##### 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 1934
|- | ---------------------------------------------------------------------------------------



For the quarterly period ended June 30, 2005



OR



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



For the transition period from
 to



Commission file number 0-28450



Netopia, Inc.

(Exact name of
registrant as specified in its charter)



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



6001 Shellmound
Street, 4thFloor

Emeryville, California 94608

(Address of principal executive offices, including Zip Code)



---



(510) 420-7400

(Registrants
telephone number, including area code)



---



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



Yes þ     No ̈



Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).



Yes þ     No ̈



As of August 5, 2005, there were 25,241,431
shares of the Registrants common stock outstanding.



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##### Table of Contents

NETOPIA, INC.

Form 10-Q

Table of Contents



|               |  |                                                                                                            |  |     
|-------------- |  | ---------------------------------------------------------------------------------------------------------- |  | ----
|               |  |                                                                                                            |  | Page
|               |  |                                                                                                           
|PART I.        |  | FINANCIAL INFORMATION                                                                                      |  |     
|               |  |                                                                                                           
|Item 1.        |  | Condensed Consolidated Financial Statements                                                                |  | 1   
|               |  |                                                                                                           
|               |  | Condensed Consolidated Balance Sheets at June 30, 2005 and September 30, 2004                              |  | 1   
|               |  |                                                                                                           
|               |  | Condensed Consolidated Statements of Operations for the three and nine months ended June 30, 2005 and 2004 |  | 2   
|               |  |                                                                                                           
|               |  | Condensed Consolidated Statements of Cash Flows for the nine months ended June 30, 2005 and 2004           |  | 3   
|               |  |                                                                                                           
|               |  | Notes to Condensed Consolidated Financial Statements                                                       |  | 4   
|               |  |                                                                                                           
|Item 2.        |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                      |  | 17  
|               |  |                                                                                                           
|Item 3.        |  | Quantitative and Qualitative Disclosures About Market Risk                                                 |  | 35  
|               |  |                                                                                                           
|Item 4.        |  | Controls and Procedures                                                                                    |  | 36  
|               |  |                                                                                                           
|PART II.       |  | OTHER INFORMATION                                                                                          |  |     
|               |  |                                                                                                           
|Item 1.        |  | Legal Proceedings                                                                                          |  | 38  
|               |  |                                                                                                           
|Item 6.        |  | Exhibits and Reports on Form 8-K                                                                           |  | 41  
|               | 
|Signatures     |  | 42                                                                                                        
|               | 
|Certifications |  |                                                                                                           



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##### Table of Contents

PART I  FINANCIAL INFORMATION



Our Annual Report on Form 10-K for the fiscal year ended September 30, 2004 (the 2004 10-K) amended our Annual Reports on Form
10-K previously filed for the fiscal years ended September 30, 2003 and September 30, 2002, and our previously filed reports on Form 10-Q for the fiscal quarters ended March 31, 2004 and December 31, 2003, to reflect the restatements of our
consolidated financial statements for all such previously reported periods. This Form 10-Q should be read in conjunction with the 2004 10-K, in which we explain the restatements of our consolidated financial statements.



|ITEM 1. | UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|------- | -----------------------------------------------------



NETOPIA, INC.

Condensed Consolidated Balance Sheets



|                                                                                                                                                                            |  |                          |          |   |                       |   |          |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------ | -------- | - | --------------------- | - | -------- | -
|                                                                                                                                                                            |  | June 30,2005 (Unaudited) |          |   | September 30,2004 (1) |  
|                                                                                                                                                                            |  | (in thousands)           |         
|Assets                                                                                                                                                                      |  |                          |          |   |                       |   |          |  
|Current assets:                                                                                                                                                             |  |                          |          |   |                       |   |          |  
|Cash and cash equivalents                                                                                                                                                   |  | $                        | 22,825   |   |                       | $ | 23,973   |  
|Trade accounts receivable, net of allowances for doubtful accounts of $81 and $111, respectively                                                                            |  |                          | 18,345   |   |                       |   | 17,812   |  
|Inventories                                                                                                                                                                 |  |                          | 5,543    |   |                       |   | 6,280    |  
|Prepaid expenses and other current assets                                                                                                                                   |  |                          | 975      |   |                       |   | 1,226    |  
|                                                                                                                                                                            |  |                          |          |   |                       |   |          |  
|Total current assets                                                                                                                                                        |  |                          | 47,688   |   |                       |   | 49,291   |  
|Furniture, fixtures and equipment, net                                                                                                                                      |  |                          | 2,631    |   |                       |   | 2,694    |  
|Acquired technology and other intangible assets, net                                                                                                                        |  |                          | 2,781    |   |                       |   | 4,016    |  
|Goodwill                                                                                                                                                                    |  |                          | 1,668    |   |                       |   | 1,668    |  
|Long-term investments                                                                                                                                                       |  |                          | 1,032    |   |                       |   | 1,032    |  
|Deposits and other assets                                                                                                                                                   |  |                          | 525      |   |                       |   | 886      |  
|                                                                                                                                                                            |  |                          |          |   |                       |   |          |  
|TOTAL ASSETS                                                                                                                                                                |  |                          | 56,325   |   |                       |   | 59,587   |  
|                                                                                                                                                                            |  |                          |          |   |                       |   |          |  
|Liabilities and Stockholders Equity                                                                                                                                        |  |                          |          |   |                       |   |          |  
|Current liabilities:                                                                                                                                                        |  |                          |          |   |                       |   |          |  
|Accounts payable                                                                                                                                                            |  |                          | 13,109   |   |                       |   | 9,827    |  
|Accrued compensation                                                                                                                                                        |  |                          | 2,300    |   |                       |   | 2,582    |  
|Accrued liabilities                                                                                                                                                         |  |                          | 2,438    |   |                       |   | 3,806    |  
|Deferred revenue                                                                                                                                                            |  |                          | 1,354    |   |                       |   | 1,679    |  
|Current portion of borrowings under term loans                                                                                                                              |  |                          |         |   |                       |   | 104      |  
|Other current liabilities                                                                                                                                                   |  |                          | 65       |   |                       |   | 53       |  
|                                                                                                                                                                            |  |                          |          |   |                       |   |          |  
|Total current liabilities                                                                                                                                                   |  |                          | 19,266   |   |                       |   | 18,051   |  
|Long-term liabilities:                                                                                                                                                      |  |                          |          |   |                       |   |          |  
|Other long-term liabilities                                                                                                                                                 |  |                          | 389      |   |                       |   | 406      |  
|                                                                                                                                                                            |  |                          |          |   |                       |   |          |  
|Total liabilities                                                                                                                                                           |  |                          | 19,655   |   |                       |   | 18,457   |  
|                                                                                                                                                                            |  |                          |          |   |                       |   |          |  
|Stockholders equity:                                                                                                                                                       |  |                          |          |   |                       |   |          |  
|Common stock: $0.001 par value, 50,000,000 shares authorized; 25,225,223 and 24,717,503 shares issued and outstanding at June 30, 2005 and
September 30, 2004, respectively |  |                          | 167,598  |   |                       |   | 166,270  |  
|Other Comprehensive Income (loss)                                                                                                                                           |  |                          | (3       | ) |                       |   |         |  
|Accumulated deficit                                                                                                                                                         |  |                          | (130,925 | ) |                       |   | (125,140 | )
|                                                                                                                                                                            |  |                          |          |   |                       |   |          |  
|Total stockholders equity                                                                                                                                                  |  |                          | 36,670   |   |                       |   | 41,130   |  
|                                                                                                                                                                            |  |                          |          |   |                       |   |          |  
|TOTAL LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                  |  | $                        | 56,325   |   |                       | $ | 59,587   |  
|                                                                                                                                                                            |  |                          |          |   |                       |   |          |  



|(1) | Derived from the audited consolidated balance sheet dated September 30, 2004 included in the 2004 10-K.
|--- | -------------------------------------------------------------------------------------------------------



See accompanying notes to Condensed Consolidated Financial Statements.



Page 1



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##### Table of Contents

NETOPIA, INC.

Condensed Consolidated Statements of Operations

Unaudited



|                                                 |  |                                         |        |   |                           |   |        |      |  |   |          |   |  |   |        |  
|------------------------------------------------ |  | --------------------------------------- | ------ | - | ------------------------- | - | ------ | ---- |  | - | -------- | - |  | - | ------ | -
|                                                 |  | Three Months EndedJune 30,              |        |   | Nine Months EndedJune 30, |  
|                                                 |  | 2005                                    |        |   | 2004                      |   |        | 2005 |  |   | 2004 (1) |  
|                                                 |  | (in thousands, except per share amount) |       
|REVENUES:                                        |  |                                         |        |   |                           |   |        |      |  |   |          |   |  |   |        |  
|Broadband equipment                              |  | $                                       | 25,103 |   |                           | $ | 21,891 |      |  | $ | 73,547   |   |  | $ | 63,426 |  
|Broadband software and services                  |  |                                         | 2,726  |   |                           |   | 3,543  |      |  |   | 8,823    |   |  |   | 12,074 |  
|                                                 |  |                                         |        |   |                           |   |        |      |  |   |          |   |  |   |        |  
|Total revenues                                   |  |                                         | 27,829 |   |                           |   | 25,434 |      |  |   | 82,370   |   |  |   | 75,500 |  
|                                                 |  |                                         |        |   |                           |   |        |      |  |   |          |   |  |   |        |  
|COST OF REVENUES:                                |  |                                         |        |   |                           |   |        |      |  |   |          |   |  |   |        |  
|Broadband equipment                              |  |                                         | 18,655 |   |                           |   | 16,757 |      |  |   | 54,907   |   |  |   | 45,780 |  
|Broadband software and services                  |  |                                         | 489    |   |                           |   | 267    |      |  |   | 1,139    |   |  |   | 706    |  
|Amortization of acquired technology              |  |                                         | 300    |   |                           |   | 300    |      |  |   | 900      |   |  |   | 900    |  
|                                                 |  |                                         |        |   |                           |   |        |      |  |   |          |   |  |   |        |  
|Total cost of revenues                           |  |                                         | 19,444 |   |                           |   | 17,324 |      |  |   | 56,946   |   |  |   | 47,386 |  
|                                                 |  |                                         |        |   |                           |   |        |      |  |   |          |   |  |   |        |  
|GROSS PROFIT                                     |  |                                         | 8,385  |   |                           |   | 8,110  |      |  |   | 25,424   |   |  |   | 28,114 |  
|OPERATING EXPENSES:                              |  |                                         |        |   |                           |   |        |      |  |   |          |   |  |   |        |  
|Research and development                         |  |                                         | 3,400  |   |                           |   | 3,846  |      |  |   | 10,009   |   |  |   | 11,854 |  
|Selling and marketing                            |  |                                         | 4,582  |   |                           |   | 5,199  |      |  |   | 14,249   |   |  |   | 15,262 |  
|General and administrative                       |  |                                         | 2,561  |   |                           |   | 1,184  |      |  |   | 6,785    |   |  |   | 3,591  |  
|Amortization of intangible assets                |  |                                         | 86     |   |                           |   | 86     |      |  |   | 259      |   |  |   | 259    |  
|Restructuring costs                              |  |                                         |       |   |                           |   |       |      |  |   | 98       |   |  |   |       |  
|                                                 |  |                                         |        |   |                           |   |        |      |  |   |          |   |  |   |        |  
|Total operating expenses                         |  |                                         | 10,629 |   |                           |   | 10,315 |      |  |   | 31,400   |   |  |   | 30,966 |  
|                                                 |  |                                         |        |   |                           |   |        |      |  |   |          |   |  |   |        |  
|OPERATING LOSS                                   |  |                                         | (2,244 | ) |                           |   | (2,205 | )    |  |   | (5,976   | ) |  |   | (2,852 | )
|Other income (expense), net                      |  |                                         | (44    | ) |                           |   | (52    | )    |  |   | 259      |   |  |   | 193    |  
|Provision for income taxes                       |  |                                         | 24     |   |                           |   | 19     |      |  |   | 68       |   |  |   | 65     |  
|NET LOSS                                         |  | $                                       | (2,312 | ) |                           | $ | (2,276 | )    |  | $ | (5,785   | ) |  | $ | (2,724 | )
|                                                 |  |                                         |        |   |                           |   |        |      |  |   |          |   |  |   |        |  
|Per share data, net loss:                        |  |                                         |        |   |                           |   |        |      |  |   |          |   |  |   |        |  
|Basic and diluted net loss per share             |  | $                                       | (0.09  | ) |                           | $ | (0.09  | )    |  | $ | (0.23    | ) |  | $ | (0.12  | )
|Common shares used in the per share calculations |  |                                         | 25,215 |   |                           |   | 24,033 |      |  |   | 25,000   |   |  |   | 23,247 |  



|(1) | See the 2004 10-K for a description of the restatements of financial results for prior periods.
|--- | -----------------------------------------------------------------------------------------------



See accompanying notes to Condensed Consolidated Financial Statements.



Page 2



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##### Table of Contents

NETOPIA, INC.

Condensed Consolidated Statements of Cash Flows

Unaudited



|                                                                     |  |                           |        |   |      |   |        |  
|-------------------------------------------------------------------- |  | ------------------------- | ------ | - | ---- | - | ------ | -
|                                                                     |  | Nine Months EndedJune 30, |       
|                                                                     |  | 2005                      |        |   | 2004 |  
|                                                                     |  | (in thousands)            |       
|CASH FLOWS FROM OPERATING ACTIVITIES:                                |  |                           |        |   |      |   |        |  
|Net loss                                                             |  | $                         | (5,785 | ) |      | $ | (2,724 | )
|Reconciliation of net loss to net cash used in operating activities: |  |                           |        |   |      |   |        |  
|Depreciation and amortization                                        |  |                           | 2,695  |   |      |   | 3,344  |  
|Changes in allowance for doubtful accounts                           |  |                           | (30    | ) |      |   | (79    | )
|Cumulative translation adjustment                                    |  |                           | (3     | ) |      |   |       |  
|Restructure costs                                                    |  |                           | (459   | ) |      |   |       |  
|Charge for impairment of capitalize software costs                   |  |                           | 99     |   |      |   |       |  
|Changes in operating assets and liabilities:                         |  |                           |        |   |      |   |        |  
|Trade accounts receivable                                            |  |                           | (503   | ) |      |   | (155   | )
|Inventories                                                          |  |                           | 737    |   |      |   | (3,208 | )
|Prepaid & other current assets                                       |  |                           | 251    |   |      |   | (20    | )
|Deposits and other assets                                            |  |                           | 9      |   |      |   | 72     |  
|Accounts payable and accrued liabilities                             |  |                           | 3,021  |   |      |   | (1,220 | )
|Deferred revenue                                                     |  |                           | (325   | ) |      |   | (114   | )
|Other liabilities                                                    |  |                           | (935   | ) |      |   | (504   | )
|                                                                     |  |                           |        |   |      |   |        |  
|Net cash used in operating activities                                |  |                           | (1,228 | ) |      |   | (4,608 | )
|                                                                     |  |                           |        |   |      |   |        |  
|Cash flow from investing activities:                                 |  |                           |        |   |      |   |        |  
|Purchase of furniture, fixtures and equipment                        |  |                           | (1,151 | ) |      |   | (1,296 | )
|Acquisition of intangibles                                           |  |                           |       |   |      |   | (300   | )
|Acquisition of business                                              |  |                           |       |   |      |   | (146   | )
|                                                                     |  |                           |        |   |      |   |        |  
|Net cash used in investing activities                                |  |                           | (1,151 | ) |      |   | (1,742 | )
|                                                                     |  |                           |        |   |      |   |        |  
|Cash flow from financing activities:                                 |  |                           |        |   |      |   |        |  
|Repayments of term loans                                             |  |                           | (104   | ) |      |   | (188   | )
|Proceeds from the issuance of common stock                           |  |                           | 1,335  |   |      |   | 7,865  |  
|                                                                     |  |                           |        |   |      |   |        |  
|Net cash provided by financing activities                            |  |                           | 1,231  |   |      |   | 7,677  |  
|                                                                     |  |                           |        |   |      |   |        |  
|Net increase (decrease) in cash and cash equivalents                 |  |                           | (1,148 | ) |      |   | 1,327  |  
|Cash and cash equivalents, beginning of period                       |  |                           | 23,973 |   |      |   | 22,208 |  
|                                                                     |  |                           |        |   |      |   |        |  
|Cash and cash equivalents, end of period                             |  | $                         | 22,825 |   |      | $ | 23,535 |  
|                                                                     |  |                           |        |   |      |   |        |  



See accompanying notes
to Condensed Consolidated Financial Statements.



Page 3



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##### Table of Contents

NETOPIA, INC.

Notes to Condensed Consolidated Financial Statements



|(1) | The Company
|--- | -----------



Netopia, Inc. (Netopia, the Company or we) develops and markets broadband customer premise equipment, remote
management software and broadband services.



Our broadband
equipment includes a family of telecommunications carrier-class broadband customer premise equipment, including modems, routers and gateways (collectively referred to as gateways), and related accessories, including wireless (Wi-Fi)
adapters. Our gateways provide a link between telecommunication carriers lines and residential and distributed business networks. The gateways provide functionality, including converting electronic and analog signals to digital communication,
network routing, and wired and wireless networked connectivity for simultaneous voice, video, data and other applications.



Our products provide broadband solutions to our customers, the largest of which are telecommunication carriers and Internet Service Providers, for the
delivery of broadband services to their residential and business-class customers. Our solutions enable carriers and broadband service providers to (i) deliver our feature-rich gateways to their customers, (ii) utilize our software that allows remote
management of equipment located at their customers premises in order to reduce customer support costs, and (iii) provide value added services, including combined voice, video and data services (commonly referred to as triple-play
services).



Our remote management software products enable
remote control, monitoring and service provisioning of broadband equipment, networked devices such as set top boxes and Web cams, as well as the personal computers with which they interact. Our software solutions are designed to meet the
requirements of a full range of users: individual-to-individual, carrier-to-customer, and help desk-to-users.



Our broadband services include Wi-Fi hot spots for local and nationwide networks of small venues, web site and remote control hosting, retail broadband
point-of-sale services and parental controls.



|(2) | Pro Forma Stock Compensation Expense
|--- | ------------------------------------



We maintain stock option plans under which we may grant incentive stock options and non-statutory stock options. Statement of Financial Accounting
Standards (SFAS) No. 123, Accounting for Stock-Based Compensation, encourages, but does not require, companies to record compensation cost for stock-based employee compensation plans based on the fair market value of options
granted. We account for stock based compensation using the intrinsic value method prescribed in Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. Because the
grant price equals the market price on the date of grant for all options we issued, we did not recognize compensation expense for stock options granted to our employees and directors. In accordance with SFAS No. 123, we recognize as an expense, the
fair value of options and other equity instruments granted to non-employees other than to our directors. We have not issued any stock options to non-employees since fiscal year 2001 other than to our directors. In December 2002, the Financial
Accounting Standards Board (FASB) issued SFAS No. 148, Accounting for Stock Based Compensation  Transition and Disclosure, which amends SFAS No. 123. SFAS No. 148 requires more prominent and frequent disclosures about the
effects of stock-based compensation. We will continue to account for our stock based compensation according to the provisions of APB No. 25, through the end of the fiscal year ending September 30, 2005. SFAS No. 148 requires the disclosure of pro
forma net income and earnings per share. Under SFAS No. 148, the fair value of stock-based awards to employees is calculated through the use of option pricing models, even though such models were developed to estimate the fair value of freely
tradable, fully transferable options without vesting restrictions, which significantly differ from the Companys stock option awards. These models also require subjective assumptions, including future stock price volatility and expected time to
exercise, which greatly affect the calculated values.



Page 4



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##### Table of Contents

The Companys calculations were made using the Black-Scholes Option-Pricing Model with the following
weighted average assumptions for options granted:



|                            |  |      |   |  |      |  
|--------------------------- |  | ---- | - |  | ---- | -
|Three Months Ended June 30, |  | 2005 |   |  | 2004 |  
|Expected life (in years)    |  | 3.23 |   |  | 3.23 |  
|Expected volatility         |  | 354  | % |  | 313  | %
|Risk-free interest rate     |  | 3.67 |   |  | 3.16 |  
|Expected dividend yield     |  |     |   |  |     |  



Under the Employee
Stock Purchase Plan, rights to purchase shares are only granted during the second and fourth quarter of each fiscal year. The value of rights to purchase shares granted were estimated at the date of grant using the following weighted average
assumptions:



|                            |  |      |   |  |      |  
|--------------------------- |  | ---- | - |  | ---- | -
|Three Months Ended June 30, |  | 2005 |   |  | 2004 |  
|Expected life (in years)    |  | 2    |   |  | 2    |  
|Expected volatility         |  | 221  | % |  | 133  | %
|Risk-free interest rate     |  | 3.66 |   |  | 2.70 |  
|Expected dividend yield     |  |     |   |  |     |  



The following table
illustrates the effect on our net loss and net loss per share if we had recorded compensation costs based on the estimated grant date fair value defined by SFAS No. 123 for all granted stock-based awards:



|                                                                                                                |  |                                       |        |   |                           |   |        |      |  |   |        |   |  |   |        |  
|--------------------------------------------------------------------------------------------------------------- |  | ------------------------------------- | ------ | - | ------------------------- | - | ------ | ---- |  | - | ------ | - |  | - | ------ | -
|                                                                                                                |  | Three Months EndedJune 30,            |        |   | Nine Months EndedJune 30, |  
|                                                                                                                |  | 2005                                  |        |   | 2004                      |   |        | 2005 |  |   | 2004   |  
|                                                                                                                |  | (in thousands, except per share data) |       
|Net loss, as reported                                                                                           |  | $                                     | (2,312 | ) |                           | $ | (2,276 | )    |  | $ | (5,785 | ) |  | $ | (2,724 | )
|Add: Total stock-based employee compensation expense included in the determination of net loss, as reported     |  |                                       |       |   |                           |   |       |      |  |   |       |   |  |   |       |  
|Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards |  |                                       | 1,152  |   |                           |   | 1,707  |      |  |   | 3,735  |   |  |   | 4,970  |  
|                                                                                                                |  |                                       |        |   |                           |   |        |      |  |   |        |   |  |   |        |  
|Net loss, pro forma                                                                                             |  | $                                     | (3,464 | ) |                           | $ | (3,983 | )    |  | $ | (9,520 | ) |  | $ | (7,694 | )
|                                                                                                                |  |                                       |        |   |                           |   |        |      |  |   |        |   |  |   |        |  
|Basic and diluted net loss per share  As reported                                                              |  | $                                     | (0.09  | ) |                           | $ | (0.09  | )    |  | $ | (0.23  | ) |  | $ | (0.12  | )
|Basic and diluted net loss per share  Pro Forma                                                                |  | $                                     | (0.14  | ) |                           | $ | (0.17  | )    |  | $ | (0.38  | ) |  | $ | (0.33  | )



The Black-Scholes
Single Option weighted average fair value of employee stock options granted during the three months ended June 30, 2005 and 2004 was $3.46 and $5.78, respectively. The Black-Scholes Single Option weighted average fair value of employee stock options
granted during the nine months ended June 30, 2005 and 2004 was $3.18 and $8.43, respectively.



Page 5



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##### Table of Contents

The following table summarizes activity under the Companys stock option plans:



|                                     |  |                     |   |  |                               |     
|------------------------------------ |  | ------------------- | - |  | ----------------------------- | ----
|Stock options                        |  | Shares underOptions |   |  | Weightedaverageexercise price
|Outstanding as of September 30, 2004 |  | 5,971,110           |   |  | $                             | 4.59
|Options granted                      |  | 449,000             |   |  |                               | 2.74
|Options exercised                    |  | (71,110             | ) |  |                               | 1.61
|Options cancelled                    |  | (817,234            | ) |  |                               | 4.86
|                                     |  |                     |   |  |                               |     
|Outstanding as of December 31, 2004  |  | 5,531,766           |   |  |                               | 4.44
|Options granted                      |  | 197,500             |   |  |                               | 3.39
|Options exercised                    |  | (152,080            | ) |  |                               | 3.00
|Options cancelled                    |  | (179,659            | ) |  |                               | 5.19
|                                     |  |                     |   |  |                               |     
|Outstanding as of March 31, 2005     |  | 5,397,527           |   |  |                               | 4.41
|Options granted                      |  | 562,000             |   |  |                               | 3.46
|Options exercised                    |  | (22,879             | ) |  |                               | 1.54
|Options cancelled                    |  | (163,909            | ) |  |                               | 3.90
|                                     |  |                     |   |  |                               |     
|Outstanding as of June 30, 2005      |  | 5,772,739           |   |  |                               | 4.35
|                                     |  |                    
|Exercisable                          |  | 3,830,465           |   |  | $                             | 4.71
|                                     |  |                     |   |  |                               |     



|(3) | Basis of Presentation
|--- | ---------------------



The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with United States generally accepted accounting
principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles in the
United States for complete financial statements. The accompanying condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Companys Annual Report on
Form 10-K for the fiscal year ended September 30, 2004.



In
the opinion of management, the unaudited interim financial statements included herein reflect all adjustments, consisting of normal recurring adjustments, necessary to present fairly the Companys consolidated financial position and the results
of operations and cash flows at June 30, 2005 and for all periods presented. The results of operations for the three- and nine-month periods ended June 30, 2005 are not necessarily indicative of the results that may be expected for the fiscal year
ending September 30, 2005 (fiscal year 2005).



Estimates: The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. Estimates are used for, but not limited to, the accounting for the allowance for doubtful accounts, sales reserves, inventory write-downs, customer support service accruals, warranty
obligations, depreciation and amortization, contingencies and potential asset impairment of investments, intangible assets, goodwill and other assets. Actual results could differ from estimates.



Cash and Cash equivalents: The Company records all investments with a
maturity of less than 90 days as cash equivalents.



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|(4) | Inventories
|--- | -----------



Inventories: Inventories are stated at the lower of cost (first-in, first-out) or market (estimated net realizable value). Inventories were as
follows:



|                 |  |                |       |                   |   |      
|---------------- |  | -------------- | ----- | ----------------- | - | -----
|                 |  | June 30,2005   |       | September 30,2004
|                 |  | (in thousands)
|Raw materials    |  | $              | 1,318 |                   | $ | 1,595
|Work in process  |  |                | 47    |                   |   | 448  
|Finished goods   |  |                | 4,178 |                   |   | 4,237
|                 |  |                |       |                   |   |      
|Inventories, net |  | $              | 5,543 |                   | $ | 6,280
|                 |  |                |       |                   |   |      



|(5) | Recent Accounting Pronouncements
|--- | --------------------------------



In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections, a replacement of APB No. 20 and FASB Statement No. 3
(SFAS No. 154). SFAS No. 154 requires retrospective application to prior periods financial statements of a voluntary change in accounting principle unless it is impracticable. APB Opinion No. 20 Accounting Changes,
previously required that most voluntary changes in accounting principle be recognized by including in net income of the period of the change the cumulative effect of changing to the new accounting principle. This statement is effective for our
Company as of January 1, 2006. The Company does not believe that the adoption of SFAS No. 154 has had nor will have a material impact on our consolidated financial statements.



In December 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based Payment(SFAS No. 123R), which
replaces SFAS No. 123 Accounting for Stock-Based Compensation and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees. SFAS No. 123R requires all share-based payments to employees, including grants of employee stock
options, to be recognized in the financial statements based on their fair values. The pro forma disclosures previously permitted under SFAS No. 123 no longer will be an alternative to financial statement recognition. We are required to adopt SFAS
No. 123R in the first quarter of fiscal year 2006, beginning October 1, 2005. Under SFAS No. 123R, we must determine the appropriate fair value model to be used for valuing share-based payments and the amortization method for compensation cost. We
are evaluating the requirements of SFAS No. 123R and expect that the adoption of SFAS No. 123R will have a material impact on our consolidated results of operations and earnings per share. We have not yet determined the effect of adopting SFAS No.
123R, and we have not determined whether the adoption will result in amounts that are similar to the current pro forma disclosures under SFAS No. 123.



In March 2005, the SEC issued Staff Accounting Bulletin (SAB) No. 107, which expresses the views of the SEC regarding the interaction between
SFAS No. 123R and certain SEC rules and regulations. SAB No. 107 provides guidance related to the valuation of share-based payment arrangements for public companies, including assumptions such as guidance related to share-based payment transactions
with non-employees, expected volatility, expected term and the accounting for income tax effects of share-based payment arrangements upon adoption of SFAS No. 123R. The Company will apply the principles of SAB 107 in conjunction with its adoption of
SFAS No. 123R.



In March 2004, the FASB ratified the
recognition and measurement guidance and certain disclosure requirements for impaired securities as described in Emerging Issues Task Force (EITF) Issue No. 03-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain
Investments. EITF Issue No. 03-1 provides new guidance for determining and recording impairment for both debt and equity securities. It also requires additional disclosure for declines in investments that are deemed to be temporary under the
standard. In September 2004, the FASB approved the issuance of a FASB Staff Position to delay certain measurement and recognition guidance contained in EITF Issue No. 03-1. We do not expect that the adoption of the recognition and measurement



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##### Table of Contents

provisions will have a material impact on our consolidated balance sheet or statement of operations. The disclosure requirements are effective for fiscal
years ending after June 15, 2004, and are required only for annual periods.



In November 2004, the FASB issued SFAS No. 151, Inventory Costsan amendment of ARB No. 43, Chapter 4. This statement clarifies the accounting for abnormal amounts of facility expense, freight,
handling costs and wasted materials (spoilage) to require them to be recognized as current-period charges. This statement is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. Earlier application is permitted.
The adoption of this standard is not expected to have a material impact on the Companys consolidated balance sheet or statement of operations.



|(6) | Goodwill and Other Intangible Assets
|--- | ------------------------------------



The Companys intangible assets at June 30, 2005 consist of goodwill acquired in connection with the acquisitions of JadeSail and WebOrder, which the
Company is not amortizing, and other intangible assets acquired in connection with the acquisitions of JadeSail and Cayman, which the Company is amortizing on a straight-line basis over the estimated useful lives.



Goodwill as of June 30, 2005 and September 30, 2004 was maintained in our
broadband software and services segment as follows:



|               |  |                 |  |                |      
|-------------- |  | --------------- |  | -------------- | -----
|               |  | Acquisitiondate |  | Goodwill      
|               |  |                 |  | (in thousands)
|JadeSail       |  | Oct-03          |  | $              | 1,149
|WebOrder       |  | Mar-00          |  |                | 519  
|               |  |                 |  |                |      
|Total Goodwill |  |                 |  | $              | 1,668
|               |  |                 |  |                |      



Acquired intangible
assets are amortized over their estimated useful lives, which range from three to five years. The carrying amounts and amortization expense by segment of the acquired intangible assets as of June 30, 2005 and September 30, 2004 are as follows:



|                                 |  |                |  |                 |  |                             |       |                     |   |        |                        |  |   |      
|-------------------------------- |  | -------------- |  | --------------- |  | --------------------------- | ----- | ------------------- | - | ------ | ---------------------- |  | - | -----
|                                 |  | EstimatedLife  |  | Acquisitiondate |  | Balance atSeptember 30,2004 |       | Amortizationexpense |   |        | Balance atJune 30,2005
|                                 |  | (in thousands)
|Broadband equipment:             |  |                |  |                 |  |                             |       |                     |   |        |                        |  |   |      
|Acquired technology              |  | 5.0 years      |  | Oct-03          |  | $                           | 197   |                     | $ | (37    | )                      |  | $ | 160  
|Acquired technology              |  | 5.4 years      |  | Oct-01          |  |                             | 3,234 |                     |   | (865   | )                      |  |   | 2,369
|Sales channel relationships      |  | 5.4 years      |  | Oct-01          |  |                             | 345   |                     |   | (259   | )                      |  |   | 86   
|                                 |  |                |  |                 |  |                             |       |                     |   |        |                        |  |   |      
|Subtotal                         |  |                |  |                 |  |                             | 3,776 |                     |   | (1,161 | )                      |  |   | 2,615
|Broadband software and services: |  |                |  |                 |  |                             |       |                     |   |        |                        |  |   |      
|Marketing license                |  | 3.0 years      |  | Mar-04          |  |                             | 240   |                     |   | (74    | )                      |  |   | 166  
|                                 |  |                |  |                 |  |                             |       |                     |   |        |                        |  |   |      
|Subtotal                         |  |                |  |                 |  |                             | 240   |                     |   | (74    | )                      |  |   | 166  
|                                 |  |                |  |                 |  |                             |       |                     |   |        |                        |  |   |      
|Total Other Intangibles          |  |                |  |                 |  | $                           | 4,016 |                     | $ | (1,235 | )                      |  | $ | 2,781
|                                 |  |                |  |                 |  |                             |       |                     |   |        |                        |  |   |      



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The total expected future amortization related to intangible assets as follows:



|                  |  |              |      
|----------------- |  | ------------ | -----
|(In thousands)    |  | Amortization
|Fiscal Year 2005* |  | $            | 412  
|Fiscal Year 2006  |  |              | 1,646
|Fiscal Year 2007  |  |              | 674  
|Fiscal Year 2008  |  |              | 49   
|                  |  |              |      
|Totals            |  | $            | 2,781
|                  |  |              |      



|* | Represents amortization expense for the remaining three months of fiscal year 2005.
|- | -----------------------------------------------------------------------------------



|(7) | Per Share Calculations
|--- | ----------------------



Basic net loss per share is calculated from the weighted average number of shares of common stock outstanding during the period. Diluted net loss per
share is calculated from the weighted average number of shares of common stock outstanding during the period plus potential dilutive shares from options outstanding using the treasury stock method. All options outstanding have been excluded from the
computation of the diluted loss per share for the three and nine months ended June 30, 2005 and 2004, because their effect on the loss per share was anti-dilutive. The following table details the per share calculations:



|                                                      |  |                                          |        |   |                           |   |        |      |  |   |        |   |  |   |        |  
|----------------------------------------------------- |  | ---------------------------------------- | ------ | - | ------------------------- | - | ------ | ---- |  | - | ------ | - |  | - | ------ | -
|                                                      |  | Three Months EndedJune 30,               |        |   | Nine Months EndedJune 30, |  
|                                                      |  | 2005                                     |        |   | 2004                      |   |        | 2005 |  |   | 2004   |  
|                                                      |  | (in thousands; except per share amounts) |       
|Calculation of basic and diluted net loss per share:  |  |                                          |        |   |                           |   |        |      |  |   |        |   |  |   |        |  
|Net loss                                              |  | $                                        | (2,312 | ) |                           | $ | (2,276 | )    |  | $ | (5,785 | ) |  | $ | (2,724 | )
|Weighted average basic and diluted shares outstanding |  |                                          | 25,215 |   |                           |   | 24,033 |      |  |   | 25,000 |   |  |   | 23,247 |  
|                                                      |  |                                          |        |   |                           |   |        |      |  |   |        |   |  |   |        |  
|Basic and diluted net loss per share                  |  | $                                        | (0.09  | ) |                           | $ | (0.09  | )    |  | $ | (0.23  | ) |  | $ | (0.12  | )
|                                                      |  |                                          |        |   |                           |   |        |      |  |   |        |   |  |   |        |  



For the three months
ended June 30, 2005 and 2004, the computation of diluted loss per share excluded in the money options to purchase common stock totaling 365,502 and 2,043,976 shares, respectively.



For the nine months ended June 30, 2005 and 2004, the computation of diluted
loss per share excluded in the money options to purchase common stock totaling 368,782 and 3,613,129 shares, respectively.



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|(8) | Segment, Geographic and Significant Customer Information
|--- | --------------------------------------------------------



Segment Information: The Companys reportable segments are broadband equipment and broadband software and services. The Company
evaluates performance based on net revenues and gross profits from operations of these two segments, which are shown below:



|                                    |  |                    |        |   |                             |   |       |       |  |   |                    |   |  |                             |        |   |       |   |        |   |  |   |        |  
|----------------------------------- |  | ------------------ | ------ | - | --------------------------- | - | ----- | ----- |  | - | ------------------ | - |  | --------------------------- | ------ | - | ----- | - | ------ | - |  | - | ------ | -
|                                    |  | 2005               |        |   | 2004                        |  
|Three months ended June 30,         |  | Broadbandequipment |        |   | BroadbandSoftware &Services |   |       | Total |  |   | Broadbandequipment |   |  | BroadbandSoftware &Services |        |   | Total |  
|                                    |  | (in thousands)     |       
|Revenue                             |  | $                  | 25,103 |   |                             | $ | 2,726 |       |  | $ | 27,829             |   |  | $                           | 21,891 |   |       | $ | 3,543  |   |  | $ | 25,434 |  
|Cost of revenues                    |  |                    | 18,655 |   |                             |   | 489   |       |  |   | 19,144             |   |  |                             | 16,757 |   |       |   | 267    |   |  |   | 17,024 |  
|Amortization of acquired technology |  |                    | 288    |   |                             |   | 12    |       |  |   | 300                |   |  |                             | 288    |   |       |   | 12     |   |  |   | 300    |  
|                                    |  |                    |        |   |                             |   |       |       |  |   |                    |   |  |                             |        |   |       |   |        |   |  |   |        |  
|Gross profit                        |  |                    | 6,160  |   |                             |   | 2,225 |       |  |   | 8,385              |   |  |                             | 4,846  |   |       |   | 3,264  |   |  |   | 8,110  |  
|Gross margin                        |  |                    | 25     | % |                             |   | 82    | %     |  |   | 30                 | % |  |                             | 22     | % |       |   | 92     | % |  |   | 32     | %
|Unallocated operating expenses      |  |                    |       |   |                             |   |      |       |  |   | 10,629             |   |  |                             |       |   |       |   |       |   |  |   | 10,315 |  
|                                    |  |                    |        |   |                             |   |       |       |  |   |                    |   |  |                             |        |   |       |   |        |   |  |   |        |  
|Operating loss                      |  |                    |        |   |                             |   |       |       |  | $ | (2,244             | ) |  |                             |        |   |       |   |        |   |  | $ | (2,205 | )
|                                    |  |                    |        |   |                             |   |       |       |  |   |                    |   |  |                             |        |   |       |   |        |   |  |   |        |  
|                                    |  |                   
|                                    |  | 2005               |        |   | 2004                        |  
|Nine months ended June 30,          |  | Broadbandequipment |        |   | BroadbandSoftware &Services |   |       | Total |  |   | Broadbandequipment |   |  | BroadbandSoftware &Services |        |   | Total |  
|                                    |  | (in thousands)     |       
|Revenue                             |  | $                  | 73,547 |   |                             | $ | 8,823 |       |  | $ | 82,370             |   |  | $                           | 63,426 |   |       | $ | 12,074 |   |  | $ | 75,500 |  
|Cost of revenues                    |  |                    | 54,907 |   |                             |   | 1,139 |       |  |   | 56,046             |   |  |                             | 45,780 |   |       |   | 706    |   |  |   | 46,486 |  
|Amortization of acquired technology |  |                    | 864    |   |                             |   | 36    |       |  |   | 900                |   |  |                             | 864    |   |       |   | 36     |   |  |   | 900    |  
|                                    |  |                    |        |   |                             |   |       |       |  |   |                    |   |  |                             |        |   |       |   |        |   |  |   |        |  
|Gross profit                        |  |                    | 17,776 |   |                             |   | 7,648 |       |  |   | 25,424             |   |  |                             | 16,782 |   |       |   | 11,332 |   |  |   | 28,114 |  
|Gross margin                        |  |                    | 24     | % |                             |   | 87    | %     |  |   | 31                 | % |  |                             | 26     | % |       |   | 94     | % |  |   | 37     | %
|Unallocated operating expenses      |  |                    |       |   |                             |   |      |       |  |   | 31,400             |   |  |                             |       |   |       |   |       |   |  |   | 30,966 |  
|                                    |  |                    |        |   |                             |   |       |       |  |   |                    |   |  |                             |        |   |       |   |        |   |  |   |        |  
|Operating loss                      |  |                    |        |   |                             |   |       |       |  | $ | (5,976             | ) |  |                             |        |   |       |   |        |   |  | $ | (2,852 | )
|                                    |  |                    |        |   |                             |   |       |       |  |   |                    |   |  |                             |        |   |       |   |        |   |  |   |        |  



Geographic
Information: The Company sells its products and provides services worldwide through our own sales force, independent distributors and value-added resellers. The Company operates primarily in two regions: the United States and Europe.
Revenues outside of the United States are primarily export sales denominated in United States Dollars or Euros. Revenues by geographic regions for the three and nine months ended June 30, 2005 and 2004 are as follows:



|                               |  |                             |        |  |                            |   |  |      |        |  |      |   |  |   |        |  |     |   |  |   |        |  |     |  
|------------------------------ |  | --------------------------- | ------ |  | -------------------------- | - |  | ---- | ------ |  | ---- | - |  | - | ------ |  | --- | - |  | - | ------ |  | --- | -
|                               |  | Three months ended June 30, |        |  | Nine months ended June 30, |  
|                               |  | 2005                        |        |  | 2004                       |   |  | 2005 |        |  | 2004 |  
|                               |  | (in thousands)              |       
|Europe                         |  | $                           | 10,218 |  | 37                         | % |  | $    | 9,427  |  | 37   | % |  | $ | 27,627 |  | 34  | % |  | $ | 29,422 |  | 39  | %
|Canada                         |  |                             | 170    |  | 1                          | % |  |      | 235    |  | 1    | % |  |   | 691    |  | 0   | % |  |   | 594    |  | 1   | %
|Asia Pacific and other         |  |                             | 365    |  | 1                          | % |  |      | 462    |  | 2    | % |  |   | 1,464  |  | 2   | % |  |   | 171    |  | 0   | %
|                               |  |                             |        |  |                            |   |  |      |        |  |      |   |  |   |        |  |     |   |  |   |        |  |     |  
|Subtotal international revenue |  |                             | 10,753 |  | 39                         | % |  |      | 10,124 |  | 40   | % |  |   | 29,782 |  | 36  | % |  |   | 30,187 |  | 40  | %
|United States                  |  |                             | 17,076 |  | 61                         | % |  |      | 15,310 |  | 60   | % |  |   | 52,588 |  | 64  | % |  |   | 45,313 |  | 60  | %
|                               |  |                             |        |  |                            |   |  |      |        |  |      |   |  |   |        |  |     |   |  |   |        |  |     |  
|Total revenues                 |  | $                           | 27,829 |  | 100                        | % |  | $    | 25,434 |  | 100  | % |  | $ | 82,370 |  | 100 | % |  | $ | 75,500 |  | 100 | %
|                               |  |                             |        |  |                            |   |  |      |        |  |      |   |  |   |        |  |     |   |  |   |        |  |     |  



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



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##### Table of Contents

Customer Information: The Company sells its products to incumbent local exchange carriers
(ILECs), competitive local exchange carriers (CLECs), distributors, Internet Service Providers (ISPs), and end-users. Revenues from customers that accounted for 10% or more of revenue for one or more of the three
and nine months ended June 30, 2005 and 2004 follows:



|                         |  |                             |       |  |                            |   |  |      |       |  |      |   |  |   |        |  |    |   |  |   |        |  |    |  
|------------------------ |  | --------------------------- | ----- |  | -------------------------- | - |  | ---- | ----- |  | ---- | - |  | - | ------ |  | -- | - |  | - | ------ |  | -- | -
|                         |  | Three months ended June 30, |       |  | Nine Months ended June 30, |  
|                         |  | 2005                        |       |  | 2004                       |   |  | 2005 |       |  | 2004 |  
|                         |  | (in thousands)              |      
|Swisscom AG (Swisscom)   |  | $                           | 6,372 |  | 23                         | % |  | $    | 3,744 |  | 15   | % |  | $ | 14,218 |  | 17 | % |  | $ | 15,436 |  | 20 | %
|BellSouth                |  |                             | 5,798 |  | 21                         | % |  |      | 2,905 |  | 11   | % |  |   | 16,918 |  | 21 | % |  |   | 5,156  |  | 7  | %
|Eircom                   |  |                             | 3,089 |  | 11                         | % |  |      | 1,511 |  | 6    | % |  |   | 8,403  |  | 10 | % |  |   | 4,398  |  | 6  | %
|SBC Communications, Inc. |  |                             | 2,311 |  | 8                          | % |  |      | 2,781 |  | 11   | % |  |   | 7,185  |  | 9  | % |  |   | 7,748  |  | 10 | %



For the three months
ended June 30, 2005 and 2004, there were three customers, that each individually represented at least 10% of revenues and in the aggregate, accounted for 55% and 37%, respectively, of total revenues. For the nine months ended June 30, 2005 and 2004,
there were three customers and two customers, respectively, that each individually represented at least 10% of revenues and in the aggregate, accounted for 48% and 30%, respectively, of total revenues.



The following table sets forth the accounts receivable balance for customers
with balances at June 30, 2005 and 2004, which were at least 10% of the total accounts receivable balance at one or more period end:



|            |  |                |       |  |      |   |  |   |       |  |    |  
|----------- |  | -------------- | ----- |  | ---- | - |  | - | ----- |  | -- | -
|June 30,    |  | 2005           |       |  | 2004 |  
|            |  | (in thousands) |      
|Swisscom AG |  | $              | 5,941 |  | 32   | % |  | $ | 3,718 |  | 23 | %
|Eircom      |  |                | 2,814 |  | 15   | % |  |   | 674   |  | 4  | %
|BellSouth   |  |                | 2,431 |  | 13   | % |  |   | 1,920 |  | 12 | %
|SBC         |  |                | 1,644 |  | 9    | % |  |   | 1,586 |  | 10 | %



|(9) | Investment in Non-Public Entities
|--- | ---------------------------------



At June 30, 2005 the Company owned 1,850,000 shares of MegaPath Networks, Inc., which represents approximately a 1.8% interest in this private company.
MegaPath offers high-speed broadband access to small and medium size businesses. The carrying value of our investment was $1.0 million at June 30, 2005 and was accounted for using the cost method.



During the three months ended June 30, 2005 and 2004, MegaPath purchased $2
thousand and $0.5 million, respectively, of the Companys products. During the nine months ended June 30, 2005 and 2004, MegaPath purchased $18 thousand and $1.1 million, respectively, of the Companys products. During the nine months
ended June 30, 2005, MegaPath has purchased the Companys products mostly through an independent distributor, and not directly from the Company.



At June 30, 2004, MegaPaths accounts receivable with the Company was $0.2 million.



|(10) | Restructuring Cost
|---- | ------------------



During our second quarter ending March 31, 2005, the Company recorded a restructuring charge of $98,000, primarily consisting of employee termination
costs, wind down costs associated with the closure of a sales office in the Netherlands and additional wind down costs associated with the prior closure of the Germany office in the quarter ended September 30, 2004.



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Detail of the remaining liabilities relating to restructuring activities as of June 30, 2005 is as
follows:



|                                          |  |                              |      |   |            |   |     |        |  |   |      |  
|----------------------------------------- |  | ---------------------------- | ---- | - | ---------- | - | --- | ------ |  | - | ---- | -
|                                          |  | Severanceand Related Charges |      |   | Facilities |   |     | Totals | 
|                                          |  | (in thousands)               |     
|Accrued liabilities at September 30, 2004 |  | $                            | 473  |   |            | $ | 27  |        |  | $ | 500  |  
|Amount paid                               |  |                              | (423 | ) |            |   | (16 | )      |  |   | (439 | )
|Accrued liabilities at December 31, 2004  |  |                              | 50   |   |            |   | 11  |        |  |   | 61   |  
|Restructuring charges                     |  |                              | 52   |   |            |   | 46  |        |  |   | 98   |  
|Amount paid                               |  |                              | (64  | ) |            |   | (37 | )      |  |   | (101 | )
|                                          |  |                              |      |   |            |   |     |        |  |   |      |  
|Accrued liabilities at March 31, 2005     |  |                              | 38   |   |            |   | 20  |        |  |   | 58   |  
|Amount paid                               |  |                              |     |   |            |   | (19 | )      |  |   | (19  | )
|                                          |  |                              |      |   |            |   |     |        |  |   |      |  
|Accrued liabilities at June 30, 2005      |  | $                            | 38   |   |            | $ | 1   |        |  | $ | 39   |  
|                                          |  |                              |      |   |            |   |     |        |  |   |      |  



The total $39,000
accrued liability as of June 30, 2005 is comprised primarily of severance related charges estimated to be paid during the remaining three months of fiscal year 2005.



|(11) | Commitments and Contingencies
|---- | -----------------------------



As of June 30, 2005, we had commitments that consisted of facilities and equipment under operating lease agreements and purchase commitments primarily for
inventory. Our purchase commitments relate to component inventory procured by our contract manufacturers on our behalf based on our production orders. We are obligated to purchase such component inventory unless orders are cancelled within agreed
upon lead times. As of June 30, 2005, purchase commitments totaled $15.8 million. The following table summarizes future minimum lease payments:



|                           |  |                |  |       |  |       |  |      |  |      |  |            |  |       
|-------------------------- |  | -------------- |  | ----- |  | ----- |  | ---- |  | ---- |  | ---------- |  | ------
|                           |  | Fiscal Years   |  |      
|                           |  | 2005 (a)       |  | 2006  |  | 2007  |  | 2008 |  | 2009 |  | Thereafter |  | Totals
|                           |  | (In thousands) |  |      
|Contractual obligation     |  |                |  |       |  |       |  |      |  |      |  |            |  |       
|Property lease obligations |  | 304            |  | 1,261 |  | 1,294 |  | 903  |  | 303  |  | 204        |  | 4,269 



|(a) | Represents cash commitments for the remaining three months of fiscal year 2005.
|--- | -------------------------------------------------------------------------------



|(12) | Warranty Liability
|---- | ------------------



Warranty liability is recorded as a component of accrued liabilities on the Companys Condensed Consolidated Balance Sheet. For the Companys
broadband equipment products, the Company generally provides a one-year warranty to domestic purchasers and a two-year warranty to international purchasers. The Company generally does not offer a warranty on its broadband software and services
products. We analyze our estimated warranty liability based upon historic return rates and record adjustments to our warranty liability as necessary.



The following table summarizes the changes in accrued warranty during the three and nine months ended June 30, 2005 and 2004:



|                              |  |                            |      |   |                           |   |      |      |  |   |      |   |  |   |      |  
|----------------------------- |  | -------------------------- | ---- | - | ------------------------- | - | ---- | ---- |  | - | ---- | - |  | - | ---- | -
|                              |  | Three Months EndedJune 30, |      |   | Nine Months EndedJune 30, |  
|                              |  | 2005                       |      |   | 2004                      |   |      | 2005 |  |   | 2004 |  
|                              |  | (In thousands)             |     
|Beginning balance             |  | $                          | (138 | ) |                           | $ | (193 | )    |  | $ | (140 | ) |  | $ | (200 | )
|Cost of warranty replacements |  |                            | 91   |   |                           |   | 62   |      |  |   | 220  |   |  |   | 258  |  
|Provision                     |  |                            | (86  | ) |                           |   | 36   |      |  |   | (213 | ) |  |   | (153 | )
|                              |  |                            |      |   |                           |   |      |      |  |   |      |   |  |   |      |  
|Ending balance                |  | $                          | (133 | ) |                           | $ | (95  | )    |  | $ | (133 | ) |  | $ | (95  | )
|                              |  |                            |      |   |                           |   |      |      |  |   |      |   |  |   |      |  



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|(13) | Credit Facility
|---- | ---------------



The Company amended its credit facility agreement with Silicon Valley Bank, effective June 27, 2005. Under the amended credit facility, the credit limit
is $10 million, the interest rate is Silicon Valley Banks prime rate, the term or maturity date is June 27, 2007, and the facility is subject to certain covenants. Covenants require that the Company maintain an adjusted quick ratio (described
below) of 1.25 and the credit facility will be subject to formula based credit limits if the adjusted quick ratio falls below 1.50. Covenants also require the Company to maintain a minimum tangible net worth of $19 million through August 2005; and
for subsequent periods the minimum will be reset. The facility is secured by substantially all of the assets of the Company. The adjusted quick ratio is the ratio of (i) the Companys unrestricted cash, cash equivalents and investments
maintained at Silicon Valley Bank plus net receivables to (ii) the Companys current liabilities plus the outstanding principal amount of any borrowings under the facility less deferred revenues.



The Company may borrow under the credit facility in order to finance working
capital requirements for new products and customers, and otherwise for general corporate purposes in the normal course of business. As of June 30, 2005, we had no outstanding borrowings under the credit facility.



|(14) | Other Income (Loss), Net
|---- | ------------------------



Other income (loss), net primarily consisted of interest income earned on cash and cash equivalents, interest expense related to the credit facility and
term loans, and gains and losses on foreign currency transactions. The following table summarizes other income (loss), net:



|                               |  |                            |      |   |                           |   |     |      |  |   |      |   |  |   |     |  
|------------------------------ |  | -------------------------- | ---- | - | ------------------------- | - | --- | ---- |  | - | ---- | - |  | - | --- | -
|                               |  | Three Months EndedJune 30, |      |   | Nine Months EndedJune 30, |  
|                               |  | 2005                       |      |   | 2004                      |   |     | 2005 |  |   | 2004 |  
|                               |  | (in thousands)             |     
|Interest income                |  | $                          | 137  |   |                           | $ | 42  |      |  | $ | 338  |   |  | $ | 134 |  
|Interest expense               |  |                            | (10  | ) |                           |   | (29 | )    |  |   | (23  | ) |  |   | (17 | )
|Other income (expense)         |  |                            | (171 | ) |                           |   | (65 | )    |  |   | (56  | ) |  |   | 76  |  
|                               |  |                            |      |   |                           |   |     |      |  |   |      |   |  |   |     |  
|Total other income (loss), net |  | $                          | (44  | ) |                           | $ | (52 | )    |  | $ | 259  |   |  | $ | 193 |  
|                               |  |                            |      |   |                           |   |     |      |  |   |      |   |  |   |     |  



|(15) | Financial Instruments
|---- | ---------------------



To hedge a portion of the Companys currency risk arising from fluctuations in foreign exchange rates on our Euro-denominated accounts receivables,
we use forward rate agreements, which are derivative instruments. The Companys use of derivative instruments is intended to mitigate the risk of significant balance sheet fluctuations caused by foreign exchange rate movements. We recognize
gains and losses resulting from changes in the fair value of derivative instruments in other income (loss), net.



As of June 30, 2005, the Company had entered into a foreign currency forward contract that had the effect of fixing the exchange rate on Euro 1,570,000 at
$1.192 through the settlement date in August 2005.



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|(16) | Comprehensive Loss
|---- | ------------------



The table below presents the comprehensive loss for the three and nine months ended June 30, 2005 and 2004, and includes the translation of our foreign
subsidiaries into our reporting currency, the United States Dollar:



|                                   |  |                            |        |   |                           |   |        |      |  |   |        |   |  |   |        |  
|---------------------------------- |  | -------------------------- | ------ | - | ------------------------- | - | ------ | ---- |  | - | ------ | - |  | - | ------ | -
|                                   |  | Three Months EndedJune 30, |        |   | Nine Months EndedJune 30, |  
|                                   |  | 2005                       |        |   | 2004                      |   |        | 2005 |  |   | 2004   |  
|Net loss                           |  | $                          | (2,312 | ) |                           | $ | (2,276 | )    |  | $ | (5,785 | ) |  | $ | (2,724 | )
|Cumulative translation adjustments |  |                            | 17     |   |                           |   | 63     |      |  |   | (3     | ) |  |   | (8     | )
|                                   |  |                            |        |   |                           |   |        |      |  |   |        |   |  |   |        |  
|Comprehensive income (loss)        |  | $                          | (2,295 | ) |                           | $ | (2,213 | )    |  | $ | (5,788 | ) |  | $ | (2,732 | )
|                                   |  |                            |        |   |                           |   |        |      |  |   |        |   |  |   |        |  



|(17) | Litigation
|---- | ----------



On December 3, 2004, the United States District Court for the Northern District of California issued an order consolidating previously filed purported class action cases under the name In re Netopia, Inc.
Securities Litigation, and appointing a lead plaintiff and plaintiffs counsel. On June 29, 2005, the lead plaintiff filed its consolidated amended complaint. The consolidated amended complaint alleges violations of Sections 10(b) and 20(a)
of the Securities Exchange Act of 1934, as amended (the Exchange Act). The consolidated amended complaint alleges that during the purported class period, November 6, 2003 through August 16, 2004, we made false and misleading statements
or failed to disclose material facts, and that the market price of our common stock was artificially inflated as a result of such alleged conduct. We believe that we have strong defenses to the claims asserted in the consolidated amended complaint.
We intend to defend the case vigorously.



In August 2004, the first of four
purported derivative actions, Freeport Partners, LLC, Derivatively on Behalf of Nominal Defendant Netopia, Inc., v. Alan B. Lefkof, William D. Baker, Reese M. Jones, Harold S. Wills, Robert Lee and Netopia, Inc., was filed in the United States
District Court for the Northern District of California. Two purported derivative actions are pending in the United States District Court for the Northern District of California, and two related purported derivative actions are pending in the
Superior Court of California for the County of Alameda. These actions make claims against our officers and directors arising out of the alleged misstatements described above in connection with the purported class action described above. In November
2004, the derivative plaintiffs agreed to coordinate the four derivative actions. The parties have agreed to a stay of the federal derivative actions, which was ordered by the court in January 2005. The state actions have been consolidated under the
name In re Netopia, Inc. Derivative Litigation. The plaintiffs have not filed their consolidated amended complaint. We believe that we have strong defenses to the claims asserted in the complaints as initially filed. We intend to defend the cases
vigorously.



On October 29, 2004, we were advised by the United States
Securities and Exchange Commission (SEC) that an informal inquiry previously commenced by the SEC had become the subject of a formal order of investigation. This investigation is to determine whether the federal securities laws have been
violated. We cooperated fully with the informal inquiry, and we have been cooperating fully with the formal investigation.



On July 22, 2005, we announced that following discussions with the SEC staff, we had made a settlement offer to the SEC to resolve the investigation into our disclosures
and accounting practices, primarily related to our restatement of financial statements for the fiscal years ended September 30, 2003 and 2002. Without admitting or denying any wrongdoing, we offered to consent to the entry of an order with respect
to violations of Sections 13(a) and 13(b)(2)(A)-(B) of the Exchange Act, and Rules 12b-20, 13a-1, 13a-11 and 13a-13 promulgated thereunder. The SEC staff has agreed to recommend that SEC approve the offer of settlement. The proposed settlement is
subject to completion of mutually agreeable settlement language and final approval by the SEC.



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On July 22, 2005, we also announced that we had learned that the SEC staff has agreed to recommend that the SEC approve
an offer of settlement with Alan B. Lefkof, our President and Chief Executive Officer. Mr. Lefkof, without admitting or denying any wrongdoing, offered to consent to the entry of an order with respect to violations of Sections 17(a)(2)-(3) of the
Securities Act of 1933, as amended, and Rule 13b2-1 promulgated under the Exchange Act, and aiding and abetting our violations of Sections 13(a) and 13(b)(2)(A)-(B) of the Exchange Act, and Rules 12b-20 and 13a-11 promulgated thereunder, in
connection with a Report on Form 8-K and exhibit furnished to the SEC on July 6, 2004. The proposed settlement with Mr. Lefkof contemplates a monetary payment. The proposed settlement is subject to completion of mutually agreeable settlement
language and final approval by the SEC.



We have been informed that the SEC
staff has issued Wells Notices to (a) a former chief financial officer, (b) a former senior sales vice president, and (c) a former software sales vice president of the Company. A Wells Notice indicates that the SEC staff has
made a preliminary decision to recommend that the SEC bring a civil enforcement action against the recipients for possible violations of federal securities laws. Recipients of Wells Notices have the opportunity to respond in writing before the SEC
staff makes its formal recommendation on whether the SEC should bring any action.



Responding to the formal order of investigation of the SEC has required significant attention and resources of management. Our proposed settlement described above is subject to final approval by the SEC. In addition, even though we have
announced the proposed settlement with the SEC, the investigation by the SEC is ongoing, and may continue to require significant attention and resources. If either we and/or Mr. Lefkof are unable to complete the proposed settlements and the SEC
elects to pursue an enforcement action against us and/or Mr. Lefkof, the defense could be costly and require additional management resources. If we were unsuccessful in defending against this or other investigations or proceedings, we could face
civil or criminal penalties that would seriously harm our business and results of operations.



In April 2005, we learned that the United States Attorney for the Northern District of California has opened an investigation following a referral by the SEC. We do not know the scope or focus of the investigation.



In January 2005, we were notified by the Occupational Health and Safety
Administration (OSHA) that we were named in an administrative complaint filed by two former employees alleging violations of Section 806 of the Corporate and Criminal Fraud Accountability Act of 2002, 18 U.S.C. § 1514A, also known
as the Sarbanes-Oxley Act. The former employees alleged we terminated them in retaliation for their participation in the internal accounting review conducted by the audit committee in 2004. On May 11, 2005, following its investigation, OSHA advised
us that the complaint was determined to have no merit. The complainants subsequently requested a hearing before an Administrative Law Judge to review this determination. The complainants have filed their complaint and we have filed our answer with
the Administrative Law Judge. We believe that we have strong defenses and intend to defend the complaint vigorously.



In February 2005, we were served with a complaint by these same two former employees. The complaint names the Company and Alan Lefkof as defendants, and asserts claims
for defamation and breach of contract. The case is pending in the United States District Court for the Northern District of Texas, Dallas Division. We believe that we have strong defenses and intend to defend the case vigorously.



Defending against the government investigations, the private securities class action, the
derivative actions and other litigation matters described above will likely require significant attention and resources of management and, regardless of the outcome, result in significant legal expense. If our defenses ultimately are unsuccessful,
or if we are unable to achieve a favorable settlement, we could be liable for large damage awards that could seriously harm our business and results of operation. While we have provided notice of the government investigations and the litigation
matters described above to our directors and officers liability insurance carriers, the insurance carriers have raised certain coverage issues and to date have not reimbursed us for any legal expenses incurred, and may not agree that they are
responsible to pay any damages that ultimately could be awarded to the plaintiffs. Furthermore, we have only a limited amount of insurance, and even if our insurers agree to make payments under the policies, the damage awards or settlements may be
greater than the amount of insurance, and we would in all cases be liable for any amounts in excess of our insurance policy limits.



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We are named as a defendant in an action pending in the United States Bankruptcy Court for the Northern District of
California entitled E. Lynn Schoenmann, trustee of NorthPoint Communications, Inc. v. Netopia. In this action commenced on January 11, 2003, the trustee of the bankruptcy estate of NorthPoint Communications, Inc. (NorthPoint) is
seeking to recover approximately $1.2 million that NorthPoint paid to us within the 90 day preference period before NorthPoint filed for bankruptcy in January 2001. NorthPoints trustee is claiming that NorthPoint was insolvent at the time it
made these payments, and that therefore the payments are recoverable preferences within the meaning of the Bankruptcy Code. We believe that we have defenses to the claims asserted by NorthPoints trustee, and we intend to continue to defend
ourselves vigorously. We do not believe that the outcome of this lawsuit is likely to harm our business seriously.



In addition to the lawsuits described above, from time to time we are involved in other litigation or disputes that are incidental to the conduct of our business. We are
not party to any such other incidental litigation or dispute that in our opinion is likely to seriously harm our business.



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##### Table of Contents

PART I  FINANCIAL INFORMATION



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



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



Company Overview



We develop and market broadband customer premise equipment, remote management software, and
broadband services.



Our products provide broadband solutions to our customers,
the largest of which are telecommunication carriers and Internet service providers, for the delivery of broadband services to their residential and business-class customers. Our solutions enable carriers and broadband service providers to (i)
deliver our feature-rich broadband modems, routers, and gateways to their customers; (ii) utilize our software that allows remote management of broadband equipment and networked devices located at their customers premises, in order to reduce
customer support costs; and (iii) provide value added services, including combined voice, video, and data services (commonly referred to as triple play services).



Our remote management software platform and related applications enable remote control, monitoring, and service provisioning of broadband
equipment, networked devices such as set top boxes (STBs) and Web cams and the personal computers with which they interact. Our software solutions are designed to meet the requirements of a full range of users: individual-to-individual,
carrier-to-customer, and help desk-to-user.



Our broadband services include
Wi-Fi hot spots for local and nationwide networks of small venues, Web site and remote control hosting, retail broadband point-of-sale services, and parental controls.



Broadband Equipment. Our family of telecommunications carrier-class broadband customer premise equipment includes
modems, routers, and gateways (collectively referred to as gateways), and related accessories such as Wi-Fi adapters. Our gateways provide a critical link between telecommunication carriers lines and residential and distributed
business local area networks. The gateway provides critical functionality, including converting electronic and analog signals to digital communication, network routing, and wired and wireless networked connectivity for simultaneous voice, video,
data and other applications.



Our gateways connect to carrier lines and enable
the transport of broadband, high-speed data over carrier networks including the local copper wires (often referred to as loop) and new deployments of fiber-optic networks.



Our gateways serve many carrier network interfaces, including digital subscriber line (ADSL, ADSL2+, Bonded ADSL and VDSL2), Ethernet, and
T1. For users devices on the LAN-side of our gateways, our products support both wireless (often referred to as Wi-Fi) and Ethernet network connectivity. We are



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##### Table of Contents

developing products using emerging new technologies such as multimedia over coaxial cable (MoCA and HCNA), and RJ-11 phone wiring (HPNA3).



As carrier-class gateways, our products are designed to deliver high performance, quality of
service, excellent reliability, scalability, and affordability, and to be a platform from which carrier and service providers can offer their customers additional broadband services and applications, especially triple play voice, video and data
services.



We believe our gateways are differentiated by:



| |  |  | Carrier-class, high quality, and high performance;
| | - |  | --------------------------------------------------



| |  |  | Comprehensive interoperability with leading carrier central office DSL equipment;
| | - |  | ---------------------------------------------------------------------------------



| |  |  | High performing, high quality common firmware deployed across our broadband gateways;
| | - |  | -------------------------------------------------------------------------------------



| |  |  | Performance-enhancing wireless technology branded as 3-D Reach® technology, which we believe gives our Wi-Fi products leading wireless range and coverage; and
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Our quality of service (QoS)-enhancing virtual gateway technology, branded as VGx technology, which provides gateway service segmentation for high quality voice, video, and data
services.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Most of our revenues are generated from sales of our
DSL gateways to major telecommunication carriers, who, in turn, include our gateways as part of their broadband service offerings to their customers. Our DSL and other broadband gateways are often bundled with virtual private networking
(VPN) capabilities that allow secure communications over the Internet, firewall protection, parental controls, hot spot access, Web content filtering, and combined voice, video, data, and other services.



During the three months ended June 30, 2005 and 2004, revenue from the sale of our broadband
equipment accounted for 90% and 86%, respectively, of our total revenues. During the nine months ended June 30, 2005 and 2004, revenue from the sale of our broadband equipment accounted for 89% and 84%, respectively, of our total revenues. When
reading our condensed consolidated statement of operations, revenues and cost of revenues related to the sale of our gateways and related accessories are classified as broadband equipment.



Broadband Software and Services. We offer remote management software, Wi-Fi hot
spots for local and nationwide networks of small venues, Web site and remote control hosting, retail broadband point-of-sale services, and parental controls:



| |  |  | Remote management software. We offer two principal remote management software solutions: Netopia Broadband Server and Timbuktu®.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------



| |  |  | Our Netopia Broadband Server (NBBS) software solution enables carrier-to-customer remote support and management of installed broadband gateways and centralized service
delivery (provisioning) for value-added broadband services such as voice, video, data, parental controls, and hot spot access. Utilizing the TR-069 protocol adopted by the DSL Forum as well as other standard methodologies, this solution allows
carriers and broadband service providers to provision services and provides support to their customers on a remote basis, which minimizes the cost of installation and broadband service provisioning over the lifetime of the relationship with their
customer. NBBS can be leveraged to manage both Netopia gateways and other third party devices. The NBBS platform includes optional modules that perform different functions:
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Zero-Touch provisioning for the initial installation of broadband equipment at the customer premises;



Element Management System for ongoing remote
provisioning, administration, and support of broadband customer premises equipment and security policies including VPN and firewall management;



Hot Spot Manager for the provisioning, authentication, and management of hot spot venue access; and



Parental Controls for Web content filtering and email and
chat management; VPN Policy Manager for the setup and administration of secure VPN-enabled wide area networks (WANs).



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##### Table of Contents

| |  |  | Timbuktu Pro software provides remote control and computing individual-to-individual and help desk-to-users, for secure remote control of both Mac and Windows personal computers.
This solution serves enterprise help desk customers and IT organizations, allowing help desks to provide support and configuration on a remote basis when computer users experience problems or require additional software upgrades for desktop or
laptop computers. Remote control of distant computers can use connections over the Internet, local network, or modem-to-modem. The software enables other users to view all, or part of a computers screen; file sharing; secure, encrypted
connections; and communication by voice intercom, text chat, or instant message. The remote control can be from Mac to PC, or PC to Mac, or across like platforms.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Web site and Web store hosting. Our eCommerce solutions provide no assembly required Web sites and online stores that we call eSites and eStores, and include a wide
variety of vertical market content packages to suit many business needs, from franchisees to sole proprietors.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Remote control hosting. For help desks, customer service and call centers, we offer a hosted remote control solution that leverages the core technology of Timbuktu. Marketed as
eCare, this hosted service enables customer support agents to support their customers over the Internet through instant Web-enabled, on-demand screen sharing, remote control, chat and diagnostic services.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Wireless hot spots. Our Wi-Fi hot spot services provide high-speed Internet access to a venues customers and provide venues with a marketing tool that includes customizable
log-in pages, the ability to control access to the hot spot, Family Friendly Surfing content controls, and complete e-Commerce solutions.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Merchant service. This broadband service is marketed as the Netopia Merchant Success POS Bundle and provides high-speed wireless Internet Protocol (IP) networking solutions for
merchants. This secure solution is designed for retail locations and provides merchants with the benefits of faster credit card payment processing and the ability to implement other value-added services, including real-time check and age
authorization, gift cards, ATM and lottery machines, and Wi-Fi hot spots.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Parental controls. Our parental controls service enables gateway blocking of adult content and supervision of Internet access. This solution enables control of the home Internet
network. This protection includes for each identified user: restricting Internet access by time of day; managing e-mail, chat, and instant messaging; filtering Web sites by category, specific site lists, or high bandwidth. Unlike many competitive
products, Netopias parental controls operate through the gateway, rather than the desktop, which we believe results in a more secure solution.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



During the three months ended June 30, 2005 and 2004, revenue from the sale of our broadband software and services accounted for 10% and
14%, respectively, of our total revenues. During the nine months ended June 30, 2005 and 2004, revenue from the sale of our broadband software and services accounted for 11% and 16%, respectively, of our total revenues. When reading our condensed
consolidated statement of operations, revenues and cost of revenues related to the sale of our broadband software and solutions are classified as Broadband software and services.



We primarily market and sell our products in the United States and in Europe through our
sales organization, distributors and value-added resellers. Most of our broadband equipment products are sold to telecommunication carriers and Internet service providers. Our broadband software and services products are generally sold directly to
telecommunication carriers and end-users. Our sales channels are summarized below.



| |  |  | Telecommunication carriers, including: incumbent local exchange carriers (ILECs), including Swisscom AG, SBC Communications Inc., BellSouth
Telecommunications, Inc. and eircom Ltd.; competitive local exchange carriers (CLECs), including Covad Communications Group, Inc. and
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

| | NextGenTel; and Internet service providers (ISPs) and managed service providers (MSPs), including EarthLink, Inc., MegaPath Networks,
Inc. and Netifice Communications, Inc.;
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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



We expect the success of our operations to remain substantially dependent upon our ability to develop products that meet the needs of both the residential and business telecommunications markets.



Telecommunications Market Opportunities and Risks



We expect that the telecommunications market will continue to evolve quickly over the next
several years. This change and evolution provides us with significant growth opportunities and risks.



Incumbent local exchange carriers are responding to competitive challenges in their core voice business particularly from the cable television network operators, which are beginning to use a bundle of voice, video and
high-speed data (often referred to as triple play services) to gain market share. In response, ILECs are pursuing various strategies of network modernization and service differentiation. We believe that ILECs will add digital video and
other services to their offerings, which already includes voice and high-speed data. Examples of other services include streaming live video, music and pictures.



The strategies that ILECs are pursuing to modernize their networks include the deployment of all fiber networks and hybrid fiber/copper
networks without end-to-end fiber connection by leveraging advanced digital subscriber line technology.



The all fiber network strategy is often referred to as fiber to the premises (FTTP). FTTP provides fibers high reliability, ease of service provisioning, and almost unlimited bandwidth. The hybrid
fiber/copper network strategy is often referred to as fiber to the neighborhood (FTTN) or fiber to the curb (FTTC). FTTN and FTTC provide sufficient bandwidth to meet the needs of digital video and other applications. FTTN
and FTTC requires the use of very-high-speed digital subscriber line (VDSL), a new high performance version of DSL for the connection to the premises. The three largest domestic ILECs, SBC Communications, Verizon and BellSouth, all have
announced that they are making substantial investments in the expansion of their fiber optic networks to residences. The fiber lines enable the ILECs to offer voice, video and high-speed data over one connection. We currently are developing gateways
that could be deployed for these new services.



The shift from circuit-switched
networks for voice and broadcast networks for video to Internet Protocol-based networks is expected to have a significant impact on the structure of the telecommunications market. This shift may increasingly separate network access and data
transport from the services delivered over those networks. For example, there are new companies entering the voice market offering Internet-based phone service.



All of these changes will impact the gateway and gateway software management market in which we compete. For example, as ILECs implement FTTP, FTTN or FTTC as well as
new residential home networking solutions, companies that provide gateways, such as ours, may have the opportunity to increasingly compete against incumbent suppliers to best achieve the cost and performance requirements for gateways within the
modernized network. While we are positioning our products for this evolving market and will compete vigorously to win new and retain existing telecommunication customers, attracting new or expanded customer relationship could positively benefit our
operating performance, while conversely losing customer relationships could negatively harm our operating performance. Given this change, we expect the next several years to be a period of intense competition among gateway providers with both
significant opportunities for growth as well as risk of failure.



Critical
Accounting Policies and Estimates



Managements discussion and
analysis of our financial condition and results of operations are based upon our Condensed Consolidated Financial Statements, which have been prepared in accordance with



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United States generally accepted accounting principles. We review the accounting policies used in reporting our financial results on a regular basis. The
preparation of these Condensed Consolidated Financial Statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. On an ongoing basis, we evaluate our processes used to
develop estimates, including those related to the allowance for doubtful accounts, sales reserves, inventory write-downs, customer support service accruals, warranty obligations, depreciation and amortization, contingencies and potential asset
impairment of investments, intangible assets, goodwill and other assets. We base our estimates on historical experience, expectations of future results, and on various other assumptions that are believed to be reasonable for making judgments about
the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates due to actual outcomes being different from those on which we based our assumptions. Management on an
ongoing basis reviews these estimates and judgments. The Audit Committee of our Board of Directors reviews any changes in our methodology for arriving at our estimates, and discusses the appropriateness of any such changes with management and our
independent auditors on a quarterly basis.



You should read our 2004 10-K for
information pertaining to our critical accounting policies, which include the following:



| |  |  | Revenue recognition;
| | - |  | --------------------



| |  |  | Goodwill;
| | - |  | ---------



| |  |  | Impairment on long-lives assets, including other intangible assets;
| | - |  | -------------------------------------------------------------------



| |  |  | Allowance for doubtful accounts; and
| | - |  | ------------------------------------



| |  |  | Excess and obsolete inventory.
| | - |  | ------------------------------



Liquidity and Capital Resources



The following sections discuss the effects of changes in our balance sheets, cash flows and commitments on our liquidity and capital resources. As of June 30, 2005, our
principal sources of liquidity included cash and cash equivalents in the amount of $22.8 million and a credit facility, which was amended and has a credit limit of $10 million. We had no outstanding borrowings against our credit facility at June 30,
2005.



Cash and Cash Equivalents.



|                          |  |                |        |                   |   |          |   |   |        |   |  |    |  
|------------------------- |  | -------------- | ------ | ----------------- | - | -------- | - | - | ------ | - |  | -- | -
|                          |  | June 30,2005   |        | September 30,2004 |   | Decrease |  
|                          |  |                |        | $                 |   |          | % |  
|                          |  | (in thousands) |        |                   |   |          |   |  
|Cash and cash equivalents |  | $              | 22,825 |                   | $ | 23,973   |   | $ | (1,148 | ) |  | -5 | %



For the nine months ended June 30,
2005, cash and cash equivalents decreased primarily due to the use of cash to fund our operating activities, including increased legal and professional fees incurred in connection with the securities litigation and government investigations related
to the restatements of our previously filed financial statements described elsewhere in this Form 10-Q and in the 2004 10-K, and capital equipment purchases.



Net Cash Used in Operating Activities



Net cash used in our operating activities totaled $1.2 million for the nine months ended June 30, 2005, compared to $4.6 million for the nine months ended June 30, 2004.
Net cash used in operating activities resulted primarily from a net loss of $5.8 million for the nine months ended June 30, 2005, partially offset by non-cash depreciation and amortization of $2.6 million, which was included in the net loss and the
net impact of changes in assets and liabilities.



Net Cash Used in Investing
Activities



Net cash used in investing activities totaled $1.2 million for
the nine months ended June 30, 2005, compared to $1.7 million for the nine months ended June 30, 2004. Investing activities for the nine months ended June 30, 2005 consisted of the purchase of capital equipment.



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Net Cash Provided by Financing Activities



Net cash provided from financing activities totaled $1.2 million for the nine months ended June 30, 2005, compared to $7.7 million for the
nine months ended June 30, 2004. Financing activities primarily consisted of the issuance of common stock upon the exercise of stock options and the issuance of shares of common stock under the Companys Employee Stock Purchase Plan.



Commitments



As of June 30, 2005, we had commitments that consisted of facilities and equipment under
operating lease agreements and purchase commitments primarily for inventory. Our purchase commitments relate to component inventory procured by our contract manufacturers on our behalf based on our production orders. We are obligated to purchase
such component inventory unless orders are cancelled within agreed upon lead times. As of June 30, 2005 purchase commitments totaled $15.8 million. The following table summarizes future minimum lease payments:



|                           |  |                |  |       |  |       |  |      |  |      |  |            |  |       
|-------------------------- |  | -------------- |  | ----- |  | ----- |  | ---- |  | ---- |  | ---------- |  | ------
|                           |  | Fiscal Years   |  |      
|                           |  | 2005 (a)       |  | 2006  |  | 2007  |  | 2008 |  | 2009 |  | Thereafter |  | Totals
|                           |  | (In thousands)
|Contractual obligation     |  |                |  |       |  |       |  |      |  |      |  |            |  |       
|Property lease obligations |  | 304            |  | 1,261 |  | 1,294 |  | 903  |  | 303  |  | 204        |  | 4,269 



|(a) | Represents cash commitments for the remaining three months of fiscal year 2005.
|--- | -------------------------------------------------------------------------------



We believe our cash and cash equivalents and cash expected to be generated by our business activities will be sufficient to meet our working
capital needs for at least the next twelve months.



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##### Table of Contents

Results of Operations for the Three and Nine Months Ended June 30, 2005 and 2004



The table below sets forth certain unaudited financial data. To help understand the data,
each item is also shown as a percentage of total revenues along with the dollar and percentage change from the corresponding period in the prior fiscal year. This data has been derived from the Condensed Consolidated Statements of Operations
elsewhere in this Form 10-Q and in the 2004 10-K, in which we describe the restatement adjustments for the same period in the prior year. The operating results for any period should not be considered indicative of results for any future period. This
information should be read in conjunction with the Condensed Consolidated Financial Statements and Notes thereto included elsewhere in this Form 10-Q and in the 2004 10-K.



|                                  |  |                |        |   |      |     |   |                      |   |        |   |  |     |   |  |   |        |   |  |     |  
|--------------------------------- |  | -------------- | ------ | - | ---- | --- | - | -------------------- | - | ------ | - |  | --- | - |  | - | ------ | - |  | --- | -
|                                  |  |                |        |   |      |     |   | Increase /(Decrease) |  
|Three Months Ended June 30,       |  | 2005           |        |   | 2004 |     |   | $                    |   |        | % | 
|                                  |  | (in thousands) |        |   |      |     |   |                      |  
|REVENUES:                         |  |                |        |   |      |     |   |                      |   |        |   |  |     |   |  |   |        |   |  |     |  
|Broadband equipment               |  | $              | 25,103 |   |      | 90  | % |                      | $ | 21,891 |   |  | 86  | % |  | $ | 3,212  |   |  | 15  | %
|Broadband software and service    |  |                | 2,726  |   |      | 10  | % |                      |   | 3,543  |   |  | 14  | % |  |   | (817   | ) |  | -23 | %
|                                  |  |                |        |   |      |     |   |                      |   |        |   |  |     |   |  |   |        |   |  |     |  
|Total revenues                    |  |                | 27,829 |   |      | 100 | % |                      |   | 25,434 |   |  | 100 | % |  |   | 2,395  |   |  | 9   | %
|GROSS MARGIN:                     |  |                |        |   |      |     |   |                      |   |        |   |  |     |   |  |   |        |   |  |     |  
|Broadband equipment               |  |                | 6,160  |   |      | 25  | % |                      |   | 4,846  |   |  | 22  | % |  |   | 1,314  |   |  | 27  | %
|Broadband software and service    |  |                | 2,225  |   |      | 82  | % |                      |   | 3,264  |   |  | 92  | % |  |   | (1,039 | ) |  | -32 | %
|                                  |  |                |        |   |      |     |   |                      |   |        |   |  |     |   |  |   |        |   |  |     |  
|Total gross margin                |  |                | 8,385  |   |      | 30  | % |                      |   | 8,110  |   |  | 32  | % |  |   | 275    |   |  | 3   | %
|OPERATING EXPENSES:               |  |                |        |   |      |     |   |                      |   |        |   |  |     |   |  |   |        |   |  |     |  
|Research and development          |  |                | 3,400  |   |      | 12  | % |                      |   | 3,846  |   |  | 15  | % |  |   | (446   | ) |  | -12 | %
|Selling and marketing             |  |                | 4,582  |   |      | 16  | % |                      |   | 5,199  |   |  | 20  | % |  |   | (617   | ) |  | -12 | %
|General and administrative        |  |                | 2,561  |   |      | 9   | % |                      |   | 1,184  |   |  | 5   | % |  |   | 1,377  |   |  | 116 | %
|Amortization of intangible assets |  |                | 86     |   |      | 0   | % |                      |   | 86     |   |  | 0   | % |  |   |       |   |  | 0   | %
|                                  |  |                |        |   |      |     |   |                      |   |        |   |  |     |   |  |   |        |   |  |     |  
|Total operating expenses          |  |                | 10,629 |   |      | 38  | % |                      |   | 10,315 |   |  | 41  | % |  |   | 314    |   |  | 3   | %
|Operating loss                    |  |                | (2,244 | ) |      | -8  | % |                      |   | (2,205 | ) |  | -9  | % |  |   | (39    | ) |  | 2   | %



|                                  |  |                |        |   |      |     |   |                      |   |        |   |  |     |   |  |   |        |   |  |     |  
|--------------------------------- |  | -------------- | ------ | - | ---- | --- | - | -------------------- | - | ------ | - |  | --- | - |  | - | ------ | - |  | --- | -
|                                  |  |                |        |   |      |     |   | Increase /(Decrease) |  
|Nine Months Ended June 30,        |  | 2005           |        |   | 2004 |     |   | $                    |   |        | % | 
|                                  |  | (in thousands) |        |   |      |     |   |                      |  
|REVENUES:                         |  |                |        |   |      |     |   |                      |   |        |   |  |     |   |  |   |        |   |  |     |  
|Broadband equipment               |  | $              | 73,547 |   |      | 89  | % |                      | $ | 63,426 |   |  | 84  | % |  | $ | 10,121 |   |  | 16  | %
|Broadband software and service    |  |                | 8,823  |   |      | 11  | % |                      |   | 12,074 |   |  | 16  | % |  |   | (3,251 | ) |  | -27 | %
|                                  |  |                |        |   |      |     |   |                      |   |        |   |  |     |   |  |   |        |   |  |     |  
|Total revenues                    |  |                | 82,370 |   |      | 100 | % |                      |   | 75,500 |   |  | 100 | % |  |   | 6,870  |   |  | 9   | %
|GROSS MARGIN:                     |  |                |        |   |      |     |   |                      |   |        |   |  |     |   |  |   |        |   |  |     |  
|Broadband equipment               |  |                | 17,776 |   |      | 24  | % |                      |   | 16,782 |   |  | 26  | % |  |   | 994    |   |  | 6   | %
|Broadband software and service    |  |                | 7,648  |   |      | 87  | % |                      |   | 11,332 |   |  | 94  | % |  |   | (3,684 | ) |  | -33 | %
|                                  |  |                |        |   |      |     |   |                      |   |        |   |  |     |   |  |   |        |   |  |     |  
|Total gross margin                |  |                | 25,424 |   |      | 31  | % |                      |   | 28,114 |   |  | 37  | % |  |   | (2,690 | ) |  | -10 | %
|OPERATING EXPENSES:               |  |                |        |   |      |     |   |                      |   |        |   |  |     |   |  |   |        |   |  |     |  
|Research and development          |  |                | 10,009 |   |      | 12  | % |                      |   | 11,854 |   |  | 16  | % |  |   | (1,845 | ) |  | -16 | %
|Selling and marketing             |  |                | 14,249 |   |      | 17  | % |                      |   | 15,262 |   |  | 20  | % |  |   | (1,013 | ) |  | -7  | %
|General and administrative        |  |                | 6,785  |   |      | 8   | % |                      |   | 3,591  |   |  | 5   | % |  |   | 3,194  |   |  | 89  | %
|Amortization of intangible assets |  |                | 259    |   |      | 0   | % |                      |   | 259    |   |  | 0   | % |  |   |       |   |  | 0   | %
|Restructuring costs               |  |                | 98     |   |      | 0   | % |                      |   |       |   |  | 0   | % |  |   | 98     |   |  | 100 | %
|                                  |  |                |        |   |      |     |   |                      |   |        |   |  |     |   |  |   |        |   |  |     |  
|Total operating expenses          |  |                | 31,400 |   |      | 38  | % |                      |   | 30,966 |   |  | 41  | % |  |   | 434    |   |  | 1   | %
|Operating loss                    |  |                | (5,976 | ) |      | -7  | % |                      |   | (2,852 | ) |  | -4  | % |  |   | (3,124 | ) |  | 110 | %



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REVENUES



Total revenues for the three months ended June 30, 2005 increased from the three months ended June 30, 2004 to $27.8 million or 9% from $25.4 million due to a $3.2
million or 15% increase in revenues from the sale of our broadband equipment products partially offset by an $817,000 or 23% decrease in revenues from our broadband software and services. Total revenues for the nine months ended June 30, 2005
increased from the nine months ended June 30, 2004 to $82.4 million, up 9% from $75.5 million due to a $10.1 million or 16% increase in revenues from the sale of our broadband equipment products offset by $3.3 million or 27% decrease in revenues
from our broadband software and services.



Broadband equipment revenues
increased for the three and nine months ended June 30, 2005 compared with the same period for the prior year by 15% and 16%, respectively. These increases reflected increased unit sales of residential-class ADSL products and accessories, which
typically sell at lower average selling prices than business-class products.



Broadband software and services revenues decreased for the three and nine months ended June 30, 2005 compared with the same periods for the prior year by 23% and 27%, respectively. The decreases were attributable to lower sales of
licensed software and associated maintenance service agreements.



Product
Volumes and Average Selling Price Information



The following table sets
forth for three months ended June 30, 2005 and 2004, volumes and average selling prices, excluding accessories, of our broadband equipment products.



|                            |  |      |         |      |   |        
|--------------------------- |  | ---- | ------- | ---- | - | -------
|Three months ended June 30, |  | 2005 |         | 2004
|Product volumes             |  |      | 276,000 |      |   | 237,000
|Average selling prices      |  | $    | 83      |      | $ | 89     

|                           |  |      |         |      |   |        
|-------------------------- |  | ---- | ------- | ---- | - | -------
|                           |  |     
|Nine months ended June 30, |  | 2005 |         | 2004
|Product volumes            |  |      | 830,000 |      |   | 711,000
|Average selling prices     |  | $    | 83      |      | $ | 88     



Gross Margin



The decreases in gross margins in the three and nine month periods ended June 30, 2005
compared with the corresponding period of the prior fiscal year were primarily the result of lower broadband software and services revenue, which have substantially higher gross margins than broadband equipment.



During the nine months ended June 30, 2005, we increased our accrual for the estimated cost
to provide customer support by $730,000, of which $415,000 was accrued in the three months ended June 30, 2005. These estimated costs are related to our practice of providing ongoing customer support services through our call center. Approximately
90% of these costs related to our broadband equipment segment and 10% related to broadband software and services segment.



Broadband equipment. The broadband equipment gross margin increased for the three months ended June 30, 2005 to 25% from 22% for the same period for the prior year
as a result of lower average unit costs. The broadband equipment gross margin decreased for the nine months ended June 30, 2005 to 24% from 26% for the same period in the prior year primarily as a result of decreased average selling prices. The
lower average selling prices reflected a mix shift toward residential-class products, which have lower average selling prices and lower margins than business-class products.



Broadband software and services. The broadband software and services gross margin decreased for the three months ended June 30, 2005
to 82% from 92% for the same period for the prior year and decreased for the nine months ended June 30, 2005 to 87% from 94% compared with the same period for the prior year. The decrease in broadband software and services gross margins primarily
reflected lower software revenue with no decrease in the related cost of revenue.



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OPERATING EXPENSES



Research and Development. Research and development (R&D) expenses consist primarily of employee related expenses, depreciation and amortization,
development related expenses such as product prototyping, design and testing, and overhead. The decrease for the three and nine months ended June 30, 2005 compared to the same periods in the prior year was primarily attributable to reduced
compensation costs following our consolidation of certain R&D activities in the prior year.



We expect to continue to allocate substantial resources to product and technological development as a percentage of revenue, and R&D expenses may increase in the future.



Selling and Marketing. Selling and marketing expenses consist primarily of salary and
commission expenses for our sales force and related travel expenses and advertising and promotional expenses. The decrease for the three and nine months ended June 30, 2005 compared to the same periods in the prior year was primarily the result of
increased allocation of costs to cost of revenues.



We expect that selling and
marketing expenses will remain near current levels for the remainder of the current fiscal year, and will fluctuate largely as a result of commission expenses and advertising and marketing initiatives that are related to increases or decreases in
sales.



General and Administrative. General and administrative
(G&A) expenses consist primarily of employee related expenses, legal and accounting fees, and insurance costs. The increase in G&A expenses for the three and nine months ended June 30, 2005 compared to the same periods in the
prior year was primarily due to increased legal and professional fees incurred in connection with the securities litigation and government investigations related to the restatements of our previously filed financial statements described elsewhere in
this Form 10-Q.



We anticipate that G&A expenses may remain at these levels
for the remainder of the fiscal year ended September 30, 2005 as a result of the ongoing legal expenses related to the securities litigation and government investigations described elsewhere in this Form 10-Q, as well as increased expenses related
to implementation of Section 404 of the Sarbanes-Oxley Act, which requires our management to assess the effectiveness of our internal controls over financial reporting.



Amortization of Other Intangible Assets. For the three and nine months ended June 30, 2005 and 2004, amortization of other intangible
assets represents the amortization of intangible assets with identifiable lives related to our acquisitions of Cayman and JadeSail (See Note 6 of Notes to Unaudited Condensed Consolidated Financial Statements included in this Form 10-Q).



Restructuring Costs. During our second fiscal quarter ended March 31, 2005, we
recorded a restructuring charge of $98,000, primarily consisting of employee termination costs and wind down costs associated with the closure of a sales office in the Netherlands and additional wind down costs associated with the prior closure of
the Germany development office.



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##### Table of Contents

Risk Factors



The risk factors discussed below should be considered carefully in evaluating our business because these factors may have a significant impact on our business, operating
results and financial condition. As a result of these risk factors and other risks discussed elsewhere in this Form 10-Q, and the risks discussed in our other filings with the United States Securities and Exchange Commission (SEC), our
actual results could differ materially from those projected in any forward-looking statements. You should carefully consider all these risks and other information in this report before investing in Netopia. The fact that certain risks are endemic to
our industry does not lessen the significance of the risk.



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



During the three months ended June 30, 2005, we incurred a net loss of $2.3 million and used approximately $1.2 million of cash for operating activities. We incurred
losses from continuing operations of $9.0 million and $8.3 million for the fiscal years ended September 30, 2004 and 2003 respectively, and used $5.2 million and $5.4 million of cash during the fiscal years ended September 30, 2004 and 2003,
respectively. Our cash and cash equivalents totaled $22.8 million at June 30, 2005. We may not be able to reach, sustain or increase profitability or generate cash on a quarterly or annual basis, which could significantly harm our business.



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



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



If we are unable to resolve pending the government investigations, the private securities action, the derivative actions and other litigation related to and arising out of the restatements of our consolidated financial statements for
prior periods in a timely and economic manner, our business could be significantly harmed.



We currently are named as a defendant in a consolidated private securities action brought as a purported class action. In addition, there are purported derivative actions pending in state and federal court in
California. We also are the subject of a formal order of investigation by the SEC to determine whether the federal securities laws have been violated. We also have learned that the United States Attorney for the Northern District of California has
opened an investigation following a referral by the SEC. We do not know the scope or focus of the investigation by the United States Attorneys office. Responding to the formal order of investigation of the SEC has required significant
attention and resources of management. Although we recently announced a proposed settlement with the SEC, this settlement is subject to final approval by the SEC. In addition, even though we have announced proposed settlements with the SEC and us
and Alan B. Lefkof, our President and Chief Executive Officer, the investigation by the SEC is ongoing, and may continue to require significant attention and resources. If we and/or Mr. Lefkof are unable to complete the proposed settlements and the
SEC elects to pursue an enforcement action against us and/or Mr. Lefkof, the defense could be costly and require additional management resources. If we were unsuccessful in defending against this or other investigations or proceedings, we could face
civil or criminal penalties that would seriously harm our business and results of operations. Defending against the government investigations, the private securities class action, the derivative actions and other litigation matters related to the
restatements also will likely require significant attention and resources of



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##### Table of Contents

management and, regardless of the outcome, result in significant legal expense. If our defenses ultimately are unsuccessful, or if we are unable to achieve a
favorable settlement, we could be liable for large damage awards that could seriously harm our business and results of operations. While we have provided notice of the government investigations and the other litigation matters to our directors and
officers liability insurance carriers, the insurance carriers have raised certain coverage issues and have not reimbursed us for any legal expenses incurred, and may not agree that they are responsible to pay any damages that ultimately could be
awarded to the plaintiffs. Furthermore, we have only a limited amount of insurance, and even if our insurers agree to make payments under the policies, the damage awards or settlements may be greater than the amount of insurance, and we would in all
cases be liable for any amounts in excess of our insurance policy limits.



Substantial sales of our broadband equipment will not occur unless telecommunications carriers and service providers continue to expand their deployments of DSL and other broadband services, and without continued expansion our revenues
may decline, which could significantly harm our business.



The success of
our broadband equipment depends upon the extent to which telecommunications carriers and service providers continue to expand their deployments of DSL and other broadband services. Factors that have impacted such deployments include:



| |  |  | Lengthy approval processes followed by carriers and service providers, including laboratory tests, technical trials, marketing trials, initial commercial deployment and full
commercial deployment;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Improved business opportunities provided by deployment of broadband services by our ILEC and other customers;
| | - |  | -------------------------------------------------------------------------------------------------------------



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



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



| |  |  | Government regulations.
| | - |  | -----------------------



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



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



ILECs have been aggressively marketing DSL services principally focusing on residential
services. We have committed resources to expand our sales in the ILEC channel both domestically and internationally. There continue to be barriers associated with such sales including, but not limited to, lengthy product evaluation cycles, the
difficulty in dislodging competitors whose products are currently being utilized, long-term product deployment cycles and intense price competition. ILECs currently obtain equipment from our competitors, which include 2Wire, Inc., Westell
Technologies, Inc., Siemens AG (through its Siemens Subscriber Networks, Inc. subsidiary, formerly known as Efficient Networks), Thomson Corporation and ZyXEL Communications Co., which have proven to be strong competitors. All of these competitors
are larger than us and may have greater financial resources. There is no guarantee we will be successful in expanding our presence in the ILEC market. If we fail to further penetrate the ILEC market for our products and services, our business may be
materially and adversely affected.



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##### Table of Contents

We expect our revenues to be increasingly dependent on our ability to develop and sell our broadband equipment into
the residential broadband gateway market.



Prior to our acquisition of
Cayman in October 2001, we developed, marketed and sold broadband equipment products primarily to CLECs and ISPs serving the small business market for DSL Internet connectivity. With our current products and technology, we now are competing for
sales of broadband equipment to ILECs serving the residential market. There are numerous risks associated with the residential broadband gateway market including, but not limited to:



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



| |  |  | The ability to market these products successfully to ILECs and to dislodge competitors that are currently supplying residential-class broadband gateways; and
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Intense price pressure.
| | - |  | -----------------------



If we are unable to increase our sales into the residential broadband gateway market, our business will be materially and adversely affected.



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



We rely on a small number of customers for a large portion
of our revenues. For the three months ended June 30, 2005 and the fiscal year ended September 30, 2004, there were five customers that each individually represented at least 5% of our revenues and in the aggregate, accounted for 70% and 60%,
respectively, of our total revenues. Our revenues will decline and our business may be significantly harmed if one or more of our significant customers stop buying our products, or reduce or delay purchases of our products.



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



A
substantial portion of our revenues is derived from sales to international customers, mainly in Europe. For the three months ended June 30, 2005 and the fiscal year ended September 30, 2004, our international sales represented 39% and 44%,
respectively, of our total revenues. We expect sales to international customers to continue to comprise a significant portion of our revenues. Sales of broadband equipment products to certain of our European customers are denominated in Euros. For
our international sales that continue to be denominated in United States dollars, fluctuations in currency exchange rates could cause our products and services to become relatively more expensive to our foreign customers, which could result in
decreased sales of our products and services. In addition, changes in the value of the Euro relative to the United States dollar could adversely affect our operating results to the extent we do not adequately hedge sales denominated in Euros.



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



Our international operations,
which principally are in Europe, are subject to a number of difficulties and special costs, including, but not limited to:



| |  |  | 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;
| | - |  | -------------------------------------------



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



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



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



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



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



We sell products and services in markets that are highly competitive. We expect competition
to intensify as current competitors expand their product and service offerings and new competitors enter the market. Increased competition is likely to result in price reductions, reduced gross margins and could cause 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 equipment, we primarily compete with 2Wire, Inc., Westell Technologies, Inc., Siemens AG (through its Siemens Subscriber Networks, Inc.
subsidiary, formerly known as Efficient Networks), Thomson Corporation and ZyXEL Communications Co. In the market for our broadband software and services products, we primarily compete with Motive, Inc., 2Wire, Inc., Altiris, Inc., Computer
Associates International, Inc., CrossTec Corporation, Expertcity, Inc., LANDesk Software, Inc., Microsoft Corporation and Symantec Corporation.



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



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



Our revenues and operating results have varied in the past and are likely to vary in the future from quarter to quarter. For example, during
the past eight quarters ended June 30, 2005, our revenues have ranged from $21.8 million to $29.3 million, and our net results have ranged from $1.2 million of income to a loss of $6.1 million. As a result, we believe that period-to-period
comparisons of our operating results are not necessarily meaningful. Investors should not rely on the results of any one quarter or series of quarters as an indication of our future performance.



In the quarter ended June 30, 2005 and in certain quarters in the past, our operating results
were below the expectations of securities analysts. It is likely that in some future quarter, quarters or year, our operating results again will be below the expectations of securities analysts or investors. When our operating results are below such
expectations, the market price of our common stock may decline significantly. In addition to the uncertainties and risks described elsewhere under this Risk Factors heading, variations in our operating results will likely be caused by
factors related to the operation of our business, including, but not limited to:



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



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



| |  |  | Our ability to license, and the timing of licenses, of our broadband software and services;
| | - |  | -------------------------------------------------------------------------------------------



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| |  |  | 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 equipment as
a percentage of our total revenues and increased sales of lower margin residential-class ADSL products within our family of broadband equipment;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



| |  |  | Foreign currency fluctuations; and
| | - |  | ----------------------------------



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



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



DSL services compete with a variety of different broadband services,
including cable, satellite and other wireless technologies. Many of these technologies compete effectively with DSL services. If any technology competing with DSL technology is more reliable, faster, less expensive, reaches more customers or has
other advantages over DSL technology, then the demand for our DSL products and services and our revenues and gross margins will decrease. We cannot guarantee that we will be able to develop and introduce products for these competing technologies.



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



All of our broadband equipment products rely on special semiconductor chips that we purchase from fewer than five suppliers. We do not have
volume purchase contracts with any of our suppliers and they could cease selling to us at any time. In addition, our suppliers change their selling prices frequently in response to market trends, which may include increased demand industry-wide.
Because we generally have been unable to pass component price increases along to our customers, our gross margins and operating results have been harmed as a result of component price increases. If we are unable to obtain a sufficient quantity of
these semiconductor chips in a timely manner for any reason, sales of our broadband equipment products could be delayed or halted. Further, we could also be forced to redesign our broadband equipment products and qualify new suppliers of
semiconductor chip sets. The resulting stoppage or delay in selling our products and the expense of redesigning our products would adversely affect our business.



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



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



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



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



Our Netopia Broadband Server (NBBS) software platform enables network operations centers of broadband service providers the ability to remotely manage, support, and troubleshoot installed broadband gateways, thereby
providing the potential for reducing support costs. We believe that NBBS can assist us in differentiating our products and services from those of our competitors. However, NBBS is a relatively new product that has required and is expected to
continue to require significant investment of development resources and to date has not generated significant revenues, and we cannot provide any assurance that NBBS will be widely adopted by the customers to whom we are marketing it. In addition,
we cannot provide any assurance that when and if deployed in mass scale, NBBS will perform as expected or that it has no hidden bugs or defects.



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



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



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



We may incur greater losses if we cannot successfully sell our broadband software and services products. We derive a substantial portion of the recurring revenues from our broadband software and services products from a small number of
large customers.



The majority of our broadband software and services
revenues are derived from the sale of higher margin software products for corporate help desks, mostly Timbuktu. For the three months ended June 30, 2005 and the fiscal year ended September 30, 2004, revenues from help desk applications were 59% and
70%, respectively, of total revenues for our broadband software and services products. We anticipate that the market for Timbuktu may continue to decline or grow more slowly than the market for our other broadband software products and services. We
also have not generated significant revenues to date from the NBBS software platform in which we have made and expect to continue to make a significant investment of development resources. In addition, we rely on a small number of licensees to
promote the use of our broadband software and services for building web sites and stores. We derive the majority of the recurring revenues from our broadband software and services products from fewer than five



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customers. The extent and nature of the promotions by licensees of our broadband software and services are outside of our control. If licensees of our eSite
and eStore software do not successfully promote web sites and stores to their customers, our recurring revenues may decrease. If these customers were to choose a competitive platform, our recurring revenues would decline and adversely impact our
results.



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



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



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



Our future performance depends on the continued service of our senior
management, product development and sales personnel. The loss of the services of one or more of our key personnel could seriously harm our business. Competition for qualified personnel in our industry and geographic location is intense. Although we
believe our personnel turnover rate is consistent with industry norms, our future success depends on our continuing ability to attract, hire, train and retain highly skilled managerial, technical, sales, marketing and customer support personnel. In
addition, new hires frequently require extensive training before they achieve desired levels of productivity.



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



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



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



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



We rely upon certain software,
firmware and hardware designs that we license from third parties, including firmware that is integrated with our internally developed firmware and used in our products. We



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cannot be certain that these third-party licenses will continue to be available to us on commercially reasonable terms. The loss of, or inability to
maintain, such licenses could result in product shipment delays until equivalent firmware is developed or licensed, and integrated into our products, which would seriously harm our business.



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



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



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



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



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



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



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



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



| |  |  | Our ability to meet the listing standards and to obtain a relisting of our common stock on The NASDAQ Stock Market or a listing on The NASDAQ SmallCap Market;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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



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



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



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| |  |  | General conditions in the broadband communications industry.
| | - |  | ------------------------------------------------------------



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 as it has in the past, including fluctuations that
are unrelated to our performance. Securities class action litigation has often been brought against a company following periods of volatility in market price of its securities. We currently are and may in the future be the target of securities
litigation. Securities litigation has resulted and is expected to continue to result in substantial costs and diversion of managements attention and resources, which could seriously harm our business.



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.



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PART I  FINANCIAL INFORMATION



|ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|------- | ----------------------------------------------------------



Interest Rate Risks



Our potential market interest rate risk for borrowings relates primarily to the rate charged by Silicon Valley Bank under our credit facility, from which we had no borrowings at June 30, 2005. The credit facility
bears interest at a rate equal to the prime rate (the rate announced by Silicon Valley Bank as its prime rate). To the extent interest rates increase and we make borrowings under the credit facility, we would incur increased interest
expense.



Foreign Currency Risks



Our exposure to foreign exchange risk relates primarily to sales and corresponding
receivables made to international customers whose related transactions are denominated in Euros. We are subject to risks typical of an international business including, but not limited to, differing economic conditions and tax structures, other
regulations and restrictions and foreign exchange rate volatility. Accordingly, our future results could be materially adversely affected by changes in these or other factors. To minimize the effects of potential short-term fluctuations on our
operating result stemming from our exposure to foreign currency changes, we enter into currency exchange forward contracts. These contracts guarantee a predetermined exchange rate at the time the contract is purchased. Our currency exchange
contracts typically have maturities of less than three months.



The table below
presents the carrying value, in United States dollars, of accounts receivables denominated in Euros at June 30, 2005 and 2004. The accounts receivables at June 30, 2005 were valued at the United States/Euro exchange rate on June 30, 2005 and the
accounts receivables at June 30, 2004 were valued at the United States/Euro exchange rate on June 30, 2004. The carrying values approximate fair value at June 30, 2005 and 2004.



|                                                       |  |                 |       |              |        |                 |   |              |  |       
|------------------------------------------------------ |  | --------------- | ----- | ------------ | ------ | --------------- | - | ------------ |  | ------
|                                                       |  | 2005            |       | 2004        
|Three Months Ended June 30,                            |  | Carryingamounts |       | Exchangerate |        | Carryingamounts |   | Exchangerate
|Principal (notional) amounts in United States Dollars: |  |                 |       |              |        |                 |   |              |  |       
|Accounts receivable denominated in Euros               |  | $               | 3,238 |              | 1.2066 |                 | $ | 2,437        |  | 1.2085



As of June 30, 2005, the Company had
entered into a foreign currency forward contract that had the effect of fixing the exchange rate on Euro 1,570,000 at $1.192 through the settlement date in August 2005.



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PART I  FINANCIAL INFORMATION



|ITEM 4. | CONTROLS AND PROCEDURES
|------- | -----------------------



Evaluation of disclosure controls and procedures



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



Changes in internal controls



During the three months ended June 30, 2005, there were no changes in our internal controls over financial reporting that have materially affected, or are reasonably
likely to materially affect, our internal controls over financial reporting.



As described in greater detail in the 2004 10-K in Item 7, Managements Discussion and Analysis of Financial Condition and Results of Operations, we restated our financial statements for the fiscal years ended September 30, 2002 and
2003, and our interim financial statements for the fiscal quarters ended December 31, 2003 and June 30, 2004. As a result of the Internal Accounting Review commenced in July 2004, we filed the Forms 10-Q for the third fiscal quarter ended June 30,
2004 and the 2004 10-K on February 1, 2005, which was later than the designated filing deadlines.



In response to the matters discovered in connection with the Internal Accounting Review, we have taken steps, including the appointment of a new senior sales executive and a new Chief Financial Officer, and will
continue to take steps to strengthen control processes and procedures to identify, rectify and prevent the recurrence of the circumstances that resulted in the restatement of prior period financial statements. With respect to such identified
weaknesses, we intend to continue to improve our internal controls and procedures by taking the additional following steps, among others:



| |  |  | Continuing to improve the quality and experience of in-house finance personnel with extensive software revenue recognition experience;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Conducting and continuing to develop internal training programs for affected employees on applicable policies and procedures and sending finance personnel to external training and
continuing education programs; and
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Continuing to improve the operational procedures for software transactions to ensure that proper documentation has been prepared and approved prior to recording revenue in
accordance with the principles of Statement of Position (SOP) 97-2, Software Revenue Recognition, as amended.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



We believe changes to our system of internal controls and our disclosure controls and procedures will be adequate to provide reasonable assurance that the objectives of
these controls will be met. We intend to review and evaluate the design and effectiveness of our disclosure controls and procedures on an ongoing basis and to improve our controls and procedures over time and to correct any deficiencies that we may
discover in the future. Our goal is to ensure that our senior management has timely access to all material financial and non-financial information concerning our business. While we believe the present design of our disclosure controls and procedures
is effective to achieve our goal, future events affecting our business may cause us to modify our disclosure controls and procedures. Furthermore, because of the inherent limitations in all control systems, no evaluation of controls can provide
absolute assurance that all control issues, if any, within the Company have been detected. These inherent limitations include



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the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake.



We are in the process of implementing the requirements of Section 404 of the Sarbanes-Oxley
Act of 2002 that requires our management to assess the effectiveness of our internal controls over financial reporting and include an assertion in our annual report as to the effectiveness of our controls. Burr Pilger & Mayer LLP, our
independent auditors, will be required to attest (a) to whether our assessment of our internal controls over financial reporting is fairly stated in all material respects, and (b) to report separately on whether it believes we maintained, in all
material respects, effective internal controls over financial reporting as of September 30, 2005. We are in the process of performing the system and process documentation, evaluation and testing required for management to make this assessment and
for the auditors to provide its attestation report. We have not completed this process or its assessment, and this process will require significant amounts of management time and resources. In the course of evaluation and testing, management may
identify deficiencies that will need to be addressed and remediated.



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PART II  OTHER INFORMATION



|ITEM 1. | LEGAL PROCEEDINGS
|------- | -----------------



On December 3, 2004, the United States District Court for the Northern District of California issued an order consolidating previously filed purported class action cases under the name In re Netopia, Inc.
Securities Litigation, and appointing a lead plaintiff and plaintiffs counsel. On June 29, 2005, the lead plaintiff filed its consolidated amended complaint. The consolidated amended complaint alleges violations of Sections 10(b) and 20(a)
of the Securities Exchange Act of 1934, as amended (the Exchange Act). The consolidated amended complaint alleges that during the purported class period, November 6, 2003 through August 16, 2004, we made false and misleading statements
or failed to disclose material facts, and that the market price of our common stock was artificially inflated as a result of such alleged conduct. We believe that we have strong defenses to the claims asserted in the consolidated amended complaint.
We intend to defend the case vigorously.



In August 2004, the first of four
purported derivative actions, Freeport Partners, LLC, Derivatively on Behalf of Nominal Defendant Netopia, Inc., v. Alan B. Lefkof, William D. Baker, Reese M. Jones, Harold S. Wills, Robert Lee and Netopia, Inc., was filed in the United States
District Court for the Northern District of California. Two purported derivative actions are pending in the United States District Court for the Northern District of California, and two related purported derivative actions are pending in the
Superior Court of California for the County of Alameda. These actions make claims against our officers and directors arising out of the alleged misstatements described above in connection with the purported class action described above. In November
2004, the derivative plaintiffs agreed to coordinate the four derivative actions. The parties have agreed to a stay of the federal derivative actions, which was ordered by the court in January 2005. The state actions have been consolidated under the
name In re Netopia, Inc. Derivative Litigation. The plaintiffs have not filed their consolidated amended complaint. We believe that we have strong defenses to the claims asserted in the complaints as initially filed. We intend to defend the cases
vigorously.



On October 29, 2004, we were advised by the United States
Securities and Exchange Commission (SEC) that an informal inquiry previously commenced by the SEC had become the subject of a formal order of investigation. This investigation is to determine whether the federal securities laws have been
violated. We cooperated fully with the informal inquiry, and we have been cooperating fully with the formal investigation.



On July 22, 2005, we announced that following discussions with the SEC staff, we had made a settlement offer to the SEC to resolve the investigation into our disclosures
and accounting practices, primarily related to our restatement of financial statements for the fiscal years ended September 30, 2003 and 2002. Without admitting or denying any wrongdoing, we offered to consent to the entry of an order with respect
to violations of Sections 13(a) and 13(b)(2)(A)-(B) of the Exchange Act, and Rules 12b-20, 13a-1, 13a-11 and 13a-13 promulgated thereunder. The SEC staff has agreed to recommend that SEC approve the offer of settlement. The proposed settlement is
subject to completion of mutually agreeable settlement language and final approval by the SEC.



On July 22, 2005, we also announced that we had learned that the SEC staff has agreed to recommend that the SEC approve an offer of settlement with Alan B. Lefkof, our President and Chief Executive Officer. Mr.
Lefkof, without admitting or denying any wrongdoing, offered to consent to the entry of an order with respect to violations of Sections 17(a)(2)-(3) of the Securities Act of 1933, as amended, and Rule 13b2-1 promulgated under the Exchange Act, and
aiding and abetting our violations of Sections 13(a) and 13(b)(2)(A)-(B) of the Exchange Act, and Rules 12b-20 and 13a-11 promulgated thereunder, in connection with a Report on Form 8-K and exhibit furnished to the SEC on July 6, 2004. The proposed
settlement with Mr. Lefkof contemplates a monetary payment. The proposed settlement is subject to completion of mutually agreeable settlement language and final approval by the SEC.



We have been informed that the SEC staff has issued Wells Notices to (a) a former chief financial officer, (b) a former senior
sales vice president, and (c) a former software sales vice president of the



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Company. A Wells Notice indicates that the SEC staff has made a preliminary decision to recommend that the SEC bring a civil enforcement action
against the recipients for possible violations of federal securities laws. Recipients of Wells Notices have the opportunity to respond in writing before the SEC staff makes its formal recommendation on whether the SEC should bring any action.



Responding to the formal order of investigation of the SEC has required
significant attention and resources of management. Our proposed settlement described above is subject to final approval by the SEC. In addition, even though we have announced the proposed settlement with the SEC, the investigation by the SEC is
ongoing, and may continue to require significant attention and resources. If either we and/or Mr. Lefkof are unable to complete the proposed settlements and the SEC elects to pursue an enforcement action against us and/or Mr. Lefkof, the defense
could be costly and require additional management resources. If we were unsuccessful in defending against this or other investigations or proceedings, we could face civil or criminal penalties that would seriously harm our business and results of
operations.



In April 2005, we learned that the United States Attorney for the
Northern District of California has opened an investigation following a referral by the SEC. We do not know the scope or focus of the investigation.



In January 2005, we were notified by the Occupational Health and Safety Administration (OSHA) that we were named in an administrative complaint filed by two
former employees alleging violations of Section 806 of the Corporate and Criminal Fraud Accountability Act of 2002, 18 U.S.C. § 1514A, also known as the Sarbanes-Oxley Act. The former employees alleged we terminated them in retaliation for
their participation in the internal accounting review conducted by the audit committee in 2004. On May 11, 2005, following its investigation, OSHA advised us that the complaint was determined to have no merit. The complainants subsequently requested
a hearing before an Administrative Law Judge to review this determination. The complainants have filed their complaint and we have filed our answer with the Administrative Law Judge. We believe that we have strong defenses and intend to defend the
complaint vigorously.



In February 2005, we were served with a complaint by
these same two former employees. The complaint names the Company and Alan Lefkof as defendants, and asserts claims for defamation and breach of contract. The case is pending in the United States District Court for the Northern District of Texas,
Dallas Division. We believe that we have strong defenses and intend to defend the case vigorously.



Defending against the government investigations, the private securities class action, the derivative actions and other litigation matters described above will likely require significant attention and resources of
management and, regardless of the outcome, result in significant legal expense. If our defenses ultimately are unsuccessful, or if we are unable to achieve a favorable settlement, we could be liable for large damage awards that could seriously harm
our business and results of operation. While we have provided notice of the government investigations and the litigation matters described above to our directors and officers liability insurance carriers, the insurance carriers have raised certain
coverage issues and to date have not reimbursed us for any legal expenses incurred, and may not agree that they are responsible to pay any damages that ultimately could be awarded to the plaintiffs. Furthermore, we have only a limited amount of
insurance, and even if our insurers agree to make payments under the policies, the damage awards or settlements may be greater than the amount of insurance, and we would in all cases be liable for any amounts in excess of our insurance policy
limits.



We are named as a defendant in an action pending in the United States
Bankruptcy Court for the Northern District of California entitled E. Lynn Schoenmann, trustee of NorthPoint Communications, Inc. v. Netopia. In this action commenced on January 11, 2003, the trustee of the bankruptcy estate of NorthPoint
Communications, Inc. (NorthPoint) is seeking to recover approximately $1.2 million that NorthPoint paid to us within the 90 day preference period before NorthPoint filed for bankruptcy in January 2001. NorthPoints trustee is
claiming that NorthPoint was insolvent at the time it made these payments, and that therefore the payments are recoverable preferences within the meaning of the Bankruptcy Code. We believe that we have defenses to the claims asserted by
NorthPoints trustee, and we intend to continue to defend ourselves vigorously. We do not believe that the outcome of this lawsuit is likely to harm our business seriously.



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In addition to the lawsuits described above, from time to time we are involved in other litigation or disputes that are
incidental to the conduct of our business. We are not party to any such other incidental litigation or dispute that in our opinion is likely to seriously harm our business.



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##### Table of Contents

|ITEM 6. | EXHIBITS AND REPORTS ON FORM 8-K
|------- | --------------------------------



(a) Exhibits



|              |  |                                                                                                                                            
|------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description                                                                                                                                
|10.15         |  | Amendment to Loan Documents entered into between Netopia, Inc. and Silicon Valley Bank as of June 27, 2005                                 
|              | 
|10.16         |  | Amended and Restated Schedule to Loan and Security Agreement entered into between Netopia, Inc. and Silicon Valley Bank as of June 27, 2005
|              | 
|31.1          |  | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                         
|              | 
|31.2          |  | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                         
|              | 
|32.1          |  | Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                         
|              | 
|32.2          |  | Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                         



(b) We filed the following Current
Reports on Form 8-K during the three months ended June 30, 2005:



| |  |  | On April 11, 2005, we filed a Current Report on Form 8-K, reporting Items 1.01, 5.02 and 9.01, reporting that we had entered into an Amendment to an Employment Agreement with Mark
H. Perry, that we had entered into a letter agreement with Charles Constanti, that Mark H. Perry would serve as our Interim Senior Vice President and Chief Financial Officer through May 15, 2005, and that Charles Constanti would serve as our Vice
President and Chief Financial Officer effective May 16, 2005, as well as certain other information.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | On April 18, 2005, we filed a Current Report on Form 8-K, reporting Items 1.01 and 9.01, reporting that we had entered into an Indemnification Agreement and a letter agreement with
Charles Constanti, as well as certain other information.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | On April 26, 2005, we filed a Current Report on Form 8-K, reporting Items 2.02 and 9.01, reporting our financial results for our second fiscal quarter ended March 31, 2005, as well
as certain other information.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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SIGNATURES



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



|                    |  |  |  |               |  |     |  |                                             
|------------------- |  |  |  | ------------- |  | --- |  | --------------------------------------------
|Date:August 9, 2005 |  |  |  | NETOPIA, INC.
|                    |  |  |  | (Registrant) 
|                    |  |  |  |              
|                    |  |  |  |               |  | By: |  | /s/ Alan B. Lefkof                          
|                    |  |  |  |               |  |     |  | Alan B. Lefkof                              
|                    |  |  |  |               |  |     |  | President and Chief Executive Officer       
|                    |  |  |  |              
|                    |  |  |  |               |  | By: |  | /s/ Charles Constanti                       
|                    |  |  |  |               |  |     |  | Charles Constanti                           
|                    |  |  |  |               |  |     |  | Vice President and Chief Financial Officer  
|                    |  |  |  |               |  |     |  | (Principal Financial and Accounting Officer)



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