1,676 |  | $    | 1,132 |      | $ | 663        |  | $    

---

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



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Results of Operations for the Three Months Ended December 31, 2002 and 2001



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



|                                                    |  |                  |        |   |      |     |    | Increase/(decrease) |  
|--------------------------------------------------- |  | ---------------- | ------ | - | ---- | --- | -- | ------------------- | -
|Three months ended December 31,                     |  | 2002             |        |   | 2001 |     |    | $                   |  
|                                                    |  | ($ in thousands) |       
|REVENUES:                                           |  |                  |        |   |      |     |    |                     |  
|Internet equipment                                  |  | $                | 14,596 |   |      | 74  | %  |                     | $
|Web platform licenses and services                  |  |                  | 5,007  |   |      | 26  | %  |                     |  
|                                                    |  |                  |        |   |      |     |    |                     |  
|Total revenues                                      |  |                  | 19,603 |   |      | 100 | %  |                     |  
|                                                    |  |                  |        |   |      |     |    |                     |  
|COST OF REVENUES:                                   |  |                  |        |   |      |     |    |                     |  
|Internet equipment                                  |  |                  | 10,711 |   |      | 55  | %  |                     |  
|Web platform licenses and services                  |  |                  | 429    |   |      | 2   | %  |                     |  
|                                                    |  |                  |        |   |      |     |    |                     |  
|Total cost of revenues                              |  |                  | 11,140 |   |      | 57  | %  |                     |  
|                                                    |  |                  |        |   |      |     |    |                     |  
|GROSS PROFIT                                        |  |                  | 8,463  |   |      | 43  | %  |                     |  
|OPERATING EXPENSES:                                 |  |                  |        |   |      |     |    |                     |  
|Research and development                            |  |                  | 3,983  |   |      | 20  | %  |                     |  
|Research and development project cancellation costs |  |                  | 606    |   |      | 3   | %  |                     |  
|Selling and marketing                               |  |                  | 5,661  |   |      | 29  | %  |                     |  
|General and administrative                          |  |                  | 1,428  |   |      | 7   | %  |                     |  
|Amortization of other intangible assets             |  |                  | 374    |   |      | 2   | %  |                     |  
|Restructuring costs                                 |  |                  | 342    |   |      | 2   | %  |                     |  
|Acquired in-process research and development        |  |                  |       |   |      |    |    |                     |  
|Integration costs                                   |  |                  |       |   |      |    |    |                     |  
|                                                    |  |                  |        |   |      |     |    |                     |  
|Total operating expenses                            |  |                  | 12,394 |   |      | 63  | %  |                     |  
|                                                    |  |                  |        |   |      |     |    |                     |  
|OPERATING LOSS                                      |  |                  | (3,931 | ) |      | (20 | %) |                     |  
|Other income (loss), net                            |  |                  | (7     | ) |      | 0   | %  |                     |  
|                                                    |  |                  |        |   |      |     |    |                     |  
|NET LOSS                                            |  | $                | (3,938 | ) |      | (20 | )% |                     | $
|                                                    |  |                  |        |   |      |     |    |                     |  



REVENUES



Total revenues for the three months ended December 31, 2002
increased from the three months ended December 31, 2001 due to increased revenues from the sale of our broadband Internet equipment products and Web platform licenses and services.



Internet Equipment. Broadband Internet equipment revenues increased for the three months ended December 31, 2002 from the three
months ended December 31, 2001 primarily due to increased sales volumes of our ADSL broadband Internet equipment to ILEC customers, both in the United States and Europe, who serve the market for business and residential-class ADSL Internet services.
Sales volumes increased primarily as a result of increased purchases by SBC and BellSouth, customers we acquired as a result of our acquisition of Cayman, and new customers in Europe as we continue our efforts to penetrate the ADSL market for
business and residential-class products. This increase was partially offset by declining average selling prices primarily as a result of the mix of products sold, price competition from foreign and domestic competitors and customer driven demands.
The mix of broadband Internet equipment sales is changing as we begin entering the residential ADSL market. Historically, residential-class products, and ADSL products generally, have carried a lower average selling price than similar business-class
products. We expect that we will continue to experience declining average selling prices, primarily as a result of the changing mix of products we sell and price competition from both foreign and domestic suppliers. We believe that increased sales
volumes to current and new customers will offset these declines. The following table sets forth our volumes and average selling prices, excluding accessories, for the periods indicated:



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|                                |  |      |        |      |   | Increase/(decrease) | 
|------------------------------- |  | ---- | ------ | ---- | - | ------------------- | 
|Three months ended December 31, |  | 2002 |        | 2001 |   | Units/$             | 
|Product volumes                 |  |      | 84,706 |      |   | 39,525              | 
|Average selling prices          |  | $    | 144    |      | $ | 282                 | 



Web Platform Licenses and
Services. Web platforms revenues increased for the three months ended December 31, 2002 from the three months ended December 31, 2001 primarily due to revenues related to a software integration project with one specific customer and licensing of
our eCare and netOctopus server software products which were not available during the three months ended December 31, 2001.



Customer Information



Historically, we have sold our products primarily to ILECs, CLECs, distributors, ISPs and directly to end-users. The following table sets forth for the periods indicated,
our customers who have represented greater than 10% of our revenues in such period, along with such data expressed as a percentage of total revenues as well as the change from the prior year. No other customers for the three months ended December
31, 2002 and 2001 accounted for 10% or more of total revenues.



|                                |  |                  |       |  |      |   |  | Increase/(decrease) |      
|------------------------------- |  | ---------------- | ----- |  | ---- | - |  | ------------------- | -----
|Three months ended December 31, |  | 2002             |       |  | 2001 |   |  | $                   |      
|                                |  | ($ in thousands) |      
|Covad                           |  | $                | 2,585 |  | 13   | % |  | $                   | 1,466
|SBC                             |  |                  | 2,570 |  | 13   | % |  |                     | 1,472
|Ingram Micro                    |  |                  | 1,417 |  | 7    | % |  |                     | 1,928

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



Including the greater than 10% customers in the table above, the following table sets forth the number of customers who each individually represented at least 5% of our revenues for the three months ended December 31, 2002 and 2001.



|Three months ended December 31, |  | 2002 |   |  | 2001 |  
|------------------------------- |  | ---- | - |  | ---- | -
|Number of customers             |  | 6    |   |  | 4    |  
|Percent of total revenue        |  | 50   | % |  | 40   | %



Geographic Information



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



|                                |  |                  |        |  |      |   |  | Increase/(decrease) |       
|------------------------------- |  | ---------------- | ------ |  | ---- | - |  | ------------------- | ------
|Three months ended December 31, |  | 2002             |        |  | 2001 |   |  | $                   |       
|                                |  | ($ in thousands) |       
|Europe                          |  | $                | 4,431  |  | 23   | % |  | $                   | 1,839 
|Canada                          |  |                  | 229    |  | 1    | % |  |                     | 230   
|Asia Pacific and other          |  |                  | 402    |  | 2    | % |  |                     | 311   
|                                |  |                  |        |  |      |   |  |                     |       
|Subtotal international revenue  |  |                  | 5,062  |  | 26   | % |  |                     | 2,380 
|United States                   |  |                  | 14,541 |  | 74   | % |  |                     | 13,505
|                                |  |                  |        |  |      |   |  |                     |       
|Total revenues                  |  | $                | 19,603 |  | 100  | % |  | $                   | 15,885
|                                |  |                  |        |  |      |   |  |                     |       



International revenues increased for
the three months ended December 31, 2002 from the three months ended December 31, 2001 primarily due to increased sales of our ADSL broadband equipment to new European customers who serve the residential ADSL service market. Revenues from the United
States increased for the three months ended December 31, 2002 from the three months ended December 31, 2001 primarily due to increased sales volumes of our ADSL broadband equipment to SBC and BellSouth, who serve the market for business and



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residential-class ADSL Internet services as well as increased revenue from our Web platform products as discussed above
in the section subtitled Web Platform Licenses and Services.



COST OF REVENUES



Cost of revenues consists
primarily of material costs related to our contract manufacturing operations and manufacturing variances. Total cost of revenues increased for the three months ended December 31, 2002 from the three months ended December 31, 2001 primarily as a
result of increased sales volumes of our ADSL broadband Internet equipment and costs related to our software integration project.



Gross Margin



Our total gross margin decreased to 43% for the three months ended December 31, 2002 from 52% for the three months ended December 31, 2001 primarily due to increased
sales volumes of our lower margin ADSL broadband Internet equipment.



Internet Equipment. Broadband Internet equipment gross margin decreased to 27% for the three months ended December 31, 2002 from 37% for the three months ended December 31, 2001 primarily due to increased sales of lower margin ADSL
products, declining average selling prices as a result of price competition and pricing strategies as we enter new markets and expand our customer base as well as reduced sales of dedicated router products which carry a higher gross margin than our
DSL products.



Web Platform Licenses and Services. Web platforms gross
margin decreased to 91% for the three months ended December 31, 2002 from 96% for the three months ended December 31, 2001 due to engineering labor costs associated with the software integration project for one specific customer. Excluding the
effects of this project, Web platforms gross margin for the three months ended December 31, 2002 is 96%.



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



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



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



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



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



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



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



RESEARCH AND DEVELOPMENT



Research and development expenses consist primarily of employee related expenses, depreciation and amortization, development related
expenses such as product prototyping, design and testing, and overhead allocations. Research and development expenses decreased for the three months ended December 31, 2002 from the three months ended December 31, 2001 primarily due to the transfer
of employee costs associated with our software integration project from research and development expenses to Web platform cost of revenues. This decrease was partially offset by the increased use of 3rdparty contractor design and development services.



We expect to continue to devote substantial resources to product and technological development. We expect research and development costs may increase in absolute dollars
in fiscal year 2003 as we continue to develop new and enhanced products and services. We believe our process for developing software is essentially completed



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concurrently with the establishment of technological feasibility, and we have not capitalized any internal software
development costs to date.



RESEARCH AND
DEVELOPMENT PROJECT CANCELLATION COSTS



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



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 months ended December 31, 2002 from the three months ended December 31, 2001 primarily due to decreased headcount and employee related expenses as well as decreased travel and entertainment expenses as a result of our restructurings and
expense control efforts.



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



GENERAL AND ADMINISTRATIVE



General and administrative expenses consist primarily of employee related expenses, provisions for doubtful accounts and legal, accounting and insurance costs. General
and administrative expenses increased for the three months ended December 31, 2002 from the three months ended December 31, 2001 primarily due to $0.2 million of costs associated with the relocation of our corporate headquarters from Alameda,
California to Emeryville, California. Additionally, general and administrative expenses for the three months ended December 31, 2001 benefited from the sale of our claim in the NorthPoint Communications, Inc. (NorthPoint) bankruptcy proceedings,
whereby we recovered approximately $0.2 million of the $1.7 million NorthPoint receivable for which we had recorded a provision for doubtful accounts in fiscal year 2000.



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



AMORTIZATION OF OTHER INTANGIBLE ASSETS



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



RESTRUCTURING COSTS



During the three months
ended December 31, 2002, we recorded a restructuring charge of $0.3 million primarily consisting of employee severance benefits related to a reduction in our workforce, and facility closure costs related to the closure of a sales office in Hong
Kong. As a result of this restructuring, we expect our operating expenses may decrease in fiscal year 2003. During the three months ended December 31, 2001, we recorded a restructuring charge of $0.5 million primarily consisting of employee
severance benefits related to a reduction in our workforce of approximately 24 people whose positions were determined to be redundant subsequent to the closing of the Cayman acquisition. (See Note 9 of Notes To Unaudited Condensed Consolidated
Financial Statements.)



ACQUIRED IN-PROCESS
RESEARCH AND DEVELOPMENT



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Acquired in process research and development represents research and development assets, acquired in connection with our
acquisition of Cayman during the three months ended December 31, 2001, that were not technologically feasible at the time of acquisition and had no alternative future use, and as such were expensed at the time of the transaction. (See Note 3 of
Notes to Unaudited Condensed Consolidated Financial Statements.)



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 10 of Notes To Unaudited Condensed Consolidated Financial
Statements.)



OTHER INCOME (LOSS), NET



Other income (loss), net consists of interest income we earn on our cash,
cash equivalents and short-term investments, interest expense and gains and losses on foreign currency transactions. Other income (loss) has decreased primarily due to lower interest income, as a result of lower interest rates and lower cash
balances, along with the interest expense associated with our borrowings under the credit facility with Silicon Valley Bank.



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



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



As a result of continuing capital expenditure requirements and operating expenses in all areas of our business, our failure to increase our revenues or sufficiently
reduce our operating expenses will result in continuing losses and negative cash flow. We incurred losses from continuing operations of $3.9 million for the three months ended December 31, 2002 and have incurred losses from continuing operations of
$34.3 million, $41.7 million and $17.6 million for fiscal years ended September 30, 2002, 2001 and 2000, respectively. We used $0.7 million of cash during the three months ended December 31, 2002. We used $10.7 million and $2.1 million of cash
during fiscal years ended September 30, 2002 and 2001, respectively. Our cash, cash equivalents and short-term investments, including $6.0 million of cash borrowed from under our credit facility, totaled $24.3 million at December 31, 2002. Even if
we reach profitability and maintain positive cash flow, we may not be able to sustain or increase profitability or cash flow on a quarterly or annual basis.



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



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



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



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



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



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



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



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



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



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



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



Demand for DSL services has exceeded the ability of certain telecommunications carriers and Internet Service Providers, or ISPs, to deploy services in a timely manner and to provide satisfactory customer service. We
offer to carriers and service provider customers the opportunity to bundle basic DSL connectivity with value-added features that enable the provider to bundle differentiated features and services that we believe can justify higher recurring revenues
from end users. These features and services include dial backup, VPNs, remote management and configuration, and hosting of eSites and eStores. We can offer no assurance that our strategy of enabling bundled service offerings will be widely accepted.
If telecommunications carriers do not continue to initiate or expand their deployment of DSL and other broadband services, our revenues could decline and our business could be significantly harmed.



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



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



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



Prior to our acquisition of Cayman in October 2001, we developed, marketed and sold broadband Internet equipment products primarily to CLECs serving the small business market. As a result of our acquisitions of Cayman
in October 2001 and DoBox in March 2002 and our internal development initiatives, we believe that we now have products and technology that will enable us to market and deliver competitive broadband Internet



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equipment products and services more effectively to ILECs serving the residential market. There are numerous risks
associated with our entrance into the residential broadband gateway market such as:



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



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



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



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



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



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



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



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



We rely on a small number of customers for a large portion of our revenues. For the three
months ended December 31, 2002, there were 6 customers who each individually represented at least 5% of our revenues and in the aggregate accounted for 50% of our total revenues. For the fiscal year ended September 30, 2002, there were four
customers who each individually represented at least 5% of our revenues and in the aggregate accounted for 36% of our total revenues. Our revenues will decline and our business may be significantly harmed if one or more of our significant customers
stop buy our products, or reduce or delay purchases of our products.



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



A substantial portion of our revenues is derived from sales to international customers, mostly in Europe. For the three months ended
December 31, 2002 and the fiscal year ended September 30, 2002, our international sales represented 26% and 21%, respectively, of total sales. We expect sales to international customers to continue to comprise a significant portion of our revenues.
For the past two fiscal years, sales of broadband Internet equipment products to our European customers who are members of the European Union have been denominated in the Euro. For our international sales that continue to be denominated in United
States dollars, fluctuations in currency exchange rates could cause our products and services to become relatively more expensive to our foreign customers, which could lead to decreased sales of our products and services. In addition, changes in the
value of the Euro relative to the United States dollar could adversely affect our operating results to the extent we do not adequately hedge sales denominated in the Euro.



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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Our quarterly operating results are likely to fluctuate because of many factors and may cause our stock price to
fluctuate.



Our revenues and operating results have varied in the past and
are likely to vary in the future from quarter to quarter. For example, during the past eight quarters ending with the December 31, 2002 quarter, our revenues have ranged from $15.6 million to $20.8 million, and our net quarterly loss has ranged from
$3.9 million to $21.1 million. As a result, we believe that period-to-period comparisons of our operating results are not necessarily meaningful. Investors should not rely on the results of any one quarter or series of quarters as an indication of
our future performance.



It is likely that in some future quarter, quarters or
year our operating results will be below the expectations of securities analysts or investors. In such event, the market price of our common stock may decline significantly. In addition to the uncertainties and risks described elsewhere under this
Risk Factors heading, variations in our operating results will likely be caused by factors related to the operation of our business, including:



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



The majority of our Web platforms revenues are derived from the sale of software products for
corporate help desks, including Timbuktu and eCare. For the three months ended December 31, 2002 and the fiscal year ended September 30, 2002, revenues from these help desk applications were 62% and 55%, respectively, of total revenues for our Web
platform products. We anticipate that the market for Timbuktu will grow more slowly than the market for our other Web platforms products and services. In addition, we rely on a small number of licensees of our Web platforms to promote the use of our
Web platforms for building eSites and eStores. As a result, we derive the majority of the recurring revenues from our Web platforms products from fewer than five customers. The extent and nature of the promotions by licensees of our Web platforms
are outside of our control. If licensees of our eSite and eStore Web platforms do not successfully promote web sites and stores to their customers, we will not generate continued recurring revenues. If these customers were to choose a competitive
platform, this could lead to reduced revenues and adversely impact our results.



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



A small number of stockholders hold a large portion of our common stock. Our Chairman of the Board owned approximately 5.3% of our common
stock outstanding at December 31, 2002. In addition, based on information contained in filings with the Securities and Exchange Commission, three institutional investors owned approximately 9.5%, 7.5% and 6.2%, respectively, of our common stock
outstanding at December 31, 2002. To the extent one or more of these large stockholders decides to sell substantial amounts of our common stock in the public market over a short period of time, based on the historic trading volumes, we expect the
market price of our common stock could fall.



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



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



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



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



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



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



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



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



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



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



| |  |  | General conditions in the broadband communications industry, in particular the DSL market.
| | - |  | ------------------------------------------------------------------------------------------



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



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



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



PART I. FINANCIAL INFORMATION



|Item 4. |  | Controls and Procedures
|------- |  | -----------------------



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



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



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



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##### Table of Contents

PART II. OTHER INFORMATION



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



(a) Exhibits



|ExhibitNumber |  | Description                                                             
|------------- |  | ------------------------------------------------------------------------
|              | 
|99.1          |  | Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002



(b) We did not file any reports on
Form 8-K during the three months ended December 31, 2002.



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##### Table of Contents

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: July 15, 2003 |  |  |  | NETOPIA, INC. (Registrant)
|------------------- |  |  |  | --------------------------
|                    |  |  |  |                           
|                    |  |  |  |                           
|                    |  |  |  |                           
|                    |  |  |  |                           
|                    |  |  |  |                           
|                    |  |  |  |                           



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##### Table of Contents

CERTIFICATION



I, Alan B. Lefkof, certify that:



|1. |  | I have reviewed this quarterly report on Form 10-Q/A of Netopia, Inc., the registrant;
|-- |  | --------------------------------------------------------------------------------------



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



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



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



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



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



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



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



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



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



|6. |  | The registrants other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors
that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Date: July 15, 2003



By:

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




36



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##### Table of Contents

CERTIFICATION



I, William D. Baker, certify that:



|1. |  | I have reviewed this quarterly report on Form 10-Q/A of Netopia, Inc., the registrant;
|-- |  | --------------------------------------------------------------------------------------



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



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



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



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



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



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



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



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



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



|6. |  | The registrants other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors
that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Date: July 15, 2003



By:

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




37