##### Table of Contents

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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 1934For the quarterly period ended March 31, 2002OR ̈

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For 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 ofincorporation or organization

(I.R.S. EmployerIdentification Number)





2470 Mariner Square Loop


Alameda, California 94501


(Address of principal executive offices, including Zip Code)





---




(510) 814-5100


(Registrants telephone number, including area code)





---

Indicate by ü check whether the registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.





Yesü

No





As of March 31, 2002 there were 18,615,173 shares of the Registrants common
stock outstanding.





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##### Table of Contents




NETOPIA, INC.


Form 10-Q


Table of Contents

PagePART I.

FINANCIAL INFORMATION

2Item 1.

Unaudited Condensed Consolidated Financial Statements

2Condensed consolidated balance sheets at March 31, 2002 (unaudited) and September 30, 2001 (audited)

2Unaudited condensed consolidated statements of operations for the three and six months ended March 31, 2002 and 2001

3Unaudited condensed consolidated statements of cash flows for the three and six months ended March 31, 2002 and 2001

4Notes to unaudited condensed consolidated financial statements

5Item 2.

Managements Discussion and Analysis of Financial Condition and Results of Operations

13Item 3.

Quantitative and Qualitative Disclosures About Market Risk

31PART II.

OTHER INFORMATION

33Item 2.

Changes in Securities and Use of Proceeds

33Item 4.

Submission of Matters to a Vote of Security Holders

33Item 6.

Exhibits and Reports on Form 8-K

33SIGNATURE



34







1




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##### Table of Contents




PART I.

FINANCIAL INFORMATIONItem 1.

Condensed Consolidated Financial Statements


---




NETOPIA, INC. AND SUBSIDIARIES


Condensed Consolidated Balance Sheets





March 31, 2002


September 30, 2001(unaudited)


(audited)(in thousands, except share and per share amounts)AssetsCurrent assets:Cash and cash equivalents

$
26,127


$
35,703Short-term investments


1,029



13,293Trade accounts receivable less allowance for doubtful accounts and returns of $1,200 at March 31, 2002 and $641 at
September 30, 2001


10,661



9,550Inventories, net


6,145



7,156Prepaid expenses and other current assets


1,512



1,634Total current assets


45,474



67,336Furniture, fixtures and equipment, net


6,447



5,770Intangible assets, net


18,888



2,758Long-term investments


2,600



4,000Deposits and other assets


2,025



2,848$
75,434


$
82,712Liabilities and Stockholders EquityCurrent liabilities:Accounts payable

$
7,679


$
4,713Accrued compensation


2,363



2,148Accrued liabilities


2,832



1,116Deferred revenue


2,103



2,589Other current liabilities


122



177Total current liabilities


15,099



10,743Long-term liabilities


87



256Total liabilities


15,186



10,999Commitments and contingenciesStockholders equity:Common stock: $0.001 par value, 50,000,000 shares authorized; 18,615,173 and 18,076,812 shares issued and outstanding at March 31,
2002 and September 30, 2001, respectively


18



17Additional paid-in capital


147,047



144,886Accumulated deficit


(86,817
)


(73,190
)Total stockholders equity


60,248



71,713$
75,434


$
82,712





See accompanying notes to unaudited condensed consolidated financial statements.




2




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##### Table of Contents




NETOPIA, INC. AND SUBSIDIARIES


Unaudited Condensed Consolidated Statements of Operations





Three months ended March 31,


Six months endedMarch 31,2002


2001


2002


2001(in thousands, except per share amounts)Revenues:Internet equipment

$
11,239


$
16,458


$
23,050


$
31,303Web platform licenses and services


4,470



4,370



8,544



9,918Total revenues


15,709



20,828



31,594



41,221Cost of revenues:Internet equipment


7,928



10,845



15,311



20,640Web platform licenses and services


146



225



310



426Total cost of revenues


8,074



11,070



15,621



21,066Gross profit


7,635



9,758



15,973



20,155Operating expenses:Research and development


4,348



3,263



8,495



6,932Selling and marketing


5,975



7,504



12,102



14,689General and administrative


1,267



1,360



2,241



4,503Restructuring costs






1,073



482



1,073Integration costs










309



Terminated merger costs






2,640







2,640Acquired in-process research and development


1,908







4,058



Amortization of intangible assets


374



2,996



749



5,992Total operating expenses


13,872



18,836



28,436



35,829Operating loss


(6,237
)


(9,078
)


(12,463
)


(15,674
)Other income (loss):Loss on impaired securities


(1,400
)


(19
)


(1,400
)


(1,000
)Other income, net


80



588



236



1,561Total other income (loss), net


(1,320
)


569



(1,164
)


561Loss from continuing operations before cumulative effect from adoption of Staff Accounting Bulletin 101


(7,557
)


(8,509
)


(13,627
)


(15,113
)Cumulative effect from adoption of Staff Accounting Bulletin 101














(1,555
)Net loss

$
(7,557
)

$
(8,509
)

$
(13,627
)

$
(16,668
)Per share data, net loss:Basic and diluted net loss per share

$
(0.41
)

$
(0.48
)

$
(0.75
)

$
(0.94
)Shares used in the per share calculations


18,255



17,819



18,173



17,712





See accompanying notes to unaudited condensed consolidated financial statements.




3




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##### Table of Contents




NETOPIA, INC. AND SUBSIDIARIES


Unaudited Condensed Consolidated Statements of Cash Flows





Six months endedMarch 31,2002


2001(in thousands)Cash flows from operating activities:Net loss

$
(13,627
)

$
(16,668
)Adjustments to reconcile net loss to net cash provided by (used in) operating activities:Depreciation and amortization


4,077



7,560Charge for acquired in-process research and development


4,058



Unrealized loss on impaired securities


1,400



1,000Changes in allowance for doubtful accounts and returns on trade accounts receivable


559



(81
)Changes in operating assets and liabilities:Trade accounts receivable


(1,671
)


2,606Inventories


1,011



29Prepaid expenses and other current assets


122



815Deposits and other assets


3



63Accounts payable and accrued liabilities


3,406



(495
)Deferred revenue


(632
)


681Other liabilities


1,412



(801
)Net cash provided by (used in) operating activities


118



(5,291
)Cash flows from investing activities:Purchase of furniture, fixtures and equipment


(3,539
)


(2,390
)Capitalization of software development costs






(564
)Acquisition of intangibles


(19,096
)


(100
)Purchase of long-term investment






(2,000
)Purchase of short-term investments


(848
)


(26,896
)Proceeds from the sale and maturity of short-term investments


13,113



34,272Net cash provided by (used in) investing activities


(10,370
)


2,322Cash flows from financing activities:Proceeds from the issuance of common stock, net


676



1,376Net cash provided by financing activities


676



1,376Net decrease in cash and cash equivalents


(9,576
)


(1,593
)Cash and cash equivalents, beginning of period


35,703



37,839Cash and cash equivalents, end of period

$
26,127


$
36,246Supplemental disclosures of noncash investing and financing activities:Issuance of common stock equivalents for consulting services

$



$
16Issuance of common stock for acquired in process research and development

$
1,485


$






See accompanying notes to unaudited condensed consolidated financial statements




4




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##### 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 March 31, 2002 are not necessarily indicative of the results
to be expected for any subsequent quarter or for the entire fiscal year ending September 30, 2002.





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




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





In July 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 142 requires that goodwill resulting from a business combination no longer be amortized
to earnings, but instead be reviewed for impairment on at least an annual basis and be expensed against earnings when the implied fair value of a reporting unit is less than its carrying amount. The Company elected to early adopt SFAS No. 142 as of
October 1, 2001. For goodwill resulting from business combinations prior to July 1, 2001, amortization of such goodwill continued through September 30, 2001, but ceased commencing on October 1, 2001. For business combinations occurring on or after
July 1, 2001, the associated goodwill will not be amortized. The Company has completed its tests for goodwill impairment and found that no impairment existed as of October 1, 2002. See Note 7 of Notes to Unaudited Condensed Consolidated Financial
Statements. Going forward, the Company will perform the annual impairment test required by SFAS No. 142 in its fiscal fourth quarter.





In August 2001 the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS No. 144 serves to clarify and further define the provisions of SFAS No. 121 Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of. SFAS No. 144 does not apply to goodwill and other intangible assets that are not amortized. SFAS No. 144 is effective for fiscal years beginning after December 15, 2001. The Company
expects to adopt SFAS No. 144 effective October 1, 2002. The effect of adopting this statement is not expected to have a material effect on the Companys consolidated financial position or results of operations.





|(3) |  | Inventories
|--- |  | -----------




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





March 31, 2002

September 30, 2001(in thousands)Raw materials

$
3,565

$
3,530Work in process


98


927Finished goods


2,482


2,699$
6,145

$
7,156







5




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##### Table of Contents

|(4) |  | Net Loss Per Share
|--- |  | ------------------




Basic net
loss per share (EPS) is based on the weighted average number of shares of common stock outstanding during the period. Diluted EPS is based on the weighted average number of shares of common stock outstanding during the period and dilutive common
equivalent shares from options and warrants outstanding during the period. Potentially dilutive common equivalent shares have been excluded from the computation of diluted EPS for the three and six months ended March 31, 2002 and 2001 since their
effect on EPS is antidilutive due to the losses incurred in each period. The following table sets forth the computation of basic and diluted net loss per share:





Three months endedMarch 31,


Six months endedMarch 31,2002


2001


2002


2001(in thousands, except per share amounts)Net loss

$
(7,557
)

$
(8,509
)

$
(13,627
)

$
(16,668
)Weighted average number of common stock outstanding


18,255



17,819



18,173



17,712Basic and diluted net loss per share

$
(0.41
)

$
(0.48
)

$
(0.75
)

$
(0.94
)





Potentially dilutive common equivalent shares which were excluded from the
computation of diluted EPS consisted of options to purchase common stock totaling 6,493,292 shares for the three and six months ended March 31, 2002; 4,905,845 shares for the three and six months ended March 31, 2001; and a warrant to purchase
common stock totaling 5,000 shares for the three and six months ended March 31, 2001.





|(5) |  | Segment, Geographic and Significant Customer Information
|--- |  | --------------------------------------------------------




Segment Information





The methodology for determining the segment information reported is
based on the organization of operating segments and the related information that the Chief Operating Decision Maker (CODM) uses for operational decisions and assessing financial performance. Netopias Chief Executive Officer (CEO) is considered
the Companys CODM. For purposes of making operating decisions and assessing financial performance, the Companys CEO reviews financial information presented on a consolidated basis accompanied by disaggregated information for revenues and
gross margins by product group as well as revenues by geographic region and by customer. Operating expenses and assets are not disaggregated by product group for purposes of making operating decisions and assessing financial performance.





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





Three months ended March 31,2002


2001Internet Equipment


Web Platforms


Total


Internet Equipment


Web Platforms


Total(in thousands)Revenue

$
11,239


$
4,470


$
15,709


$
16,458


$
4,370


$
20,828Cost of revenues


7,928



146



8,074



10,845



225



11,070Gross profit


3,311



4,324



7,635



5,613



4,145



9,758Gross margin


29
%


97
%


49
%


34
%


95
%


47
%Unallocated operating expenses










13,872











18,836Operating loss









$
(6,237
)









$
(9,078
)




6




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##### Table of Contents




Six months ended March 31,2002


2001Internet Equipment


Web Platforms


Total


Internet Equipment


Web Platforms


Total(in thousands)Revenue

$
23,050


$
8,544


$
31,594


$
31,303


$
9,918


$
41,221Cost of revenues


15,311



310



15,621



20,640



426



21,066Gross profit


7,739



8,234



15,973



10,663



9,492



20,155Gross margin


34
%


96
%


51
%


34
%


96
%


49
%Unallocated operating expenses










28,436











35,829Operating loss









$
(12,463
)









$
(15,674
)





Geographic Information





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





Three months ended March 31,


Six months ended March 31,2002


2001


2002


2001(in thousands)Europe

$
2,778

18
%

$
3,074

15
%

$
4,617

15
%

$
5,997

15
%Canada


406

3
%


257

1
%


636

2
%


658

2
%Asia Pacific and other


600

4
%


301

1
%


911

3
%


553

1
%Subtotal international revenue


3,784

24
%


3,632

17
%


6,164

20
%


7,208

18
%United States


11,925

76
%


17,196

83
%


25,430

80
%


34,013

82
%Total revenues

$
15,709

100
%

$
20,828

100
%

$
31,594

100
%

$
41,221

100
%





Customer Information





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





Three months ended March 31,


Six months ended March 31,2002


2001


2002


2001(in thousands)Ingram Micro

$
2,003

13
%

$
2,461

12
%

$
3,932

12
%

$
3,537

9
%Covad Communications


1,952

12



3,696

18



3,418

11



3,946

10Innotrac


1,875

12



116

1



3,341

11



116

Rhythms NetConnections [a]








3,318

16









6,839

17


---

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



7




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##### Table of Contents




No other customers during the three and six months ended March 31, 2002 and 2001 accounted for
10% or more of the Companys total revenues. The following table sets forth the accounts receivable balance for the customers identified above along with such data expressed as a percentage of total accounts receivable:





Accounts receivable balances atMarch 31,2002


2001(in thousands)Ingram Micro

$
1,368

11
%

$
1,726

10
%Covad Communications


162

1



1,842

11Rhythms NetConnections








2,035

12Innotrac


1,889

15











|(6) |  | Acquisitions
|--- |  | ------------




DoBox, Inc.
(DoBox)





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





| | · |  | 300,000 shares of the Companys common stock;
| | - |  | ---------------------------------------------




| | · |  | $0.1 million in cash in severance benefits to DoBox employees that were not retained; and
| | - |  | -----------------------------------------------------------------------------------------




| | · |  | $0.1 million in cash for the Companys transaction costs including legal, accounting and other professional services.
| | - |  | ---------------------------------------------------------------------------------------------------------------------




The Company also assumed certain other liabilities of DoBox.





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





A
business is a self-sustaining set of activities and assets conducted and managed for the purpose of providing a return to investors. A business consists of (a) inputs, (b) processes applied to those inputs, and (c) resulting outputs that are used to
generate revenues. For a transferred set of activities and asset to be a business, it must contain all of the inputs and processes necessary for it to continue to conduct normal operations after the transferred set is separated from the transferor,
which includes the ability to sustain a revenue stream by providing its outputs customers.





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





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




8




---

##### Table of Contents




Cayman Systems, Inc. (Cayman)





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





The Company accounted for the transaction
under the purchase method. The aggregate purchase price of the transaction was $14.8 million, based on the consideration paid at closing. The aggregate purchase price included:





| | · |  | $6.0 million in cash in exchange for all of Caymans outstanding equity, including in-the-money stock options;
| | - |  | --------------------------------------------------------------------------------------------------------------




| | · |  | $4.2 million in cash in exchange for all of Caymans outstanding convertible debt;
| | - |  | ----------------------------------------------------------------------------------




| | · |  | $2.4 million in cash to satisfy an outstanding credit line of Cayman;
| | - |  | ---------------------------------------------------------------------




| | · |  | $0.9 million in cash in fees to Caymans investment bankers, attorneys and accountants;
| | - |  | ---------------------------------------------------------------------------------------




| | · |  | $0.6 million in cash for the Companys transaction costs including legal, accounting and other professional services; and
| | - |  | -------------------------------------------------------------------------------------------------------------------------




| | · |  | $0.7 million cash in severance benefits to Cayman employees that were not retained.
| | - |  | -----------------------------------------------------------------------------------




The Company also assumed certain other liabilities of Cayman.





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





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





Amount


Annualamortization

Useful life(in thousands)Current assets

$
4,490



n/a

n/aLong-term assets


895



n/a

n/aCurrent liabilities


(9,543
)


n/a

n/aIdentified intangible assets:Developed product technology


1,120


$
224

5 yearsCore technology leveraged


5,570



928

6 yearsSales channel relationships


1,380



345

4 yearsGoodwill


8,763



n/a

n/aAcquired in-process research and development


2,150



n/a

n/aTotal purchase price

$
14,825


$
1,497





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





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



9




---

##### Table of Contents




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




| | · |  | Sales channel relationships, which represents the value of Caymans established relationships with its ILEC and cable company customers to whom Netopia expects to continue
to sell products; and
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | · |  | Goodwill, which represents the excess of the Cayman purchase price over the fair value of the underlying net identifiable assets. Included in goodwill is $2.5 million,
representing the fair value of the assembled workforce. Pursuant to SFAS No. 141, Business Combinations, the value of such assembled workforce should not be reported separately from goodwill. Also included in goodwill is a $1.2 million
liability to fully reserve the excess space at the Cayman facilities resulting from the termination of employees whose positions were determined to be redundant subsequent to the closing of the Cayman acquisition and $1.2 million related to
recording the fair value of Cayman inventory purchase commitments. The Company believes that the amount allocated to goodwill appropriately reflects the market value of the amount of purchase price over the fair value of the underlying net
identifiable assets based upon the value in the expansion of the Companys product offerings and expected synergies resulting from the acquisition.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------







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





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





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





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





For comparative
purposes the following summary, prepared on an unaudited pro forma basis, reflects the condensed consolidated statements of operations of the Company for the three and six months ended March 31, 2002 and 2001, giving effect to the Cayman acquisition
and assuming that Cayman had been acquired as of the beginning of the periods presented:





Three months ended March 31,


Six months ended March 31,2002


2001


2002


2001(in thousands, except per share amounts)Revenueas reported

$
15,709


$
20,828


$
31,594


$
41,221Revenuepro forma

$
15,709


$
24,849


$
31,594


$
48,463Net lossas reported

$
(7,557
)

$
(8,509
)

$
(13,627
)

$
(16,668
)Net losspro forma

$
(7,557
)

$
(11,848
)

$
(11,477
)

$
(24,304
)Basic and diluted net loss per shareas reported

$
(0.41
)

$
(0.48
)

$
(0.75
)

$
(0.94
)Basic and diluted net loss per sharepro forma

$
(0.41
)

$
(0.67
)

$
(0.63
)

$
(1.37
)Shares used in the per share calculationsas reported


18,255



17,819



18,173



17,712Shares used in the per share calculationspro forma


18,255



17,819



18,173



17,712





The pro forma revenue figures set forth above for the three and six months ended
March 31, 2001 have been adjusted to include $4.0 million and $7.2 million, respectively, of Cayman revenue for such periods.





The pro forma net loss figure set forth above for the six months ended March 31, 2002 has been adjusted to exclude the $2.2 million charge for acquired in-process research and development related to the Cayman acquisition. The pro forma net
loss figures set forth above for the three and six months ended March 31, 2001 have been adjusted to include $0.4 million and $0.7 million, respectively, for amortization of intangible assets related to the Cayman acquisition for each period.





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





|(7) |  | Intangible Assets
|--- |  | -----------------




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





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




10




---

##### Table of Contents




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





Detail of the Companys identifiable
intangible assets as of March 31, 2002 is as follows:





Acquisition date

Balance at September 30, 2001

Identifiable intangible assets acquired duringthe period

Accumulated amortization

Balance at March 31, 2002(in thousands)Cayman

October 2001

$


$
8,070

$
749

$
7,321





Aggregate amortization expense of intangible assets was $0.4 million and $0.8
million for the three and six months ended March 31, 2002. There was no impairment loss recorded during the three months ended March 31, 2002.





Detail of the Companys goodwill as of March 31, 2002 is as follows:





Acquisition date

Balance at September 30, 2001

Goodwillacquired during the period


Balance at March 31, 2002Cayman

October 2001

$


$
8,763


$
8,763WebOrder

March 2000


572


(54
)


518Starnet Technologies

October 1999


1,821






1,821netOctopus

December 1998


365


100



465$
2,758

$
8,809


$
11,567





The following table reflects the consolidated results adjusted as though the
adoption of SFAS No. 142 occurred at the beginning of the six-month period ended March 31, 2001:





Three months ended March 31,


Six months endedMarch 31,2002


2001


2002


2001(in thousands, except per share amounts)Net loss:As reported

$
(7,557
)

$
(8,509
)

$
(13,627
)

$
(16,668
)Amortization of goodwill






1,230







2,460Adjusted net loss

$
(7,557
)

$
(7,279
)

$
(13,627
)

$
(14,208
)Basic and diluted net loss per share:As reported

$
(0.41
)

$
(0.48
)

$
(0.75
)

$
(0.94
)Amortization of goodwill






0.07







0.14Adjusted basic and diluted net loss per share

$
(0.41
)

$
(0.41
)

$
(0.75
)

$
(0.80
)





|(8) |  | Restructuring Costs
|--- |  | -------------------




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




11




---

##### Table of Contents




Total charge

$
482Less:Amounts paid


256Non-cash charges


58Balance at December 31, 2001


168Less amounts paid


11Balance at March 31, 2002

$
157





|(9) |  | Integration Costs
|--- |  | -----------------




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





Customer integrationcommunications

Systemsintegration

Total(in thousands)Total charge

$
269

$
40

$
309Less amounts paid


269





269Balance at December 31, 2001





40


40Less amounts paid





12


12Balance at March 31, 2002

$


$
28

$
28





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




During
the three months ended December 31, 2000, the Company purchased $2.0 million of Series D Preferred stock in MegaPath. MegaPath offers high-speed DSL access and eCommerce and Web hosting services to small and medium size businesses. During fiscal
year 2000, MegaPath had purchased the Companys broadband Internet equipment and licensed certain of our Web platforms products. During the three months ended March 31, 2002, the Company recorded a $1.4 million unrealized loss on impaired
securities related to its investment in MegaPath. This impairment was recorded in connection with the recent valuation of MegaPath based upon its most recent round of financing. During April 2002, the Company purchased $0.4 million of Series E
Preferred stock in MegaPath.





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





|(11) |  | Employee Stock Purchase Plan
|---- |  | ----------------------------




An amendment to the Company's Employee Stock Purchase Plan was approved at the Company's Annual Meeting of Stockholders in January 2002 to increase the number of shares of common stock available for issuance under the plan by 650,000
shares.




12




---

##### Table of Contents







PART I.

FINANCIAL INFORMATIONItem 2.

Managements Discussion and Analysis of Financial Condition and Results of Operations


---




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





Overview





We develop, market and support broadband Internet equipment and Web platforms software solutions. Our platforms are designed to enable our
telecommunications carrier, distributor and Internet service provider (ISP) customers to create and offer expanded broadband service offerings focused on the needs of distributed enterprises, small and medium size businesses, small office/home
office professionals, and multi-PC households. These service offerings allow our customers to lower their support costs and increase their average revenue per user and often include digital subscriber line (DSL) service bundled with back-up,
bonding, virtual private networking (VPN), and voice over DSL, as well as eSite and eStore hosting and eSupport services.





Our broadband Internet equipment products consist principally of DSL routers, smart modems and integrated access devices (IADs) which enable the transmission of data and/or voice over DSL networks as well as Cable Ethernet, T1/Frame Relay,
integrated services digital network (ISDN) and dual analog routers. Our Web platforms software products consist principally of the eSite, eStore and eCare products, sold through our telecommunications carrier partners that provide Web sites and
eCommerce enabled Web sites as well as electronic customer relation management (eCRM) and system management software, and Timbuktu Pro products, primarily sold to enterprise and distribution customers that provide help desk and systems management
applications.





We primarily sell our products to:





| | · |  | Telecommunication carriers, such as: incumbent local exchange carriers (ILECs), such as SBC, BellSouth and Verizon; competitive local exchange carriers (CLECs), such as Covad
and McLeod; Internet service providers (ISPs), such as Business Telecommunications and Onsite Access; Internet Exchange Carriers (IXCs) such as AT&T, Sprint and WorldCom;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | · |  | Distributors, such as Ingram Micro, Softway and Tech Data;
| | - |  | ----------------------------------------------------------




| | · |  | Cable companies; and
| | - |  | --------------------




| | · |  | Directly to end-users.
| | - |  | ----------------------




Historically, we have depended upon the ability of CLECs and ISPs to offer broadband services successfully and become sustainable businesses. Several of our CLEC and ISP customers have incurred operating losses and negative cash flows as
they attempted to establish their networks and operations, and filed for protection under the Bankruptcy Act or ceased operations. Most notably, Covad, which currently is our largest CLEC customer, filed a voluntary petition under the Bankruptcy Act
in August 2001 as part of a capital restructuring plan. In November 2001, Covad announced that it had secured an agreement with SBC to provide Covad with $150 million in funding. Covad emerged from bankruptcy in December 2001 upon closing the SBC
funding. Additionally, Covad has announced that this funding is expected to provide the cash that it believes will allow it to become cash flow positive by the latter half of 2003.




13




---

##### Table of Contents




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





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





Three months endedMarch 31,


Percent increase/ (decrease)


Six months endedMarch 31,


Percent increase/ (decrease)2002


2001



2002


2001(in thousands)





(in thousands)Revenues:Internet equipment

$
11,239


72%


$
16,458


79%


(32%
)

$
23,050


73%


$
31,303


76%


(26%
)Web platform licenses and services


4,470


28%



4,370


21%


2%



8,544


27%



9,918


24%


(14%
)Total revenues


15,709


100%



20,828


100%


(25%
)


31,594


100%



41,221


100%


(23%
)Cost of revenues:Internet equipment


7,928


50%



10,845


52%


(27%
)


15,311


48%



20,640


50%


(26%
)Web platform licenses and services


146


1%



225


1%


(35%
)


310


1%



426


1%


(27%
)Total cost of revenues


8,074


51%



11,070


53%


(27%
)


15,621


49%



21,066


51%


(26%
)Gross profit


7,635


49%



9,758


47%


(22%
)


15,973


51%



20,155


49%


(21%
)Operating expenses:Research and development


4,348


28%



3,263


16%


33%



8,495


27%



6,932


17%


23%Selling and marketing


5,975


37%



7,504


36%


(20%
)


12,102


38%



14,689


36%


(18%
)General and administrative


1,267


8%



1,360


7%


(7%
)


2,241


7%



4,503


11%


(50%
)Restructuring costs









1,073


5%


(100%
)


482


2%



1,073


3%


(55%
)Integration costs



















309


1%









Terminated merger costs









2,640


13%


(100%
)









2,640


6%


(100%
)Acquired in-process research and development


1,908


12%













4,058


13%









Amortization of intangible assets


374


2%



2,996


14%


(88%
)


749


2%



5,992


15%


(88%
)Total operating expenses


13,872


88%



18,836


90%


(26%
)


28,436


90%



35,829


87%


(21%
)Operating loss


(6,237
)

(39%
)


(9,078
)

(43%
)

(31%
)


(12,463
)

(39%
)


(15,674
)

(38%
)

(20%
)Other income (loss):Loss on impaired securities


(1,400
)

(9%
)


(19
)

0%


7,268%



(1,400
)

(4%
)


(1,000
)

(2%
)

40%Other income, net


80


1%



588


3%


(86%
)


236


1%



1,561


4%


(85%
)Total other income (loss), net


(1,320
)

(8%
)


569


3%


(332%
)


(1,164
)

(3%
)


561


(2%
)

(307%
)Loss from continuing operations before cumulative effect from adoption of Staff Accounting Bulletin 101


(7,557
)

(47%
)


(8,509
)

(40%
)

(11%
)


(13,627
)

(42%
)


(15,113
)

(40%
)

(10%
)Cumulative effect from adoption of Staff Accounting Bulletin 101


























(1,555
)

(4%
)

(100%
)Net loss

$
(7,557
)

(47%
)

$
(8,509
)

(40%
)

(11%
)

$
(13,627
)

(42%
)

$
(16,668
)

(44%
)

(18%
)





REVENUE





Broadband Internet Equipment





For the three and six months ended March 31, 2002,
broadband Internet equipment revenue decreased due to declining sales volumes and average selling prices of our broadband Internet equipment, particularly our DSL routers. Our sales volumes have declined as a result of financial difficulties
experienced by many of our CLEC customers, to whom we have historically sold our broadband Internet equipment, and reduced sales to SBC as a result of SBCs on-hand inventory levels and planned transition to new products offered by vendors of
broadband Internet equipment. Our average selling prices have declined due to price competition, pricing strategies, and increased percentage of sales of our asynchronous digital subscriber line (ADSL) routers which have a lower average selling
price than our other DSL routers. Sales of our ADSL routers have increased as a percentage of revenues primarily due to sales to BellSouth, a customer we acquired in connection with the acquisition of Cayman Systems, Inc. (Cayman) in October 2001,
and our relationship with a new customer in Europe.




14




---

##### Table of Contents




Web Platform Licenses and Services





For the three months ended March 31, 2002, Web platforms revenue increased due to increased recurring revenue and services related to the licensing and hosting of our eSite and
eStore products as we move to a recurring revenue model for the sale of such products. This increase was partially offset by reduced volume license sales of our eSite and eStore products and reduced volume license sales of Timbuktu Pro, our system
management software, as a result of companies reducing their information technology (IT) spending due to the current macro-economic environment and as a result of the financial difficulties encountered by many of the .com customers to
whom we licensed our eSite and eStore products.





For the six months ended March 31, 2002, Web platforms revenue decreased due to
reduced license sales of our eSite and eStore products and reduced volume license sales of Timbuktu Pro as a result of the factors described above. This decrease was partially offset by increased recurring revenue and services related to the
licensing and hosting of our eSite and eStore products.





Customer Information





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





Three months endedMarch 31,


Percent increase/ (decrease)


Six months endedMarch 31,


Percent increase/ (decrease)2002


2001



2002


2001(in thousands)





(in thousands)Ingram Micro

$
2,003

13
%

$
2,461

12
%

(19
%)

$
3,932

12
%

$
3,537

9
%

11
%Covad Communications


1,952

12



3,696

18


(47
)


3,418

11



3,946

10


(13
)Innotrac


1,875

12



116

1


1,516



3,341

11



116




2,780Rhythms NetConnections(a)








3,318

16


(100
)








6,839

17


(100
)


---

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




No other customers during the three and six months ended March 31, 2002 and 2001 accounted for 10% or more of our total revenues. The
following table sets forth for the periods indicated, the number of customers who each individually represented at least 5% of our revenues:





Three months ended March 31,


Six months ended March 31,2002


2001


2002


2001Number of customers who each individually represented at least 5% of our revenues

3


4


3


6Percent of total revenue

37
%

52
%

34
%

55
%




15




---

##### Table of Contents




Region Information





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





Three months endedMarch 31,

Percent increase/ (decrease)


Six months endedMarch 31,

Percent increase/ (decrease)2002

2001


2002

2001(in thousands)




(in thousands)Europe

$
2,778

18%

$
3,074

15%

(10%
)

$
4,617

15%

$
5,997

15%

(23%
)Canada


406

3%


257

1%

58%



636

2%


658

2%

(3%
)Asia Pacific and other


600

4%


301

1%

99%



911

3%


553

1%

65%Subtotal international revenue


3,784

24%


3,632

17%

4%



6,164

20%


7,208

18%

(14%
)United States


11,925

76%


17,196

83%

(31%
)


25,430

80%


34,013

82%

(25%
)Total revenue

$
15,709

100%

$
20,828

100%

(25%
)

$
31,594

100%

$
41,221

100%

(23%
)





COST OF REVENUES





Cost of revenues consist primarily of material costs related to our contract manufacturing operations and manufacturing variances. Total cost of revenues decreased for the three and six
months ended March 31, 2002 from the three and six months ended March 31, 2001 primarily as a result of declining sales volumes and declining material costs for our broadband Internet equipment.





For the three months ended March 31, 2002, our total gross margin increased to 49% from 47% for the three months ended March 31, 2001 as a result of the increased proportion of
revenues from our higher margin Web platforms products. Broadband Internet equipment gross margin decreased to 29% for the three months ended March 31, 2002 from 34% for the three months ended March 31, 2001 due to increased sales of lower
margin ADSL products, declining average selling prices as a result of price competition and pricing strategies as we enter new markets and expand our customer base, as well as reduced sales of dedicated router products which carry a higher gross
margin than our DSL products. Web platforms gross margin increased to 97% for the three months ended March 31, 2002 from 95% for the three months ended March 31, 2001 as a result of our ability to reduce our costs related to supporting and
provisioning our eSite and eStore products.





For the six months ended March 31, 2002, our total gross margin increased to 51%
from 49% for the six months ended March 31, 2001 as a result of the increased proportion of revenues from our higher margin Web platforms products. Broadband Internet equipment gross margin remained unchanged at 34% for the six months ended
March 31, 2002 and 2001 and Web platforms gross margin remained unchanged at 96% for the six months ended March 31, 2002 and 2001.





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





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




| | · |  | Pricing strategies;
| | - |  | -------------------




| | · |  | Standard cost changes;
| | - |  | ----------------------




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




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



16




---

##### Table of Contents




RESEARCH AND DEVELOPMENT





Research and development expenses consist primarily of employee related expenses, depreciation and amortization, development related expenses such as product prototyping, design and
testing, and overhead allocations. Research and development expenses increased for the three and six months ended March 31, 2002 from the three and six months ended March 31, 2001 primarily due to:





| | · |  | Increased research and development headcount and employee related expenses as a result of our acquisition of Cayman and its research and development staff; and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------




| | · |  | Increased depreciation expense as a result of increased capital purchases related to development of our broadband Internet equipment and the acquisition of Caymans
development assets.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




These increases were partially offset by reduced product prototyping and design
expenses. Additionally, the use of third party contractors was reduced for the six months ended March 31, 2002 from the six months ended March 31, 2001.





We expect to continue to devote substantial resources to product and technological development. We expect research and development costs may increase in absolute dollars for the remainder of fiscal year 2002 and into
fiscal year 2003 as we continue to expand the breadth and depth of our product offerings. We believe our process for developing software is essentially completed concurrently with the establishment of technological feasibility, and we have not
capitalized any internal software development costs to date. However, during the six months ended March 31, 2001, we capitalized $0.6 million of software development costs incurred subsequent to the delivery of a working model, under a development
agreement with third parties.





SELLING AND MARKETING





Selling and marketing expenses consist primarily of salary and commission expense for our sales force, travel and entertainment, advertising and promotional expenses, product marketing, customer service and support
costs. Selling and marketing expenses decreased for the three and six months ended March 31, 2002 from the three and six months ended March 31, 2001 primarily due to:





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




| | · |  | Decreased marketing programs and activities.
| | - |  | --------------------------------------------




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





GENERAL AND ADMINISTRATIVE





General and administrative expenses consist primarily of employee related expenses, provisions for doubtful accounts and legal, accounting and insurance costs. General and administrative expenses decreased for the
three and six months ended March 31, 2002 from the three and six months ended March 31, 2001 primarily due to:





| | · |  | Reduced provisions for doubtful accounts for outstanding accounts receivable owed by our CLEC customers that filed voluntary petitions under the Bankruptcy Act and many of
which ceased operations. Included in general and administrative expense for the six months ended March 31, 2001 is $2.0 million of provisions for doubtful accounts, of which $1.7 million was related to the outstanding accounts receivable of
NorthPoint Communications; and
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | · |  | Decreased general and administrative headcount and employee related expenses.
| | - |  | -----------------------------------------------------------------------------




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




17




---

##### Table of Contents




RESTRUCTURING COSTS





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





INTEGRATION COSTS





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





ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT





Acquired in process research and development represents research and development assets acquired in connection with our acquisitions of Cayman and DoBox that were not technologically
feasible at the time of acquisition and had no alternative future use, and as such were expensed at the time of the transaction. (See Note 6 of Notes To Unaudited Condensed Consolidated Financial Statements.)





AMORTIZATION OF GOODWILL AND OTHER INTANGIBLE ASSETS





For the three and six months ended March 31, 2002, we amortized the amounts allocated to intangible assets with identifiable lives related to our acquisition of Cayman. (See Note 6 of Notes To Unaudited Condensed Consolidated Financial
Statements.)





For the three and six months March 31, 2001, amortization of goodwill and other intangible assets represents the
amortization of such amounts allocated to goodwill and other intangible assets related to our acquisitions of WebOrder, StarNet, Serus and netOctopus.





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





OTHER INCOME (LOSS)





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





For the three and six months ended March 31, 2002, loss on impaired
securities reflects the other than temporary decline in the value of our investment in MegaPath. For the three and six months ended March 31, 2001, loss on impaired securities reflects the loss of our investment in NorthPoint.





Other income, net decreased for the three and six months ended March 31, 2002 from the three and six months ended March 31, 2001 due to our
reduced cash, cash equivalents and short-term investments as a result of the cash used to acquire Cayman, to support our operating activities and purchases of furniture, fixtures and equipment combined with a reduction in interest rates from the
prior fiscal year.





PROVISION FOR INCOME TAXES





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




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CUMULATIVE EFFECT FROM ADOPTION OF STAFF ACCOUNTING BULLETIN 101





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





Liquidity and Capital
Resources





We have funded our operations to date primarily through the public offerings of our common stock. As of March 31,
2002, our principal source of liquidity included cash, cash equivalents and short-term investments of $27.0 million. We currently do not have a line of credit facility.





OPERATING ACTIVITIES





Our operating activities generated $0.1 million of cash for the six
months ended March 31, 2002. The cash provided by operating activities was primarily due to increases in our accounts payable and other liabilities, reduced inventory balances and the non-cash charges for depreciation and amortization, acquired
in-process research and development and unrealized loss on impaired securities. The cash provided by operations was partially offset by cash used to support the loss generated by our regular operating activities.





Our operating activities used $5.3 million of cash for the six months ended March 31, 2001. This use of cash was primarily due to supporting our regular
operating activities, paying the expenses related to our terminated merger with Proxim, and paying the expenses related to our restructuring. These costs were partially offset by increased accounts receivable collections.





INVESTING ACTIVITIES





Our investing activities
used $10.3 million of cash for the six months ended March 31, 2002 primarily due to our acquisition of Cayman in October 2001, purchases of furniture, fixtures and equipment partially offset by proceeds realized from the sale and maturity of
short-term investments.





Our investing activities provided $2.3 million of cash for the six months ended March 31, 2001
primarily due to proceeds realized from the sale and maturity of short-term investments, partially offset by the purchase of such short-term investments and the purchase of capital equipment and our long-term investment in MegaPath.





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





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




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FINANCING ACTIVITIES





Our financing activities provided $0.7 million and $1.4 million for the six months ended March 31, 2002 and 2001, respectively. The cash provided by financing activities for the six months ended March 31, 2002 and
2001 is due to activity in our employee stock purchase program and the exercise of employee stock options.





We currently depend
on our existing cash, cash equivalents and short-term investments of $27.0 million to meet our needs for working capital which we believe will adequately meet our cash needs for working capital and capital expenditures for the next twelve months. We
currently do not have a line of credit facility. We do not utilize any off-balance sheet financing arrangements. We may require additional capital to finance our future growth and fund our ongoing research and development activities during fiscal
2002 and beyond. If we issue additional stock to raise capital, the percentage ownership in Netopia of our existing stockholders would be reduced. Additional financing may not be available when needed and, if such financing is available, it may not
be available on terms we believe favorable.





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





Commitments





Our principal
commitments consist of leased facilities and equipment under operating lease agreements expiring at various dates through 2005. The following is a schedule of our future minimum rental payments required under these leases that have initial or
remaining non-cancelable lease terms in excess of one year (in thousands):





Year ending September 30,2002

$
1,3092003


1,4992004


9462005


451thereafter


Total minimum lease payments

$
4,205





Risk Factors





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





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





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





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




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




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




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




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




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




| | · |  | Government regulation.
| | - |  | ----------------------



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





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





ILECs have been aggressively marketing DSL services principally focusing on residential services. Historically, we have not sold meaningful quantities
of our broadband Internet equipment to ILECs in the United States. As a result of our acquisition of Cayman, we have expanded the channels through which we sell our products to include ILEC customers, such as SBC and BellSouth and Comcast, a cable
provider, and have committed resources that are focused on expanding our presence in the ILEC channel both domestically and internationally in response to changing market conditions. There continue to be barriers associated with such sales
including, but not limited to, lengthy product evaluation cycles, the ability to dislodge competitors whose products are currently being utilized, a long-term contract cycle and intense price pressures. ILECs currently obtain equipment from our
competitors, such as Alcatel, Siemens (through its Efficient Networks subsidiary), Westell, ZyXEL and 2Wire, who have proven to be strong competitors. There is no guarantee we will be successful in retaining the customers acquired in connection with
our acquisition of Cayman or our ability to successfully expand our presence in the ILEC market. If we fail to retain the customers acquired in connection with our acquisition of Cayman or fail to successfully penetrate the ILEC market for our
products and services, our business may be materially and adversely affected.





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





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





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




| | · |  | Rhythms announced in January 2001 its intention to reduce the number of markets in which it offers services and significantly scaled back its operations. In addition, Rhythms
filed a voluntary petition under the Bankruptcy Act in August 2001, and ceased normal operations during September 2001. In December 2001, WorldCom Group purchased Rhythms key DSL assets. As a result, WorldCom will be able to deliver
uninterrupted service to existing Rhythms customers served by the portion of the network that WorldCom is acquiring. However, there is no certainty that WorldCom will continue to purchase our equipment for deployment on the Rhythms network; and
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




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



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





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





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





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





Our revenues will decline and we may incur losses if we lose one or more of our significant customers or if our customers reduce or delay purchases of our products. For the six months
ended March 31, 2002, there were three customers who each individually represented at least 5% of our revenues and in the aggregate, accounted for 37% of our total revenues. In this period, sales to Ingram Micro, Covad and Innotrac represented
approximately 13%, 12% and 12%, respectively, of our total revenues.





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





Our failure to significantly increase our revenues or
sufficiently reduce our operating expenses will result in continuing losses. We incurred losses from continuing operations of $13.6 million for the six months ended March 31, 2002 and have incurred losses from continuing operations of $41.7 million,
$17.6 million and $7.9 million for fiscal years 2001, 2000 and 1999, respectively. Our operations provided $0.1 million of cash for the six months ended March 31, 2002 and have used $5.8 million of cash for fiscal year 2001, provided $0.1 million of
cash for fiscal year 2000 and used $8.4 million of cash for fiscal 1999. Even if we reach profitability and maintain positive cash flow from operations, we may not be able to sustain or increase profitability or cash flow from operations on a
quarterly or annual basis.




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





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





Our revenues and operating results have varied in the past and are likely to vary in the future from quarter to quarter. As
a result, we believe that period-to-period comparisons of our operating results are not necessarily meaningful. Investors should not rely on the results of any one quarter or series of quarters as an indication of our future performance.





It is likely that in some future quarter or quarters our operating results will be below the expectations of securities
analysts or investors. In such event, the market price of our common stock may decline significantly. Variations in our operating results will likely be caused by factors related to the operation of our business, including:





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




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




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




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




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




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




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




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




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




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




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





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




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




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




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



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




| | · |  | Anticipated increases in competition among producers of eCommerce products, including the impact of products that are available from some of our competitors at no cost.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------




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





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




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




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




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




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





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





In the market for broadband
Internet equipment, we primarily compete with Alcatel, Cisco, Siemens (through its Efficient Networks subsidiary), Lucent, Linksys, 2Wire, Polycom (in the IAD market), Westell, and ZyXEL.





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





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





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





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




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Sales of our DSL Internet equipment will decline substantially if central office DSL equipment is not widely
deployed.





We currently depend on the central office equipment of telecommunications carriers that are deploying DSL
services. Historically, substantially all of our sales of DSL products have been designed, manufactured and sold for use with DSL central office equipment manufactured by Copper Mountain and Nokia. We have introduced DSL products that are
interoperable with Alcatel, Cisco, Ericsson, Lucent, Nortel, Orckit, Paradyne, Siemens, and Zhone central office access concentrators. If DSL central office equipment with which our routers are interoperable are not widely used in DSL deployments,
our business will be seriously harmed.





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





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





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





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





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





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





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





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




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





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





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





We compete in markets
characterized by continuing technological advancement, changes in customer requirements and evolving industry standards. To compete successfully, we must design, develop, manufacture and sell new or enhanced products that provide increasingly higher
levels of performance, reliability and compatibility. We will need to continue to integrate our DSL router technology with the architectures of leading central office equipment providers in order to enhance the reliability, ease-of-use and
management functions of each of our DSL products. Currently, our router products are fully integrated with Copper Mountain central office access concentrators and are interoperable with Alcatel, Cisco, Ericsson, Lucent Technologies, Nortel, Nokia,
Orckit, Paradyne, Siemens, and Zhone central office access concentrators. However, we may not be able to successfully develop, introduce, enhance or market these or other products necessary to our future success. In addition, any delay in
developing, introducing or marketing these or other products would seriously harm our business.





Many of our broadband Internet
equipment products are relatively new. You should consider our prospects in light of the difficulties we may encounter because these products are at an early stage of development in a relatively new, rapidly evolving and intensely competitive
market. For example, we may not correctly anticipate market requirements, including requirements for performance, price, features and compatibility with other DSL equipment. We may not be able to introduce rapidly innovative new products that meet
these market requirements. It is possible that the market for broadband Internet equipment will develop in a manner that we do not anticipate.





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





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




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





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





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





Growth in
revenues from our Web platforms will be heavily dependent on recurring fees from eSites and eStores created by licensees. Accordingly, to be successful, our Web platforms must become widely used. If we are unable to expand our sales and distribution
channels to establish the widespread use of our Web platforms, it is possible that competing products could become widely used, reducing the likelihood that we will generate significant revenues from our Web platforms. In addition, some companies
are offering Web presence and enhancement products at no cost. If such free products and services become widely used, the market for our Web platforms products will be limited.





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





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





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





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





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





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




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Our Web platforms products have a lengthy sales cycle.





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





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





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





There are risks associated with international operations.





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





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




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




| | · |  | Dependence on local vendors;
| | - |  | ----------------------------




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




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




| | · |  | Longer sales cycles;
| | - |  | --------------------




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




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




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




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




| | · |  | Political and economic instability.
| | - |  | -----------------------------------




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





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





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




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





Our future performance depends on the continued service of our senior management, product development and sales personnel, particularly Alan
Lefkof, our President and Chief Executive Officer, Thomas Skoulis, our Senior Vice President and General Manager, Web Platforms and William Baker, our Senior Vice President, Finance and Operations, and Chief Financial Officer. None of these persons
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. Our future success depends on our continuing ability to attract,
hire, train and retain a substantial number of highly skilled managerial, technical, sales, marketing and customer support personnel. In addition, new hires frequently require extensive training before they achieve desired levels of productivity.
Competition for qualified personnel is intense, and we may fail to retain our key employees or to attract or retain other highly qualified personnel.





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





We depend on our ability to develop and maintain the proprietary aspects of our technology. To protect our proprietary technology, we rely primarily on a combination of contractual
provisions, confidentiality procedures, trade secrets, and patent, copyright and trademark law.





Despite our efforts to protect
our proprietary rights, unauthorized parties may attempt to copy aspects of our products or obtain and use information that we regard as proprietary. Policing unauthorized use of our products is difficult, and there is no guarantee that the
safeguards that we employ will protect our intellectual property and other valuable competitive information.





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





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





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





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





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




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





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





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





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





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





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





Business
interruptions could adversely affect our business.





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





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





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





| | · |  | Acceptance of and demand for our products;
| | - |  | ------------------------------------------




| | · |  | The number and timing of acquisitions;
| | - |  | --------------------------------------




| | · |  | The costs of developing new products;
| | - |  | -------------------------------------




| | · |  | The costs associated with expansion; and
| | - |  | ----------------------------------------




| | · |  | The extent to which we invest in new technology and research and development projects.
| | - |  | --------------------------------------------------------------------------------------




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





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





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





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




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



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




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




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




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




| | · |  | Fluctuations in the stock market price and volume, which are particularly common among highly volatile securities of companies in our industry;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------




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




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




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




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




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




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





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





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





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





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





PART I.

FINANCIAL INFORMATIONItem 3.

Quantitative and Qualitative Disclosures About Market Risk


---




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





Interest Rate Risk





The table below presents the market value and related weighted-average interest rates for our investment portfolio at March 31, 2002 and 2001. All of our investments mature in twelve months or less.




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March 31, 2002

March 31, 2001Principal (notional) amounts inUnited States dollars:

Cost basis

Fair market value

Averageinterest rate

Cost basis

Fair market value

Averageinterest rate(in thousands)



(in thousands)Cash equivalents  fixed rate [a]

$
24,349

$
24,384

1.81%

$
34,071

$
34,255

5.35%Short-term investments  fixed rate [b]


992


994

1.89%


14,304


14,389

5.24%$
25,341

$
25,378



$
47,375

$
48,644


---

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

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




Our market interest rate risk relates primarily to changes in the United States short-term prime interest rate. These changes impact the price and yield
of our short-term investments. We minimize this risk by following a policy of portfolio diversification.





Foreign Currency Exchange Risk





The table below presents the carrying value, in United
States dollars, of our accounts receivable denominated in Euros at March 31, 2002 and 2001. These accounts receivable are valued at the United States/Euro exchange rate as of March 31, 2002 and 2001, respectively. The carrying value
approximates fair value at March 31, 2002 and 2001.





March 31, 2002

March 31, 2001Principal (notional) amounts inUnited States dollars:

Carrying amount

Exchangerate

Carrying amount

Exchangerate(in thousands)

(in thousands)Accounts receivable denominated in Euros

$
1,334

0.8759

$
2,060

0.8780





The table below presents the carrying value of our currency exchange forward
contracts, in United States dollars, at March 31, 2002 and 2001. The carrying value approximates fair value at March 31, 2002 and 2001.





March 31, 2002

March 31, 2001Principal (notional) amounts in Euros:

Carryingamount


Spotrate

Settlementdate

Carryingamount

Spotrate

Settlementdate(in thousands)






(in thousands)Currency exchange forward contract # 1

$
44


0.8630

April 2002

$
25

0.8811

May 2001Currency exchange forward contract # 2

$
86


0.8605

April 2002

$
155

0.8811

June 2001Currency exchange forward contract # 3

$
(7
)

0.8704

April 2002

$
548

0.8812

July 2001Currency exchange forward contract # 4

$
(105
)

0.8512

April 2002

$
418

0.8813

August 2001Currency exchange forward contract # 5

$
85


0.8625

May 2002






Currency exchange forward contract # 6

$
65


0.8625

May 2002






Currency exchange forward contract # 7

$
172


0.8590

May 2002






Currency exchange forward contract # 8

$
214


0.8575

June 2002












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.




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PART II.

OTHER INFORMATIONItem 2.

Changes in Securities and Use of Proceeds


---




|[c] |  | On March 29, 2002 we issued 300,000 shares of our common stock to the shareholders of DoBox as consideration for the acquisition of certain assets and the assumption of certain
liabilities of DoBox. The common stock was issued in reliance on Section 4(2) of the Securities Act and/or Rule 505 of Regulation D promulgated under the Securities Act, in part based on the limited number and the nature of the DoBox
shareholders.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




PART II.

OTHER INFORMATIONItem 4.

Submission of Matters to a Vote of Security Holders


---




On January 30, 2002, we held our Annual
Meeting of Stockholders in Alameda, California.





An election of directors was held, with the following individuals being elected
to our Board of Directors:





Votes For:

Votes Withheld:Reese M. Jones

16,771,038

270,841Alan B. Lefkof

16,758,179

283,700Robert Lee

16,795,425

246,454David F. Marquardt

16,795,934

245,845Harold S. Wills

16,794,330

247,549





Other matters voted upon at the meeting and the number of affirmative and
negative votes cast with respect to each such matter were as follows:





| | · |  | To approve the Companys 2002 Equity Incentive Plan and to authorize 750,000 shares of common stock for issuance under the plan: there were 4,547,289 votes in favor,
3,422,342 votes opposed, 1,089,616 votes abstaining and no broker non-votes;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | · |  | To approve an amendment to the Companys Employee Stock Purchase Plan to increase the number of shares of common stock available for issuance under the plan by 650,000
shares: there were 7,585,808 votes in favor, 394,219 votes opposed, 1,079,220 votes abstaining and no broker non-votes;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | · |  | To ratify the appointment of KPMG LLP as independent auditors of the Company: there were 16,799,778 votes in favor, 206,643 votes opposed, 35,458 votes abstaining and no broker
non-votes.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




PART II.

OTHER INFORMATIONItem 6.

Exhibits and Reports on Form 8-K


---




|[b] |  | During the three months ended March 31, 2002, we filed the following reports on Form 8-K:
|--- |  | -----------------------------------------------------------------------------------------




| | · |  | On March 4, 2002, we filed a report on Form 8-K reporting: Item 5  Other Events announcing effective March 1, 2002, Michael Trupiano will no longer serve as Senior Vice
President and General Manager of Netopia. Mr. Trupiano will remain as a part time employee and special advisor to Netopias President and Chief Executive Officer and to Netopias Board of Directors.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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SIGNATURE


---




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





Date:May 15, 2002

NETOPIA, INC.(Registrant)By:

/s/  William D. BakerWilliam D. BakerSenior Vice President, Finance and Operations, and Chief Financial Officer




34