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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q



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



For the quarterly period ended March 31, 2003



OR



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



For the transition period from
 to



Commission file number 0-28450



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Netopia, Inc.

(Exact name of registrant as specified in its charter)



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



Marketplace Tower

6001 Shellmound Street, 4thFloor

Emeryville,
California 94608

(Address of principal executive offices, including Zip Code)



---



(510) 420-7400

(Registrants telephone
number, including area code)



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



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



As of March 31, 2003 there were 19,298,825 shares of the Registrants common stock outstanding.



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##### Table of Contents



NETOPIA, INC.



Form 10-Q



Table of Contents



|               |  |                                                                                                                                    |  | Page
|-------------- |  | ---------------------------------------------------------------------------------------------------------------------------------- |  | ----
|              
|PART I.        |  | FINANCIAL INFORMATION                                                                                                              |  |     
|              
|Item 1.        |  | Unaudited Condensed Consolidated Financial Statements                                                                              |  | 2   
|              
|               |  | Unaudited Condensed Consolidated Balance Sheets at March 31, 2003 and September 30, 2002                                           |  | 2   
|              
|               |  | Unaudited Condensed Consolidated Statements of Operations for the Three and Six Months Ended March 31, 2003 and 2002, respectively |  | 3   
|              
|               |  | Unaudited Condensed Consolidated Statements of Cash Flows for the Six Months Ended March 31, 2003 and 2002                         |  | 4   
|              
|               |  | Notes to Unaudited Condensed Consolidated Financial Statements                                                                     |  | 5   
|              
|Item 2.        |  | Management's Discussion and Analysis of Financial Condition and Results of Operations                                              |  | 15  
|              
|Item 3.        |  | Quantitative and Qualitative Disclosures About Market Risk                                                                         |  | 37  
|              
|Item 4.        |  | Controls and Procedures                                                                                                            |  | 39  
|              
|PART II.       |  | OTHER INFORMATION                                                                                                                  |  |     
|              
|Item 4.        |  | Submission of Matters to a Vote of Security Holders                                                                                |  | 39  
|              
|Item 6.        |  | Exhibits and Reports on Form 8-K                                                                                                   |  | 40  
|              
|Signatures     |  | 41                                                                                                                                
|              
|Certifications |  | 42                                                                                                                                



1



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##### Table of Contents



PART I. FINANCIAL INFORMATION



Item 1. Unaudited Condensed Consolidated Financial Statements



NETOPIA, INC. AND SUBSIDIARIES



Unaudited Condensed Consolidated Balance Sheets



|                                                                                                                                                                           |  | March 31, 2003 |          |   | September 30,2002* |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------- | -------- | - | ------------------ | -
|                                                                                                                                                                           |  | (in thousands) |         
|ASSETS                                                                                                                                                                     |  |                |          |   |                    |  
|Current assets:                                                                                                                                                            |  |                |          |   |                    |  
|Cash and cash equivalents                                                                                                                                                  |  | $              | 21,220   |   |                    | $
|Short-term investments                                                                                                                                                     |  |                | 10       |   |                    |  
|Trade accounts receivable less allowance for doubtful accounts and returnsof $350
and $567 at March 31, 2003 and September 30, 2002, respectively                          |  |                | 13,115   |   |                    |  
|Inventory                                                                                                                                                                  |  |                | 5,703    |   |                    |  
|Prepaid expenses and other current assets                                                                                                                                  |  |                | 1,630    |   |                    |  
|                                                                                                                                                                           |  |                |          |   |                    |  
|Total current assets                                                                                                                                                       |  |                | 41,678   |   |                    |  
|Furniture, fixtures and equipment, net                                                                                                                                     |  |                | 4,601    |   |                    |  
|Acquired technology, net                                                                                                                                                   |  |                | 4,961    |   |                    |  
|Other intangible assets and goodwill, net                                                                                                                                  |  |                | 2,372    |   |                    |  
|Long-term investments                                                                                                                                                      |  |                | 1,006    |   |                    |  
|Deposits and other assets                                                                                                                                                  |  |                | 1,259    |   |                    |  
|                                                                                                                                                                           |  |                |          |   |                    |  
|TOTAL ASSETS                                                                                                                                                               |  | $              | 55,877   |   |                    | $
|                                                                                                                                                                           |  |                |          |   |                    |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                       |  |                |          |   |                    |  
|Current liabilities:                                                                                                                                                       |  |                |          |   |                    |  
|Accounts payable                                                                                                                                                           |  | $              | 7,193    |   |                    | $
|Accrued compensation                                                                                                                                                       |  |                | 2,023    |   |                    |  
|Accrued liabilities                                                                                                                                                        |  |                | 2,504    |   |                    |  
|Deferred revenue                                                                                                                                                           |  |                | 1,401    |   |                    |  
|Borrowings under term loans                                                                                                                                                |  |                | 250      |   |                    |  
|Other current liabilities                                                                                                                                                  |  |                | 51       |   |                    |  
|                                                                                                                                                                           |  |                |          |   |                    |  
|Total current liabilities                                                                                                                                                  |  |                | 13,422   |   |                    |  
|Long-term liabilities:                                                                                                                                                     |  |                |          |   |                    |  
|Borrowings under credit facility and term loans                                                                                                                            |  |                | 8,729    |   |                    |  
|Other long-term liabilities                                                                                                                                                |  |                | 252      |   |                    |  
|                                                                                                                                                                           |  |                |          |   |                    |  
|Total liabilities                                                                                                                                                          |  |                | 22,403   |   |                    |  
|                                                                                                                                                                           |  |                |          |   |                    |  
|Commitments and contingencies                                                                                                                                              |  |                |          |   |                    |  
|                                                                                                                                                                          
|Stockholders equity:                                                                                                                                                      |  |                |          |   |                    |  
|Common stock: $0.001 par value, 50,000,000 shares authorized;19,298,825 and
18,905,223 shares issued and outstanding atMarch 31, 2003 and September 30, 2002, respectively |  |                | 19       |   |                    |  
|Additional paid-in capital                                                                                                                                                 |  |                | 147,976  |   |                    |  
|Accumulated deficit                                                                                                                                                        |  |                | (114,521 | ) |                    |  
|                                                                                                                                                                           |  |                |          |   |                    |  
|Total stockholders equity                                                                                                                                                 |  |                | 33,474   |   |                    |  
|                                                                                                                                                                           |  |                |          |   |                    |  
|TOTAL LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                 |  | $              | 55,877   |   |                    | $
|                                                                                                                                                                           |  |                |          |   |                    |  

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



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##### Table of Contents



NETOPIA, INC. AND SUBSIDIARIES



Unaudited Condensed Consolidated Statements of Operations



|                                                    |  | Three Months Ended March 31,             |        |   | Six Months Ended March 31, |  
|--------------------------------------------------- |  | ---------------------------------------- | ------ | - | -------------------------- | -
|                                                    |  | 2003                                     |        |   | 2002                       |  
|                                                    |  | (in thousands, except per share amounts) |       
|REVENUES:                                           |  |                                          |        |   |                            |  
|Internet equipment                                  |  | $                                        | 14,838 |   |                            | $
|Web platform licenses and services                  |  |                                          | 4,400  |   |                            |  
|                                                    |  |                                          |        |   |                            |  
|Total revenues                                      |  |                                          | 19,238 |   |                            |  
|                                                    |  |                                          |        |   |                            |  
|COST OF REVENUES:                                   |  |                                          |        |   |                            |  
|Internet equipment                                  |  |                                          | 10,920 |   |                            |  
|Web platform licenses and services                  |  |                                          | 345    |   |                            |  
|                                                    |  |                                          |        |   |                            |  
|Total cost of revenues                              |  |                                          | 11,265 |   |                            |  
|                                                    |  |                                          |        |   |                            |  
|GROSS PROFIT                                        |  |                                          | 7,973  |   |                            |  
|                                                   
|OPERATING EXPENSES:                                 |  |                                          |        |   |                            |  
|Research and development                            |  |                                          | 4,026  |   |                            |  
|Research and development project cancellation costs |  |                                          |       |   |                            |  
|Selling and marketing                               |  |                                          | 5,130  |   |                            |  
|General and administrative                          |  |                                          | 1,107  |   |                            |  
|Amortization of intangible assets                   |  |                                          | 374    |   |                            |  
|Restructuring costs                                 |  |                                          |       |   |                            |  
|Integration costs                                   |  |                                          |       |   |                            |  
|Acquired in-process research and development        |  |                                          |       |   |                            |  
|                                                    |  |                                          |        |   |                            |  
|Total operating expenses                            |  |                                          | 10,637 |   |                            |  
|                                                    |  |                                          |        |   |                            |  
|OPERATING LOSS                                      |  |                                          | (2,664 | ) |                            |  
|Other income (loss), net                            |  |                                          |        |   |                            |  
|Loss on impaired securities                         |  |                                          | (457   | ) |                            |  
|Other income (expense), net                         |  |                                          | (5     | ) |                            |  
|                                                    |  |                                          |        |   |                            |  
|Other income (loss), net                            |  |                                          | (462   | ) |                            |  
|                                                    |  |                                          |        |   |                            |  
|NET LOSS                                            |  | $                                        | (3,126 | ) |                            | $
|                                                    |  |                                          |        |   |                            |  
|Per share data, net loss:                           |  |                                          |        |   |                            |  
|Basic and diluted net loss per share                |  | $                                        | (0.16  | ) |                            | $
|                                                    |  |                                          |        |   |                            |  
|Shares used in the per share calculations           |  |                                          | 19,163 |   |                            |  
|                                                    |  |                                          |        |   |                            |  



See
accompanying notes to unaudited condensed consolidated financial statements.



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NETOPIA, INC. AND SUBSIDIARIES



Unaudited Condensed Consolidated Statements of Cash Flows



|                                                                                          |  | Six months ended March 31, |       
|----------------------------------------------------------------------------------------- |  | -------------------------- | ------
|                                                                                          |  | 2003                       |       
|                                                                                          |  | (in thousands)             |       
|Cash flows from operating activities:                                                     |  |                            |       
|Net loss                                                                                  |  | $                          | (7,064
|Adjustments to reconcile net loss to net cash provided by (used in) operating
activities: |  |                            |       
|Depreciation and amortization                                                             |  |                            | 2,840 
|Charge for in-process research and development                                            |  |                            |       
|Loss on impaired securities                                                               |  |                            | 457   
|Write-off of capitalized software development costs                                       |  |                            | 137   
|Changes in allowance for doubtful accounts and returns on accounts
receivable             |  |                            | (218  
|Changes in operating assets and liabilities:                                              |  |                            |       
|Trade accounts receivable                                                                 |  |                            | (2,947
|Inventory                                                                                 |  |                            | 556   
|Prepaid expenses and other current assets                                                 |  |                            | 101   
|Deposits and other assets                                                                 |  |                            | (829  
|Accounts payable and accrued liabilities                                                  |  |                            | (644  
|Deferred revenue                                                                          |  |                            | (874  
|Other liabilities                                                                         |  |                            | 423   
|                                                                                          |  |                            |       
|Net cash provided by (used in) operating activities                                       |  |                            | (8,062
|                                                                                          |  |                            |       
|Cash flows from investing activities:                                                     |  |                            |       
|Purchase of short-term investments                                                        |  |                            | (10   
|Proceeds from the sale of short-term investments                                          |  |                            |      
|Purchase of furniture, fixtures and equipment                                             |  |                            | (772  
|Acquisition of businesses                                                                 |  |                            |      
|                                                                                          |  |                            |       
|Net cash used in investing activities                                                     |  |                            | (782  
|                                                                                          |  |                            |       
|Cash flows from financing activities:                                                     |  |                            |       
|Borrowings under credit facility and term loans                                           |  |                            | 4,551 
|Proceeds from the issuance of common stock                                                |  |                            | 491   
|                                                                                          |  |                            |       
|Net cash provided by financing activities                                                 |  |                            | 5,042 
|                                                                                          |  |                            |       
|Net decrease in cash and cash equivalents                                                 |  |                            | (3,802
|Cash and cash equivalents, beginning of period                                            |  |                            | 25,022
|                                                                                          |  |                            |       
|Cash and cash equivalents, end of period                                                  |  | $                          | 21,220
|                                                                                          |  |                            |       
|Supplemental disclosures of noncash investing and financing activities:                   |  |                            |       
|Issuance of common stock for acquired in process research and
development                 |  | $                          |      
|                                                                                          |  |                            |       



See
accompanying notes to unaudited condensed consolidated financial statements



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NETOPIA, INC. AND SUBSIDIARIES



Notes To Unaudited Condensed Consolidated Financial Statements



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



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



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



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



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



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



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



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



DoBox, Inc. (DoBox). In March 2002, the Company purchased 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 condensed consolidated statement of operations.



Cayman Systems, Inc. (Cayman). In October 2001, the Company and Cayman, a Massachusetts corporation, consummated a merger (the Merger) whereby Amazon Merger Corporation, a Delaware corporation
and a wholly-owned subsidiary of Netopia (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:



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



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



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



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



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



| |  |  | Goodwill, which represents the excess of the Cayman purchase price over the fair value of the underlying net identifiable assets, was attributed to the
Companys Internet equipment reporting unit. In connection with the Companys annual impairment test as required by SFAS No. 142, the Company determined that this amount was fully impaired at August 31, 2002. As a result, the Company
recorded a charge of $7.3 million to its Consolidated Statement of Operations 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, as part of the Companys independent third-party valuation, was determined by estimating the costs to develop the in-process research and development projects into commercially viable products,
estimating the resulting net cash flows from the projects when completed and discounting the net cash flows to their present value. The revenue estimates used to value the in-process research and development projects were based upon estimates of
relevant market sizes and growth factors, expected trends in technology and the nature and expected timing of new product introductions by Cayman and its competitors.



The rate utilized to discount the net cash flows to their present value was 28%, which 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 March 31, 2003 consist primarily of identifiable intangible assets acquired in connection with the
Cayman acquisition, which the Company is amortizing on a straight-line basis over their estimated useful lives, and goodwill acquired in connection with the acquisitions of WebOrder and netOctopus which the Company is not amortizing.



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



The Company performed the annual impairment test required by
SFAS No. 142 on August 31, 2002 for its two reporting units. To complete the first step of the analysis, the Company discounted the cash flows generated by its Internet equipment and Web platforms reporting units 5 year plans and applied the
Gordon Growth factor to determine the residual value. To complete the second step of the analysis, the Company used an independent third party valuation consultant to determine 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.



7



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##### Table of Contents



Detail of the
Companys identifiable intangible assets, by reporting unit, as of March 31, 2003 is as follows:



|                            |  | Acquisition date |  | Balance at September 30, 2002 |       | Identifiable intangible assets acquired during the period |   | Amortization expense |  | Balance at March 31, 2003
|--------------------------- |  | ---------------- |  | ----------------------------- | ----- | --------------------------------------------------------- | - | -------------------- |  | -------------------------
|                            |  |                  |  | (in thousands)               
|Internet equipment:         |  |                  |  |                               |       |                                                           |   |                      |  |                          
|Acquired technology         |  | October 2001     |  | $                             | 5,538 |                                                           | $ |                     |  | $                        
|Sales channel relationships |  | October 2001     |  |                               | 1,035 |                                                           |   |                     |  |                          
|                            |  |                  |  |                               |       |                                                           |   |                      |  |                          
|Subtotal                    |  |                  |  |                               | 6,573 |                                                           |   |                     |  |                          
|                           
|Web platforms:              |  |                  |  |                               |       |                                                           |   |                      |  |                          
|Marketing license           |  | July 1999        |  |                               | 138   |                                                           |   |                     |  |                          
|Marketing license           |  | January 2003     |  |                               |      |                                                           |   | 700                  |  |                          
|                            |  |                  |  |                               |       |                                                           |   |                      |  |                          
|Total                       |  |                  |  | $                             | 6,711 |                                                           | $ | 700                  |  | $                        
|                            |  |                  |  |                               |       |                                                           |   |                      |  |                          



Detail
of the Companys goodwill, by reporting unit, as of March 31, 2003 is as follows:



|               |  | Acquisition date |  | Balance at September 30, 2002 |     | Goodwill acquired during the period |   | Goodwill impairment charges |  | Balance at March 31, 2003
|-------------- |  | ---------------- |  | ----------------------------- | --- | ----------------------------------- | - | --------------------------- |  | -------------------------
|               |  |                  |  | (in thousands)               
|Web platforms: |  |                  |  |                               |     |                                     |   |                             |  |                          
|WebOrder       |  | March 2000       |  | $                             | 519 |                                     | $ |                            |  | $                        
|netOctopus     |  | December 1998    |  |                               | 465 |                                     |   |                            |  |                          
|               |  |                  |  |                               |     |                                     |   |                             |  |                          
|Total          |  |                  |  | $                             | 984 |                                     | $ |                            |  | $                        
|               |  |                  |  |                               |     |                                     |   |                             |  |                          

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



Inventory consisted of the following:



|                |  | March 31, 2003 |       | September 30, 2002
|--------------- |  | -------------- | ----- | ------------------
|                |  | (in thousands)
|Raw materials   |  | $              | 2,112 |                   
|Work in process |  |                | 291   |                   
|Finished goods  |  |                | 3,300 |                   
|                |  |                |       |                   
|Total           |  | $              | 5,703 |                   
|                |  |                |       |                   



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|(6) |  | Per Share Calculation
|--- |  | ---------------------



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 and six months ended March 31, 2003 and 2002, as their effect on the loss per share was anti-dilutive.



For the three and six months ended March 31, 2003, potential dilutive common shares excluded from the
computation of diluted loss per share consisted of options to purchase common stock totaling 7,156,987 shares, with a weighted average exercise price of $4.22. For the three and six months ended March 31, 2002, potential dilutive common shares
excluded from the computation of diluted loss per share consisted of options to purchase common stock totaling 6,493,292 shares, with a weighted average exercise price of $4.95, as well as a warrant to purchase common stock totaling 5,000 shares.



|(7) |  | Stock Based Compensation.
|--- |  | -------------------------



SFAS No. 123, Accounting for Stock-Based Compensation, encourages, but does not require, companies to record compensation cost for
stock-based employee compensation plans based on the fair market value of options granted. We have chosen to account for stock based compensation using the intrinsic value method prescribed in APB No. 25, Accounting for Stock Issued to
Employees, and related interpretations. Accordingly, because the grant price equals the market price on the date of grant for 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.



If we elected to use the fair value method of accounting for stock based compensation as prescribed by SFAS No. 123, the net loss and loss per share for the three and six months ended March 31, 2003
and 2002 would have been the pro forma amounts as follows:



|                                                               |  | Three Months EndedMarch 31, |        |   | Six Months EndedMarch 31, |  
|-------------------------------------------------------------- |  | --------------------------- | ------ | - | ------------------------- | -
|                                                               |  | 2003                        |        |   | 2002                      |  
|                                                               |  | (in thousands)              |       
|Net lossas reported                                           |  | $                           | (3,126 | ) |                           | $
|Stock based compensation expense as prescribed by SFAS No. 123 |  |                             | 1,620  |   |                           |  
|                                                               |  |                             |        |   |                           |  
|Net losspro forma                                             |  | $                           | (4,746 | ) |                           | $
|                                                               |  |                             |        |   |                           |  
|Basic and diluted net loss per shareas reported               |  | $                           | (0.16  | ) |                           | $
|                                                               |  |                             |        |   |                           |  
|Basic and diluted net loss per sharepro forma                 |  | $                           | (0.25  | ) |                           | $
|                                                               |  |                             |        |   |                           |  



|(8) |  | Stock Option Plans
|--- |  | ------------------



Employee Stock Purchase Plan. An amendment to the Companys Employee Stock Purchase Plan was approved at the Companys
Annual Meeting of Stockholders in January 2003 to (a) increase the number of shares of common stock available for issuance under the plan by 750,000 shares to a total of 3,000,000 shares, and (b) increase the number of shares of common stock that
each participating employee may purchase in any purchase period from 2,000 shares to 5,000 shares.



Stock Option Plans. Amendments to the Companys Automatic Option Grant Programs that are included in the 1996 Stock Option
Plan and 2002 Equity Incentive Plan to increase the number of options granted to non-employee directors of the Company were approved at the Companys Annual Meeting of Stockholders in



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



|(9) |  | 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:



|                               |  | Three months ended March 31, |       
|------------------------------ |  | ---------------------------- | ------
|                               |  | 2003                         |       
|                               |  | Internet equipment           |       
|                               |  | ($ in thousands)             |       
|Revenue                        |  | $                            | 14,838
|Cost of revenues               |  |                              | 10,920
|                               |  |                              |       
|Gross profit                   |  |                              | 3,918 
|Gross margin                   |  |                              | 26    
|Unallocated operating expenses |  |                              |      
|                               |  |                              |       
|Operating loss                 |  |                              |      
|                               |  |                              |       



|                               |  | Six months ended March 31, |       
|------------------------------ |  | -------------------------- | ------
|                               |  | 2003                       |       
|                               |  | Internet equipment         |       
|                               |  | ($ in thousands)           |       
|Revenue                        |  | $                          | 29,434
|Cost of revenues               |  |                            | 21,631
|                               |  |                            |       
|Gross profit                   |  |                            | 7,803 
|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 and six months ended March 31, 2003
and 2002 is as follows:



|                               |  | Three months ended March 31, |        |  | Six months ended March 31, |  
|------------------------------ |  | ---------------------------- | ------ |  | -------------------------- | -
|                               |  | 2003                         |        |  | 2002                       |  
|                               |  | ($ in thousands)             |       
|Europe                         |  | $                            | 5,176  |  | 27                         | %
|Canada                         |  |                              | 270    |  | 1                          | %
|Asia Pacific and other         |  |                              | 667    |  | 4                          | %
|                               |  |                              |        |  |                            |  
|Subtotal international revenue |  |                              | 6,113  |  | 32                         | %
|United States                  |  |                              | 13,125 |  | 68                         | %
|                               |  |                              |        |  |                            |  
|Total revenues                 |  | $                            | 19,238 |  | 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 and six months ended March 31, 2003 and 2002 is as follows:



|                                               |  | Three months ended March 31, |       |  | Six months ended March 31, |  
|---------------------------------------------- |  | ---------------------------- | ----- |  | -------------------------- | -
|                                               |  | 2003                         |       |  | 2002                       |  
|                                               |  | ($ in thousands)             |      
|Covad Communications Company (Covad)           |  | $                            | 3,052 |  | 16                         | %
|SwissCom AG (Swisscom)                         |  |                              | 2,387 |  | 12                         |  
|SBC Communications, Inc. (SBC)                 |  |                              | 1,931 |  | 10                         |  
|Ingram Micro Inc. (Ingram Micro)               |  |                              | 1,192 |  | 6                          |  
|BellSouth Telecommunications, Inc. (BellSouth) |  |                              | 611   |  | 3                          |  



No other customers
during the three and six months ended March 31, 2003 and 2002 accounted for 10% or more of the Companys total revenues. For the three months ended March 31, 2003 and 2002, there were four and three customers, respectively, who each
individually represented at least 5% of the Companys revenues and in the aggregate, accounted for 45% and 37%, respectively, of the Companys total revenues. For the six months ended March 31, 2003 and 2002, there were four and three
customers, respectively, who each individually represented at least 5% of the Companys revenues and in the aggregate, accounted for 42% and 34%, respectively, of the Companys total revenues



The following table sets forth the accounts receivable balances at March 31,
2003 and 2002 for the customers identified above along with such data expressed as a percentage of total accounts receivable:



|             |  | March 31,        |      
|------------ |  | ---------------- | -----
|             |  | 2003             |      
|             |  | ($ in thousands) |      
|Covad        |  | $                | 1,728
|Swisscom     |  |                  | 1,791
|SBC          |  |                  | 1,383
|Ingram Micro |  |                  | 995  
|BellSouth    |  |                  | 371  





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|(10) |  | 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 and six months ended March 31, 2003, MegaPath purchased $0.4 million and $0.8 million, respectively, of the Companys products.
At March 31, 2003, MegaPaths account receivable with the Company was $0.2 million. In fiscal year 2002, the Company recorded a $1.4 million loss on impaired securities related to its investment in MegaPath. This impairment was recorded in
connection with the valuation of MegaPath based upon its most recent round of financing. During fiscal year 2002, the Company purchased $0.4 million of Series E Preferred stock in MegaPath and 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 March 31, 2003. After
March 31, 2003, MegaPath completed an additional round of financing in which the Company invested $26,000, the pro-rata amount required to maintain its pro-rata investment interest.



In fiscal year 2000, the Company purchased $2.0 million of Series C Preferred Stock in Everdream Corporation
(Everdream). Everdream provides outsourced information technology expertise, products and services that enable small and medium size businesses to focus on their core competencies. Everdream did not purchase any of the Companys products during
the three or six months ended March 31, 2003 and did not account for any accounts receivable at March 31, 2003. In fiscal year 2002, the Company recorded a $1.5 million loss on impaired securities related to its investment in Everdream. During the
three months ended March 31, 2003, the Company recorded a $0.5 million loss on impaired securities, fully impairing the remaining balance of the Companys investment in Everdream. These impairments were recorded based on valuations determined
in subsequent financings and the Companys relative ownership interest in Everdream.



|(11) |  | Restructuring Costs
|---- |  | -------------------



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:



|                          |  | Employee severance benefits |     | Facility closure costs |   | Other |  | Total
|------------------------- |  | --------------------------- | --- | ---------------------- | - | ----- |  | -----
|                          |  | (in thousands)             
|Total charge              |  | $                           | 313 |                        | $ | 25    |  | $    
|Less: Amounts paid        |  |                             | 304 |                        |   | 12    |  |      
|Non-cash charges          |  |                             |    |                        |   |      |  |      
|                          |  |                             |     |                        |   |       |  |      
|Balance at March 31, 2003 |  | $                           | 9   |                        | $ | 13    |  | $    
|                          |  |                             |     |                        |   |       |  |      



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:



|                          |  | Employeeseverancebenefits |     | Other |   | Total
|------------------------- |  | ------------------------- | --- | ----- | - | -----
|Total charge              |  | $                         | 394 |       | $ | 88   
|Less: Amounts paid        |  |                           | 307 |       |   |     
|Non-cash charges          |  |                           |    |       |   | 58   
|                          |  |                           |     |       |   |      
|Balance at March 31, 2003 |  | $                         | 87  |       | $ | 30   
|                          |  |                           |     |       |   |      



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During the
three months ended March 31, 2001, the Company recorded a restructuring charge in connection with a reduction in the Companys workforce of approximately 27 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:



|                          |  | Employee severance benefits |     | Internet portal exit costs |   | Facility costs |  | Total
|------------------------- |  | --------------------------- | --- | -------------------------- | - | -------------- |  | -----
|                          |  | (in thousands)             
|Total charge              |  | $                           | 475 |                            | $ | 510            |  | $    
|Less:                     |  |                             |     |                            |   |                |  |      
|Amounts paid              |  |                             | 344 |                            |   | 97             |  |      
|Non-cash charges          |  |                             | 63  |                            |   | 413            |  |      
|                          |  |                             |     |                            |   |                |  |      
|Balance at March 31, 2003 |  | $                           | 68  |                            | $ |               |  | $    
|                          |  |                             |     |                            |   |                |  |      



|(12) |  | Integration Costs
|---- |  | -----------------



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



|                          |  | Customer integration communications |     | Systems integration |   | Total
|------------------------- |  | ----------------------------------- | --- | ------------------- | - | -----
|                          |  | (in thousands)                     
|Total charge              |  | $                                   | 269 |                     | $ | 40   
|Less amounts paid         |  |                                     | 269 |                     |   | 29   
|                          |  |                                     |     |                     |   |      
|Balance at March 31, 2003 |  | $                                   |    |                     | $ | 11   
|                          |  |                                     |     |                     |   |      



|(13) |  | Terminated Merger Costs
|---- |  | -----------------------



During fiscal year 2001, the Company recorded a non-recurring charge of $2.6 million for costs incurred in connection with the terminated
merger between the Company and Proxim, Inc (Proxim). The non-recurring charge consisted of fees for accounting and legal advisory services, initiation of joint marketing and research and development expenses in anticipation of the merger that we had
undertaken at the direction of Proxim, certain shared merger costs, and other related expenses. During the three months ended March 31, 2003, the Company reversed the remaining balance of the terminated merger costs because these costs were
estimated to be over-accrued. Details of the charge is as follows:



|                              |  | Accounting and legal advisory services |       | Joint marketing commitments |   |     | Joint research and development costs |  | Shared merger costs |     |  | Other |     | Total | 
|----------------------------- |  | -------------------------------------- | ----- | --------------------------- | - | --- | ------------------------------------ |  | ------------------- | --- |  | ----- | --- | ----- | 
|                              |  | (in thousands)                         |      
|Total charge                  |  | $                                      | 1,257 |                             | $ | 572 |                                      |  | $                   | 429 |  | $     | 150 |       | 
|Less:                         |  |                                        |       |                             |   |     |                                      |  |                     |     |  |       |     |       | 
|Amounts paid                  |  |                                        | 1,257 |                             |   | 560 |                                      |  |                     | 429 |  |       | 117 |       | 
|Non-cash charges              |  |                                        |      |                             |   |    |                                      |  |                     |    |  |       |    |       | 
|                              |  |                                        |       |                             |   |     |                                      |  |                     |     |  |       |     |       | 
|Balance at September 30, 2002 |  |                                        |      |                             |   | 12  |                                      |  |                     |    |  |       | 33  |       | 
|                              |  |                                        |       |                             |   |     |                                      |  |                     |     |  |       |     |       | 
|Less: Non-cash charges        |  |                                        |      |                             |   | (12 | )                                    |  |                     |    |  |       | (33 | )     | 
|                              |  |                                        |       |                             |   |     |                                      |  |                     |     |  |       |     |       | 
|Balance at March 31, 2003     |  | $                                      |      |                             | $ |    |                                      |  | $                   |    |  | $     |    |       | 
|                              |  |                                        |       |                             |   |     |                                      |  |                     |     |  |       |     |       | 



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



Credit Facility. In June 2002, the Company entered into a Loan and Security Agreement with Silicon Valley Bank (the Credit
Facility). Pursuant to the Credit Facility, the Company may borrow up to $15.0 million from time to time from Silicon Valley Bank. The 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.



On February 12, 2003, Silicon Valley Bank amended the tangible net worth covenant whereby the Company must maintain a minimum tangible net worth of $23.5 million through June 2003, rather than the $32.0 million minimum tangible net
worth covenant in the original Credit Facility. The minimum tangible net worth covenant was amended because the Company had not met the original tangible net worth covenant of $32.0 million at September 30, 2002 or December 31, 2002. Silicon Valley
Bank waived the Companys default of the tangible net worth covenant at September 30, 2002 on December 9, 2002, and waived the Companys default of the tangible net worth covenant at December 31, 2002 on February 11, 2003. There is no
assurance that Silicon Valley Bank will waive any future default of this or any other covenant contained in the Credit Facility agreement. The minimum tangible net worth covenant will be reset for the second year of the Credit Facility upon
agreement between the Company and Silicon Valley Bank.



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 March 31, 2003, the interest rate was 5.0%. The credit limit is
determined based on a formula related to the amount of accounts receivable and inventory at any particular time. The Company may borrow under the Credit Facility in order to finance working capital requirements for new products and customers, and
otherwise for general corporate purposes in the normal course of business.



As of March 31, 2003, the Company had outstanding borrowings of $8.5 million, collateralized by the Companys accounts receivable and inventory. This borrowing was recorded as a long-term
liability on the Companys March 31, 2003 condensed consolidated balance sheet based upon the contractual repayment terms that exceed one year from the balance sheet date. As of March 31, 2003, the Companys actual borrowing exceeded its
borrowing availability under the Credit Facility by approximately $2.8 million. On May 2, 2003, Silicon Valley Bank provided a temporary waiver of compliance for repayment of the overadvance.



Term Loan A. On February 25, 2003, Silicon Valley Bank
made a separate term loan to the Company in the original principal amount of $0.2 million. The principal amount of Term Loan A is payable in equal monthly payments of principal in the amount of $8,333.33 per month, commencing on March 1, 2003 and
continuing until paid in full. Term Loan A bears interest at a rate equal to Silicon Valley Banks prime rate plus 0.75% per annum. At March 31, 2003, the interest rate was 5%. Upon the repayment of any portion of Term Loan A, such portion may
not be reborrowed. The outstanding principal balance of Term Loan A shall be reserved from the amount of credit facility otherwise available to the Company.



Term Loan B.On February 25, 2003, Silicon Valley Bank made a separate term loan to the Company in the original principal amount of
$0.3 million. The principal amount of Term Loan B is payable in equal monthly payments of principal in the amount of $12,500.00 per month, commencing on March 1, 2003 and continuing until paid in full. Term Loan B bears interest at a rate equal to
Silicon Valley Banks prime rate plus 0.75% per annum. At March 31, 2003, the interest rate was 5%. Upon the repayment of any portion of Term Loan B, such portion may not be reborrowed.



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



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



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|                            |  | Three Months Ended March 31, |      |   | Six Months Ended March 31, |  
|--------------------------- |  | ---------------------------- | ---- | - | -------------------------- | -
|                            |  | 2003                         |      |   | 2002                       |  
|                            |  | (in thousands)               |     
|Loss on impaired securities |  | $                            | (457 | ) |                            | $
|Other income (expense), net |  |                              |      |   |                            |  
|Interest income             |  |                              | 39   |   |                            |  
|Interest expense            |  |                              | (77  | ) |                            |  
|Other income (expense)      |  |                              | 33   |   |                            |  
|                            |  |                              |      |   |                            |  
|Subtotal                    |  |                              | (5   | ) |                            |  
|                            |  |                              |      |   |                            |  
|Total                       |  | $                            | (462 | ) |                            | $
|                            |  |                              |      |   |                            |  



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 enterprise-class customers. Our product and service
offerings enable carriers and broadband service providers to (i) improve their profitability with feature rich routers and gateways, and software that manages to the edge of the network to reduce costs, and (ii) provide
value-added services to enhance revenue generation. These bundled service offerings often include digital subscriber line (DSL) or broadband cable equipment bundled with backup, bonding, virtual private networking (VPN), firewall protection,
parental controls, Web content filtering, integrated voice and data, and eSite and eStore hosting.



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 copper 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 consolidated statement of operations, revenues and cost of revenues related to the sale of
our broadband Internet equipment are classified as Internet equipment.



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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, allowing carriers and broadband service providers to manage to the edge of their network. 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,
what we refer to as eSites and eStores, with a wide variety of vertical market content packages to suit many needs, from franchisees to sole proprietors. Timbuktu software solutions include systems management tools such as remote control, remote
computer configuration and file transfer. When reading our consolidated statement of operations, revenues and cost of revenues related to the sale of our broadband services are classified as Web platform licenses and services.



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



| |  |  | Telecommunication carriers, including incumbent local exchange carriers (ILECs), such as SBC Communications Inc. (SBC), SwissCom AG (Swisscom), BellSouth
Telecommunications, Inc. (BellSouth) and Verizon Communications Inc. (Verizon); competitive local exchange carriers (CLECs), including Covad Communications Company (Covad), McLeodUSA Incorporated (McLeod) and NextGenTel; Internet service providers
(ISPs), including DSL.Net, Inc. (DSL.Net) 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); and
| | - |  | -----------------------------------------------------------------------------------------------------------------------------



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



Historically, we have depended upon the ability of our customers to successfully offer broadband services, in particular DSL services. Prior to our
acquisition of Cayman Systems, Inc. (Cayman), our largest customers were CLECs. Many CLECs have incurred operating losses and negative cash flows as they attempted to establish their networks and operations, and many have filed for protection under
the Bankruptcy Act or ceased operations. Most notably, Covad, which currently is our largest CLEC customer and was our largest customer during the three and six months ended March 31, 2003, 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. Additionally, the financial
instability of the telecommunications industry was highlighted in July 2002 when WorldCom and substantially all of its active United States subsidiaries filed voluntary petitions for reorganization under Chapter 11 of the United States Bankruptcy
Code.



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 established relationships with ILECs such as BellSouth and SBC, customers with whom we had not had historic relationships for broadband equipment, and have developed new products designed for the residential market for DSL services. We
expect that our continued operations will become substantially dependent upon our ability to develop and enhance products to meet the needs of the residential market for DSL services and requirements of our ILEC customers. The ILECs and our other
customers are significantly larger than we are, and are able to exert a high degree of influence over our business. As a result, our larger customers may be able to reschedule or cancel orders without significant penalty and force our products to
undergo lengthy approval and purchase processes.



Critical
Accounting Policies and Estimates



Managements
discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in accordance with United States generally accepted accounting principles. We
review the accounting policies used in reporting our financial results on a regular basis. The preparation of these financial statements requires us to make estimates and judgments that affect



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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 Internet
equipment when persuasive evidence of an arrangement exists, delivery has occurred, the fees are fixed or determinable, and collectibility is reasonably assured. We recognize revenue from the sale of Web platform licenses and services in accordance
with Statement of Position (SOP) 97-2, Software Revenue Recognition, as amended. In general, software license revenues are recognized when a non-cancelable license agreement has been signed and the customer acknowledges an unconditional
obligation to pay, the software product has been delivered, there are no uncertainties surrounding product acceptance, the fees are fixed and determinable, and collection is considered probable; professional services revenues are recognized as such
services are performed; and maintenance revenues, including revenues bundled with software agreements which entitle the customers to technical support and future unspecified enhancements to our products, are deferred and recognized ratably over the
related contract period, generally twelve months. Revenues recognized from multiple-element software arrangements are allocated to each element of the arrangement based on the specific objective evidence of the fair values of the elements, such as
software products, upgrades, enhancements, post contract customer support, installation, or training. We record unearned revenue for software arrangements when cash has been received from the customer and the arrangement does not qualify for revenue
recognition under our revenue recognition policy. We record accounts receivable for software arrangements when the arrangement qualifies for revenue recognition and cash or other consideration has not been received from the customer. We recognize
revenue from long-term software development contracts using the percentage of completion method in accordance with SOP 81-1, Accounting for Performance of Construction-Type and Certain Production-Type Contracts.Under the percentage of
completion method, we recognize revenue as certain results are achieved with consideration to the costs incurred.



Goodwill. On October 1, 2001, we early adopted SFAS No. 142, which provides that goodwill should not be amortized but instead be tested for
impairment annually at the reporting unit level. The impairment testing is performed in two steps: (i) the determination of impairment, based upon the fair value of a reporting unit as compared to its carrying value, and (ii) if there is an
indication of impairment, this step measures the amount of impairment loss by comparing the implied fair value of goodwill with the carrying amount of that goodwill. We will perform our annual impairment test, as required by SFAS No. 142, in our
fiscal fourth quarter. We did not perform an impairment test during the six months ended March 31, 2003, as there are no indicators of impairment related to the value of our goodwill. As of March 31, 2003, we had approximately $1.0 million of
goodwill related to our acquisitions of WebOrder and netOctopus.



Impairment of Long-Lived Assets, Including Identifiable Intangibles. We elected to adopt early the provisions of SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, on October 1, 2001. SFAS No.
144 serves to clarify and further define the provisions of SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of.We evaluate our long-lived assets, including identifiable intangible
assets in accordance with SFAS No. 144 and test our long-lived assets and identifiable intangibles for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. Recoverability of
assets to be held and used is measured by a comparison of the carrying amount of an asset to the estimated undiscounted future net cash flows expected to be generated by the asset group which represents the lowest level for which identifiable cash
flows exist. If an asset group is considered to be impaired, the



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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 March 31, 2003, our identifiable intangible assets consisted of developed product technology, core technology and sales channel relationships related
to the acquisition of Cayman. We did not test our long-lived assets and identifiable intangibles for impairment during the six months ended March 31, 2003, because there were no events or changes in circumstances that would indicate that the
carrying amount of the asset groups may not be recoverable. As of March 31, 2003, we had $5.8 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 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



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customers or channel partners
were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.



Non-Marketable Securities. We periodically make strategic investments in companies whose stock is not currently traded on a stock exchange and for
which no quoted price exists. The cost method of accounting is used to account for these investments, as we do not exert significant influence over these investments. We review these investments for impairment whenever events or changes in
circumstances indicate that the carrying amount of the assets might not be recoverable. Examples of events or changes in circumstances that may indicate to management that an impairment exists may be a significant decrease in the market value of the
company, poor or deteriorating market conditions in the public and private equity capital markets, significant adverse changes in legal factors or within the business climate the company operates, and current period operating or cash flow losses
combined with a history of operating or cash flow losses or projections and forecasts that demonstrate continuing losses associated with the companys future business plans. Impairment indicators identified during the reporting period could
result in a significant write down in the carrying value of the investment if we believe an investment has experienced a decline in value that is other than temporary. These investments had a total carrying value of $1.0 million as of March 31,
2003, and have been permanently written down a total of $3.4 million from original cost. Also, future adverse changes in market conditions or poor operating results of underlying investments could result in significant additional impairment charges
in the future.



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



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



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



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 March 31, 2003, our principal source of liquidity included cash, cash equivalents and short-term investments of $21.2 million, a credit facility with a maximum borrowing
capacity of $15.0 million from which we had outstanding borrowings of $8.5 million and no additional amounts available to borrow, and two term loans from which we had amounts outstanding of $0.5 million.



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Cash, Cash Equivalents and
Short-Term Investments. The following table sets forth our cash, cash equivalents and short-term investments as of March 31, 2003 and September 30, 2002.



|                                                  |  | March 31, 2003   |        | September 30, 2002 |   | Increase/(decrease) | 
|------------------------------------------------- |  | ---------------- | ------ | ------------------ | - | ------------------- | 
|                                                  |  |                  |        |                    |   | $                   | 
|                                                  |  | ($ in thousands) |       
|Cash, cash equivalents and short-term investments |  | $                | 21,220 |                    | $ | 25,022              | 



For the six months ended
March 31, 2003, cash and cash equivalents decreased primarily due to the cash used by our operating activities and purchases of capital equipment partially offset by increased borrowings under our credit facility and term loans as well as proceeds
from the issuance of common stock related to activities under our Employee Stock Purchase Program.



| |  |  | Our operating activities excluding the changes in operating assets and liabilities, used $3.8 million to support our net loss;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------



| |  |  | We purchased $0.8 million of capital equipment primarily related to equipment to enhance the capabilities of our test laboratory;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------



| |  |  | Changes in our operating assets and liabilities used $4.3 million primarily related to a $2.9 million increase of accounts receivable as a large proportion of our
sales occurred in the last month of the quarter, a $0.8 million increase in deposits and other assets related to our purchase of a marketing license and a $0.9 million decrease in deferred revenue primarily related to the recognition of revenue for
a software integration project.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



This use of cash
was partially offset by net borrowings under our credit facility and term loans of $4.6 million and $0.5 million of cash provided from purchases of our common stock primarily related to activities under our Employee Stock Purchase Program and
employee stock option exercises.



As of March 31, 2003,
borrowings under our credit facility and term loans totaled $9.0 million. We expect to continue to use our credit facility along with our existing cash, cash equivalent and short-term investments to support our working capital needs in both the
short and long-term. Additionally, we expect our cash, cash equivalents and short-term investments at June 30, 2003 will be less than the balances at March 31, 2003 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 March 31, 2003, we did not have any material commitments for capital expenditures. We will continue to use our
credit facility to finance our future growth and fund our ongoing research and development activities during fiscal 2003 and beyond. If our continuing operations cannot generate sufficient capital to meet our needs and if we are unable to reduce our
level of expenditures, we will have to seek additional financing which may not be available when needed and, if such financing is available, it may not be available on terms we believe favorable. 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 March 31, 2003 and September 30, 2002.



|                               |  | March 31, 2003   |         | September 30, 2002 |   | Increase/(decrease) | 
|------------------------------ |  | ---------------- | ------- | ------------------ | - | ------------------- | 
|                               |  |                  |         |                    |   | $                   | 
|                               |  | ($ in thousands) |        
|Trade accounts receivable, net |  | $                | 13,115  |                    | $ | 9,950               | 
|Days sales outstanding (DSO)   |  |                  | 62 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. Trade accounts receivable and DSO increased primarily due to a large proportion of sales occurring in the last month of the three-month period ending March 31, 2003.



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Inventory. The
following table sets forth our inventory as of March 31, 2003 and September 30, 2002.



|                |  | March 31, 2003   |           | September 30, 2002 |   | Increase/(decrease) | 
|--------------- |  | ---------------- | --------- | ------------------ | - | ------------------- | 
|                |  |                  |           |                    |   | $                   | 
|                |  | ($ in thousands) |          
|Inventory       |  | $                | 5,703     |                    | $ | 6,259               | 
|Inventory turns |  |                  | 5.8 turns |                    |   | 5.8 turns           | 



Inventory consists
primarily of raw materials, work in process, and finished goods. Inventory has decreased slightly as a result of increasing visibility into customer orders enabling us to more effectively manage inventory levels. Inventory levels may increase in the
near future if we are not provided with accurate information by our customers, 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 March 31, 2003 and September 30, 2002.



|                                                |  | March 31, 2003   |       | September 30, 2002 |   | Increase/(decrease) | 
|----------------------------------------------- |  | ---------------- | ----- | ------------------ | - | ------------------- | 
|                                                |  |                  |       |                    |   | $                   | 
|                                                |  | ($ in thousands) |      
|Borrowings under credit facility and term loans |  | $                | 8,979 |                    | $ | 4,428               | 



Borrowings increased
primarily as a result of two new term loans totaling approximately $0.5 million made to us by Silicon Valley Bank as well as increased borrowings under our credit facility. We used the term loans primarily to purchase capital equipment used to
enhance the capabilities of our test laboratory. Borrowings under our credit facility increased primarily to support our operating activities and purchases of inventory.



In June 2002, the Company entered into a Loan and Security Agreement with Silicon Valley Bank (the Credit Facility). Pursuant
to the Credit Facility, the Company may borrow up to $15.0 million from time to time from Silicon Valley Bank. The term of the Credit Facility is two years. The Company must maintain an adjusted quick ratio, 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.



On February 12, 2003,
Silicon Valley Bank amended the tangible net worth covenant whereby the Company must maintain a minimum tangible net worth of $23.5 million through June 2003, rather than the $32.0 million minimum tangible net worth covenant in the original Credit
Facility. The minimum tangible net worth covenant was amended because the Company had not met the original tangible net worth covenant of $32.0 million at September 30, 2002 or December 31, 2002. Silicon Valley Bank waived the Companys default
of the tangible net worth covenant at September 30, 2002 on December 9, 2002, and waived the Companys default of the tangible net worth covenant at December 31, 2002 on February 11, 2003. There is no assurance that Silicon Valley Bank will
waive any future default of this or any other covenant contained in the Credit Facility agreement. The minimum tangible net worth covenant will be reset for the second year of the Credit Facility upon agreement between the Company and Silicon Valley
Bank.



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 March 31, 2003, the interest rate was 5.0%. The credit limit is determined based on a formula related to the amount of accounts receivable
and inventory at any particular time. The Company may borrow under the Credit Facility in order to finance working capital requirements for new products and customers, and otherwise for general corporate purposes in the normal course of business.



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As of March 31, 2003, the
Company had outstanding borrowings of $8.5 million, collateralized by the Companys accounts receivable and inventory. This borrowing was recorded as a long-term liability on the Companys March 31, 2003 condensed consolidated balance
sheet based upon the contractual repayment terms that exceed one year from the balance sheet date. As of March 31, 2003, the Companys actual borrowing exceeded its borrowing availability under the Credit Facility by approximately $2.8 million.
On May 2, 2003, Silicon Valley Bank provided a temporary waiver of compliance for repayment of the overadvance.



Commitments



As of March 31, 2003 we had commitments that consisted of facilities and equipment under operating lease agreements expiring at various dates through 2008. These commitments and obligations are reflected in our financial
statements once goods or services have been received or payments related to the obligations become due. The 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 |  | $              | 691 |      | $ | 1,703 |  | $    | 1,177 |      | $ | 733        |  | $    

---

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



Results of Operations for the Three and Six Months Ended March 31, 2003 and 2002



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



|                                                    |  | Three months endedMarch 31, |        |   | Percent increase/ (decrease) |     |    | Six months endedMarch 31, |      |        | Percent increase/ (decrease) |     
|--------------------------------------------------- |  | --------------------------- | ------ | - | ---------------------------- | --- | -- | ------------------------- | ---- | ------ | ---------------------------- | ----
|                                                    |  | 2003                        |        |   | 2002                         |     |    |                           | 2003 |        |                              | 2002
|                                                    |  | (in thousands)              |        |   |                              |     |    | (in thousands)            |      |        |                              |     
|REVENUES:                                           |  |                             |        |   |                              |     |    |                           |      |        |                              |     
|Internet equipment                                  |  | $                           | 14,838 |   |                              | 77  | %  |                           | $    | 11,239 |                              |     
|Web platform licensesand services                   |  |                             | 4,400  |   |                              | 23  | %  |                           |      | 4,470  |                              |     
|                                                    |  |                             |        |   |                              |     |    |                           |      |        |                              |     
|Total revenues                                      |  |                             | 19,238 |   |                              | 100 | %  |                           |      | 15,709 |                              |     
|                                                    |  |                             |        |   |                              |     |    |                           |      |        |                              |     
|COST OF REVENUES:                                   |  |                             |        |   |                              |     |    |                           |      |        |                              |     
|Internet equipment                                  |  |                             | 10,920 |   |                              | 57  | %  |                           |      | 7,928  |                              |     
|Web platform licensesand services                   |  |                             | 345    |   |                              | 2   | %  |                           |      | 146    |                              |     
|                                                    |  |                             |        |   |                              |     |    |                           |      |        |                              |     
|Total cost ofrevenues                               |  |                             | 11,265 |   |                              | 59  | %  |                           |      | 8,074  |                              |     
|                                                    |  |                             |        |   |                              |     |    |                           |      |        |                              |     
|GROSS PROFIT                                        |  |                             | 7,973  |   |                              | 41  | %  |                           |      | 7,635  |                              |     
|OPERATING EXPENSES:                                 |  |                             |        |   |                              |     |    |                           |      |        |                              |     
|Research and development                            |  |                             | 4,026  |   |                              | 21  | %  |                           |      | 4,348  |                              |     
|Research and development project cancellation costs |  |                             |       |   |                              |    |    |                           |      |       |                              |     
|Selling and marketing                               |  |                             | 5,130  |   |                              | 27  | %  |                           |      | 5,975  |                              |     
|General and administrative                          |  |                             | 1,107  |   |                              | 6   | %  |                           |      | 1,267  |                              |     
|Amortization of intangible assets                   |  |                             | 374    |   |                              | 1   | %  |                           |      | 374    |                              |     
|Restructuring costs                                 |  |                             |       |   |                              |    |    |                           |      |       |                              |     
|Integration costs                                   |  |                             |       |   |                              |    |    |                           |      |       |                              |     
|Acquired in-process research and development        |  |                             |       |   |                              |    |    |                           |      | 1,908  |                              |     
|                                                    |  |                             |        |   |                              |     |    |                           |      |        |                              |     
|Total operating expenses                            |  |                             | 10,637 |   |                              | 56  | %  |                           |      | 13,872 |                              |     
|                                                    |  |                             |        |   |                              |     |    |                           |      |        |                              |     
|OPERATING LOSS                                      |  |                             | (2,664 | ) |                              | (14 | )% |                           |      | (6,237 | )                            |     
|Other income (loss), net                            |  |                             | (462   | ) |                              | (2  | )% |                           |      | (1,320 | )                            |     
|                                                    |  |                             |        |   |                              |     |    |                           |      |        |                              |     
|NET LOSS                                            |  | $                           | (3,126 | ) |                              | (16 | )% |                           | $    | (7,557 | )                            |     
|                                                    |  |                             |        |   |                              |     |    |                           |      |        |                              |     



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REVENUES



Internet Equipment. Broadband Internet equipment revenues increased
for the three and six months ended March 31, 2003 from the three and six months ended March 31, 2002 primarily due to increased sales volumes of our ADSL broadband Internet equipment to ILEC customers, both in the United States and Europe, who serve
the market for business and residential-class ADSL Internet services. Sales volumes increased primarily as a result of increased purchases by SBC and Swisscom, as we continue to penetrate the ADSL market for business and residential-class products.
This increase was partially offset by reduced sales to Ingram Micro and BellSouth as well as declining average selling prices primarily as a result of the mix of products sold, price competition from foreign and domestic competitors and customer
driven demands. The mix of broadband Internet equipment sales is changing as we begin entering the residential ADSL market. 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.



Web Platform Licenses and Services. Web platforms revenues decreased for the three months ended March 31, 2003 from the three months ended March 31, 2002 primarily due to reduced volume marketing licenses of our eSite
and eStore products partially offset by revenues related to a software integration project with one specific customer which we did not have during the three months ended March 31, 2002.



Web platforms revenues increased for the six months ended March 31, 2003 from the six months ended March 31, 2002 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 six months ended March 31, 2002.



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 and six months ended March 31, 2003 and 2002 accounted for 10% or more of total revenues.



|             |  | Three months endedMarch 31, |       |  | Percent increase/ (decrease) |   |  | Six months endedMarch 31, |       |  | Percent increase/ (decrease) |     
|------------ |  | --------------------------- | ----- |  | ---------------------------- | - |  | ------------------------- | ----- |  | ---------------------------- | ----
|             |  | 2003                        |       |  | 2002                         |   |  |                           | 2003  |  |                              | 2002
|             |  | (in thousands)              |       |  |                              |   |  | (in thousands)            |       |  |                              |     
|Covad        |  | $                           | 3,052 |  | 16                           | % |  | $                         | 1,952 |  | 12                           | %   
|Swisscom     |  |                             | 2,387 |  | 12                           |   |  |                           |      |  |                             |     
|SBC          |  |                             | 1,931 |  | 10                           |   |  |                           | 19    |  | 0                            |     
|Ingram Micro |  |                             | 1,192 |  | 6                            |   |  |                           | 2,003 |  | 13                           |     
|BellSouth    |  |                             | 611   |  | 3                            |   |  |                           | 1,875 |  | 12                           |     



Including the greater
than 10% customers in the table above, the following table sets forth the number of customers who each individually represented at least 5% of our revenues for the three and six months ended March 31, 2003 and 2002.



|                         |  | Three Months Ended March 31, |   |  | Six Months Ended March 31, |  
|------------------------ |  | ---------------------------- | - |  | -------------------------- | -
|                         |  | 2003                         |   |  | 2002                       |  
|Number of customers      |  | 4                            |   |  | 3                          |  
|Percent of total revenue |  | 45                           | % |  | 37                         | %



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Geographic Information



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



|                               |  | Three months endedMarch 31, |        |  | Percent increase/(decrease) |   |  | Six months endedMarch 31, |        |  | Percentincrease/(decrease) |     
|------------------------------ |  | --------------------------- | ------ |  | --------------------------- | - |  | ------------------------- | ------ |  | -------------------------- | ----
|                               |  | 2003                        |        |  | 2002                        |   |  |                           | 2003   |  |                            | 2002
|                               |  | (in thousands)              |        |  |                             |   |  | (in thousands)            |        |  |                            |     
|Europe                         |  | $                           | 5,176  |  | 27                          | % |  | $                         | 2,778  |  | 18                         | %   
|Canada                         |  |                             | 270    |  | 1                           | % |  |                           | 406    |  | 3                          | %   
|Asia Pacific and other         |  |                             | 667    |  | 4                           | % |  |                           | 600    |  | 4                          | %   
|                               |  |                             |        |  |                             |   |  |                           |        |  |                            |     
|Subtotal international revenue |  |                             | 6,113  |  | 32                          | % |  |                           | 3,784  |  | 24                         | %   
|United States                  |  |                             | 13,125 |  | 68                          | % |  |                           | 11,925 |  | 76                         | %   
|                               |  |                             |        |  |                             |   |  |                           |        |  |                            |     
|Total revenues                 |  | $                           | 19,238 |  | 100                         | % |  | $                         | 15,709 |  | 100                        | %   
|                               |  |                             |        |  |                             |   |  |                           |        |  |                            |     



International revenues
increased for the three and six months ended March 31, 2003 from the three and six months ended March 31, 2002 primarily due to increased sales of our ADSL broadband equipment to new European customers, Swisscom in particular, who serve the
residential ADSL service market. Revenues from the United States increased for the three and six months ended March 31, 2003 from the three and six months ended March 31, 2002 primarily due to increased sales volumes of our ADSL broadband equipment
to SBC, a customer acquired in connection with our Cayman acquisition.



COST OF REVENUES



Cost of revenues consists primarily of material costs related to our contract manufacturing operations and manufacturing variances. Total cost of revenues increased for the three and six months ended March 31, 2003 from the three and
six months ended March 31, 2002 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 41% for the three months ended March 31, 2003 from 49% for the three months ended March
31, 2002 and decreased to 42% for the six months ended March 31, 2003 from 51% for the six months ended March 31, 2002 primarily due to increased sales volumes of our lower margin ADSL broadband Internet equipment.



Internet Equipment. Broadband Internet equipment gross margin decreased
to 26% for the three months ended March 31, 2003 from 29% for the three months ended March 31, 2002 and decreased to 27% for the six months ended March 31, 2003 from 34% for the six months ended March 31, 2002 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. The primary factors influencing our Internet equipment gross margin are
product mix, our ability to drive down cost of revenues based on negotiations with our vendors and increased volumes, and the timing of these cost reductions relative to market pricing conditions.



Web Platform Licenses and Services. Web platforms gross margin
decreased to 92% for the three months ended March 31, 2003 from 97% for the three months ended March 31, 2002 and decreased to 92% for the six months ended March 31, 2003 from 96% for the six months ended March 31, 2002 primarily due to engineering
labor costs associated with the software integration project for one specific customer. Excluding the effects of this project, Web platforms gross margin for the three and six months ended March 31, 2002 were 97% and 96%, respectively.



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



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| |  |  | 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 and six months ended March 31, 2003 from the three and six months ended March 31, 2002 primarily
due to the transfer of employee costs associated with our software integration project from research and development expenses to Web platform cost of revenues. For the three and six months ended March 31, 2003, we transferred $0.2 million and $0.4
million, respectively, of employee costs to Web platform cost of revenues. This decrease was partially offset by the write-off of technology that we licensed and subsequently decided not to incorporate into our Internet equipment products.



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



RESEARCH AND DEVELOPMENT PROJECT CANCELLATION COSTS



For the six months ended March 31, 2003, research and development project
cancellation costs consist primarily of material and equipment costs associated with our joint development efforts with Siemens AG (Siemens) and Proxim, Inc. (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 Seimens under the agreement between AT&T and Seimens 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 and six months ended March 31, 2003 from the three and six months ended March 31, 2002 primarily due to decreased headcount and employee related expenses as well as decreased travel and entertainment
expenses as a result of our restructurings and expense control efforts.



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 decreased for the three months ended March 31, 2003 from the three months ended March 31, 2002 primarily due to the benefit of
the sale of our claim in the Worldcom bankruptcy proceedings, whereby we recovered approximately $0.1 million of the $0.3 million Worldcom receivable for which we had recorded a provision for doubtful accounts in fiscal year 2002 as well as the
reversal the remaining balance accrued in the amount of $45,000 for terminated merger costs initially accrued in fiscal 2001 related to our terminated merger with Proxim. Because the merger was terminated two years ago, we now have concluded that
these costs remaining on our balance sheet were over-accrued (see Note 13 of Notes to Unaudited Condensed Consolidated Financial Statements).



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General and administrative
expenses increased for the six months ended March 31, 2003 from the six months ended March 31, 2002. General and administrative expenses for the six months ended March 31, 2002 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 smaller headquarters facility in January 2003, and increased expense control efforts.



AMORTIZATION OF INTANGIBLE ASSETS



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



RESTRUCTURING COSTS



During the three months ended 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 11 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 the Cayman
acquisition and integrating Caymans customers, systems and operations. (See Note 12 of Notes To Unaudited Condensed Consolidated Financial Statements.)



ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT



Acquired in process research and development represents research and development assets, acquired in connection with our
acquisition of Cayman during the three months ended December 31, 2001 and DoBox during the three months ended March 31, 2002, that were not technologically feasible at the time of acquisition and had no alternative future use, and as such were
expensed at the time of the transaction. The amount allocated to acquired in-process research and development in connection with the Cayman acquisition was based upon an independent third party valuation analysis. (See Note 3 of Notes to Unaudited
Condensed Consolidated Financial Statements.)



OTHER INCOME (LOSS), NET



Other income (loss),
net consists of losses on impaired securities and other income (expenses) which consists of interest income we earn on our cash, cash equivalents and short-term investments, interest expense and gains and losses on foreign currency transactions.
Included in other income (loss) for the three and six months ended March 31, 2003 is a $0.5 million loss on impaired securities, fully impairing the remaining balance of our investment in Everdream. Included in other income (loss) for the three and
six months ended March 31, 2002 is a $1.4 million loss on impaired securities, impairing our investment in MegaPath. (See Notes 10 and 15 of Notes to Unaudited Condensed Consolidated Financial Statements.)



Risk Factors



In addition to other information in this prospectus, the following risk
factors should be considered carefully in evaluating our business because such factors currently may have a significant impact on our business, operating results and financial condition. As a result of the risk factors set forth below and elsewhere
in this prospectus, and



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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.



Our failure to significantly increase our revenues or
sufficiently reduce our operating expenses will result in continuing losses and negative cash flow. We incurred net losses of $3.1 million and $7.1 million for the three and six months ended March 31, 2003 and have incurred losses from continuing
operations of $34.3 million, $41.7 million and $17.6 million for fiscal years ended September 30, 2002, 2001 and 2000, respectively. We used $3.8 million of cash during the six months ended March 31, 2003. We used $10.7 million and $2.1 million of
cash during fiscal years ended September 30, 2002 and 2001, respectively. Our cash, cash equivalents and short-term investments, including $9.0 million of cash borrowed from under our credit facility and term loans, totaled $21.2 million at March
31, 2003. Even if we reach profitability and maintain positive cash flow, we may not be able to sustain or increase profitability or cash flow on a quarterly or annual basis.



We may incur negative cash flow in the future particularly to the extent we complete any acquisition opportunities or are
unable to increase our revenues and/or decrease our costs and expenses. As a result of continuing substantial capital expenditures and product development, sales, marketing and administrative expenses, we will need to generate significant revenues
to achieve and maintain positive cash flow.



We may find it
difficult to raise needed capital in the future, which could 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. If we issue additional stock or other instruments to raise
capital, the percentage ownership in Netopia of existing stockholders would be reduced. If we cannot generate sufficient cash flow from our operations and if we are unable to reduce our level of expenditures, or are unable to borrow or otherwise
obtain additional funds to finance our operations when needed, our financial condition and operating results would be materially adversely affected and we would not be able to operate our business.



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



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



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



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



| |  |  | The ability of our CLEC customers to obtain required capital resources;
| | - |  | -----------------------------------------------------------------------



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



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



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



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



Demand for DSL services has exceeded the ability of certain telecommunications carriers and ISPs to deploy services in a timely manner and to provide
satisfactory customer service. We offer to carriers and service provider



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customers the opportunity to
bundle basic DSL connectivity with value-added features that enable the provider to bundle differentiated services that will justify higher recurring revenues from end users. These features include dial backup, VPN, voice over DSL, remote management
and configuration, and eSite or eStore hosting. We can offer no assurance that our strategy of enabling bundled service offerings will be widely accepted. If telecommunications carriers do not continue to expand their deployment of DSL and other
broadband services, or if additional telecommunications carriers do not offer DSL and other broadband services on a timely basis, then our business, financial condition and results of operations will be seriously harmed.



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



ILECs have been aggressively marketing DSL services principally focusing on residential services. Prior to the acquisition of Cayman, we had not sold
meaningful quantities of our broadband Internet equipment to ILECs in the United States. As a result of our acquisition of Cayman, we have expanded the channels through which we sell our products to include ILEC customers, such as SBC and BellSouth,
and have committed resources that are focused on expanding our presence in the ILEC channel both domestically and internationally in response to changing market conditions. There continue to be barriers associated with such sales including, but not
limited to, lengthy product evaluation cycles, the ability to dislodge competitors whose products are currently being utilized, a long-term contract cycle and intense price pressures. ILECs currently obtain equipment from our 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. There is no guarantee we will be successful in retaining the customers acquired in connection with our acquisition of Cayman or our ability to successfully expand our presence in the ILEC market. If we fail to retain the customers
acquired in connection with our acquisition of Cayman or fail to 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.



We have historically developed, marketed and sold business class broadband Internet equipment products to CLECs serving the business market for DSL Internet connectivity. Through our acquisitions of Cayman in October 2001 and
substantially all the assets of DoBox in March 2002, we believe that we have acquired existing customer relationships, products and technology that will enable us to more quickly develop, enhance and market broadband Internet equipment products and
services 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;
| | - |  | -----------------------------------------------------------------------------------------



| |  |  | The ability to dislodge current suppliers of residential class broadband gateways; and
| | - |  | --------------------------------------------------------------------------------------



| |  |  | Our failure to successfully complete and bring to market the products and technology acquired in connection with our acquisitions of Cayman and substantially all the
assets of DoBox.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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



Prior to our acquisition of Cayman in October 2001, our most significant customers 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



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have demonstrated the
following market difficulties:



| |  |  | Covad, our largest customer in the three and six months ended March 31, 2003 and in fiscal years 2002, 2001 and 2000, has reduced its breadth of network build-out
and significantly scaled back its operations. In addition, Covad filed a voluntary petition under the Bankruptcy Act in August 2001 as part of a capital-restructuring plan. In November 2001, Covad announced that it had secured an agreement with SBC
to provide Covad with $150 million in funding. Covad emerged from bankruptcy in December 2001 upon closing the SBC funding. Additionally, Covad has announced that this funding is expected to provide the cash that it believes will allow it to become
cash flow positive by the latter half of 2003;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Rhythms voluntarily filed for protection under the Bankruptcy Act in August 2001, and subsequently ceased normal operations in September 2001. In December 2001,
WorldCom purchased Rhythms key DSL assets. As a result, WorldCom has been delivering service to customers on the Rhythms network. In July 2002, WorldCom and substantially all of its active United States subsidiaries filed voluntary petitions
for reorganization under Chapter 11 of the United States Bankruptcy Code. There is no certainty that WorldCom will continue to purchase our equipment for deployment on the Rhythms network, and there is no certainty that WorldCom will continue to
operate the Rhythms network as a result of the pending bankruptcy proceedings; and
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | NorthPoint voluntarily filed for protection under the Bankruptcy Act in January 2001 and subsequently ceased operations in March 2001.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------



Like the CLECs, ISPs also have struggled for the past two years. Most ISPs
have had significant difficulties in differentiating their services from the services provided by their competitors. As a result, the lack of differentiation has led to significant erosion in the prices charged to customers. Many of our ISP
customers such as Mpower Communications Corp., PSINet, Inc. (PSINet), Onsite Access Inc. and Business Telecommunications, Inc., have all experienced business difficulties and some have filed for bankruptcy or ceased operations. PSINet, which had
been one of our key ISP customers, filed a voluntary petition under the Bankruptcy Act in June 2001, and no longer is purchasing products from us. The pricing pressure for ISPs continues to date, and, accordingly, sales of our products to ISPs
remain difficult. The financing market for CLECs and ISPs has remained difficult and has been largely closed since calendar year 2001, resulting in significantly decreased sales to CLECs and ISPs and write-offs of outstanding accounts receivable.



If we are unable to retain our customers and/or employees and
complete our projects and products in development, our business would be seriously harmed.



We have attempted to expand the channels through which and markets to which we sell our products through our acquisitions and product development and marketing efforts. Historically, we have focused on
serving the small and medium size business market primarily through the CLEC channels from which we have derived a substantial portion of our revenue. The Cayman acquisition in October 2001, helped to expand our customer base to include ILEC
customers, such as SBC and BellSouth. Our recent product introductions have helped us win new customers in Europe. If we are unable to retain our customers and/or employees, maintain the quality of our products and timely and successfully develop,
manufacture and gain market acceptance of our new products, our business will be seriously harmed.



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



Our revenues will decline and we may incur losses if we lose one or more of our significant customers or if our customers reduce or delay purchases of our
products. For the three months ended March 31, 2003, there were four customers who each individually represented at least 5% of our revenues and in the aggregate accounted for 45% of our total revenues. For the three months ended March 31, 2003, we
had three greater than 10% customers: Covad accounted for 16%, Swisscom accounted for 12% and SBC accounted for 10%, respectively, 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. In fiscal year 2002, sales to Covad and Ingram Micro represented approximately 13% and 12%, respectively, of our total revenues.



Substantial portions of our revenues are derived from sales to
international customers.



A substantial portion of our
revenues is derived from sales to European and other international customers. We expect sales to international customers to continue to comprise a significant portion of our revenues. 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. All other international sales are denominated in United States dollars. For our international sales that continue to be denominated
in United States dollars, fluctuations in currency exchange rates could cause our products and services to become relatively more expensive to our foreign customers. This could lead to decreased profitability of our products and services. In
addition, changes in the value of the Euro relative to the United States dollar could adversely affect our operating results to the extent we do not hedge sales denominated in the Euro.



There are risks associated with international operations.



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



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



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



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



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



| |  |  | 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.



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



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



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



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



Our revenues and operating results have varied in the past and are likely to vary in the future from quarter to quarter. 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. Variations in our operating results will likely be caused by factors related to the operation of our business, including:



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



| |  |  | Decreases or delays in purchases by significant customers, or loss of customers such as Covad, Ingram Micro, SBC or Swisscom;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------



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



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



| |  |  | The growth rate in the number of eSites and eStores that are built using our Web platforms products from which we derive revenues;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------



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



| |  |  | Shifts in the channel fulfilling demand from small, medium and distributed enterprises for DSL services to entities with whom we do not have historical
relationships;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The price and availability of chip sets and other components for our DSL products;
| | - |  | ----------------------------------------------------------------------------------



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



| |  |  | Our ability to attract and retain key personnel.
| | - |  | ------------------------------------------------



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



| |  |  | The ability of CLECs to obtain required capital resources;
| | - |  | ----------------------------------------------------------



| |  |  | The timing, rate and ability of telecommunications service providers to deploy DSL and other broadband services;
| | - |  | ----------------------------------------------------------------------------------------------------------------



| |  |  | Anticipated price and promotion competition in the market for broadband Internet equipment and Web platforms products;
| | - |  | ----------------------------------------------------------------------------------------------------------------------



| |  |  | The level of market penetration of our broadband Internet equipment and Web platforms products relative to those of our competitors; and
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The timing and rate of deployment of alternative high-speed data transmission technologies, such as cable and high-speed wireless data transmission.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------



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



| |  |  | Foreign currency and exchange rate fluctuations which may make our dollar-denominated products more expensive in those foreign markets where we sell our products in
United States dollars or could expose us to currency rate fluctuation risks to the extent we do not adequately hedge these foreign currency sales;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Costs associated with future litigation, including securities litigation or litigation relating to the use or ownership of intellectual property;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Acquisition costs or other non-recurring charges in connection with the acquisition of companies, products or technologies; and
| | - |  | -------------------------------------------------------------------------------------------------------------------------------



| |  |  | General global economic conditions that could adversely affect sales to our customers.
| | - |  | --------------------------------------------------------------------------------------



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 DSL products from
a limited number of suppliers.



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



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



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



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



We do not manufacture any of the components used in our products and perform only limited assembly on some products. All of our broadband Internet equipment relies on components that are supplied by
independent contractors and specialized suppliers. We generally do not have guaranteed supply arrangements with these third parties and they could cease selling components to us at any time. Moreover, the ability of independent contractors and
specialized suppliers to provide us with sufficient components for our broadband Internet equipment also depends on our ability to accurately forecast our future requirements. If we are unable to timely obtain a sufficient quantity of components
from independent contractors or specialized suppliers for any reason, sales of our broadband Internet equipment could be delayed or halted. In addition, we may be required to pay premiums for components purchased from other 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. In addition, we anticipate that it will be necessary for us to establish relationships with additional component suppliers in the future. If we are unsuccessful in establishing these relationships, we may not be able to obtain
sufficient components in some future period.



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



We compete in markets characterized by continuing technological advancement, changes in customer requirements and evolving industry standards. To compete
successfully, we must design, develop, manufacture and sell new or enhanced products 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 router technology with the architectures of leading central office equipment providers in order to enhance the reliability, ease-of-use and management functions of each of our DSL products. Currently, our router products are fully
integrated with Copper Mountain Networks, Inc.s central office access concentrators and are interoperable with Alcatel, Cisco, LM Ericsson Telephone Company (Ericsson), Lucent Technologies Inc., Nortel Networks Corporation, Nokia Corporation,
Paradyne Networks, Inc. and Zhone Technologies, Inc. central office access concentrators.



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 reducing support costs. We believe this service delivery platform is new to and has unique features in the market for broadband services and can assist us in differentiating our products and services from those of our competitors.
While this platform is based upon technology developed within Netopia, it is relatively new and we cannot provide any assurance that, when deployed in mass scale, it 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. It is possible that the market for broadband Internet equipment will develop in a manner that we do not anticipate.



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



In the past, we have engaged in both acquisitions and divestitures. Our acquisitions and divestitures have involved numerous risks, including the use of significant amounts of our cash, diversion of
the attention of our management



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from our core business, loss of our key employees and significant expenses and write-offs. For example, in
fiscal year 2002, we recorded a $4.1 million charge for acquired in-process research and development related to our acquisitions of DoBox and Cayman and a $9.1 million charge for impairment of goodwill related to our acquisitions of Cayman and
StarNet. Similarly, in September 2001, we recorded a $16.4 million charge for impairment of goodwill and other intangible assets related to our acquisitions of WebOrder, StarNet and Serus. Incremental acquisition related charges including in-process
research and development and amortization of goodwill and other intangibles or divestitures of profitable technologies or products could adversely impact our profitability. The success of these acquisitions depends upon our ability to retain the
customers and key employees, and timely and successfully develop, manufacture and gain market acceptance for the products we acquired. If we engage in additional acquisitions or divestitures in future periods, we may not be able to address these
risks and our business may be harmed.



Our revenues will not
grow and we may incur losses if we cannot successfully introduce, market and sell our Web platforms products. 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 Timbuktu. 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 a substantial portion of the recurring revenues from our Web platforms products from a small number of large 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 our eSite and eStore Web platforms to their customers, we will not generate recurring revenues from royalties on eSites and
eStores promoted by licensees of our Web platforms. If these customers were to choose a competitive platform, this could lead to reduced revenues and adversely impact our results.



If hosting services for our Web platforms perform poorly, our reputation will be damaged and we could be sued.



We depend on our servers, networking hardware and software
infrastructure, and third-party service and maintenance of these items to provide reliable, high-performance eSite and eStore hosting and eSupport services for our customers. In addition, our servers are located at third-party facilities. Failure or
poor performance by third parties with whom we contract to maintain our servers and hardware and software, could lead to interruption or deterioration of our eSite and eStore hosting and eSupport services. Additionally, a slowdown or failure of our
systems due to an increase in the use of the eSites and eStores we currently host, or due to damage or destruction of our systems for any reason, or the possibility of rolling blackouts could also lead to interruption or deterioration of our eSite
and eStore hosting and eSupport services. If there is an interruption or a deterioration of our eSite and eStore hosting and eSupport services, our reputation would be seriously harmed and, consequently, sales of our products and services would
decrease. If such circumstances do arise in some future period, in order to retain current customers and attract new customers, we may have to provide our eSite and eStore hosting and eSupport services at a subsidized price or even at no cost. In
addition, if our eSite and eStore hosting or eSupport services are interrupted, perform poorly, or are unreliable, we are at risk of litigation from our customers.



We may 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 generally 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, in particular DSL products, will
become increasingly competitive and that we will be forced to lower the prices we charge for our broadband Internet equipment in the future. As the average selling price of our routers declines, our gross margins related to such products, as well as
our overall gross margins, are likely to decline.



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



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



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



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



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



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



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



There has been a substantial amount of litigation in the software and Internet
industries regarding intellectual property rights. It is possible that in the future third parties may claim that our current or potential future products or we infringe their intellectual property. It is possible that our patent may be successfully
challenged, that our patent may not provide us with any competitive advantages, or that the patents of others will seriously harm our ability to do business. Any claims, with or without merit, could be time-consuming, result in costly litigation,
cause product shipment delays or require us to enter into royalty or licensing agreements. Royalty or licensing agreements, if required, may not be available on terms acceptable to us or at all, which could seriously harm our business.



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



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



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



We
provide end users of our products with a limited warranty on our broadband Internet equipment and our Timbuktu software. We permit end users to return our broadband Internet equipment and Timbuktu for replacements or for refund of the full purchase
price if the products do not perform as warranted. Our other Web platforms products are provided on an as is basis, and we generally do not offer a warranty on this product. End users of our eSites and eStores generally can discontinue
their service at any time at no cost. In the past, we have not



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encountered material warranty
claims. In the future, if warranty claims exceed our reserves for such claims, our business would be seriously harmed. Additionally, we attempt to further limit our liability to end users through disclaimers of special, consequential and indirect
damages and similar provisions. However, we cannot assure you that such limitations of liability will be legally enforceable.



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



Our products are complex and may contain undetected or unresolved defects when first introduced or as new versions are
released. We cannot assure you that, despite our testing, defects will not be found in new products or new versions of products following commercial release. If our products do contain undetected or unresolved defects, we may lose market share,
experience delays in or losses of market acceptance or be required to issue a product recall. In addition, we would be at risk of product liability litigation for financial or other damages to our customers because of defects in our products.
Although we attempt to limit our liability to end users through disclaimers of special, consequential and indirect damages and similar provisions, we cannot assure you that such limitations of liability will be legally enforceable.



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



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



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



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



Business interruptions could adversely affect our business.



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



PART I. FINANCIAL INFORMATION



Item 3. Quantitative and Qualitative Disclosures About Market Risk



Our exposure to market risk for changes in interest rates relates primarily to our investment portfolio. Our exposure to foreign exchange risk relates primarily to sales made to international customers
denominated in Euros in European Union countries. We do not use derivative financial instruments for speculative or trading purposes. We place our investments in instruments that meet high credit quality standards, as specified in our investment
policy. This policy also limits the amount of credit exposure to any one issue, issuer and type of instrument. We do not expect any material loss with respect to our investment portfolio. Beginning in our fiscal third quarter of 2000, sales to
European countries that are members of the European Union have been denominated in the Euro. In order to reduce our exposure resulting from currency fluctuations, we have entered into currency exchange forward contracts. These contracts guarantee a
predetermined exchange rate at the time the contract is purchased. We do not enter into currency exchange contracts for speculative or trading purposes. All currency exchange contracts have a maturity of less than one year.



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Interest Rate Risk



The table below presents the market value and related
weighted-average interest rates for our investment portfolio at March 31, 2003 and 2002. All of our investments mature in twelve months or less.



|                                                       |  | March 31, 2003 |       |                   | March 31, 2002 |                      
|------------------------------------------------------ |  | -------------- | ----- | ----------------- | -------------- | ---------------------
|Principal (notional) amounts in United States dollars: |  | Cost basis     |       | Fair market value |                | Average interest rate
|                                                       |  | (in thousands) |       |                   |                |                      
|Cash equivalentsfixed rate (a)                        |  | $              | 9,713 |                   | $              | 9,713                
|Short-term investmentsfixed rate (b)                  |  |                |      |                   |                |                     
|                                                       |  |                |       |                   |                |                      
|                                                       |  | $              | 9,713 |                   | $              | 9,713                
|                                                       |  |                |       |                   |                |                      

---

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

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



Our market interest rate risk for our investment portfolio relates primarily
to changes in the United States short-term prime interest rate. These changes impact the price and yield of our short-term investments. We minimize this risk by following a policy of portfolio diversification. Our market interest rate risk for
borrowings under our Credit Facility relates primarily to the rate we are charged by Silicon Valley Bank for our credit facility. The Credit Facility bears interest at a rate equal to the prime rate (the rate announced by Silicon Valley Bank as its
prime rate) plus 0.75% per annum. At March 31, 2003, the interest rate was 5.0%. To the extent we borrow heavily against our accounts receivable and inventory and Silicon Valley Bank were to increase its Prime Rate, our interest expense
would increase and it would cost us more to borrow against the credit facility.



Foreign Currency Exchange Risk



The table
below presents the carrying value, in United States dollars, of our accounts receivable denominated in Euros at March 31, 2003 and 2002. The accounts receivable at March 31, 2003 are valued at the United States/Euro exchange rate as of March 31,
2003 and the accounts receivable at March 31, 2002 are valued at the United States/Euro exchange rate as of March 31, 2002. The carrying value approximates fair value at March 31, 2003 and 2002.



|                                                       |  | March 31, 2003  |       | March 31, 2002
|------------------------------------------------------ |  | --------------- | ----- | --------------
|Principal (notional) amounts in United States dollars: |  | Carrying amount |       | Exchange rate 
|                                                       |  | (in thousands)  |       |               
|Accounts receivable denominated in Euros               |  | $               | 1,339 |               



The table below presents
the carrying value of our currency exchange forward contracts, in United States dollars, at March 31, 2003 and 2002. The carrying value approximates fair value at March 31, 2003 and 2002.



|                                       |  | March 31, 2003  |     | March 31, 2002
|-------------------------------------- |  | --------------- | --- | --------------
|Principal (notional) amounts in Euros: |  | Carrying amount |     | Spot rate     
|                                       |  | (in thousands)  |     |               
|Currency exchange forward contract # 1 |  | $               | 152 |               
|Currency exchange forward contract # 2 |  | $               | 212 |               
|Currency exchange forward contract # 3 |  |                 |    |               
|Currency exchange forward contract # 4 |  |                 |    |               
|Currency exchange forward contract # 5 |  |                 |    |               
|Currency exchange forward contract # 6 |  |                 |    |               
|Currency exchange forward contract # 7 |  |                 |    |               
|Currency exchange forward contract # 8 |  |                 |    |               



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



PART I. FINANCIAL INFORMATION



Item 4. Controls and Procedures



As of
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. The design of any system of controls and procedures is
based upon certain assumptions about the likelihood of future events. There can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.



PART II.
OTHER INFORMATION



Item 4. Submission of Matters to a Vote of Security Holders



On January 28, 2003, we held our Annual Meeting of Stockholders in Emeryville, California for the following purposes:



| | 1. |  | To elect five (5) directors to serve until the 2004 Annual Stockholder Meeting or until their successors have been elected and qualified or until their earlier
resignation, death or removal.
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 2. |  | To approve amendments to the Companys 1996 Stock Option Plan and 2002 Equity Incentive Plan.
| | -- |  | ---------------------------------------------------------------------------------------------



| | 3. |  | To approve amendments to the Companys Employee Stock Purchase Plan.
| | -- |  | --------------------------------------------------------------------



| | 4. |  | To ratify the appointment of KPMG LLP as independent auditors of the Company.
| | -- |  | -----------------------------------------------------------------------------



| | 5. |  | To transact such other business as may properly be brought before the meeting.
| | -- |  | ------------------------------------------------------------------------------



The voting results for items 1 through 4 were as follows:



|                   |  | For        |  | Withheld |  | Against   |  | Abstain  
|------------------ |  | ---------- |  | -------- |  | --------- |  | ---------
|Item 1             |  |            |  |          |  |           |  |          
|Reese M. Jones     |  | 17,531,928 |  | 187,121  |  |          |  |         
|Alan B. Lefkof     |  | 17,624,689 |  | 94,360   |  |          |  |         
|Robert Lee         |  | 17,629,714 |  | 89,335   |  |          |  |         
|David F. Marquardt |  | 17,515,514 |  | 203,535  |  |          |  |         
|Harold S. Wills    |  | 17,525,614 |  | 193,435  |  |          |  |         
|Item 2             |  | 4,381,563  |  |         |  | 1,639,426 |  | 1,621,409
|Item 3             |  | 7,391,606  |  |         |  | 186,681   |  | 64,111   
|Item 4             |  | 17,583,789 |  |         |  | 71,110    |  | 64,150   



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PART II. OTHER INFORMATION



Item 6. Exhibits and Reports on Form 8-K



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



|Exhibit Number |  | 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 March 31, 2003.
|--- |  | -------------------------------------------------------------------------------------



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SIGNATURE



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



|Date:May 15, 2003 |  |  |  | NETOPIA,
INC.(Registrant)
|----------------- |  |  |  | -------------------------
|                 
|                  |  |  |  | By:                      
|                  |  |  |  |                          
|                 
|                  |  |  |  | By:                      
|                  |  |  |  |                          



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CERTIFICATION



I, Alan B. Lefkof,
certify that:



|1. |  | I have reviewed this quarterly report on Form 10-Q 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:May 15, 2003



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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 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:May 15, 2003 |  |  |  |    
|----------------- |  |  |  | ---
|                 
|                  |  |  |  | By:
|                  |  |  |  |    



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