##### Table of Contents

---

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



---



FORM 10-Q



---



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



For the quarterly period ended December 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



---



Netopia, Inc.

(Exact name of registrant as specified in its charter)



---



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



6001 Shellmound
Street, 4thFloor

Emeryville, California 94608

(Address of principal executive offices, including Zip Code)



(510) 420-7400

(Registrants telephone number, including area code)



---



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



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



As of December 31, 2003 there were 22,833,829 shares of the Registrants common stock outstanding.



---



---

##### Table of Contents

NETOPIA, INC.

Form 10-Q

Table of Contents



|               |  |                                                                                                                 |  |     
|-------------- |  | --------------------------------------------------------------------------------------------------------------- |  | ----
|               |  |                                                                                                                 |  | Page
|PART I.        |  | FINANCIAL INFORMATION                                                                                           |  |     
|               |  |                                                                                                                
|Item 1.        |  | Unaudited Condensed Consolidated Financial Statements                                                           |  | 1   
|               |  |                                                                                                                
|               |  | Unaudited condensed consolidated balance sheets at December 31, 2003 and September 30, 2003                     |  | 1   
|               |  |                                                                                                                
|               |  | Unaudited condensed consolidated statements of operations for the three months ended December 31, 2003 and 2002 |  | 2   
|               |  |                                                                                                                
|               |  | Unaudited condensed consolidated statements of cash flows for the three months ended December 31, 2003 and 2002 |  | 3   
|               |  |                                                                                                                
|               |  | Notes to unaudited condensed consolidated financial statements                                                  |  | 4   
|               |  |                                                                                                                
|Item 2.        |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                           |  | 12  
|               |  |                                                                                                                
|Item 3.        |  | Quantitative and Qualitative Disclosures About Market Risk                                                      |  | 31  
|               |  |                                                                                                                
|Item 4.        |  | Controls and Procedures                                                                                         |  | 33  
|               |  |                                                                                                                
|PART II.       |  | OTHER INFORMATION                                                                                               |  |     
|               |  |                                                                                                                
|Item 2.        |  | Changes in Securities and Use of Proceeds                                                                       |  | 33  
|               |  |                                                                                                                
|Item 6.        |  | Exhibits and Reports on Form 8-K                                                                                |  | 34  
|               | 
|Signatures     |  | 35                                                                                                             
|               | 
|Certifications |  |                                                                                                                



---

##### Table of Contents

PART I  FINANCIAL INFORMATION



ITEM 1. UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS



NETOPIA, INC. AND SUBSIDIARIES

Unaudited Condensed Consolidated Balance Sheets



|                                                                                                                                                                          |  |                   |          |   |                     |   |          |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------- | -------- | - | ------------------- | - | -------- | -
|                                                                                                                                                                          |  | December 31, 2003 |          |   | September 30, 2003* |  
|                                                                                                                                                                          | 
|                                                                                                                                                                          |  | (in thousands)    |         
|ASSETS                                                                                                                                                                    |  |                   |          |   |                     |   |          |  
|Current assets:                                                                                                                                                           |  |                   |          |   |                     |   |          |  
|Cash and cash equivalents                                                                                                                                                 |  | $                 | 26,423   |   |                     | $ | 22,208   |  
|Trade accounts receivable less allowance for doubtful accounts and returns of $127 and $178 at December 31 and September 30, 2003,
respectively                           |  |                   | 18,148   |   |                     |   | 16,755   |  
|Inventory                                                                                                                                                                 |  |                   | 8,312    |   |                     |   | 5,968    |  
|Prepaid expenses and other current assets                                                                                                                                 |  |                   | 984      |   |                     |   | 899      |  
|                                                                                                                                                                          |  |                   |          |   |                     |   |          |  
|Total current assets                                                                                                                                                      |  |                   | 53,867   |   |                     |   | 45,830   |  
|Furniture, fixtures and equipment, net                                                                                                                                    |  |                   | 3,409    |   |                     |   | 3,740    |  
|Acquired technology and other intangible assets, net                                                                                                                      |  |                   | 4,936    |   |                     |   | 5,251    |  
|Goodwill                                                                                                                                                                  |  |                   | 2,124    |   |                     |   | 984      |  
|Long-term investments                                                                                                                                                     |  |                   | 1,032    |   |                     |   | 1,032    |  
|Deposits and other assets                                                                                                                                                 |  |                   | 1,043    |   |                     |   | 1,105    |  
|                                                                                                                                                                          |  |                   |          |   |                     |   |          |  
|TOTAL ASSETS                                                                                                                                                              |  | $                 | 66,411   |   |                     | $ | 57,942   |  
|                                                                                                                                                                          |  |                   |          |   |                     |   |          |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                      |  |                   |          |   |                     |   |          |  
|Current liabilities:                                                                                                                                                      |  |                   |          |   |                     |   |          |  
|Accounts payable                                                                                                                                                          |  | $                 | 12,615   |   |                     | $ | 11,222   |  
|Accrued compensation                                                                                                                                                      |  |                   | 2,556    |   |                     |   | 1,965    |  
|Accrued liabilities                                                                                                                                                       |  |                   | 1,642    |   |                     |   | 1,924    |  
|Deferred revenue                                                                                                                                                          |  |                   | 1,637    |   |                     |   | 1,659    |  
|Current portion of borrowings under term loans                                                                                                                            |  |                   | 250      |   |                     |   | 250      |  
|Other current liabilities                                                                                                                                                 |  |                   | 116      |   |                     |   | 113      |  
|                                                                                                                                                                          |  |                   |          |   |                     |   |          |  
|Total current liabilities                                                                                                                                                 |  |                   | 18,816   |   |                     |   | 17,133   |  
|Long-term liabilities:                                                                                                                                                    |  |                   |          |   |                     |   |          |  
|Borrowings under term loans                                                                                                                                               |  |                   | 42       |   |                     |   | 104      |  
|Other long-term liabilities                                                                                                                                               |  |                   | 351      |   |                     |   | 328      |  
|                                                                                                                                                                          |  |                   |          |   |                     |   |          |  
|Total liabilities                                                                                                                                                         |  |                   | 19,209   |   |                     |   | 17,565   |  
|                                                                                                                                                                          |  |                   |          |   |                     |   |          |  
|Commitments and contingencies                                                                                                                                             |  |                   |          |   |                     |   |          |  
|                                                                                                                                                                          |  |                  
|Stockholders equity:                                                                                                                                                     |  |                   |          |   |                     |   |          |  
|Common stock: $0.001 par value, 50,000,000 shares authorized; 22,833,829 and 21,631,832 shares issued and outstanding at December 31 and
September 30, 2003, respectively |  |                   | 23       |   |                     |   | 22       |  
|Additional paid-in capital                                                                                                                                                |  |                   | 161,826  |   |                     |   | 156,132  |  
|Accumulated deficit                                                                                                                                                       |  |                   | (114,647 | ) |                     |   | (115,777 | )
|                                                                                                                                                                          |  |                   |          |   |                     |   |          |  
|Total stockholders equity                                                                                                                                                |  |                   | 47,202   |   |                     |   | 40,377   |  
|                                                                                                                                                                          |  |                   |          |   |                     |   |          |  
|TOTAL LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                |  | $                 | 66,411   |   |                     | $ | 57,942   |  
|                                                                                                                                                                          |  |                   |          |   |                     |   |          |  

---

|* | Derived from the audited consolidated balance sheet dated September 30, 2003 included in the Companys 2003 Annual Report on Form 10-K.
|- | ---------------------------------------------------------------------------------------------------------------------------------------



See accompanying notes to unaudited condensed consolidated financial
statements.



Page 1



---

##### Table of Contents

NETOPIA, INC. AND SUBSIDIARIES

Unaudited Condensed Consolidated Statements of Operations



|                                                    |  |                                         |        |      |   |        |  
|--------------------------------------------------- |  | --------------------------------------- | ------ | ---- | - | ------ | -
|Three months ended December 31,                     |  | 2003                                    |        | 2002 |  
|                                                    |  | (in thousands; except pershare amounts) |       
|REVENUES:                                           |  |                                         |        |      |   |        |  
|Internet equipment                                  |  | $                                       | 23,946 |      | $ | 14,596 |  
|Web platform licenses and services                  |  |                                         | 4,653  |      |   | 5,007  |  
|                                                    |  |                                         |        |      |   |        |  
|Total revenues                                      |  |                                         | 28,599 |      |   | 19,603 |  
|                                                    |  |                                         |        |      |   |        |  
|COST OF REVENUES:                                   |  |                                         |        |      |   |        |  
|Internet equipment                                  |  |                                         | 16,459 |      |   | 10,711 |  
|Web platform licenses and services                  |  |                                         | 208    |      |   | 429    |  
|                                                    |  |                                         |        |      |   |        |  
|Total cost of revenues                              |  |                                         | 16,667 |      |   | 11,140 |  
|                                                    |  |                                         |        |      |   |        |  
|GROSS PROFIT                                        |  |                                         | 11,932 |      |   | 8,463  |  
|OPERATING EXPENSES:                                 |  |                                         |        |      |   |        |  
|Research and development                            |  |                                         | 3,961  |      |   | 3,983  |  
|Research and development project cancellation costs |  |                                         |       |      |   | 606    |  
|Selling and marketing                               |  |                                         | 5,315  |      |   | 5,661  |  
|General and administrative                          |  |                                         | 1,251  |      |   | 1,428  |  
|Amortization of intangible assets                   |  |                                         | 386    |      |   | 374    |  
|Restructuring costs                                 |  |                                         |       |      |   | 342    |  
|                                                    |  |                                         |        |      |   |        |  
|Total operating expenses                            |  |                                         | 10,913 |      |   | 12,394 |  
|                                                    |  |                                         |        |      |   |        |  
|OPERATING INCOME (LOSS)                             |  |                                         | 1,019  |      |   | (3,931 | )
|Other income (loss), net                            |  |                                         | 168    |      |   | (7     | )
|                                                    |  |                                         |        |      |   |        |  
|Income (loss) before income taxes                   |  |                                         | 1,187  |      |   | (3,938 | )
|                                                    |  |                                         |        |      |   |        |  
|Provision for income taxes                          |  |                                         | 57     |      |   |       |  
|                                                    |  |                                         |        |      |   |        |  
|NET INCOME (LOSS)                                   |  | $                                       | 1,130  |      | $ | (3,938 | )
|                                                    |  |                                         |        |      |   |        |  
|Per share data, net income (loss):                  |  |                                         |        |      |   |        |  
|Basic net income (loss) per share                   |  | $                                       | 0.05   |      | $ | (0.21  | )
|                                                    |  |                                         |        |      |   |        |  
|Diluted net income (loss) per share                 |  | $                                       | 0.04   |      | $ | (0.21  | )
|                                                    |  |                                         |        |      |   |        |  
|Shares used in the basic per share calculation      |  |                                         | 22,236 |      |   | 18,906 |  
|                                                    |  |                                         |        |      |   |        |  
|Shares used in the diluted per share calculation    |  |                                         | 26,091 |      |   | 18,906 |  
|                                                    |  |                                         |        |      |   |        |  



See accompanying notes
to unaudited condensed consolidated financial statements.



Page 2



---

##### Table of Contents

NETOPIA, INC. AND SUBSIDIARIES

Unaudited Condensed Consolidated Statements of Cash Flows



|                                                                                          |  |                |        |   |      |   |        |  
|----------------------------------------------------------------------------------------- |  | -------------- | ------ | - | ---- | - | ------ | -
|Three months ended December 31,                                                           |  | 2003           |        |   | 2002 |  
|                                                                                          |  | (in thousands) |       
|CASH FLOWS FROM OPERATING ACTIVITIES:                                                     |  |                |        |   |      |   |        |  
|Net income (loss)                                                                         |  | $              | 1,130  |   |      | $ | (3,938 | )
|Adjustments to reconcile net loss to net cash provided by (used in) operating activities: |  |                |        |   |      |   |        |  
|Depreciation and amortization                                                             |  |                | 1,281  |   |      |   | 1,438  |  
|Write-off of capitalized software development costs                                       |  |                | 26     |   |      |   | 16     |  
|Changes in allowance for doubtful accounts and returns on accounts receivable             |  |                | (52    | ) |      |   | (20    | )
|Changes in operating assets and liabilities:                                              |  |                |        |   |      |   |        |  
|Trade accounts receivable                                                                 |  |                | (1,341 | ) |      |   | (653   | )
|Inventory                                                                                 |  |                | (2,344 | ) |      |   | (1,941 | )
|Prepaid expenses and other current assets                                                 |  |                | (85    | ) |      |   | 452    |  
|Deposits and other assets                                                                 |  |                |       |   |      |   | (129   | )
|Accounts payable and accrued liabilities                                                  |  |                | 1,958  |   |      |   | 3,390  |  
|Deferred revenue                                                                          |  |                | (51    | ) |      |   | (540   | )
|Other liabilities                                                                         |  |                | (202   | ) |      |   | (1     | )
|                                                                                          |  |                |        |   |      |   |        |  
|Net cash provided by (used in) operating activities                                       |  |                | 320    |   |      |   | (1,926 | )
|                                                                                          |  |                |        |   |      |   |        |  
|CASH FLOWS FROM INVESTING ACTIVITIES:                                                     |  |                |        |   |      |   |        |  
|Purchase of furniture, fixtures and equipment                                             |  |                | (352   | ) |      |   | (379   | )
|Acquisition of business                                                                   |  |                | (137   | ) |      |   |       |  
|                                                                                          |  |                |        |   |      |   |        |  
|Net cash used in investing activities                                                     |  |                | (489   | ) |      |   | (379   | )
|                                                                                          |  |                |        |   |      |   |        |  
|CASH FLOWS FROM FINANCING ACTIVITIES:                                                     |  |                |        |   |      |   |        |  
|Borrowings under credit facility                                                          |  |                |       |   |      |   | 1,572  |  
|Payments under term loans                                                                 |  |                | (62    | ) |      |   |       |  
|Proceeds from the issuance of common stock                                                |  |                | 4,446  |   |      |   | 2      |  
|                                                                                          |  |                |        |   |      |   |        |  
|Net cash provided by financing activities                                                 |  |                | 4,384  |   |      |   | 1,574  |  
|                                                                                          |  |                |        |   |      |   |        |  
|Net increase (decrease) in cash and cash equivalents                                      |  |                | 4,215  |   |      |   | (731   | )
|Cash and cash equivalents, beginning of quarter                                           |  |                | 22,208 |   |      |   | 25,022 |  
|                                                                                          |  |                |        |   |      |   |        |  
|CASH AND CASH EQUIVALENTS, END OF QUARTER                                                 |  | $              | 26,423 |   |      | $ | 24,291 |  
|                                                                                          |  |                |        |   |      |   |        |  
|Supplemental disclosure of non-cash investing and financing activities:                   |  |                |        |   |      |   |        |  
|Issuance of common stock for acquisition of businesses                                    |  | $              | 1,249  |   |      | $ |       |  
|                                                                                          |  |                |        |   |      |   |        |  



See accompanying notes
to unaudited condensed consolidated financial statements.



Page 3



---

##### Table of Contents

NETOPIA, INC. AND SUBSIDIARIES

Notes To Unaudited Condensed Consolidated Financial Statements



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



The unaudited condensed consolidated financial statements included in this Form 10-Q reflect all adjustments, consisting only of normal recurring
adjustments which in the Companys opinion are necessary to fairly present the Companys consolidated financial position, results of operations and cash flows for the periods presented. These condensed consolidated financial statements
should be read in conjunction with the Companys consolidated financial statements included in the Companys Annual Report on Form 10-K and other filings with the United States Securities and Exchange Commission (SEC). The consolidated
results of operations for the period ended December 31, 2003 are not necessarily indicative of the results to be expected for any subsequent quarter or for the entire fiscal year ending September 30, 2004.



|(2) | Stock Based Compensation
|--- | ------------------------



Statement of Financial Accounting Standards (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 all options we have issued, no compensation expense is recognized for
stock options issued to employees. In December 2002, the Financial Accounting Standards Board (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 months ended December 31, 2003 and 2002 would have been the pro forma amounts as follows:



|                                                               |  |                                         |       |   |      |   |        |  
|-------------------------------------------------------------- |  | --------------------------------------- | ----- | - | ---- | - | ------ | -
|Three months ended December 31,                                |  | 2003                                    |       |   | 2002 |  
|                                                               |  | (in thousands; exceptper share amounts) |      
|Net income (loss)  as reported                                |  | $                                       | 1,130 |   |      | $ | (3,938 | )
|Stock based compensation expense as prescribed by SFAS No. 123 |  |                                         | 1,651 |   |      |   | 2,151  |  
|                                                               |  |                                         |       |   |      |   |        |  
|Net loss  pro forma                                           |  | $                                       | (521  | ) |      | $ | (6,089 | )
|                                                               |  |                                         |       |   |      |   |        |  
|Basic net income (loss) per share  as reported                |  | $                                       | 0.05  |   |      | $ | (0.21  | )
|                                                               |  |                                         |       |   |      |   |        |  
|Diluted net income (loss) per share  as reported              |  | $                                       | 0.04  |   |      | $ | (0.21  | )
|                                                               |  |                                         |       |   |      |   |        |  
|Basic and diluted net loss per share  pro forma               |  | $                                       | (0.02 | ) |      | $ | (0.32  | )
|                                                               |  |                                         |       |   |      |   |        |  



The Black-Scholes
Single Option weighted average fair value of employee stock options granted during the three months ended December 31, 2003 and 2002 was $8.73 and $1.52, respectively. The weighted average exercise price of employee stock options granted during the
three months ended December 31, 2003 and 2002 was $8.74 and $1.56, respectively.



The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable while the Companys



Page 4



---

##### Table of Contents

employee stock options have characteristics significantly different from those of traded options. In
addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. The fair value of each option grant and share purchased under the Purchase Plan are estimated on the date of grant or
share purchase using the Black-Scholes option-pricing model with the following assumptions:



|                                |  |      |   |  |      |  
|------------------------------- |  | ---- | - |  | ---- | -
|Three months ended December 31, |  | 2003 |   |  | 2002 |  
|Expected volatility             |  | 261  | % |  | 159  | %
|Risk-free interest rate         |  | 3.77 | % |  | 3.36 | %
|Expected dividend yield         |  |     |   |  |     |  



The expected lives of
options under the Employee Stock Option and Employee Stock Purchase Plans are estimated at seven years and two years, respectively. In accordance with SFAS No. 123, the Company recognizes as an expense, the fair value of options and other equity
instruments granted to non-employees. The Company uses the Black-Scholes option valuation model to determine the fair value of any options or other equity instruments granted to non-employees.



|(3) | Recent Accounting Pronouncements
|--- | --------------------------------



In December 2003, the SEC issued Staff Accounting Bulletin (SAB) 104, Revenue Recognition  Corrected Copy. SAB 104 revises or rescinds
portions of the interpretative guidance included in Topic 13 of the codification of staff accounting bulletins in order to make this interpretive guidance consistent with current authoritative accounting and auditing guidance and SEC rules and
regulations. The principal revisions relate to the rescission of material no longer necessary because of private sector developments in U.S. generally accepted accounting principles. The Company adopted the interpretive guidance in SAB 104 during
the three months ended December 31, 2003. The Companys application of the interpretive guidance in SAB 104 in the three months ended December 31, 2003 did not have a significant on the Companys condensed consolidated financial
statements.



|(4) | Acquisitions
|--- | ------------



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



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



Page 5



---

##### Table of Contents

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



|                              |  |                |       |   |                    |   |             |  |        
|----------------------------- |  | -------------- | ----- | - | ------------------ | - | ----------- |  | -------
|                              |  | Amount         |       |   | Annualamortization |   | Useful Life
|                              |  | (in thousands) |       |  
|Cash                          |  | $              | 42    |   |                    |   | n/a         |  | n/a    
|Accounts payable              |  |                | (42   | ) |                    |   | n/a         |  | n/a    
|Identified intangible assets: |  |                |       |   |                    |   |             |  |        
|Developed product technology  |  |                | 246   |   |                    | $ | 49          |  | 5 years
|Goodwill                      |  |                | 1,140 |   |                    |   | n/a         |  | n/a    
|                              |  |                |       |   |                    |   |             |  |        
|Total                         |  | $              | 1,386 |   |                    | $ | 49          |  |        
|                              |  |                |       |   |                    |   |             |  |        



The allocation of the
total purchase price of JadeSail to its individual assets and assumed liabilities was based upon the Companys estimate of the fair value thereof. In addition to the current assets and liabilities that were acquired, intangible assets were
identified. These intangible assets were developed product technology, which represents the value of JadeSails proprietary know-how that was technologically feasible as of the acquisition date, and goodwill, which represents the excess of the
purchase price over the fair value of the underlying net identifiable assets. The goodwill was attributed to the Companys Web platforms reporting unit. The value of the developed product technology was determined based upon the value of the
cash flows expected to be generated by technology that was feasible as of the acquisition date.



JadeSails operating results are included the Companys condensed consolidated financial statements for the three months ended December 31,
2003. For comparative purposes the following summary, prepared on an unaudited pro forma basis, reflects the condensed consolidated statements of operations of the Company for the three months ended December 31, 2002 giving effect to the JadeSail
acquisition and assuming that JadeSail had been acquired as of the beginning of the three months ended December 31, 2002:



|                                                                |  |                                          |        |      |   |        |  
|--------------------------------------------------------------- |  | ---------------------------------------- | ------ | ---- | - | ------ | -
|                                                                |  | Three months endedDecember 31,           |       
|                                                                |  | 2003                                     |        | 2002 |  
|                                                                |  | (in thousands; except per share amounts) |       
|Revenue  as reported                                           |  | $                                        | 28,599 |      | $ | 19,603 |  
|Revenue  pro forma                                             |  | $                                        | 28,599 |      | $ | 19,633 |  
|                                                                |  |                                         
|Net income (loss)  as reported                                 |  | $                                        | 1,130  |      | $ | (3,938 | )
|Net income (loss)  pro forma                                   |  | $                                        | 1,130  |      | $ | (3,991 | )
|                                                                |  |                                         
|Basic net income (loss) per share  as reported                 |  | $                                        | 0.05   |      | $ | (0.21  | )
|Basic net income (loss) per share  pro forma                   |  | $                                        | 0.05   |      | $ | (0.21  | )
|                                                                |  |                                         
|Diluted net income (loss) per share  as reported               |  | $                                        | 0.04   |      | $ | (0.21  | )
|Diluted net income (loss) per share  pro forma                 |  | $                                        | 0.04   |      | $ | (0.21  | )
|                                                                |  |                                         
|Shares used in the basic per share calculations  as reported   |  |                                          | 22,236 |      |   | 18,906 |  
|Shares used in the basic per share calculations  pro forma     |  |                                          | 22,236 |      |   | 19,061 |  
|                                                                |  |                                         
|Shares used in the diluted per share calculations  as reported |  |                                          | 26,091 |      |   | 18,906 |  
|Shares used in the diluted per share calculations  pro forma   |  |                                          | 26,091 |      |   | 19,061 |  



|(5) | Goodwill and Other Intangible Assets
|--- | ------------------------------------



The Companys intangible assets at December 31, 2003 consist primarily of goodwill acquired in connection with the acquisitions of JadeSail, WebOrder
and netOctopus which the Company is not amortizing, and other intangible assets acquired in connection with the JadeSail and Cayman acquisitions, which the Company is amortizing on a straight-line basis over their estimated useful lives.



Page 6



---

##### Table of Contents

The following chart details the Companys goodwill, maintained in its Web platforms reporting unit,
as of December 31, 2003:



|               |  |                  |  |                             |     |                                   |   |                           |  |                             |   |  |   |      
|-------------- |  | ---------------- |  | --------------------------- | --- | --------------------------------- | - | ------------------------- |  | --------------------------- | - |  | - | -----
|               |  | Acquisition date |  | Balance atSeptember30, 2003 |     | Goodwillacquired duringthe period |   | Goodwillimpairmentcharges |  | Balance at December 31,2003
|               |  |                  |  | (in thousands)             
|Web platforms: |  |                  |  |                             |     |                                   |   |                           |  |                             |   |  |   |      
|JadeSail       |  | Oct-03           |  | $                           |    |                                   | $ | 1,140                     |  | $                           |  |  | $ | 1,140
|WebOrder       |  | Mar-00           |  |                             | 519 |                                   |   |                          |  |                             |  |  |   | 519  
|netOctopus     |  | Dec-98           |  |                             | 465 |                                   |   |                          |  |                             |  |  |   | 465  
|               |  |                  |  |                             |     |                                   |   |                           |  |                             |   |  |   |      
|Total          |  |                  |  | $                           | 984 |                                   | $ | 1,140                     |  | $                           |  |  | $ | 2,124
|               |  |                  |  |                             |     |                                   |   |                           |  |                             |   |  |   |      



The following chart
details the Companys other intangible assets, by reporting unit, as of December 31, 2003:



|                            |  |                               |  |                             |       |                                                 |   |                     |  |                             |     |  |   |      
|--------------------------- |  | ----------------------------- |  | --------------------------- | ----- | ----------------------------------------------- | - | ------------------- |  | --------------------------- | --- |  | - | -----
|                            |  | Acquisitionandacquisitiondate |  | Balance atSeptember30, 2003 |       | Otherintangible assetsacquired duringthe period |   | Amortizationexpense |  | Balance at December 31,2003
|                            |  |                               |  | (in thousands)             
|Internet equipment:         |  |                               |  |                             |       |                                                 |   |                     |  |                             |     |  |   |      
|Acquired technology         |  | CaymanOct-01                  |  | $                           | 4,386 |                                                 | $ |                    |  | $                           | 288 |  | $ | 4,098
|Sales channel relationships |  | CaymanOct-01                  |  |                             | 690   |                                                 |   |                    |  |                             | 86  |  |   | 604  
|                            |  |                               |  |                             |       |                                                 |   |                     |  |                             |     |  |   |      
|Subtotal                    |  |                               |  |                             | 5,076 |                                                 |   |                    |  |                             | 374 |  |   | 4,702
|                            |  |                               |  |                             |      
|Web platforms:              |  |                               |  |                             |       |                                                 |   |                     |  |                             |     |  |   |      
|Acquired technology         |  | JadeSailOct-03                |  |                             |      |                                                 |   | 246                 |  |                             | 12  |  |   | 234  
|Marketing license           |  | Jan-03                        |  |                             | 175   |                                                 |   |                    |  |                             | 175 |  |   |     
|                            |  |                               |  |                             |       |                                                 |   |                     |  |                             |     |  |   |      
|Subtotal                    |  |                               |  |                             | 175   |                                                 |   | 246                 |  |                             | 187 |  |   | 234  
|                            |  |                               |  |                             |       |                                                 |   |                     |  |                             |     |  |   |      
|Total                       |  |                               |  | $                           | 5,251 |                                                 | $ | 246                 |  | $                           | 561 |  | $ | 4,936
|                            |  |                               |  |                             |       |                                                 |   |                     |  |                             |     |  |   |      



|(6) | Inventories
|--- | -----------



Inventories consisted of the following:



|                |  |                  |       |                   |   |      
|--------------- |  | ---------------- | ----- | ----------------- | - | -----
|                |  | December 31,2003 |       | September 30,2003
|                |  | (in thousands)  
|Raw materials   |  | $                | 1,593 |                   | $ | 1,175
|Work in process |  |                  | 64    |                   |   | 213  
|Finished goods  |  |                  | 6,655 |                   |   | 4,580
|                |  |                  |       |                   |   |      
|                |  | $                | 8,312 |                   | $ | 5,968
|                |  |                  |       |                   |   |      



Page 7



---

##### Table of Contents

|(7) | Warranty Liability
|--- | ------------------



Warranty liability is recorded as a component of accrued liabilities on the Companys condensed consolidated balance sheet. For the Companys
Internet equipment products, the Company generally provides a one-year warranty to domestic customers and a two-year warranty to international customers. The Company generally does not offer a warranty on its Web platforms products. On a monthly
basis, the Company accrues its estimated warranty liability based upon a percentage of such months cost of revenues. On a quarterly basis, the Company analyzes its estimated warranty liability based upon historic return rates and records adjustments
to its warranty liability as necessary. Warranty liability consisted of the following:



|                 |  |                             |      |   |                             |   |                   |  |   |                            |   |  |   |      |  
|---------------- |  | --------------------------- | ---- | - | --------------------------- | - | ----------------- |  | - | -------------------------- | - |  | - | ---- | -
|                 |  | Balance atSeptember 30,2003 |      |   | Cost ofwarrantyreplacements |   | Warrantyprovision |  |   | Balance atDecember 31,2003 |  
|                 |  | (in thousands)              |     
|Accrued warranty |  | $                           | (197 | ) |                             | $ | 196               |  | $ | (189                       | ) |  | $ | (190 | )



|(8) | Per Share Calculations
|--- | ----------------------



Basic net income (loss) per share is based on the weighted average number of shares of common stock outstanding during the period. Diluted net income
(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 outstanding using the treasury stock method. The following chart details the Companys
per share calculations for the periods indicated:



|                                                    |  |                                         |        |      |   |        |  
|--------------------------------------------------- |  | --------------------------------------- | ------ | ---- | - | ------ | -
|Three months ended December 31,                     |  | 2003                                    |        | 2002 |  
|                                                    |  | (in thousands; exceptper share amounts) |       
|Calculation of basic net income (loss) per share:   |  |                                         |        |      |   |        |  
|Net income (loss)                                   |  | $                                       | 1,130  |      | $ | (3,938 | )
|Weighted average basic shares outstanding           |  |                                         | 22,236 |      |   | 18,906 |  
|                                                    |  |                                         |        |      |   |        |  
|Basic net income (loss) per share                   |  | $                                       | 0.05   |      | $ | (0.21  | )
|                                                    |  |                                         |        |      |   |        |  
|Calculation of diluted net income (loss) per share: |  |                                         |        |      |   |        |  
|Net income (loss)                                   |  | $                                       | 1,130  |      | $ | (3,938 | )
|Weighted average basic shares outstanding           |  |                                         | 22,236 |      |   | 18,906 |  
|Dilutive effect of options outstanding (a)          |  |                                         | 3,855  |      |   |       |  
|                                                    |  |                                         |        |      |   |        |  
|Weighted average diluted shares outstanding         |  |                                         | 26,091 |      |   | 18,906 |  
|Diluted net income (loss) per share                 |  | $                                       | 0.04   |      | $ | (0.21  | )
|                                                    |  |                                         |        |      |   |        |  

---

| | (a) | All potential dilutive common shares have been excluded from the computation of the diluted loss per share for the three months ended December 31, 2002 as their effect on the loss
per share was anti-dilutive. Potential dilutive common shares excluded from the computation of diluted loss per share for the three months ended December 31, 2002 consisted of options to purchase common stock totaling 140,335 shares when applying
the treasury stock method.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(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



Page 8



---

##### Table of Contents

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:



|                                |  |                   |        |   |             |   |       |       |  |   |                   |   |  |             |        |   |       |   |       |   |  |   |        |  
|------------------------------- |  | ----------------- | ------ | - | ----------- | - | ----- | ----- |  | - | ----------------- | - |  | ----------- | ------ | - | ----- | - | ----- | - |  | - | ------ | -
|                                |  | 2003              |        |   | 2002        |  
|Three months ended December 31, |  | Internetequipment |        |   | Webplatform |   |       | Total |  |   | Internetequipment |   |  | Webplatform |        |   | Total |  
|                                |  | ($ in thousands)  |       
|Revenue                         |  | $                 | 23,946 |   |             | $ | 4,653 |       |  | $ | 28,599            |   |  | $           | 14,596 |   |       | $ | 5,007 |   |  | $ | 19,603 |  
|Cost of revenues                |  |                   | 16,459 |   |             |   | 208   |       |  |   | 16,667            |   |  |             | 10,711 |   |       |   | 429   |   |  |   | 11,140 |  
|                                |  |                   |        |   |             |   |       |       |  |   |                   |   |  |             |        |   |       |   |       |   |  |   |        |  
|Gross profit                    |  | $                 | 7,487  |   |             | $ | 4,445 |       |  |   | 11,932            |   |  | $           | 3,885  |   |       | $ | 4,578 |   |  | $ | 8,463  |  
|Gross margin                    |  |                   | 31     | % |             |   | 96    | %     |  |   | 42                | % |  |             | 27     | % |       |   | 91    | % |  |   | 43     | %
|Unallocated operating expenses  |  |                   |        |   |             |   |       |       |  |   | 10,913            |   |  |             |        |   |       |   |       |   |  |   | 12,394 |  
|                                |  |                   |        |   |             |   |       |       |  |   |                   |   |  |             |        |   |       |   |       |   |  |   |        |  
|Operating income (loss)         |  |                   |        |   |             |   |       |       |  | $ | 1,019             |   |  |             |        |   |       |   |       |   |  | $ | (3,931 | )
|                                |  |                   |        |   |             |   |       |       |  |   |                   |   |  |             |        |   |       |   |       |   |  |   |        |  



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 or Euros. Disaggregated financial information regarding the Companys revenues by geographic region for the three months ended
December 31, 2003 and 2002 is as follows:



|                                |  |                  |        |  |      |   |  |   |        |  |     |  
|------------------------------- |  | ---------------- | ------ |  | ---- | - |  | - | ------ |  | --- | -
|Three months ended December 31, |  | 2003             |        |  | 2002 |  
|                                |  | ($ in thousands) |       
|Europe                          |  | $                | 12,048 |  | 42   | % |  | $ | 4,431  |  | 23  | %
|Canada                          |  |                  | 171    |  | 1    |   |  |   | 229    |  | 1   |  
|Asia Pacific and other          |  |                  | 685    |  | 2    |   |  |   | 402    |  | 2   |  
|                                |  |                  |        |  |      |   |  |   |        |  |     |  
|Subtotal international revenue  |  |                  | 12,904 |  | 45   |   |  |   | 5,062  |  | 26  |  
|United States                   |  |                  | 15,695 |  | 55   |   |  |   | 14,541 |  | 74  |  
|                                |  |                  |        |  |      |   |  |   |        |  |     |  
|Total revenues                  |  | $                | 28,599 |  | 100  | % |  | $ | 19,603 |  | 100 | %
|                                |  |                  |        |  |      |   |  |   |        |  |     |  



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



Customer Information. The Company sells its products to incumbent local exchange carriers (ILECs), competitive local exchange carriers (CLECs), distributors, Internet service providers (ISPs) and directly to end-users. Disaggregated
financial information regarding the Companys customers who accounted for 10% or more of the Companys revenue for the three months ended December 31, 2003 and 2002 is as follows:



|                                         |  |                  |       |  |      |   |  |   |       |  |    |  
|---------------------------------------- |  | ---------------- | ----- |  | ---- | - |  | - | ----- |  | -- | -
|Three months ended December 31,          |  | 2003             |       |  | 2002 |  
|                                         |  | ($ in thousands) |      
|Swisscom AG (Swisscom)                   |  | $                | 8,262 |  | 29   | % |  | $ | 1,023 |  | 5  | %
|SBC Communications, Inc. (SBC)           |  |                  | 2,617 |  | 9    |   |  |   | 2,570 |  | 13 |  
|Covad Communications Group, Inc. (Covad) |  |                  | 2,349 |  | 8    |   |  |   | 2,585 |  | 13 |  



No other customers
during the three months ended December 31, 2003 and 2002 accounted for 10% or more of the Companys total revenues. For the three months ended December 31, 2003, there were three customers that each individually represented at least 5% of the
Companys revenues and in the aggregate, accounted for 46% of the Companys total revenues. For the three months ended December 31, 2002, there were six customers that each individually represented at least 5% of the Companys
revenues and in the aggregate, accounted for 50% of the Companys total revenues.



Page 9



---

##### Table of Contents

The following table sets forth the accounts receivable balance for the customers identified above along
with such data expressed as a percentage of total accounts receivable:



|                                |  |                  |       |  |      |   |  |   |       |  |    |  
|------------------------------- |  | ---------------- | ----- |  | ---- | - |  | - | ----- |  | -- | -
|Three months ended December 31, |  | 2003             |       |  | 2002 |  
|                                |  | ($ in thousands) |      
|Swisscom                        |  | $                | 6,322 |  | 35   | % |  | $ | 1,023 |  | 10 | %
|SBC                             |  |                  | 933   |  | 5    |   |  |   | 1,317 |  | 12 |  
|Covad                           |  |                  | 696   |  | 4    |   |  |   | 277   |  | 3  |  



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



|(10) | Long-Term Investments
|---- | ---------------------



In fiscal year 2001, the Company purchased $2.0 million of Series D Preferred stock in MegaPath Networks Inc. (MegaPath). In fiscal year 2002, the Company
purchased $0.4 million of Series E Preferred Stock in MegaPath. In fiscal year 2003, MegaPath completed an additional financing in which the Company invested $26,000. The Company owns approximately 4.0% of MegaPath. MegaPath offers high-speed DSL
access and eCommerce and Web hosting services to small and medium size businesses. Although there is no public market for MegaPaths stock, the Company believes that the market value of its investment in MegaPath is not less than the
Companys $1.0 million carrying value at December 31, 2003 because the fiscal year 2003 financing in which the Company participated, used the same valuation as the Series E Preferred Stock financing.



During the three months ended December 31, 2003 MegaPath purchased $0.3
million of the Companys products. At December 31, 2003, MegaPaths accounts receivable with the Company was $0.2 million.



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



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



|                              |  |                           |    |       |   |       |  |   |   
|----------------------------- |  | ------------------------- | -- | ----- | - | ----- |  | - | --
|                              |  | Employeeseverancebenefits |    | Other |   | Total
|                              |  | (in thousands)           
|Balance at September 30, 2003 |  | $                         | 15 |       | $ |      |  | $ | 15
|Less: Amounts paid            |  |                           |   |       |   |      |  |   |  
|                              |  |                           |    |       |   |       |  |   |   
|Balance at December 31, 2003  |  | $                         | 15 |       | $ |      |  | $ | 15
|                              |  |                           |    |       |   |       |  |   |   



|(12) | Credit Facility
|---- | ---------------



Credit Facility. In June 2002, the Company entered into a Loan and Security Agreement with Silicon Valley Bank (the Credit Facility). Pursuant to
the Credit Facility, the Company may borrow up to $15.0 million from time to time from Silicon Valley Bank. The actual amount that can be borrowed at any time is determined using a formula relating to the amount of eligible accounts receivable and
inventory at the borrowing date. On November 26, 2003 Silicon Valley Bank amended the tangible net worth covenant in the Credit Facility to provide that the Company must maintain a minimum tangible net worth of $30 million plus 50% of the
Companys net income in each fiscal quarter commencing with the first fiscal quarter ending December 31, 2003 and shall continue effective thereafter, as well as amending Collection of Accounts, Filing of the Transaction Reports, Limits on the
Revolving Loans, Collateral Monitoring Fee and Interest Rate on the Loans as noted below. The Company must 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



Page 10



---

##### Table of Contents

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 1.5 to 1 from January 1, 2003 to the end of the term.



The Credit Facility bears interest at a rate equal to the prime rate (the rate announced by Silicon Valley Bank as its
prime rate) plus 0.75% per annum. Per the November 26, 2003 amendment, as long as no Default or Event of Default has occurred and is continuing, and as long as the Company maintains profitability as of the end of each fiscal quarter, the
Credit Facility will bear interest equal to Silicon Valley Banks prime rate only. At December 31, 2003, the interest rate was 4.0%, Silicon Valley Banks prime rate. The Company may borrow under the Credit Facility
in order to finance working capital requirements for new products and customers, and otherwise for general corporate purposes in the normal course of business.



As of December 31, 2003, the Company had no outstanding borrowings under this credit facility and had a borrowing availability of approximately $10.5
million.



Term Loan A. On February 25, 2003, Silicon
Valley Bank made a term loan to the Company in the original principal amount of $0.2 million. The principal amount of Term Loan A is payable in twenty-four equal monthly payments of principal in the amount of $8,333.33 per month, commencing on March
1, 2003 and continuing until paid in full. $100,000 of the outstanding balance of Term Loan A is recorded as a current liability on the Companys December 31, 2003 condensed consolidated balance sheet because that portion of the principal of
Term Loan A will be repaid within one year of the balance sheet date. The remaining balance is recorded as a long-term liability. Term Loan A bears interest at a rate equal to Silicon Valley Banks prime rate plus 0.75% per annum. Per the
November 26, 2003 amendment, as long as no Default or Event of Default has occurred and is continuing, and as long as the Company maintains profitability as of the end of each fiscal quarter, Term Loan A will bear interest equal to Silicon Valley
Banks prime rate only. At December 31, 2003, the interest rate was 4.0%, Silicon Valley Banks prime rate. Upon the repayment of any portion of Term Loan A, such portion may not be re-borrowed. The outstanding
principal balance of Term Loan A shall be reserved from the amount of credit facility otherwise available to the Company.



Term Loan B.On February 25, 2003, Silicon Valley Bank made a term loan to the Company in the original principal amount of $0.3 million. The
principal amount of Term Loan B is payable in twenty-four equal monthly payments of principal in the amount of $12,500.00 per month, commencing on March 1, 2003 and continuing until paid in full. $150,000 of the outstanding balance of Term Loan B is
recorded as a current liability on the Companys December 31, 2003 condensed consolidated balance sheet because that portion of the principal of Term Loan B will be repaid within one year of the balance sheet date. The remaining balance is
recorded as a long-term liability. Term Loan B bears interest at a rate equal to Silicon Valley Banks prime rate plus 1.00% per annum. Per the November 26, 2003 amendment, as long as no Default or Event of Default has occurred and is continuing, and
as long as the Company maintains profitability as of the end of each fiscal quarter, Term Loan B will bear interest at a rate equal to Silicon Valley Banks prime rate only. At December 31, 2003, the interest rate was 4.0%, Silicon
Valley Banks prime rate. Upon the repayment of any portion of Term Loan B, such portion may not be re-borrowed.



Page 11



---

##### Table of Contents

|(13) | Other Income (Loss), Net
|---- | ------------------------



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



|                                      |  |                |     |   |      |   |     |  
|------------------------------------- |  | -------------- | --- | - | ---- | - | --- | -
|Three months ended December 31,       |  | 2003           |     |   | 2002 |  
|                                      |  | (in thousands) |    
|Interest income                       |  | $              | 42  |   |      | $ | 73  |  
|Interest expense                      |  |                | (29 | ) |      |   | (66 | )
|Foreign currency exchange gain (loss) |  |                | 155 |   |      |   | (14 | )
|                                      |  |                |     |   |      |   |     |  
|Total                                 |  | $              | 168 |   |      | $ | (7  | )
|                                      |  |                |     |   |      |   |     |  



PART I 
FINANCIAL INFORMATION



|ITEM 2. |  | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|------- |  | -------------------------------------------------------------------------------------



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



Company Overview



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



Broadband Equipment. We have developed a comprehensive family of broadband Internet modems, routers and gateways. The substantial
majority of our revenues are generated from sales of our



Page 12



---

##### Table of Contents

broadband Internet products, in particular our DSL modems, routers and gateways. During the three months ended December
31, 2003 and each of fiscal years 2003 and 2002, revenue from the sale of our broadband Internet products have accounted for 84%, 79% and 71%, respectively, of our total revenues. Our broadband equipment products allow the transport of high-speed
data and enable telecommunications carriers to provide cost-effective and high-speed services over existing copper infrastructure. This family of products serves an array of wide area network (WAN) interfaces including DSL, cable and T1, and local
area network (LAN) interfaces including Wi-Fi, Ethernet and Universal Serial Bus (USB). Our broadband Internet products are designed to deliver high performance, excellent reliability, scalability, and affordability, and to provide a platform from
which our carrier and service provider customers can offer their customers additional services and applications. We believe key components of our success are comprehensive interoperability with leading central office DSL equipment, a common firmware
platform across all versions of our broadband Internet products, and technology such as our 3-D Reach technology which allows our Wi-Fi products to achieve greater and more reliable wireless coverage than is provided by many of our competitors. When reading our condensed consolidated
statement of operations, revenues and cost of revenues related to the sale of our broadband Internet equipment are classified as Internet equipment.



Broadband Services. Our service delivery platform includes the netOctopus suite of server software products and systems management software products. The
netOctopus suite includes: EdgeManager, which enables remote support and centralized management of installed broadband gateways and real-time customer support; eCare and Desktop Support, which enable broadband service providers and other enterprise
customers to support their customers or employees by remotely viewing and operating the customers desktop computer; and, our Web eCommerce server solution that provides no assembly required Web sites and online stores that we call
eSites and eStores, with a wide variety of vertical market content packages to suit many needs. Our customers for this product include franchisees to sole proprietors. Our systems management software includes Timbuktu, a systems management tool
providing remote computer control, configuration, support and file transfer for both Macintosh and Windows based personal computers. We hold one United States patent relating to eCare and Timbuktu systems management software. The term of this patent
is through August 2010. During the three months ended December 31, 2003 and each of fiscal years 2003 and 2002, revenue from the sale of our broadband services have accounted for 16%, 21% and 29%, respectively, of our total revenues. When reading
our condensed 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 primarily market and sell our products in the United States, Canada, Europe and the Asia
Pacific region through a field sales organization and through selected distributors. Our broadband equipment products are generally sold directly to our carrier and service provider customers or in some cases to distributors who then resell our
products. Our broadband service products are generally sold directly to our customers. We primarily sell our products to:



| |  | Telecommunication carriers, including: incumbent local exchange carriers (ILECs), such as Swisscom AG (Swisscom), SBC Communications Inc. (SBC), BellSouth Telecommunications, Inc.
(BellSouth), Eircom Ltd. (Eircom) and Verizon Communications Inc.; competitive local exchange carriers (CLECs), including Covad Communications Group, Inc. (Covad) and NextGenTel; Internet service providers (ISPs) and managed service providers
(MSPs), including EarthLink, Inc. (EarthLink), MegaPath Networks, Inc. (MegaPath) and Netifice Communications, Inc.; and Internet exchange carriers (IXCs) including Sprint Corporation and WorldCom, Inc. which currently conducts business under the
MCI brand name;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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



Historically, we have primarily depended upon the ability of our customers to successfully offer DSL broadband services. Prior to our acquisition of Cayman in October 2001, our largest customers were CLECs. Many CLECs
filed for protection under the Bankruptcy Act or ceased operations. Covad, which currently is our largest CLEC customer and historically has been among our largest customers, is expecting operating losses and negative cash flow to continue into
2004.



Page 13



---

##### Table of Contents

As a result of financial and operational difficulties encountered by many of our CLEC customers, which primarily had the
business market for DSL services, we acted aggressively to expand our customer base and markets served. As a result of our acquisition of Cayman, we have expanded our customer base to include two ILEC customers, SBC and BellSouth, to which we
previously had not sold our broadband equipment, and have developed new products designed for the residential market for ADSL services, which have enabled us to win new customers such as Swisscom in Switzerland, EarthLink in the United States, and
Eircom in Ireland. We expect that the success of our operations will remain substantially dependent upon our ability to develop and enhance products that meet the needs of both the residential and business market for ADSL and Wi-Fi services and
requirements of our ILEC customers. Our major customers are significantly larger than we are, and are able to exert a high degree of influence over our business. For example, our larger customers may be able to reschedule or cancel orders without
significant penalty and may force lengthy approval and purchase processes before purchasing our products.



Critical Accounting Policies and Estimates



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



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



We recognize
software revenue in accordance with Statement of Position (SOP) 97-2, Software Revenue Recognition, as amended. We generally have multiple element arrangements for our software revenue including software licenses and maintenance. We allocate the
arrangement fee to each of the elements based on the residual method utilizing vendor specific objective evidence (VSOE) for the undelivered elements, regardless of any separate prices stated within the contract for each element. VSOE for
maintenance is generally based on the price the customer would pay when sold separately. Software license revenue is recognized when a non-cancelable license agreement has been signed or a properly authorized firm purchase order is received and the
customer acknowledges an unconditional obligation to pay, the software product has been delivered, there are no uncertainties surrounding product acceptance, the fees are fixed and determinable, and collection is considered probable. Maintenance
revenues, including revenues included in multiple element arrangements, are deferred and recognized ratably over



Page 14



---

##### Table of Contents

the related contract period, generally twelve months. We recognize revenue from long-term software development contracts
using the percentage of completion method in accordance with SOP 81-1, Accounting for Performance of Construction-Type and Certain Production-Type Contracts. Revenue is recognized based on our achievement, and the customers acceptance, of
certain milestones agreed upon by both parties with consideration given to the number of hours expended as compared to hours budgeted. On a quarterly basis, we review costs incurred to date along with an estimate to complete and compare the sum of
such amounts against the revenue expected from the arrangement to determine the need for an accrual for loss contracts.



We apply the provisions of Emerging Issues Task Force (EITF) Issue No. 00-21, Revenue Arrangements with Multiple Deliverables, to arrangements that involve the
delivery or performance of multiple products, services and/or rights to use assets. Our enhanced web site services generally involve the delivery of multiple services. We allocate a portion of the arrangement fee to the undelivered element,
generally web site hosting and maintenance, based on the residual method utilizing fair value for the undelivered elements, regardless of any separate prices stated within the contract for each element. Fair value for hosting and maintenance is
based on the price the customer would pay when sold separately. Fair value for the delivered elements, primarily fulfillment services, is based on the residual amount of the total arrangement fees after deducting the fair value for the undelivered
elements. Fulfillment revenue is recognized when a properly authorized firm purchase order is received and the customer acknowledges an unconditional obligation to pay, there are no uncertainties surrounding product acceptance, the fees are fixed
and determinable, collection is considered probable and the fulfillment has been completed. Hosting and maintenance revenues are deferred and recognized ratably over the related service period, generally twelve months. We record unearned revenue for
software and service arrangements when cash has been received from the customer and the arrangement does not qualify for revenue recognition under our revenue recognition policy. We record accounts receivable for software and service arrangements
when the arrangement qualifies for revenue recognition and cash or other consideration has not been received from the customer.



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



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 standard cost based upon the first-in, first out (FIFO) method which approximates 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.



Warranty Liability. Our warranty liability is an estimate of our future product warranty returns. For our Internet equipment products, we generally provide a one-year warranty to domestic customers and a
two-year warranty to international customers. We do not generally offer a warranty on our Web platforms products. On a monthly basis, we accrue for our estimated warranty liability based upon a percentage of such months cost of revenues. On a
quarterly basis, we analyze our estimated warranty liability based upon historic return rates and record adjustments to the warranty liability as necessary.



Provision for Income Taxes. We recorded a provision for income tax expense for the three months ended December 31, 2003. This provision consists of amounts accrued
for our estimated fiscal year 2004 domestic federal and state income tax liability as well as an estimate of the foreign income tax expense to which our foreign subsidiaries are subject. This provision is based upon our estimated fiscal year 2004
net income before income taxes and takes into consideration the utilization of our net operating loss carry



Page 15



---

##### Table of Contents

forwards. To the extent our estimate of fiscal year 2004 net income before income tax changes, our provision for income
taxes will change as well. Historically, we have not recorded a provision for income tax expense because we had been generating net losses. Furthermore, we have not recorded an income tax benefit for the fiscal years 2003 and 2002 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 ability to realize our deferred tax assets which warrants a full
valuation allowance in our financial statements. The factors considered included prior losses, inconsistent profits, and lack of carry-back potential to realize our deferred tax assets. Based on our estimates for fiscal year 2004 and beyond, we
believe the uncertainty regarding the ability to realize 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 reverse all or a portion of our
valuation allowance which will result in an income tax benefit.



Goodwill. We test our goodwill for impairment annually or whenever events or changes in circumstances indicate that the carrying amount may be impaired. The impairment testing is performed in two steps: (i) the determination of
impairment, based upon the fair value of a reporting unit as compared to its carrying value, and (ii) if there is an indication of impairment, this step measures the amount of impairment loss by comparing the implied fair value of goodwill with the
carrying amount of that goodwill. We perform our annual impairment test, as required by SFAS No. 142, in our fiscal fourth quarter. (See Note 5 of Notes to Unaudited Condensed Consolidated Financial Statements.)



Impairment of Long-Lived Assets, Including Other Intangible Assets. We evaluate our
long-lived assets, including other intangible assets in accordance with SFAS No. 144 and test our long-lived assets and other intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset
may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the estimated undiscounted future net cash flows expected to be generated by the asset group that represents the
lowest level for which identifiable cash flows exist. If an asset group is considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount exceeds the fair value of the assets and is allocated to the
long-lived assets of the asset group on a pro rata basis. Fair value is estimated using the discounted cash flow method. Assets to be disposed of are reported at the lower of carrying values or fair values, less costs of disposal. (See Note 5 of
Notes to Consolidated Financial Statements.)



Accounting for Stock-based
Compensation. We maintain stock option plans under which we may grant incentive stock options and non-statutory stock options. SFAS No. 123, Accounting for Stock-Based Compensation, encourages, but does not require, companies to record
compensation cost for stock-based employee compensation plans based on the fair market value of options granted. We account for stock based compensation using the intrinsic value method prescribed in Accounting Principles Board (APB) No. 25,
Accounting for Stock Issued to Employees, and related interpretations. Because the grant price equals the market price on the date of grant for all options we issue, we do not recognize compensation expense for stock options granted to
employees. In accordance with SFAS No. 123, we recognize as an expense, the fair value of options and other equity instruments granted to non-employees. We have not issued any stock options to non-employees since fiscal year 2001, excluding options
issued to our directors. In December 2002, the Financial Accounting Standards Board (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.



Long-Term Investments. 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



Page 16



---

##### Table of Contents

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. Future adverse changes in
market conditions or poor operating results of underlying investments could result in significant additional impairment charges in the future.



Liquidity and Capital Resources



The following sections discuss the effects of changes in our balance sheets, cash flows and commitments on our liquidity and capital resources. As of December 31, 2003,
our principal source of liquidity included cash and cash equivalents in the amount of $26.4 million, a credit facility with a maximum borrowing capacity of up to $15.0 million from which, at December 31, 2003, we had no outstanding borrowings, and
two term loans from which we had amounts outstanding of $0.3 million.



Cash
and Cash Equivalents. The following table sets forth our cash and cash equivalents as of December 31 and September 30, 2003.



|                          |  |                   |        |                    |   |                     |  |   |       |  |    |  
|------------------------- |  | ----------------- | ------ | ------------------ | - | ------------------- |  | - | ----- |  | -- | -
|                          |  | December 31, 2003 |        | September 30, 2003 |   | Increase/(decrease) | 
|                          |  |                   | $      |                    | % |                    
|                          |  | ($ in thousands)  |        |                    |  
|Cash and cash equivalents |  | $                 | 26,423 |                    | $ | 22,208              |  | $ | 4,215 |  | 19 | %



For the three months ended December
31, 2003, cash and cash equivalents increased primarily due to the proceeds we received from the issuance of our common stock and our operating activities.



Net Cash Provided by Operating Activities



During the three months ended December 31, 2003, our operating activities provided $0.3 million of cash. Excluding the changes in operating assets and liabilities, our
operating activities generated $2.4 million of cash primarily due to our net income, which was a result of increased revenues and gross profits generated by our Internet equipment products, and adding back non-cash charges of depreciation and
amortization. Changes in our operating assets and liabilities used $2.1 million of cash primarily as a result of increased inventory purchases as well as increased accounts receivable balances partially offset by increased accounts payable balances.
Our inventory increased as a result of increased ocean shipments of in-transit finished goods and accounts receivables increased as a result of increased purchases by our larger European customers to which we provided payments terms that are longer
than our customary terms.



Net Cash Used in Investing Activities



During the three months ended December 31, 2003, our investing activities
used approximately $0.5 million of cash. We purchased approximately $0.4 million of capital equipment primarily for use in our development and manufacturing operations and we used approximately $0.1 million in connection with our acquisition of
JadeSail for certain professional fees and payments to shareholders.



Net
Cash Provided from Financing Activities



During the three months ended
December 31, 2003, we generated $4.4 million of cash primarily through employee stock option exercises. We expect that while our stock price remains above the average price of our outstanding stock options, which at December 31, 2003 was $4.34,
employees will continue to exercise their stock options thereby generating cash. Additionally, we expect that purchases of our stock through our Employee Stock Purchase Plan (ESPP) will also generate cash.



Page 17



---

##### Table of Contents

Commitments



As of December 31, 2003, we had commitments that consisted of facilities and equipment under operating lease agreements and both short and long-term borrowing
obligations. 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 cash payments
with respect to such commitments.



|                                         |  |                |       |      |   |       |  |      |     |      |   |            |  |       |     |  |   |   |  |   |      
|---------------------------------------- |  | -------------- | ----- | ---- | - | ----- |  | ---- | --- | ---- | - | ---------- |  | ----- | --- |  | - | - |  | - | -----
|Fiscal years ended September 30,         |  | 2004(a)        |       | 2005 |   | 2006  |  | 2007 |     | 2008 |   | thereafter |  | Total
|                                         |  | (in thousands)
|Facility and operating lease commitments |  | $              | 1,418 |      | $ | 1,549 |  | $    | 996 |      | $ | 1,022      |  | $     | 623 |  | $ |  |  | $ | 5,608
|Payments under term loans                |  |                | 187   |      |   | 105   |  |      |    |      |   |           |  |       |    |  |   |  |  |   | 292  
|                                         |  |                |       |      |   |       |  |      |     |      |   |            |  |       |     |  |   |   |  |   |      
|Total commitments                        |  | $              | 1,605 |      | $ | 1,654 |  | $    | 996 |      | $ | 1,022      |  | $     | 623 |  | $ |  |  | $ | 5,900
|                                         |  |                |       |      |   |       |  |      |     |      |   |            |  |       |     |  |   |   |  |   |      

---

|(a) | Represents cash commitments for remaining 9 months of fiscal year 2004.
|--- | -----------------------------------------------------------------------



At December 31, 2003, we had no borrowings under our credit facility and approximately $0.3 million borrowed under our term loans. We currently believe we have enough
cash and cash equivalents and that our business will generate sufficient cash to cover our working capital needs for both the short and long-term. To the extent our business does not generate sufficient cash to cover our working capital needs we
would utilize our credit facility, which currently has a maximum borrowing capacity of up to $15.0 million. As of December 31, 2003, our borrowing availability under our credit facility was approximately $10.5 million and we did not have any
material commitments for capital expenditures.



Trade Accounts
Receivable, Net. The following table sets forth our trade accounts receivables, net as of December 31 and September 30, 2003.



|                               |  |                   |        |                    |   |                      |  |   |       |  |   |  
|------------------------------ |  | ----------------- | ------ | ------------------ | - | -------------------- |  | - | ----- |  | - | -
|                               |  | December 31, 2003 |        | September 30, 2003 |   | Increase/ (decrease) | 
|                               |  |                   | $      |                    | % |                     
|                               |  | ($ in thousands)  |       
|Trade accounts receivable, net |  | $                 | 18,148 |                    | $ | 16,755               |  | $ | 1,393 |  | 8 | %
|Days sales outstanding (DSO)   |  |                   | 58     |                    |   | 60                   |  |   |       |  |   |  



Changes in our trade accounts
receivable, net balances and days sales outstanding are primarily due to the timing of sales within the quarter, increased revenues and collections performance. Our targeted range for DSO is 50 to 60 days. Trade accounts receivable increased
primarily due to our increased revenues.



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



|                |  |                   |       |                    |   |                      |  |   |       |  |    |  
|--------------- |  | ----------------- | ----- | ------------------ | - | -------------------- |  | - | ----- |  | -- | -
|                |  | December 31, 2003 |       | September 30, 2003 |   | Increase/ (decrease) | 
|                |  |                   | $     |                    | % |                     
|                |  | ($ in thousands)  |      
|Inventory       |  | $                 | 8,312 |                    | $ | 5,968                |  | $ | 2,344 |  | 39 | %
|Inventory turns |  |                   | 9.5   |                    |   | 7.9                  |  |   |       |  |    |  



Inventory consists primarily of raw
material, work in process, and finished goods. Inventory increased primarily due to an increase of finished goods inventory of $2.1 million as a result of increased ocean shipments of in-transit finished goods and inventory turns have improved
primarily as a result of increased sales and better inventory management. Inventory levels may increase in the future if our



Page 18



---

##### Table of Contents

customers do not provide us with accurate forecast, sell-through and on-hand inventory information, thereby impairing our
ability to correctly forecast expected customer demand, or if customers defer or otherwise delay purchases or shipments. As a result of rapidly changing technology and customer requirements, we continue to closely monitor our management of inventory
as we balance the need to maintain adequate inventory levels to ensure competitive lead times against the risk of inventory obsolescence.



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



The following table sets forth for the periods indicated certain unaudited condensed consolidated statement of operations data. To help
understand the data, each item of data is also shown as a percentage of total revenues along with the dollar and percentage change from the same period in the prior fiscal year.



|                                                    |  |                  |        |  |      |   |  |   |        |   |   |     |                     |  |   |        |   |  |       |  
|--------------------------------------------------- |  | ---------------- | ------ |  | ---- | - |  | - | ------ | - | - | --- | ------------------- |  | - | ------ | - |  | ----- | -
|                                                    |  |                  |        |  |      |   |  |   |        |   |   |     | Increase/(decrease) | 
|Three months ended December 31,                     |  | 2003             |        |  | 2002 |   |  | $ |        |   | % |    
|                                                    |  | ($ in thousands) |       
|REVENUES:                                           |  |                  |        |  |      |   |  |   |        |   |   |     |                     |  |   |        |   |  |       |  
|Internet equipment                                  |  | $                | 23,946 |  | 84   | % |  | $ | 14,596 |   |   | 74  | %                   |  | $ | 9,350  |   |  | 64    | %
|Web platform licenses and services                  |  |                  | 4,653  |  | 16   |   |  |   | 5,007  |   |   | 26  |                     |  |   | (354   | ) |  | (7    | )
|                                                    |  |                  |        |  |      |   |  |   |        |   |   |     |                     |  |   |        |   |  |       |  
|Total revenues                                      |  |                  | 28,599 |  | 100  |   |  |   | 19,603 |   |   | 100 |                     |  |   | 8,996  |   |  | 46    |  
|                                                    |  |                  |        |  |      |   |  |   |        |   |   |     |                     |  |   |        |   |  |       |  
|COST OF REVENUES:                                   |  |                  |        |  |      |   |  |   |        |   |   |     |                     |  |   |        |   |  |       |  
|Internet equipment                                  |  |                  | 16,459 |  | 57   |   |  |   | 10,711 |   |   | 55  |                     |  |   | 5,748  |   |  | 54    |  
|Web platform licenses and services                  |  |                  | 208    |  | 1    |   |  |   | 429    |   |   | 2   |                     |  |   | (221   | ) |  | (52   | )
|                                                    |  |                  |        |  |      |   |  |   |        |   |   |     |                     |  |   |        |   |  |       |  
|Total cost of revenues                              |  |                  | 16,667 |  | 58   |   |  |   | 11,140 |   |   | 57  |                     |  |   | 5,527  |   |  | 50    |  
|                                                    |  |                  |        |  |      |   |  |   |        |   |   |     |                     |  |   |        |   |  |       |  
|GROSS PROFIT                                        |  |                  | 11,932 |  | 42   |   |  |   | 8,463  |   |   | 43  |                     |  |   | 3,469  |   |  | 41    |  
|                                                    |  |                  |        |  |      |  
|OPERATING EXPENSES:                                 |  |                  |        |  |      |   |  |   |        |   |   |     |                     |  |   |        |   |  |       |  
|Research and development                            |  |                  | 3,961  |  | 14   |   |  |   | 3,983  |   |   | 20  |                     |  |   | (22    | ) |  | (1    | )
|Research and development project cancellation costs |  |                  |       |  |     |   |  |   | 606    |   |   | 3   |                     |  |   | (606   | ) |  | (100  | )
|Selling and marketing                               |  |                  | 5,315  |  | 19   |   |  |   | 5,661  |   |   | 29  |                     |  |   | (346   | ) |  | (6    | )
|General and administrative                          |  |                  | 1,251  |  | 4    |   |  |   | 1,428  |   |   | 7   |                     |  |   | (177   | ) |  | (12   | )
|Amortization of other intangible assets             |  |                  | 386    |  | 1    |   |  |   | 374    |   |   | 2   |                     |  |   | 12     |   |  | 3     |  
|Restructuring costs                                 |  |                  |       |  |     |   |  |   | 342    |   |   | 2   |                     |  |   | (342   | ) |  | (100  | )
|                                                    |  |                  |        |  |      |   |  |   |        |   |   |     |                     |  |   |        |   |  |       |  
|Total operating expenses                            |  |                  | 10,913 |  | 38   |   |  |   | 12,394 |   |   | 63  |                     |  |   | (1,481 | ) |  | (12   | )
|                                                    |  |                  |        |  |      |   |  |   |        |   |   |     |                     |  |   |        |   |  |       |  
|OPERATING INCOME (LOSS)                             |  |                  | 1,019  |  | 4    |   |  |   | (3,931 | ) |   | (20 | )                   |  |   | 4,950  |   |  | (126  | )
|                                                    |  |                  |        |  |      |  
|Other income (loss), net                            |  |                  | 168    |  | 0    |   |  |   | (7     | ) |   | 0   |                     |  |   | 175    |   |  | (2500 | )
|                                                    |  |                  |        |  |      |   |  |   |        |   |   |     |                     |  |   |        |   |  |       |  
|Income (loss) before income taxes                   |  |                  | 1,187  |  | 4    |   |  |   | (3,938 | ) |   | (20 | )                   |  |   | 5,125  |   |  | (140  | )
|                                                    |  |                  |        |  |      |   |  |   |        |   |   |     |                     |  |   |        |   |  |       |  
|Provision for income taxes                          |  |                  | 57     |  | 0    |   |  |   |       |   |   |    |                     |  |   | 57     |   |  |      |  
|                                                    |  |                  |        |  |      |   |  |   |        |   |   |     |                     |  |   |        |   |  |       |  
|NET INCOME (LOSS)                                   |  | $                | 1,130  |  | 4    | % |  | $ | (3,938 | ) |   | (20 | )%                  |  | $ | (5,068 | ) |  | (129  | )
|                                                    |  |                  |        |  |      |   |  |   |        |   |   |     |                     |  |   |        |   |  |       |  
|Per share data, net income (loss):                  |  |                  |        |  |      |   |  |   |        |   |   |     |                     |  |   |        |   |  |       |  
|Basic net income (loss) per share                   |  | $                | 0.05   |  |      |   |  | $ | (0.21  | ) |   |     |                     |  | $ | 0.26   |   |  | (124  | )
|                                                    |  |                  |        |  |      |   |  |   |        |   |   |     |                     |  |   |        |   |  |       |  
|Diluted net income (loss) per share                 |  | $                | 0.04   |  |      |   |  | $ | (0.21  | ) |   |     |                     |  | $ | 0.25   |   |  | (119  | )
|                                                    |  |                  |        |  |      |   |  |   |        |   |   |     |                     |  |   |        |   |  |       |  
|Shares used in the basic per share calculation      |  |                  | 22,236 |  |      |   |  |   | 18,906 |   |   |     |                     |  |   | 3,330  |   |  | 18    |  
|                                                    |  |                  |        |  |      |   |  |   |        |   |   |     |                     |  |   |        |   |  |       |  
|Shares used in the diluted per share calculation    |  |                  | 26,091 |  |      |   |  |   | 18,906 |   |   |     |                     |  |   | 7,185  |   |  | 38    | %
|                                                    |  |                  |        |  |      |   |  |   |        |   |   |     |                     |  |   |        |   |  |       |  



REVENUES



Total revenues for the three months ended December 31, 2003
increased from the three months ended December 31, 2002 primarily due to increased revenues from the sale of our broadband Internet equipment products partially offset by reduced revenues from the sale of our Web platform licenses and services.



Page 19



---

##### Table of Contents

Internet Equipment. Broadband Internet equipment revenues increased for the three months ended December 31, 2003
from the three months ended December 31, 2002 primarily due to increased international volumes of our ADSL Internet equipment to Swisscom, and sales to Eircom, which was not a customer during the three months ended December 31, 2002. Volumes to
Swisscom increased as their demand for our Internet equipment products increased for their residential broadband Internet services. These increases were partially offset by the effect of declining average unit 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 changes as we continue to win new customers which serve the residential market for ADSL
broadband Internet services. Historically, residential-class products, and ADSL products in general, have carried a lower average unit-selling price than similar business-class products. Similar to the three months ended March 31, 2003, we do not
expect our revenues to grow for the three months ended March 31, 2004 from the three months ended December 31, 2003. We believe that increased sales volumes from new customers and new opportunities with existing customers will help offset any
declines in revenues. See the Product Volume and Average Selling Price Information section below, which sets forth our volumes and average selling prices.



Web Platform Licenses and Services. Web platforms revenues decreased for the three months ended December 31, 2003 from the three
months ended December 31, 2002 because the three months ended December 31, 2002 included revenue from a software integration project that was completed during the three months ended September 30, 2003 as well as reduced revenues from the licensing
of our help-desk products. We had recorded revenue with respect to the software integration project during the three months ended December 31, 2002. These declines were partially offset by revenues from the sale of a license to the software we
acquired in connection with our acquisition of JadeSail. We expect our Web platforms revenues in the three months ended March 31, 2004 could potentially be unchanged from and may even be less than Web platforms revenues from the three months ended
December 31, 2003 to the extent we are not able to increase the licensing of our help-desk products or the base of our recurring revenue does not increase.



Product Volumes and Average Selling Price Information



The following tables sets forth for the periods indicated, volumes and average selling prices, excluding accessories, of our broadband Internet equipment products. The
decline in average selling prices resulted from increased sales of lower price residential class products as compared to higher price business class products, as well as competitive market conditions generally. We expect that average-selling prices
will continue to decline for the same reasons, although at a lesser rate.



|                                |  |      |         |      |   |                     |  |   |         |   |  |     |   
|------------------------------- |  | ---- | ------- | ---- | - | ------------------- |  | - | ------- | - |  | --- | --
|                                |  |      |         |      |   | Increase/(decrease) | 
|Three months ended December 31, |  | 2003 |         | 2002 |   | Units/$             |  |   | %       |  
|Product volumes                 |  |      | 262,180 |      |   | 84,706              |  |   | 177,474 |   |  | 210 | % 
|Average selling prices          |  | $    | 92      |      | $ | 144                 |  | $ | (52     | ) |  | (36 | )%



COST
OF REVENUES



Cost of revenues consists primarily of material costs of our
Internet equipment products. Total cost of revenues increased for the three months ended December 31, 2003 from the three months ended December 31, 2002 primarily as a result of increased sales volumes of our ADSL broadband Internet equipment. To
the extent that component costs increase as a result of improved general economic conditions and customer demand, we expect our cost of revenues as a percent of revenue may increase in 2004. To help offset any cost increase, we intend to leverage
the increasing volumes with our contract manufacturers and continue to pursue product redesigns and alternative, lower cost components for our products in an effort to reduce our products material costs.



Page 20



---

##### Table of Contents

Gross Margin



Our total gross margin decreased to 42% for the three months ended December 31, 2003 from 43% for the three months ended December 31, 2002 primarily due to the increased
proportion of revenues from our Internet equipment products, which have a lower gross margin than our Web platforms products.



Internet Equipment. Broadband Internet equipment gross margin increased to 31% for the three months ended December 31, 2003 from 27% for the three months ended
December 31, 2002 primarily due to reduced manufacturing variances and reduced product costs. Product costs have decreased primarily due to our ability to leverage our economies of scale, redesign our products for greater cost savings, incorporate
alternative lower cost components, and introduce new products that have a lower average percent of cost of revenues. The primary factors influencing our Internet equipment gross margin are product mix, our ability to drive down product costs based
on negotiations with our vendors and increased cost absorption due to increased volumes, and the timing of these cost reductions relative to market pricing conditions.



Web Platform Licenses and Services. Web platforms gross margin increased to 96% for the three months ended December 31, 2003 from 91%
for the three months ended December 31, 2002 because there were no engineering labor costs reclassed to cost of revenues during the three months ended December 31, 2003 as there were in the three months ended December 31, 2002. We completed the
software integration project, which required the reclassification of certain engineering labor costs from research and development to cost of revenues, during the three months ended September 30, 2003. Excluding the effects of this project, Web
platforms gross margin for the three months ended December 31, 2002 was also 96%.



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



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



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



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



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



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



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



OPERATING EXPENSES



Research and Development. Research and development expenses consist primarily of employee related expenses, depreciation and amortization, development related
expenses such as product prototyping, design and testing, and overhead allocations. Research and development expenses decreased for the three months ended December 31, 2003 from the three months ended December 31, 2002 primarily due to reduced
product prototyping and design, depreciation, facility and telecom expenses. These decreases were partially offset by increased employee related costs. The increase in employee related costs is a result of the transfer of employee costs associated
with our software integration project from research and development expenses to Web platform cost of revenues during the three months ended December 31, 2002. We completed this project during the three months ended September 30, 2003 and as such,
there were no engineering labor costs transferred to cost of revenues during the three months ended December 31, 2003.



Page 21



---

##### Table of Contents

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 2004 as we continue to expand the breadth and depth of our product offerings. We believe our process for developing software is essentially completed concurrently with the
establishment of technological feasibility and therefore we do not capitalize software development costs.



Selling and Marketing. Selling and marketing expenses consist primarily of salary and commission expense for our sales force, travel and entertainment, advertising and promotional expenses, product marketing,
customer service and support costs. Selling and marketing expenses decreased for the three months ended December 31, 2003 from the three months ended December 31, 2002 primarily due to decreased headcount and employee related expenses as well as
decreased commission expense as a result of changes to sales compensation plans, facility and telecom expenses. Our average selling and marketing staff decreased by six employees to 132 employees for the three months ended December 31, 2003 from 138
employees for the three months ended December 31, 2002 resulting in approximately $0.4 million in reduced employee related and commission expenses. These decreases were partially offset by increased marketing program expenses.



We do not currently expect selling and marketing expenses will increase significantly during
the remainder of fiscal year 2004.



General and Administrative. General
and administrative expenses consist primarily of employee related expenses, legal and accounting fees as well as insurance costs. Included in general and administrative expenses for the three months ended December 31, 2002 are approximately $0.2
million of expenses related to the relocation of our headquarters facility from Alameda, California to Emeryville, California. Excluding the costs related to this relocation, general and administrative expenses for the three months ended December
31, 2002 were approximately $1.2 million.



We expect general and administrative
expenses will increase during fiscal year 2004 resulting from costs related to Sarbanes-Oxley compliance.



Amortization of Other Intangible Assets. For the three months ended December 31, 2003, amortization of other intangible assets represents the amortization of intangible assets with identifiable lives related to
our acquisitions of JadeSail and Cayman. For the three months ended December 31, 2002, amortization of other intangible assets represents the amortization of intangible assets with identifiable lives related to our acquisition of Cayman (See Notes 4
and 5 of Notes to Unaudited Condensed Consolidated Financial Statements).



Restructuring Costs. There were no restructuring costs for the three months ended December 31, 2003. For the three months ended December 31, 2002, restructuring costs primarily consist 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. (See Note 11 of Notes To Unaudited Condensed Consolidated Financial Statements).



NET INCOME (LOSS) and NET INCOME (LOSS) PER SHARE



For the three months ended December 31, 2003, we generated net income of
approximately $1.1 million and basic and diluted net income per share of $0.05 and $0.04, respectively. For the three months ended December 31, 2002, we had a net loss of approximately $3.9 million and basic and diluted net loss per



Page 22



---

##### Table of Contents

share of ($0.21). Our net results improved year over year as discussed in the preceding sections. For the computation of
net income (loss) per share, see Note 8 of Notes to Unaudited Condensed Consolidated Financial Statements.



Shares Used in the Computation of Per Share Data. The following table provides a detailed schedule explaining the increase in our basic and diluted shares outstanding from December 31, 2002 to December 31,
2003, which is a significant component of our net income (loss) per share (in thousands):





|                                                                                                            |  |       
|----------------------------------------------------------------------------------------------------------- |  | ------
|Common stock outstanding as of December 31, 2002                                                            |  | 18,907
|Common stock issued from: Private placement                                                                 |  | 1,414 
|Purchases from ESPP                                                                                         |  | 756   
|Options exercised                                                                                           |  | 555   
|                                                                                                            |  |       
|Common stock outstanding at September 30, 2003                                                              |  | 21,632
|Weighted average common stock issued from options exercised during the three months ended December 31, 2003 |  | 449   
|Weighted average common stock issued from the acquisition of JadeSail(a)                                    |  | 155   
|                                                                                                            |  |       
|Shares used in the basic per share calculation for the three months ended December 31, 2003                 |  | 22,236
|Dilutive effect of options outstanding during the three months ended December 31, 2003                      |  | 3,855 
|                                                                                                            |  |       
|Shares used in the diluted per share calculation for the three months ended December 31, 2003               |  | 26,091
|                                                                                                            |  |       

---

|(a) | See Note 4 of Notes to Unaudited Condensed Consolidated Financial Statements and Part II, Item 2Changes in Securities and Use of Proceeds, for additional information with
respect to the shares issued in connection with the JadeSail acquisition.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Risk Factors



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



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



Although
we produced operating income of $1.0 million and generated $4.2 million of cash for the three months ended December 31, 2003, we incurred losses from continuing operations of $8.3 million, $34.3 million and $41.7 million for fiscal years ended
September 30, 2003, 2002 and 2001, respectively and used $2.8 million, $10.7 million and $2.1 million of cash during fiscal years ended September 30, 2003, 2002 and 2001, respectively. Our cash and cash equivalents totaled $26.4 million at December
31, 2003. Even though we have recently reached profitability and have generated cash, we may not be able to sustain or increase profitability or generate cash on a quarterly or annual basis.



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



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



Page 23



---

##### Table of Contents

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



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



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



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



| |  | 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.
| | - | ----------------------



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



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



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



Page 24



---

##### Table of Contents

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



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



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



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



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



If we are unable to overcome these challenges, our business will be materially and adversely affected.



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



Prior to our acquisition of Cayman in October 2001, our most significant customers were CLECs and ISPs. Since the middle of calendar year 2000, most of our CLEC and ISP
customers have experienced business difficulties and some have filed for bankruptcy or ceased operations. The financing market for CLECs and ISPs has been effectively closed since calendar year 2001, resulting in significantly decreased sales to
CLECs and ISPs and write-offs of outstanding accounts receivable. The difficulties of these CLEC and ISP customers have materially and adversely affected our operating results. Covad, which emerged from bankruptcy in December 2001, was our second
largest customer during fiscal year 2003, and it continues to incur losses.



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



We rely on a small number of customers for a large portion of our revenues. For the three months ended December 31, 2003 and the fiscal year
ended September 30, 2003, there were three and four customers, respectively, that each individually represented at least 5% of our revenues and in the aggregate, accounted for 46% and 47%, respectively, of our total revenues. Our revenues will
decline and our business may be significantly harmed if one or more of our significant customers stop buying our products, or reduce or delay purchases of our products.



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



A substantial portion of our revenues is derived from
sales to international customers, mainly in Europe. For the three months ended December 31, 2003 and the fiscal year ended September 30, 2003, our international sales represented 45% and 32%, respectively, of our total sales. We expect sales to
international customers to continue to comprise a significant portion of our revenues. Sales of broadband Internet equipment products to some of our European customers have been denominated in Euros. For our international sales that continue to be
denominated in United States dollars, fluctuations in currency exchange rates could cause our products and services to become relatively more expensive to our foreign customers, which could lead to decreased sales of our products and services. In
addition, changes in the value of the Euro relative to the United States dollar could adversely affect our operating results to the extent we do not adequately hedge sales denominated in Euros.



Page 25



---

##### Table of Contents

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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



In the market for our Web
platforms products, we primarily compete with Altiris, Inc., Computer Associates International, Inc., CrossTec Corporation, Expertcity, Inc., LANDesk Software, Inc., Microsoft Corporation and Symantec Corporation. We anticipate intense competition
from some of these companies because some of these competitors provide their products to consumers at no cost.



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



Page 26



---

##### Table of Contents

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



Our revenues and operating results have varied in the past and
are likely to vary in the future from quarter to quarter. For example, during the past eight quarters ending December 31, 2003, our revenues have ranged from $15.6 million to $28.6 million, and our net results have ranged from $1.1 million of income
to a loss of $15.8 million. As a result, we believe that period-to-period comparisons of our operating results are not necessarily meaningful. Investors should not rely on the results of any one quarter or series of quarters as an indication of our
future performance.



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



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



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



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



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



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



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



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



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



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



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



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



We do not manufacture any of the components used in our products and perform only limited assembly on some products. All of our broadband Internet equipment relies on
components that are supplied by independent contractors and specialized suppliers. Furthermore, substantially all of our broadband



Page 27



---

##### Table of Contents

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



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



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



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



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



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



The majority of our Web platforms revenues are derived from the sale of software products for corporate help desks, including Timbuktu and eCare. For the three months ended December 31, 2003 and the fiscal year ended September 30, 2003,
revenues from these help desk applications were 53% and 58%, respectively, of total revenues for our Web platform products. We anticipate that the market for Timbuktu will grow more slowly than the market for our other Web platforms products and
services. In addition, we rely on a small number of licensees of our Web platforms to promote the use of our Web platforms for



Page 28



---

##### Table of Contents

building web sites and stores. As a result, we derive the majority of the recurring revenues from our Web platforms
products from fewer than five customers. The extent and nature of the promotions by licensees of our Web platforms are outside of our control. If licensees of our eSite and eStore Web platforms do not successfully promote web sites and stores to
their customers, we will not generate continued recurring revenues. If these customers were to choose a competitive platform, this could lead to reduced revenues and adversely impact our results.



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



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



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



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



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



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



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



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



Page 29



---

##### Table of Contents

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



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



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



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



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



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



A small number of stockholders hold a large portion of our common stock. Our Chairman of the Board owned approximately 4.1% of our common
stock outstanding at December 31, 2003. In addition, based on information contained in the most recent filings with the United States Securities and Exchange Commission, three institutional investors owned approximately 4.7%, 3.9% and 3.6%,
respectively, of our common stock outstanding at December 31, 2003. To the extent one or more of these large stockholders decides to sell substantial amounts of our common stock in the public market over a short period of time, based on the historic
trading volumes, we expect the market price of our common stock could fall.



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



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



Page 30



---

##### Table of Contents

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



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



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



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



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



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



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



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



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



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



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



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



PART I  FINANCIAL INFORMATION



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK



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



Page 31



---

##### Table of Contents

Interest Rate Risk



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



|                                                       |  |                   |        |                 |                   |                     |  |      |           |  |                 |        |                       |   |        |  |      |  
|------------------------------------------------------ |  | ----------------- | ------ | --------------- | ----------------- | ------------------- |  | ---- | --------- |  | --------------- | ------ | --------------------- | - | ------ |  | ---- | -
|                                                       |  | December 31, 2003 |        |                 | December 31, 2002 |                    
|Principal (notional) amounts in United States dollars: |  | Costbasis         |        | Fairmarketvalue |                   | Averageinterestrate |  |      | Costbasis |  | Fairmarketvalue |        | Average interest rate |  
|                                                       |  | (in thousands)    |        |                 | (in thousands)    |                    
|Cash equivalents  fixed rate (a)                      |  | $                 | 21,016 |                 | $                 | 21,016              |  | 0.68 | %         |  | $               | 14,867 |                       | $ | 14,867 |  | 1.01 | %

---

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



Our market interest rate risk for our investment portfolio relates primarily to changes in the United States short-term prime interest rate.
Our market interest rate risk for borrowings under our credit facility, from which we had no borrowings at December 31, 2003, 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) as long as no default or event of default has occurred and is continuing, and as long as we maintain profitability as of the end of
each fiscal quarter. To the extent there is a default or an event of default has occurred and is continuing or we cannot maintain profitability, the interest rate on the credit facility would change to the prime rate plus 0.75% per annum. To the
extent we borrow heavily against the credit facility and Silicon Valley Bank were to increase its prime rate, it would cost us more to borrow and our interest expense would increase.



Foreign Currency Exchange Risk



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



|                                                       |  |                   |       |                   |        |                |   |               |  |       
|------------------------------------------------------ |  | ----------------- | ----- | ----------------- | ------ | -------------- | - | ------------- |  | ------
|                                                       |  | December 31, 2003 |       | December 31, 2002
|Principal (notional) amounts in United States dollars: |  | Carryingamount    |       | Exchangerate      |        | Carryingamount |   | Exchange rate
|                                                       |  | (in thousands)    |       |                   |        | (in thousands) |   |              
|Accounts receivable denominated in Euros               |  | $                 | 2,173 |                   | 1.2296 |                | $ | 1,341         |  | 1.0202



The table below presents the carrying
value of our currency exchange forward contracts, in United States dollars, at December 31, 2003 and 2002. The carrying value approximates fair value at September 30, 2003 and 2002.



|                                       |  |                   |     |                   |        |                |        |                |   |          |  |                 |  |       
|-------------------------------------- |  | ----------------- | --- | ----------------- | ------ | -------------- | ------ | -------------- | - | -------- |  | --------------- |  | ------
|                                       |  | December 31, 2003 |     | December 31, 2002
|Principal (notional) amounts in Euros: |  | Carryingamount    |     | Spotrate          |        | Settlementdate |        | Carryingamount |   | SpotRate |  | Settlement date
|                                       |  | (in thousands)    |     |                   |        |                |        | (in thousands) |   |          |  |                
|Currency exchange forward contract # 1 |  | $                 | 165 |                   | 1.1835 |                | Jan-04 |                | $ | 477      |  | 0.9751          |  | Jan-03
|Currency exchange forward contract # 2 |  |                   |    |                   |       |                |       |                | $ | 197      |  | 0.9829          |  | Feb-03



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.



Page 32



---

##### Table of Contents

PART I  FINANCIAL INFORMATION



ITEM 4. CONTROLS AND PROCEDURES



As of the end of
the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our President and Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design
and operation of our disclosure controls and procedures (as defined in Securities Exchange Act Rules 13a-15(e) and 15d-15(e)). Based upon this evaluation, our President and Chief Executive Officer and our Chief Financial Officer concluded that, as
of December 31, 2003, our disclosure controls and procedures were adequate to ensure that information required to be disclosed in the reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the United States Securities and Exchange Commission rules and forms.



During the three months ended December 31, 2003, there were no changes in our internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal
controls over financial reporting.



PART II  OTHER INFORMATION



ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS



In October 2003, we issued 160,000 shares of our common stock to the shareholders of JadeSail as consideration for our acquisition of JadeSail. The issuance of these securities were deemed to be exempt from registration under the Securities
Act of 193 (the Securities Act), as amended, by virtue of Section 4(2) of the Securities Act, in light of, among other facts, the small number and sophistication of the persons receiving the shares and the investment representations made
by those persons. We filed in December 2003, a registration statement on Form S-3 registering the possible resale of the common stock issued in the JadeSail transaction.



Page 33



---

##### Table of Contents

PART II. OTHER INFORMATION



ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K



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



|              |  |                                                                                                           
|------------- |  | ----------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description                                                                                               
|10.12         |  | Amendment to Loan Documents entered into between Silicon Valley Bank and Netopia, Inc. on November 26,2003
|              | 
|11.1          |  | Reference is made to Note 8 of Notes to Unaudited Condensed Consolidated Financial Statements             
|              | 
|31.1          |  | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002        
|              | 
|31.2          |  | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002        
|              | 
|32.1          |  | Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002        
|              | 
|32.2          |  | Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002        



|(b) | We filed the following reports on Form 8-K during the three months ended December 31, 2003:
|--- | -------------------------------------------------------------------------------------------



| |  | On December 11, 2003, we filed a Form 8-K reporting Item 5  Other Events announcing certain of our Directors and Officers had entered into trading plans pursuant to Rule
10b5-1 (of the General Regulations under the Securities Exchange Act of 1934, as amended).
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | On November 5, 2003, we filed a Form 8-K reporting Item 7  Financial Statements and Exhibits and Item 9  Regulation FD Disclosure providing our financial results for the
fourth fiscal quarter and fiscal year ended September 30, 2003.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | On October 6, 2003, we filed a Form 8-K reporting Item 5  Other Events and Item 7  Financial Statements and Exhibits announcing our acquisition of JadeSail.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------



Page 34



---

##### Table of Contents

SIGNATURES



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: February 17, 2004 |  | NETOPIA, INC.
|                        |  | (Registrant) 
|                        |  |              
|                        |  | By:           |  | /s/ Alan B. Lefkof                                                                                                     
|                        |  |               |  | Alan B. Lefkof                                                                                                         
|                        |  |               |  | President and Chief Executive Officer                                                                                  
|                        |  |              
|                        |  | By:           |  | /s/ William D. Baker                                                                                                   
|                        |  |               |  | William D. Baker                                                                                                       
|                        |  |               |  | Senior Vice President, Finance and Operations, and
Chief Financial Officer (Principal Financial and Accounting Officer)



Page 35