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UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C.
20549

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FORM 10-Q

|x |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT  OF 1934
|- |  | ----------------------------------------------------------------------------------------
|  |  |                                                                                         
|  |  | For the quarterly period ended December 31, 2002                                        
|  |  |                                                                                         
|  |  | OR                                                                                      
|  |  |                                                                                         
|o |  | 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)

Marketplace Tower 6001
Shellmound Street, 4th Floor Emeryville, California 94608 (Address of principal executive offices, including Zip Code)

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(510) 420-7400 (Registrants telephone number, including area code)

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

|Yes | x | No | o
|--- | - | -- | -

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

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|NETOPIA, INC.     |                                                                                                                
|----------------- | ---------------------------------------------------------------------------------------------------------------
|Form 10-Q         |                                                                                                                
|Table of Contents | Page                                                                                                           
|                  |                                                                                                                
|PART I.           | FINANCIAL INFORMATION                                                                                          
|                  |                                                                                                                
|Item 1.           | Unaudited Condensed Consolidated Financial Statements                                                          
|                  |                                                                                                                
|                  | Unaudited condensed consolidated balance sheets at December 31, 2002 and September 30, 2002                    
|                  |                                                                                                                
|                  | Unaudited condensed consolidated statements of operations for the three months ended December 31, 2002 and 2001
|                  |                                                                                                                
|                  | Unaudited condensed consolidated statements of cash flows for the three months ended December 31, 2002 and 2001
|                  |                                                                                                                
|                  | Notes to unaudited condensed consolidated financial statements                                                 
|                  |                                                                                                                
|Item 2.           | Managements Discussion and Analysis of Financial Condition and Results of Operations                          
|                  |                                                                                                                
|Item 3.           | Quantitative and Qualitative Disclosures About Market Risk                                                     
|                  |                                                                                                                
|Item 4.           | Controls and Procedures                                                                                        
|                  |                                                                                                                
|PART II.          | OTHER INFORMATION                                                                                              
|                  |                                                                                                                
|Item 6.           | Exhibits and Reports on Form 8-K                                                                               
|                  |                                                                                                                
|Signatures        | 37                                                                                                             
|                  |                                                                                                                
|Certifications    | 38                                                                                                             

1



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##### Table of Contents

PART I.      
FINANCIAL INFORMATIONItem 1.        
Unaudited Condensed Consolidated Financial Statements

NETOPIA, INC. ANDSUBSIDIARIESUnaudited Condensed Consolidated Balance Sheets

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

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

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NETOPIA, INC. AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements of Operations

|Three months ended December 31, |                                                     |                                          | 2002   |        |   | 2001   |       
|------------------------------- | --------------------------------------------------- | ---------------------------------------- | ------ | ------ | - | ------ | ------
|                                |                                                     |                                          |       
|                                |                                                     | (in thousands, except per share amounts) |       
|REVENUES:                       |                                                     |                                          |        |        |   |        |       
|                                | Internet equipment                                  |                                          | $      | 14,596 |   | $      | 11,811
|                                | Web platform licenses and services                  |                                          |        | 5,007  |   |        | 4,074 
|                                |                                                     |                                          |        |        |   |        |       
|                                | Total revenues                                      |                                          |        | 19,603 |   |        | 15,885
|                                |                                                     |                                          |        |        |   |        |       
|COST OF REVENUES:               |                                                     |                                          |        |        |   |        |       
|                                | Internet equipment                                  |                                          |        | 10,711 |   |        | 7,383 
|                                | Web platform licenses and services                  |                                          |        | 429    |   |        | 164   
|                                | Total cost of revenues                              |                                          |        | 11,140 |   |        | 7,547 
|                                |                                                     |                                          |        |        |   |        |       
|GROSS PROFIT                    |                                                     |                                          | 8,463  |        |   | 8,338  |       
|                                |                                                     |                                          |        |        |   |        |       
|OPERATING EXPENSES:             |                                                     |                                          |        |        |   |        |       
|                                | Research and development                            |                                          |        | 3,983  |   |        | 4,148 
|                                | Research and development project cancellation costs |                                          |        | 606    |   |        |      
|                                | Selling and marketing                               |                                          |        | 5,661  |   |        | 6,128 
|                                | General and administrative                          |                                          |        | 1,428  |   |        | 973   
|                                | Amortization of intangible assets                   |                                          |        | 374    |   |        | 374   
|                                | Restructuring costs                                 |                                          |        | 342    |   |        | 482   
|                                | Acquired in-process research and development        |                                          |        |       |   |        | 2,150 
|                                | Integration costs                                   |                                          |        |       |   |        | 309   
|                                |                                                     |                                          |        |        |   |        |       
|                                | Total operating expenses                            |                                          |        | 12,394 |   |        | 14,564
|                                |                                                     |                                          |        |        |   |        |       
|OPERATING LOSS                  |                                                     |                                          | (3,931 | )      |   | (6,226 | )     
|Other income (loss), net        |                                                     |                                          | (7     | )      |   | 156    |       
|                                |                                                     |                                          |        |        |   |        |       
|                                | NET LOSS                                            |                                          | $      | (3,938 | ) | $      | (6,070
|                                |                                                     |                                          |        |        |   |        |       
|Per share data, net loss:       |                                                     |                                          |        |        |   |        |       
|                                | Basic and diluted net loss per share                |                                          | $      | (0.21  | ) | $      | (0.34 
|                                |                                                     |                                          |        |        |   |        |       
|                                | Common shares used in the per share calculations    |                                          |        | 18,906 |   |        | 18,092
|                                |                                                     |                                          |        |        |   |        |       
|                                |                                                     |                                          |        |        |   |        |       

See accompanying notes to unaudited condensed consolidated financial statements.

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NETOPIA, INC. AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements of Cash Flows

|Three months ended December 31,                                                           |                                                                               |                | 2002   |        |   | 2001   |        
|----------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------- | -------------- | ------ | ------ | - | ------ | -------
|                                                                                          |                                                                               |                |        |        |   |        |        
|                                                                                          |                                                                               | (in thousands) |       
|Cash flows from operating activities:                                                     |                                                                               |                |        |        |   |        |        
|Net loss                                                                                  |                                                                               | $              | (3,938 | )      | $ | (6,070 | )      
|Adjustments to reconcile net loss to net cash provided by (used in) operating activities: |                                                                               |                |        |        |   |        |        
|                                                                                          | Depreciation and amortization                                                 |                |        | 1,438  |   |        | 2,593  
|                                                                                          | Charge for in-process research and development                                |                |        |       |   |        | 2,150  
|                                                                                          | Write-off of capitalized software development costs                           |                |        | 16     |   |        |       
|                                                                                          | Changes in allowance for doubtful accounts and returns on accounts receivable |                |        | (20    | ) |        | 427    
|                                                                                          | Changes in operating assets and liabilities:                                  |                |        |        |   |        |        
|                                                                                          | Trade accounts receivable                                                     |                |        | (653   | ) |        | 313    
|                                                                                          | Inventories                                                                   |                |        | (1,941 | ) |        | (2,063 
|                                                                                          | Prepaid expenses and other current assets                                     |                |        | 452    |   |        | (120   
|                                                                                          | Deposits and other assets                                                     |                |        | (129   | ) |        | 3      
|                                                                                          | Accounts payable and accrued liabilities                                      |                |        | 3,390  |   |        | 6,774  
|                                                                                          | Deferred revenue                                                              |                |        | (540   | ) |        | (443   
|                                                                                          | Other liabilities                                                             |                |        | (1     | ) |        | 14     
|                                                                                          |                                                                               |                |        |        |   |        |        
|                                                                                          | Net cash provided by (used in) operating activities                           |                |        | (1,926 | ) |        | 3,578  
|                                                                                          |                                                                               |                |        |        |   |        |        
|Cash flows from investing activities:                                                     |                                                                               |                |        |        |   |        |        
|                                                                                          | Purchase of short-term investments                                            |                |        |       |   |        | 147    
|                                                                                          | Proceeds from the sale of short-term investments                              |                |        |       |   |        | 13,113 
|                                                                                          | Purchase of furniture, fixtures and equipment                                 |                |        | (379   | ) |        | (2,576 
|                                                                                          | Acquisition of businesses                                                     |                |        |       |   |        | (17,729
|                                                                                          |                                                                               |                |        |        |   |        |        
|                                                                                          | Net cash used in investing activities                                         |                |        | (379   | ) |        | (7,045 
|                                                                                          |                                                                               |                |        |        |   |        |        
|Cash flows from financing activities:                                                     |                                                                               |                |        |        |   |        |        
|                                                                                          | Borrowings under credit facility                                              |                |        | 1,572  |   |        |       
|                                                                                          | Proceeds from the issuance of common stock                                    |                |        | 2      |   |        | 156    
|                                                                                          | Net cash provided by financing activities                                     |                |        | 1,574  |   |        | 156    
|                                                                                          |                                                                               |                |        |        |   |        |        
|Net decrease in cash and cash equivalents                                                 |                                                                               |                | (731   | )      |   | (3,311 | )      
|Cash and cash equivalents, beginning of quarter                                           |                                                                               |                | 25,022 |        |   | 35,703 |        
|                                                                                          |                                                                               |                |        |        |   |        |        
|Cash and cash equivalents, end of quarter                                                 |                                                                               | $              | 24,291 |        | $ | 32,392 |        
|                                                                                          |                                                                               |                |        |        |   |        |        
|                                                                                          |                                                                               |                |        |        |   |        |        

See accompanying notes to unaudited condensed consolidated financial statements

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NETOPIA, INC. AND SUBSIDIARIESNotes To Unaudited Condensed Consolidated Financial Statements

|(1) | Basis of Presentation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|    | The unaudited condensed consolidated financial statements included in this Form 10-Q reflect all adjustments, consisting only of normal recurring adjustments which in the
Companys opinion are necessary to fairly present the Companys consolidated financial position, results of operations and cash flows for the periods presented. These condensed consolidated financial statements should be read in
conjunction with the Companys consolidated financial statements included in the Companys Annual Report on Form 10-K and other filings with the United States Securities and Exchange Commission (SEC). The consolidated results of operations
for the period ended December 31, 2002 are not necessarily indicative of the results to be expected for any subsequent quarter or for the entire fiscal year ending September 30, 2003.                                                                                                                                                                                                   
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|(2) | Recent Accounting Pronouncements                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|    | In June 2001, the Financial Accounting Standards Board (FASB) approved for issuance Statement of Financial Accounting Standards (SFAS) No. 143, Accounting for Asset Retirement
Obligations. SFAS No. 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. This Statement amends FASB Statement No. 19, Financial
Accounting and Reporting by Oil and Gas Producing Companies. SFAS No. 143 requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can
be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. The provisions of SFAS No. 143 are effective for financial statements issued for fiscal years beginning after June 15, 2002. This
adoption had no impact on the Companys consolidated financial statements.                         
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|    | In August 2001 the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS No. 144 serves to clarify and further define the
provisions of SFAS No. 121 Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of. SFAS No. 144 does not apply to goodwill and other intangible assets that are not amortized. SFAS No. 144 is effective
for fiscal years beginning after December 15, 2001. The Company adopted early SFAS No. 144 effective October 1, 2001. This adoption had no impact on the Companys consolidated financial statements.                                                                                                                                                                                                                                                                                                                                                                                                                                 
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|    | In May 2002, the FASB approved for issuance SFAS No. 145, Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections. SFAS
No. 145 requires gains and losses from extinguishment of debt to be classified as an extraordinary item only if the criteria in Accounting Principles Board (APB) No. 30 have been met. Further, lease modifications with economic effects similar to
sale-leaseback transactions must be accounted for in the same manner as sale-leaseback transactions. The Company has adopted the provisions of SFAS No. 145 required for financial statements issued on or after May 15, 2002. This adoption had no
impact on the Companys consolidated financial statements.                                                                                                                                                                                                                                                                                                        
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|    | In June 2002, the FASB approved for issuance SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. SFAS No. 146 addresses accounting and reporting
for costs associated with exit and disposal activities and supersedes Emerging Issues Task Force No. 94-3 (EITF 94-3), Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs
Incurred in a Restructuring). SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred, as defined by the Statement. Under EITF 94-3, an exit cost was recognized
at the date an entity committed to an exit plan. Additionally, SFAS No. 146 provides that exit and disposal costs should be measured at fair value and that the associated liability will be adjusted for changes in estimated cash flows. The provisions
of SFAS No. 146 are effective for exit and disposal activities that are initiated after December 31, 2002.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|    | In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation - Transition and Disclosure, which is effective for fiscal years ending after
December 15, 2002. SFAS No. 148 amends SFAS No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition to                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

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|    | the fair value method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure provisions of SFAS No. 123 to require disclosure in the
summary of significant accounting policies of the effects of an entitys accounting policy with respect to stock-based employee compensation on reported net income and earnings per share in annual and interim financial statements. This adoption
had no impact on the Companys consolidated financial statements.                                                                                                                                                                                                                                                                                                                                 
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|(3) | Acquisitions                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|    | DoBox, Inc. (DoBox).In March 2002, the Company closed a transaction to purchase substantially all of the assets and assume certain liabilities of DoBox, a developer of
broadband gateway parental control, content filtering and family firewall software. The Company purchased DoBox primarily for its technology. The Company accounted for the acquisition as a purchase of net assets. The aggregate purchase price of the
transaction was $1.9 million, based upon consideration paid at closing.                                                                                                                                                                                                                                                                                                                                  
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|    | The transaction did not meet the criteria of a business combination as outlined by EITF 98-3, Determining Whether a Non-Monetary Transaction Involves Receipt of Productive
Assets or of a Business, because upon acquisition, the net asset acquired did not have any significant outputs. Accordingly, the excess purchase price over the net tangible assets received was attributed to in-process research and development
and was expensed in the accompanying consolidated statement of operations.                                                                                                                                                                                                                                                                                                                                 
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|    | Cayman Systems, Inc. (Cayman).In October 2001, the Company and Cayman, a Massachusetts corporation, consummated a merger (the Merger) whereby Amazon Merger Corporation, a
Delaware corporation and a wholly-owned subsidiary of Netopia (Merger Sub), was merged with and into Cayman pursuant to an Agreement and Plan of Merger and Reorganization (the Merger Agreement) dated as of September 19, 2001, as amended. Cayman, a
developer and supplier of business class broadband gateways, has survived the Merger as a wholly owned subsidiary of Netopia. The Company purchased Cayman primarily for its technology, product and customer base. The Company accounted for the
transaction under the purchase method. The aggregate purchase price of the transaction was $14.9 million, based on the consideration paid at closing.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|    | Approximately $1.7 million initially was held in escrow to satisfy Caymans indemnification obligations under the Merger Agreement. Fifty percent (50%) of the escrow amount
was released from escrow shortly after the one-year anniversary date of the close of the transaction. Upon the satisfaction of Caymans indemnification obligations, any remaining amounts are to be released from escrow on the two-year
anniversary date of the close of the transaction.                                                                                                                                                                                                                                                                                                                                                                  





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



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



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



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|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |  | Developed product technology, which represents the value of Caymans proprietary know-how that is technologically feasible as of the acquisition date;                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |  | Core technology leveraged, which represents the value of Caymans research and development projects in process that are leveraged off of Caymans previously developed
products and technology;                                                                                                                                                                                                                                                                                                                                                                                                                                 
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |  | Sales channel relationships, which represents the value of Caymans established relationships with its incumbent local exchange carrier (ILEC) and cable company customers to
whom Netopia expects to continue to sell products; and                                                                                                                                                                                                                                                                                                                                                                                            
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |  | Goodwill, which represents the excess of the Cayman purchase price over the fair value of the underlying net identifiable assets, was attributed to the Companys Internet
equipment reporting unit. In connection with the Companys annual impairment test as required by SFAS No. 142, the Company determined that this amount was fully impaired at August 31, 2002. As a result, the Company recorded a charge of $7.3
million to its Consolidated Statement of Operations in the fiscal year ended September 30, 2002 representing the full impairment of the goodwill acquired in connection with the Cayman acquisition.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    | The value that was assigned to acquired in-process research and development, as part of the Companys independent third-party valuation, was determined by estimating
the costs to develop the in-process research and development projects into commercially viable products, estimating the resulting net cash flows from the projects when completed and discounting the net cash flows to their present value. The revenue
estimates used to value the in-process research and development projects were based upon estimates of relevant market sizes and growth factors, expected trends in technology and the nature and expected timing of new product introductions by Cayman
and its competitors.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    | The rate utilized to discount the net cash flows to their present value was 28%, which the Company believes adequately reflects the nature of the investment and the risk
of the underlying cash flows. This discount rate is a weighted average cost of capital based upon a peer group of companies.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|(4) | Intangible Assets                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    | The Companys intangible assets at December 31, 2002 consist primarily of identifiable intangible assets acquired in connection with the Cayman acquisition, which the
Company is amortizing on a straight-line basis over their estimated useful lives, and goodwill acquired in connection with the acquisitions of WebOrder and netOctopus which the Company is not amortizing.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    | On July 1, 2001, the Company adopted SFAS No. 141, Business Combinations, and on October 1, 2001, the Company early adopted SFAS No. 142, Goodwill and Other
Intangible Assets. SFAS No. 141 requires that the purchase method of accounting be used for all business combinations and that certain acquired intangible assets be recognized as assets apart from goodwill. SFAS No. 142 provides that goodwill
should not be amortized but instead be tested for impairment annually at the reporting unit level.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    | In accordance with SFAS No. 142, the Company completed the transitional impairment test of its goodwill during the three months ended March 31, 2002. That effort, and
preliminary assessments of the Companys goodwill, indicated no adjustment was required upon adoption of this pronouncement. The impairment testing is performed in two steps: (i) the determination of impairment, based upon the fair value of a
reporting unit as compared to its carrying value, and (ii) if there is an indication of impairment, this step measures the amount of impairment loss by comparing the implied fair value of goodwill with the carrying amount of that goodwill. The
Company performed the annual impairment test required by SFAS No. 142 on August 31, 2002 for its two reporting units. To complete the first step of the analysis, the Company discounted the cash flows generated by its Internet equipment and Web
platforms reporting units 5 year plans and applied the Gordon Growth factor to determine the residual value. To complete the second step of the analysis, the Company used an independent third party valuation consultant to determine the value
of the intangible assets of the Internet equipment-reporting unit as compared to the excess of fair value over the net book value of the assets of the Internet equipment-reporting unit. At August 31, 2002, the implied fair value of the
Companys Internet equipment

7



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##### Table of Contents

| | reporting unit was found to be less than its carrying amount and as a result, the Company recorded a charge to its Consolidated Statement of Operations in the fiscal year ended
September 30, 2002.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                     
| | Detail of the Companys identifiable intangible assets, by reporting unit, as of December 31, 2002 is as follows:                                                                                   



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

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

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

(5)     Inventory

Inventory consisted of the following:

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

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##### Table of Contents

|(6)                             | Per Share Calculations                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|                                | Basic net loss per share is based on the weighted average number of shares of common stock outstanding during the period. Diluted net loss per share is based on the
weighted average number of shares of common stock outstanding during the period plus potential dilutive shares from options and warrants outstanding using the treasury stock method. All potential dilutive common shares have been excluded from the
computation of the diluted loss per share for the three months ended December 31, 2002 and 2001, as their effect on the loss per share was anti-dilutive. Potential dilutive common shares excluded from the computation of diluted loss per share
consisted of options to purchase common stock totaling 7,169,913 shares, with a weighted average exercise price of $4.31, and 5,249,656 shares, with a weighted average exercise price of $5.38, for the three months ended December 31, 2002 and 2001,
respectively; and a warrant to purchase common stock totaling 5,000 shares for the three months ended December 31, 2001.               
|                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|(7)                             | Segment, Geographic and Significant Customer Information                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|                                | Segment Information.The Company has adopted the provisions of SFAS No. 131, which establishes standards for the reporting by public business enterprises of
information about operating segments, products and services, geographic areas, and major customers. The methodology for determining the information reported is based on the organization of operating segments and the related information that the
Chief Operating Decision Maker (CODM) uses for operational decisions and assessing financial performance. Netopias Chief Executive Officer (CEO) is considered the Companys CODM. For purposes of making operating decisions and assessing
financial performance, the Companys CEO reviews financial information presented on a consolidated basis accompanied by disaggregated information for revenues and gross margins by product group as well as revenues by geographic region and by
customer. Operating expenses and assets are not disaggregated by product group for purposes of making operating decisions and assessing financial performance.
|                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|                                | The Company generates revenue from two groups of products and services. Disaggregated financial information regarding the operating segments is as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|Three months ended December 31, |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|Revenue                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|Cost of revenues                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|                                | Gross profit                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|                                | Gross margin                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|Unallocated operating expenses  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|                                | Operating loss                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|                                | Geographic Information. The Company sells its products and provides services worldwide through a direct sales force, independent distributors, and value-added
resellers. It currently operates in four regions: United States, Europe, Canada, and Asia Pacific and other. Revenues outside of the United States are primarily export sales denominated in United States dollars. Disaggregated financial information
regarding the Companys revenues by geographic region for the three months ended December 31, 2002 and 2001 is as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|Three months ended December 31, |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|Europe                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|Canada                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|Asia Pacific and other          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|                                | Subtotal international revenue                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|United States                   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|                                | Total revenues                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

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

9



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##### Table of Contents

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



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



|                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                | (a)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|                                | No other customers during the three months ended December 31, 2002 and 2001 accounted for 10% or more of the Companys total revenues. For the three months ended
December 31, 2002, there were six customers who each individually represented at least 5% of the Companys revenues and in the aggregate, accounted for 50% of the Companys total revenues. For the three months ended December 31, 2001,
there were four customers who each individually represented at least 5% of the Companys revenues and in the aggregate, accounted for 40% of the Companys total revenues.
|                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|                                | The following table sets forth the accounts receivable balance for the customers identified above along with such data expressed as a percentage of total accounts
receivable:                                                                                                                                                                                                                                                                                                                                                                                                         
|                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|Three months ended December 31, |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|Covad                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|SBC                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|Ingram Micro                    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        



|(8) | Long-Term Investments                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|    | In fiscal year 2001, the Company purchased $2.0 million of Series D Preferred stock in MegaPath Networks Inc. (MegaPath). MegaPath offers high-speed DSL access and eCommerce and
Web hosting services to small and medium size businesses. During the three months ended December 31, 2002, MegaPath purchased $0.4 million of the Companys products and during fiscal years 2002 and 2001, MegaPath purchased $0.9 million and $0.1
million, respectively, of the Companys products. At December 31, 2002, MegaPaths accounts receivable with the Company was $0.2 million. In fiscal year 2002, the Company recorded a $1.4 million unrealized loss on impaired securities
related to its investment in MegaPath. This impairment was recorded in connection with the valuation of MegaPath based upon its most recent round of financing. During fiscal year 2002, the Company purchased $0.4 million of Series E Preferred stock
in MegaPath and currently owns approximately 4.0% of MegaPath. Although there is no public market for MegaPaths stock, the Company believes that the market value of its investment in Series D and Series E Preferred shares is not less than the
Companys $1.0 million carrying value at December 31, 2002.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|    | In fiscal year 2000, the Company purchased $2.0 million of Series C Preferred Stock in Everdream Corporation (Everdream). Everdream provides outsourced information technology (IT)
expertise, products and services that enable small and medium size businesses to focus on their core competencies. During fiscal year 2000, the Company entered into an agreement with Everdream to host a co-branded version of the Companys
eStore platform for Everdreams customers. Everdream did not purchase any of the Companys products during the three months ended December 31, 2002 or during fiscal year 2002 and did not account for any accounts receivable at December 31,
2002. During fiscal years 2001 and 2000, Everdream purchased $5,000 and $0.1 million, respectively, of the Companys products. In fiscal year 2002, the Company recorded a $1.5 million unrealized loss on impaired securities related to its
investment in Everdream. This impairment was recorded in connection with the valuation of Everdream based upon its most recent round of financing.  The Company                                                                                                                                                         

10



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##### Table of Contents

|    | currently owns approximately 2.5% of Everdream. Although there is no public market for Everdreams stock, the Company believes that the market value of these shares is not
less than the Companys $0.5 million carrying value at December 31, 2002.                                                                                                   
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                         
|(9) | Restructuring Costs                                                                                                                                                                                                                                                                                                                                     
|    |                                                                                                                                                                                                                                                                                                                                                         
|    | During the three months ended December 31, 2002, the Company recorded a restructuring charge of $0.3 million primarily consisting of employee severance benefits related to a
reduction in the Companys workforce, and facility closure costs related to the closure of a sales office in Hong Kong. Details of the restructuring charge is as follows:



| |                              |                  | Employee severance benefits |     | Facility closure costs |   | Other |   | Total |  
| | ---------------------------- | ---------------- | --------------------------- | --- | ---------------------- | - | ----- | - | ----- | -
| |                              |                  |                             |     |                        |   |       |   |       |  
| |                              |                  | (in thousands)              |    
| | Total charge                 |                  | $                           | 313 |                        | $ | 25    |   | $     | 4
| | Less: Amounts paid           |                  |                             | 287 |                        |   |      |   |       | 
| |                              | Non-cash charges |                             |     |                       |   |       |  |       |  
| |                              |                  |                             |     |                        |   |       |   |       |  
| | Balance at December 31, 2002 |                  | $                           | 26  |                        |   | 25    |   | $     | 
| |                              |                  |                             |     |                        |   |       |   |       |  



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



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



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



|     |                                                                                                                                                                                                                                                                     |  | Employee severance  benefits |     | Internet portal exit  costs |   | Facility costs |  | Total |   
|---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------------- | --- | --------------------------- | - | -------------- |  | ----- | --
|     |                                                                                                                                                                                                                                                                     |  |                              |     |                             |   |                |  |       |   
|     |                                                                                                                                                                                                                                                                     |  | (in thousands)               |    
|     | Total charge                                                                                                                                                                                                                                                        |  | $                            | 475 |                             | $ | 510            |  | $     | 88
|     | Less:                                                                                                                                                                                                                                                               |  |                              |     |                             |   |                |  |       |   
|     | Amounts paid                                                                                                                                                                                                                                                        |  |                              | 344 |                             |   | 97             |  |       | 88
|     | Non-cash charges                                                                                                                                                                                                                                                    |  |                              | 63  |                             |   | 413            |  |       |  
|     |                                                                                                                                                                                                                                                                     |  |                              |     |                             |   |                |  |       |   
|     | Balance at December 31, 2002                                                                                                                                                                                                                                        |  | $                            | 68  |                             | $ |               |  | $     |  
|     |                                                                                                                                                                                                                                                                     |  |                              |     |                             |   |                |  |       |   
|(10) | Integration Costs                                                                                                                                                                                                                                                  
|     |                                                                                                                                                                                                                                                                    
|     | During the three months ended December 31, 2001, the Company recorded a charge of $0.3 million for integration costs
incurred in connection with integrating Caymans customers, systems and operations. Details of the charge for integration costs is as follows:

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##### Table of Contents

|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |  | Customer integration communications |     | Systems integration |   |    | Total |  
|---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------------------- | --- | ------------------- | - | -- | ----- | -
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |  |                                     |     |                     |   |    |       |  
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |  | (in thousands)                      |    
|     | Total charge                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |  | $                                   | 269 |                     | $ | 40 |       | $
|     | Less amounts paid                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |  |                                     | 269 |                     |   | 17 |       |  
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |  |                                     |     |                     |   |    |       |  
|     | Balance at December 31, 2002                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |  | $                                   |    |                     | $ | 23 |       | $
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |  |                                     |     |                     |   |    |       |  
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |  |                                     |     |                     |   |    |       |  
|(11) | Credit Facility                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|     | In June 2002, the Company entered into a Loan and Security Agreement with Silicon Valley Bank (the Credit Facility).
Pursuant to the Credit Facility, the Company may borrow up to $15.0 million from time to time from Silicon Valley Bank. The term of the Credit Facility is two years. The Company must maintain an adjusted quick ratio, as defined as the ratio of
(i) the Companys unrestricted cash maintained at Silicon Valley Bank plus cash equivalents maintained at Silicon Valley Bank plus receivables and investments made on behalf of the Company through Silicon Valley Banks Investment
Product Services Division (ISP Division) to (ii) the Companys current liabilities plus the outstanding principal amount of any obligations less deferred revenues, of not less than 1.25 to 1 from June 2002 through December 31, 2002 and
1.5 to 1 from January 1, 2003 to the end of the term.
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|     | Through June 2003, the Company must maintain a tangible net worth of not less than $32.0 million; the minimum tangible
net worth covenant will be reset for the second year of the Credit Facility. On December 9, 2002, Silicon Valley Bank waived the Companys default of the tangible net worth covenant at September 30, 2002 and on February 11, 2003, Silicon Valley
Bank waived the Companys default of the tangible net worth covenant at December 31, 2002. Additionally, the Company has been notified by Silicon Valley Bank that the tangible net worth covenant has been reduced to $23.5 million for the
remainder of the term of the Credit Facility. There is no assurance that Silicon Valley Bank will waive any future default of this or any other covenant contained in the Credit Facility agreement.                                                                                   
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|     | The Credit Facility bears interest at a rate equal to the prime rate (the rate announced by Silicon Valley Bank as its
prime rate) plus 0.75% per annum. At December 31, 2002, the interest rate was 5.0%. The credit limit is determined based on a formula related to the amount of accounts receivable and inventory at any particular time. The Company may
borrow under the Credit Facility in order to finance working capital requirements for new products and customers, and otherwise for general corporate purposes in the normal course of business.                                                                                                                                                                                                                                                                                                                                              
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|     | As of December 31, 2002, the Company had outstanding borrowings of $6.0 million, collateralized by the Companys
accounts receivable and inventory. This borrowing was recorded as a long-term liability on the Companys December 31, 2002 consolidated balance sheet based upon the contractual repayment terms that exceed one year from the balance sheet date.
As of December 31, 2002, $1.4 million was available under the Credit Facility.                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|(12) | Other Income (Loss), Net                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|     | Other income (loss), net consists of interest income the Company earns on its cash, cash equivalents and short-term
investments, interest expense related to the Companys borrowing under its credit facility and gains and losses on foreign currency transactions. The following table sets forth for the periods indicated, detail of the Companys other
income (loss), net:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 



| | Three months ended December 31, |       |                | 2002 |    |   | 2001 |    
| | ------------------------------- | ----- | -------------- | ---- | -- | - | ---- | ---
| |                                 |       |                |      |    |   |      |    
| |                                 |       | (in thousands) |     
| | Interest income                 |       | $              | 73   |    | $ | 202  |    
| | Interest expense                |       |                | (66  | )  |   |     |    
| | Other income (expense)          |       |                | (14  | )  |   | (46  | )  
| |                                 |       |                |      |    |   |      |    
| |                                 | Total |                | $    | (7 | ) | $    | 156
| |                                 |       |                |      |    |   |      |    

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PART I.          FINANCIAL INFORMATION

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

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

Overview

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

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

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

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

| |  | Telecommunication carriers, including incumbent local exchange carriers (ILECs), such as SBC Communications Inc. (SBC), BellSouth Corporation (BellSouth) and Verizon
Communications Inc. (Verizon); competitive local exchange carriers (CLECs), including Covad Communications Company (Covad), McLeodUSA Incorporated (McLeod) and NextGenTel; Internet service providers (ISPs), including Business Telecommunications,
Inc. (BTI) and Integra Telecom, Inc. (Integra Telecom); and Internet Exchange Carriers (IXCs) including AT&T Corp. (AT&T), Sprint Corporation (Sprint) and WorldCom, Inc. (WorldCom);
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |  | Distributors, including Ingram Micro Inc. (Ingram Micro), Groupe Softway (Softway) and Tech Data Corporation (Tech Data);                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |  | Cable companies, including Comcast Corporation (Comcast); and                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |  | Directly to end-users.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

Historically, we have depended upon the ability of our customers to successfully
offer broadband services, in particular DSL services. Prior to our acquisition of Cayman Systems, Inc. (Cayman), our largest customers were CLECs. Many CLECs have incurred operating losses and negative cash flows as they attempted to establish their
networks and operations, and many have filed for protection under the Bankruptcy Act or ceased operations. Most notably, Covad, which currently is our largest CLEC customer and was our largest customer during the quarter ended December 31, 2002,
filed a voluntary petition under the Bankruptcy Act in August 2001 as part of a capital-restructuring plan. Covad emerged from bankruptcy in December 2001 and has announced that it has adequate cash to allow it to become cash flow positive by the
latter half of 2003. Additionally, the financial instability of the telecommunications industry was highlighted when WorldCom, Inc. announced in July 2002 that WorldCom and substantially all of its active United States subsidiaries filed voluntary
petitions for reorganization under Chapter 11 of the United States Bankruptcy Code. In July 2002, the Bankruptcy Court approved interim financing arrangements that WorldCom believes should provide sufficient funds to continue operations.

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

Critical Accounting Policies and
Estimates

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

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

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

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

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

| |  | The 1996 Stock Option Plan provides for the issuance of incentive or non-statutory options to directors, employees, and non-employee consultants. Options are granted at the
discretion of the Board of Directors or the Compensation Committee of the Board of Directors. Incentive stock options may be granted at not less than 100% of the fair market value per share and non-statutory stock options may be granted at not less
than 85% of the fair market value per share at the date of grant as determined by the Board of Directors or the Compensation Committee, except for options granted to a person owning greater than 10% of the total combined voting power of all classes
of stock of the Company, for which the exercise price of the options must be not less than 110% of the fair market value.                                                                                                                                                                                                                                                                            
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |  | The 2000 Stock Incentive Plan provides for issuance of non-statutory options and restricted stock to employees, officers, directors, consultants, independent contractors and
advisors of the Company or any subsidiary of the Company. Options and restricted stock awards granted under the 2000 Plan are granted at the discretion of the Board of Directors or the Compensation Committee of the Board of Directors. The 2000 Plan
is not a stockholder approved stock option plan and is intended to comply with the exception for broadly based option plans in which a majority of the participants are rank and file employees not officers or directors, and a majority of the grants
are made to such employees. Only nonqualified stock options that do not qualify as incentive stock options within the meaning of Section 422(b) of the Code may be granted under this Plan. The Board of Directors or the Compensation Committee will
determine the exercise price of an option when the option is granted and may be not less than the par value of the shares on the date of grant.
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |  | The 2002 Equity Incentive Plan provides for the issuance of incentive or non-statutory options, stock awards and other equity awards to directors, employees, and non-employee
consultants. The 2002 Plan is a successor to the 1996 Plan. Options and other awards are granted at the discretion of the Board of Directors or the Compensation Committee of the Board of Directors. Incentive stock options may be granted at not less
than 100% of the fair market value per share and non-statutory stock options may be granted at not less than 85% of the fair market value per share at the date of grant as determined by the Board of Directors or the Compensation
Committee.                                                                                                                                                                                                                                                                                                                                                                                                             

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

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

Non-Marketable
Securities.We periodically make strategic investments in companies whose stock is not currently traded on a stock exchange and for which no quoted price exists. The cost method of accounting is used to account for these investments, as we do not
exert significant influence over these investments. We review these investments for impairment when events or changes in circumstances indicate that the carrying amount of the assets might not be recoverable. Examples of events or changes in
circumstances that may indicate to management that an impairment exists may be a significant decrease in the market value of the company, poor or deteriorating market conditions in the public and private equity capital markets, significant adverse
changes in legal factors or within the business

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climate the company operates, and current period operating or cash flow losses combined with a history of operating or cash flow losses or projections and forecasts that
demonstrate continuing losses associated with the companys future business plans. Impairment indicators identified during the reporting period could result in a significant write down in the carrying value of the investment if we believe an
investment has experienced a decline in value that is other than temporary. These investments had a total carrying value of $1.5 million as of December 31, 2002, and have been permanently written down a total of $2.9 million from original
cost during the fiscal year ended September 30, 2002. Also, future adverse changes in market conditions or poor operating results of underlying investments could result in significant additional impairment charges in the future.

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

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

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

Liquidity and Capital Resources

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

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



|                                                  |  |                   |        |                    |   |                 |  | Increase/(decrease) |     
|------------------------------------------------- |  | ----------------- | ------ | ------------------ | - | --------------- |  | ------------------- | ----
|                                                  |  | December 31, 2002 |        | September 30, 2002 |   |                 | 
|                                                  |  |                   |        | $                  |   | %               | 
|                                                  |  |                   |        |                    |   |                 |  |                     |     
|                                                  |  |                   |        |                    |   | ($in thousands) |  |                     |     
|Cash, cash equivalents and short-term investments |  | $                 | 24,291 |                    | $ | 25,022          |  | $                   | (731
|                                                  |  |                   |        |                    |   |                 |  |                     |     

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

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changes in operating assets and liabilities of $0.6 million, primarily related to an increase of accounts payable and other liabilities partially offset by increased purchases
of inventory.

As of December 31, 2002, borrowings under our credit facility totaled $6.0 million and we were in default of the tangible net worth covenant as set forth in the credit facility. As of
February 11, 2003, Silicon Valley Bank waived our default of the tangible net worth covenant at December 31, 2002. Additionally, we have been notified by Silicon Valley Bank that the tangible net worth covenant has been reduced to $23.5 million for
the remainder of the term of the credit facility. There is no assurance that Silicon Valley Bank will waive any future default of this or any other covenant contained in the Credit Facility agreement. We expect to continue to use our credit facility
along with our existing cash, cash equivalent and short-term investments to support our working capital needs in both the short and long-term. Additionally, our cash, cash equivalents and short-term investments at March 31, 2003 will be less than
the balances at December 31, 2002 as we repay the outstanding borrowings from under our credit facility, purchase additional inventory to build our products and use our existing cash and cash equivalents to support our continuing operations. As of
December 31, 2002, we did not have any material commitments for capital expenditures. We will require additional capital to finance our future growth and fund our ongoing research and development activities during fiscal 2003 and beyond. If our
continuing operations cannot generate sufficient capital to meet our needs and if we are unable to reduce our level of expenditures, we will have to seek additional financing which may not be available when needed and, if such financing is
available, it may not be available on terms we believe favorable. If we issue additional stock to raise capital, our existing stockholders percentage ownership in Netopia would be reduced.

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

|                               |  |                   |         |                    |   |                  |  | Increase/(decrease) |    
|------------------------------ |  | ----------------- | ------- | ------------------ | - | ---------------- |  | ------------------- | ---
|                               |  | December 31, 2002 |         | September 30, 2002 |   |                  | 
|                               |  |                   |         | $                  |   | %                | 
|                               |  |                   |         |                    |   |                  |  |                     |    
|                               |  |                   |         |                    |   | ($ in thousands) |  |                     |    
|Trade accounts receivable, net |  | $                 | 10,623  |                    | $ | 9,950            |  | $                   | 673
|Days sales outstanding (DSO)   |  |                   | 49 days |                    |   | 54 days          |  |                     |    

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

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

|                |  |                   |           |                    |   |                  |  | Increase/(decrease) |      
|--------------- |  | ----------------- | --------- | ------------------ | - | ---------------- |  | ------------------- | -----
|                |  | December 31, 2002 |           | September 30, 2002 |   |                  | 
|                |  |                   |           | $                  |   | %                | 
|                |  |                   |           |                    |   |                  |  |                     |      
|                |  |                   |           |                    |   | ($ in thousands) |  |                     |      
|Inventory       |  | $                 | 8,200     |                    | $ | 6,259            |  | $                   | 1,941
|Inventory turns |  |                   | 6.0 turns |                    |   | 5.8 turns        |  |                     |      

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

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

|                                 |  |   | December 31, 2002 |  |   | September 30, 2002 |   | Increase/(decrease) |      
|-------------------------------- |  | - | ----------------- |  | - | ------------------ | - | ------------------- | -----
|                                 |  |   |                   |  |   |                    |  
|                                 |  |   |                   |  |   |                    | $ |                     |      
|                                 |  |   |                   |  |   |                    |   |                     |      
|                                 |  |   |                   |  |   | ($ in thousands)   |   |                     |      
|Borrowings Under Credit Facility |  | $ | 6,000             |  | $ | 4,428              |   | $                   | 1,572

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

Through June 2003, we must maintain a tangible net worth of not less than $32.0 million; the minimum tangible net worth covenant will be reset
for the second year of the Credit Facility. On December 9, 2002, Silicon Valley Bank waived our default of the tangible net worth covenant at September 30, 2002 and on February 11, 2003, Silicon Valley Bank waived our default of the tangible net
worth covenant at December 31, 2002. Additionally, we have been notified by Silicon Valley Bank that the tangible net worth covenant has been reduced to $23.5 million for the remainder of the term of the Credit Facility. There is no assurance that
Silicon Valley Bank will waive any future default of this or any other covenant contained in the Credit Facility agreement.

The Credit Facility bears interest at a rate equal to the prime
rate (the rate announced by Silicon Valley Bank as its prime rate) plus 0.75% per annum. At December 31, 2002, the interest rate was 5.0% and the borrowing was recorded as a long-term liability on the December 31, 2002 consolidated
balance sheet based upon the contractual repayment terms that exceed one year from the balance sheet date. The available credit limit is determined based on a formula related to the amount of accounts receivable and inventory at any particular time,
up to a maximum borrowing capacity of $15.0 million. We may borrow under the Credit Facility in order to finance working capital requirements for new products and customers, and otherwise for general corporate purposes in the normal course of
business. As of December 31, 2002, based upon our inventory and accounts receivable balances, an additional $1.4 million was available under the Credit Facility.

Commitments

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



|Fiscal years ending September 30,        |  | 2003 (a)       |       | 2004 |   | 2005  |  | 2006 |       | 2007 |   | thereafter |  | Total |    
|---------------------------------------- |  | -------------- | ----- | ---- | - | ----- |  | ---- | ----- | ---- | - | ---------- |  | ----- | ---
|                                         |  |                |       |      |   |       |  |      |       |      |   |            |  |       |    
|                                         |  | (in thousands) |      
|Facility and operating lease commitments |  | $              | 1,083 |      | $ | 1,676 |  | $    | 1,132 |      | $ | 663        |  | $     | 682
|                                         |  |                |       |      |   |       |  |      |       |      |   |            |  |       |    

---

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

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

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

|                                |                                                     |                  |        |        |   |      |      |   |        |        |   |      |      | Increase/(decrease) |      
|------------------------------- | --------------------------------------------------- | ---------------- | ------ | ------ | - | ---- | ---- | - | ------ | ------ | - | ---- | ---- | ------------------- | -----
|                                |                                                     |                  |        |        |   |      |      |   |        |        |   |      |      |                     |      
|Three months ended December 31, |                                                     | 2002             |        | 2001   |   | $    |      | % |       
|                                |                                                     |                  |        |        |   |      |      |   |       
|                                |                                                     | ($ in thousands) |       
|REVENUES:                       |                                                     |                  |        |        |   |      |      |   |        |        |   |      |      |                     |      
|                                | Internet equipment                                  |                  | $      | 14,596 |   |      | 74   | % | $      | 11,811 |   |      | 74   | %                   | $    
|                                | Web platform licenses and services                  |                  |        | 5,007  |   |      | 26   | % |        | 4,074  |   |      | 26   | %                   |      
|                                |                                                     |                  |        |        |   |      |      |   |        |        |   |      |      |                     |      
|                                | Total revenues                                      |                  |        | 19,603 |   |      | 100  | % |        | 15,885 |   |      | 100  | %                   |      
|                                |                                                     |                  |        |        |   |      |      |   |        |        |   |      |      |                     |      
|COST OF REVENUES:               |                                                     |                  |        |        |   |      |      |   |        |        |   |      |      |                     |      
|                                | Internet equipment                                  |                  |        | 10,711 |   |      | 55   | % |        | 7,383  |   |      | 47   | %                   |      
|                                | Web platform licenses and services                  |                  |        | 429    |   |      | 2    | % |        | 164    |   |      | 1    | %                   |      
|                                |                                                     |                  |        |        |   |      |      |   |        |        |   |      |      |                     |      
|                                | Total cost of revenues                              |                  |        | 11,140 |   |      | 57   | % |        | 7,547  |   |      | 48   | %                   |      
|                                |                                                     |                  |        |        |   |      |      |   |        |        |   |      |      |                     |      
|                                | GROSS PROFIT                                        |                  |        | 8,463  |   |      | 43   | % |        | 8,338  |   |      | 52   | %                   |      
|OPERATING EXPENSES:             |                                                     |                  |        |        |   |      |      |   |        |        |   |      |      |                     |      
|                                | Research and development                            |                  |        | 3,983  |   |      | 20   | % |        | 4,148  |   |      | 26   | %                   |      
|                                | Research and development project cancellation costs |                  |        | 606    |   |      | 3    | % |        |       |   |      |     |                     |      
|                                | Selling and marketing                               |                  |        | 5,661  |   |      | 29   | % |        | 6,128  |   |      | 39   | %                   |      
|                                | General and administrative                          |                  |        | 1,428  |   |      | 7    | % |        | 973    |   |      | 6    | %                   |      
|                                | Amortization of other intangible assets             |                  |        | 374    |   |      | 2    | % |        | 374    |   |      | 2    | %                   |      
|                                | Restructuring costs                                 |                  |        | 342    |   |      | 2    | % |        | 482    |   |      | 3    | %                   |      
|                                | Acquired in-process research and development        |                  |        |       |   |      |     |   |        | 2,150  |   |      | 14   | %                   |      
|                                | Integration costs                                   |                  |        |       |   |      |     |   |        | 309    |   |      | 2    | %                   |      
|                                |                                                     |                  |        |        |   |      |      |   |        |        |   |      |      |                     |      
|                                | Total operating expenses                            |                  |        | 12,394 |   |      | 63   | % |        | 14,564 |   |      | 92   | %                   |      
|                                |                                                     |                  |        |        |   |      |      |   |        |        |   |      |      |                     |      
|OPERATING LOSS                  |                                                     |                  | (3,931 | )      |   | (20% | )    |   | (6,226 | )      |   | (40% | )    |                     | 2,295
|                                |                                                     |                  |        |        |   |      |      |   |        |        |   |      |      |                     |      
|Other income (loss), net        |                                                     |                  | (7     | )      |   | 0    | %    |   | 156    |        |   | 1    | %    |                     | (163 
|                                |                                                     |                  |        |        |   |      |      |   |        |        |   |      |      |                     |      
|                                | NET LOSS                                            |                  | $      | (3,938 | ) |      | (20% | ) | $      | (6,070 | ) |      | (39% | )                   | $    
|                                |                                                     |                  |        |        |   |      |      |   |        |        |   |      |      |                     |      

REVENUES

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

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

Web Platform Licenses and Services. Web platforms revenues
increased for the three months ended December 31, 2002 from the three months ended December 31, 2001 primarily due to revenues related to a software integration

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project with one specific customer and licensing of our eCare and netOctopus server software products which were not available during the three months ended December 31,
2001.

Customer Information

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

|                                |                                                                                                                                                                                                                                                                                  |                 |       |      |  |    |   |   |       |  |  |    |   | Increase/(decrease) |      
|------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------- | ----- | ---- |  | -- | - | - | ----- |  |  | -- | - | ------------------- | -----
|                                |                                                                                                                                                                                                                                                                                  |                 |       |      |  |    |   |   |       |  |  |    |   |                     |      
|Three months ended December 31, |                                                                                                                                                                                                                                                                                  | 2002            |       | 2001 |  | $  |   | % |      
|                                |                                                                                                                                                                                                                                                                                  |                 |       |      |  |    |   |   |      
|                                |                                                                                                                                                                                                                                                                                  | ($in thousands) |      
|Covad (a)                       |                                                                                                                                                                                                                                                                                  | $               | 2,585 |      |  | 13 | % | $ | 1,466 |  |  | 9  | % | $                   | 1,119
|SBC                             |                                                                                                                                                                                                                                                                                  |                 | 2,570 |      |  | 13 | % |   | 1,472 |  |  | 9  | % |                     | 1,098
|Ingram Micro                    |                                                                                                                                                                                                                                                                                  |                 | 1,417 |      |  | 7  | % |   | 1,928 |  |  | 12 | % |                     | (511 
|                               
|                               
|(a)                             | Covad filed a voluntary petition under the Bankruptcy Act in August 2001 as part of a capital-restructuring plan. Covad
emerged from bankruptcy in December 2001and has announced that it has adequate cash to allow it to become cash flow positive by the latter half of 2003.
|                                |                                                                                                                                                                                                                                                                                  |                 |       |      |  |    |   |   |       |  |  |    |   |                     |      

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

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

Geographic Information

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

|                                |  |                 |        |      |  |     |   |   |        |  |  |     |   | Increase/(decrease) |      
|------------------------------- |  | --------------- | ------ | ---- |  | --- | - | - | ------ |  |  | --- | - | ------------------- | -----
|                                |  |                 |        |      |  |     |   |   |        |  |  |     |   |                     |      
|Three months ended December 31, |  | 2002            |        | 2001 |  | $   |   | % |       
|                                |  |                 |        |      |  |     |   |   |       
|                                |  | ($in thousands) |       
|                                |  |                 |       
|Europe                          |  | $               | 4,431  |      |  | 23  | % | $ | 1,839  |  |  | 12  | % | $                   | 2,592
|Canada                          |  |                 | 229    |      |  | 1   | % |   | 230    |  |  | 1   | % |                     | (1   
|Asia Pacific and other          |  |                 | 402    |      |  | 2   | % |   | 311    |  |  | 2   | % |                     | 91   
|Subtotal international revenue  |  |                 | 5,062  |      |  | 26  | % |   | 2,380  |  |  | 15  | % |                     | 2,682
|United States                   |  |                 | 14,541 |      |  | 74  | % |   | 13,505 |  |  | 85  | % |                     | 1,036
|Total revenues                  |  | $               | 19,603 |      |  | 100 | % | $ | 15,885 |  |  | 100 | % | $                   | 3,718

International revenues increased for the three months ended December 31, 2002 from the three months
ended December 31, 2001 primarily due to increased sales of our ADSL broadband equipment to new European customers who serve the residential ADSL service market. Revenues from the United States increased for the three months ended December 31, 2002
from the three months ended December 31, 2001 primarily due to increased sales volumes of our ADSL broadband equipment to SBC and BellSouth, who serve the market for business and residential-class ADSL Internet services as well as increased revenue
from our Web platform products as discussed above in the section subtitled Web Platform Licenses and Services.

COST OF REVENUES

Cost of
revenues consists primarily of material costs related to our contract manufacturing operations and manufacturing variances. Total cost of revenues increased for the three months ended December 31, 2002 from the

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three months ended December 31, 2001 primarily as a result of increased sales volumes of our ADSL broadband Internet equipment and costs related to our software integration
project.

Gross Margin

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

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

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

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

| |  | The mix of Internet equipment and Web platforms products sold;                                                                                                                       
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  |  |                                                                                                                                                                                      
| |  | Pricing strategies;                                                                                                                                                                  
|  |  |                                                                                                                                                                                      
| |  | Increased sales of our residential-class broadband Internet equipment which historically have had a lower average selling price than our business-class broadband Internet
equipment;
|  |  |                                                                                                                                                                                      
| |  | Standard cost changes;                                                                                                                                                               
|  |  |                                                                                                                                                                                      
| |  | New versions of existing products; and                                                                                                                                               
|  |  |                                                                                                                                                                                      
| |  | External market factors, including, but not limited to, price competition.                                                                                                           

RESEARCH AND
DEVELOPMENT

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

We expect to continue to devote substantial resources to product and technological development. We expect research and development costs may increase in absolute dollars in fiscal year 2003 as we continue to develop new and
enhanced products and services. We believe our process for developing software is essentially completed concurrently with the establishment of technological feasibility, and we have not capitalized any internal software development costs to
date.

RESEARCH AND DEVELOPMENT PROJECT CANCELLATION COSTS

Research and development project cancellation costs consist primarily of material and
equipment costs associated with our joint development efforts with Siemens AG (Siemens) and Proxim, Inc. (Proxim) to develop a wireless IAD for sale to AT&T Corp. (AT&T) to serve AT&Ts anticipated roll-out of DSL services. As a result of
AT&T

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not accepting the final product developed by Seimens under the agreement between AT&T and Seimens and canceling its plans to deploy these services on its network, there was
no longer a customer or market into which we could sell the product under development.

SELLING AND MARKETING

Selling and marketing expenses consist
primarily of salary and commission expense for our sales force, travel and entertainment, advertising and promotional expenses, product marketing, customer service and support costs. Selling and marketing expenses decreased for the three months
ended December 31, 2002 from the three months ended December 31, 2001 primarily due to decreased headcount and employee related expenses as well as decreased travel and entertainment expenses as a result of our restructurings and expense control
efforts.

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

GENERAL AND ADMINISTRATIVE

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

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

AMORTIZATION OF OTHER INTANGIBLE ASSETS

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

RESTRUCTURING
COSTS

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

ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT

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

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INTEGRATION COSTS

During the three months ended December 31, 2001, we recorded a charge of $0.3 million for integration costs
incurred in connection with integrating Caymans customers, systems and operations. (See Note 10 of Notes To Unaudited Condensed Consolidated Financial Statements.)

OTHER INCOME (LOSS),
NET

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

Risk Factors

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

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

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

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

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

We must continue to enhance and expand our product and service offerings in order to maintain our competitive position and to increase our market share. As a result and due to our net
losses and use of cash, the continuing operations of our business may require substantial capital infusions. Whether or when we can achieve cash flow levels sufficient to support our operations cannot be accurately predicted. Unless such cash flow
levels are achieved, we may require additional borrowings or the sale of debt or equity securities, sale of non-strategic assets, or some combination thereof, to provide funding for our operations. If we issue additional stock or other instruments
to raise capital, the percentage ownership in Netopia of existing stockholders would be reduced. If we cannot generate sufficient cash flow from our operations and if we are unable to reduce our level of expenditures, or are unable to borrow or
otherwise obtain additional funds to finance our operations when needed, our financial condition and operating results would be materially adversely affected and we would not be able to operate our business.

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

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

| |  | A prolonged approval process by service providers, including laboratory tests, technical trials, marketing trials, initial commercial deployment and full commercial
deployment; 
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  |  |                                                                                                                                                                                  
| |  | The development of a viable business model for DSL and other broadband services, including the capability to market, sell, install and maintain DSL and other broadband
services;
|  |  |                                                                                                                                                                                  
| |  | The ability of our CLEC customers to obtain required capital resources;                                                                                                          
|  |  |                                                                                                                                                                                  
| |  | Cost constraints, such as installation costs and space and power requirements at the telecommunications service providers central office;                                       
|  |  |                                                                                                                                                                                  
| |  | Lack of compatibility of DSL equipment that is supplied by different manufacturers;                                                                                              
|  |  |                                                                                                                                                                                  
| |  | Evolving industry standards for DSL and other broadband technologies; and                                                                                                        
|  |  |                                                                                                                                                                                  
| |  | Government regulation.                                                                                                                                                           

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

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

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

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

We have historically developed, marketed and sold business class broadband Internet equipment products to CLECs
serving the business market for DSL Internet connectivity. Through our acquisitions of Cayman in October 2001 and DoBox in March 2002, we believe that we have acquired existing customer relationships, products and technology that will enable us to
more quickly develop, enhance and market broadband Internet equipment products and services to ILECs serving the residential market. There are numerous risks associated with our entrance into the residential broadband gateway market such
as:

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| |  | The ability to design and develop products that meet the needs of the residential market;                                                             
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------
|  |  |                                                                                                                                                       
| |  | The ability to successfully market these products to ILECs currently serving this market;                                                             
|  |  |                                                                                                                                                       
| |  | The ability to dislodge current suppliers of residential class broadband gateways; and                                                                
|  |  |                                                                                                                                                       
| |  | Our failure to successfully complete and bring to market the products and technology acquired in connection with our acquisitions of Cayman and DoBox.

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

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

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

| |  | Covad, our largest customer in the three months ended December 31, 2002 and in fiscal years 2002, 2001 and 2000, has reduced its breadth of network build-out and significantly
scaled back its operations. In addition, Covad filed a voluntary petition under the Bankruptcy Act in August 2001 as part of a capital-restructuring plan. In November 2001, Covad announced that it had secured an agreement with SBC to provide Covad
with $150 million in funding. Covad emerged from bankruptcy in December 2001 upon closing the SBC funding. Additionally, Covad has announced that this funding is expected to provide the cash that it believes will allow it to become cash flow
positive by the latter half of 2003;                              
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |  | Rhythms voluntarily filed for protection under the Bankruptcy Act in August 2001, and subsequently ceased normal operations in September 2001. In December 2001, WorldCom purchased
Rhythms key DSL assets. As a result, WorldCom has been delivering service to customers on the Rhythms network. In July 2002, WorldCom and substantially all of its active United States subsidiaries filed voluntary petitions for reorganization
under Chapter 11 of the United States Bankruptcy Code. There is no certainty that WorldCom will continue to purchase our equipment for deployment on the Rhythms network, and there is no certainty that WorldCom will continue to operate the Rhythms
network as a result of the pending bankruptcy proceedings; and
|  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |  | NorthPoint voluntarily filed for protection under the Bankruptcy Act in January 2001 and subsequently ceased operations in March 2001.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

Like the CLECs, ISPs also have struggled for the past two years. Most ISPs have had significant difficulties in differentiating their services from the services provided by their competitors. As a result, the lack of
differentiation has led to significant erosion in the prices charged to customers. Many of our ISP customers such as Mpower Communications Corp., PSINet, Inc. (PSINet), Onsite Access Inc. and Business Telecommunications, Inc., have all experienced
business difficulties and some have filed for bankruptcy or ceased operations. PSINet, which had been one of our key ISP customers, filed a voluntary petition under the Bankruptcy Act in June 2001, and no longer is purchasing products from us. The
pricing pressure for ISPs continues to date, and, accordingly, sales of our products to ISPs remain difficult. The financing market for CLECs and ISPs has remained difficult and has been largely closed in calendar years 2001 and 2002, resulting in
significantly decreased sales to CLECs and ISPs and write-offs of outstanding accounts receivable.

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

We have attempted to expand the channels through which and markets to which we sell our products through our acquisitions and product
development and marketing efforts. Historically, we have focused on serving the small and

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

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

Our revenues will decline and we may incur losses if we lose one or more of our significant
customers or if our customers reduce or delay purchases of our products. For the three months ended December 31, 2002, there were 6 customers who each individually represented at least 5% of our revenues and in the aggregate accounted for 50% of our
total revenues. For the three months ended December 31, 2002, both Covad and SBC accounted for 13% each, of our total revenues. For the fiscal year ended September 30, 2002, there were four customers who each individually represented at least 5% of
our revenues and in the aggregate, accounted for 36% of our total revenues. In fiscal year 2002, sales to Covad and Ingram Micro represented approximately 13% and 12%, respectively, of our total revenues.

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

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

There are risks associated with international
operations.

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

| |  | Costs of customizing products for foreign countries;                                 
|- |  | -------------------------------------------------------------------------------------
|  |  |                                                                                      
| |  | Laws and business practices favoring local competitors;                              
|  |  |                                                                                      
| |  | Dependence on local vendors;                                                         
|  |  |                                                                                      
| |  | Uncertain regulation of electronic commerce;                                         
|  |  |                                                                                      
| |  | Compliance with multiple, conflicting and changing governmental laws and regulations;
|  |  |                                                                                      
| |  | Longer sales cycles;                                                                 
|  |  |                                                                                      
| |  | Greater difficulty in collecting accounts receivable;                                
|  |  |                                                                                      
| |  | Import and export restrictions and tariffs;                                          
|  |  |                                                                                      
| |  | Difficulties staffing and managing foreign operations;                               
|  |  |                                                                                      
| |  | Multiple conflicting tax laws and regulations; and                                   
|  |  |                                                                                      
| |  | Political and economic instability.                                                  

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

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

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

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

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

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

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

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

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

| |  | Variations in the timing and size of orders for our broadband Internet equipment products;                                                                                                                                                                                                                                                              
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  |  |                                                                                                                                                                                                                                                                                                                                                         
| |  | Decreases or delays in purchases by significant customers, or loss of customers such as Covad, Ingram Micro, SBC or BellSouth;                                                                                                                                                                                                                          
|  |  |                                                                                                                                                                                                                                                                                                                                                         
| |  | Increased price competition for our broadband Internet equipment products;                                                                                                                                                                                                                                                                              
|  |  |                                                                                                                                                                                                                                                                                                                                                         
| |  | Our ability to license, and the timing of licenses, of our Web platforms products;                                                                                                                                                                                                                                                                      
|  |  |                                                                                                                                                                                                                                                                                                                                                         
| |  | The growth rate in the number of eSites and eStores that are built using our Web platforms products from which we derive revenues;                                                                                                                                                                                                                      
|  |  |                                                                                                                                                                                                                                                                                                                                                         
| |  | The mix of products and services and the gross margins associated with such products and services, including the impact of our increased sales of lower margin broadband Internet
equipment products as a percentage of our total revenues and increased sales of lower margin ADSL products within our family of broadband Internet equipment products;

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|                                                                                                                                                                                                                            |  | Shifts in the channel fulfilling demand from small, medium and distributed enterprises for DSL services to entities with whom we do not have historical relationships;                                                                                                                                                 
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                             |  |                                                                                                                                                                                                                                                                                                                        
|                                                                                                                                                                                                                            |  | The price and availability of chip sets and other components for our DSL products;                                                                                                                                                                                                                                     
|                                                                                                                                                                                                                             |  |                                                                                                                                                                                                                                                                                                                        
|                                                                                                                                                                                                                            |  | The timing and size of expenses, including operating expenses and expenses of developing new products and product enhancements; and                                                                                                                                                                                    
|                                                                                                                                                                                                                             |  |                                                                                                                                                                                                                                                                                                                        
|                                                                                                                                                                                                                            |  | Our ability to attract and retain key personnel.                                                                                                                                                                                                                                                                       
|                                                                                                                                                                                                                             |  |                                                                                                                                                                                                                                                                                                                        
|These variations may also be caused by factors related to the development of the market for broadband Internet equipment, the market for our Web platforms products
and the competition we face in these markets, including:
|                                                                                                                                                                                                                             |  |                                                                                                                                                                                                                                                                                                                        
|                                                                                                                                                                                                                            |  | The ability of CLECs to obtain required capital resources;                                                                                                                                                                                                                                                             
|                                                                                                                                                                                                                             |  |                                                                                                                                                                                                                                                                                                                        
|                                                                                                                                                                                                                            |  | The timing, rate and ability of telecommunications service providers to deploy DSL and other broadband services;                                                                                                                                                                                                       
|                                                                                                                                                                                                                             |  |                                                                                                                                                                                                                                                                                                                        
|                                                                                                                                                                                                                            |  | Anticipated price and promotion competition in the market for broadband Internet equipment and Web platforms products;                                                                                                                                                                                                 
|                                                                                                                                                                                                                             |  |                                                                                                                                                                                                                                                                                                                        
|                                                                                                                                                                                                                            |  | The level of market penetration of our broadband Internet equipment and Web platforms products relative to those of our competitors; and                                                                                                                                                                               
|                                                                                                                                                                                                                             |  |                                                                                                                                                                                                                                                                                                                        
|                                                                                                                                                                                                                            |  | The timing and rate of deployment of alternative high-speed data transmission technologies, such as cable and high-speed wireless data transmission.                                                                                                                                                                   
|                                                                                                                                                                                                                             |  |                                                                                                                                                                                                                                                                                                                        
|These variations may also be caused by other factors affecting our business, many of which are substantially outside of the control of our management,
including:                                                           
|                                                                                                                                                                                                                             |  |                                                                                                                                                                                                                                                                                                                        
|                                                                                                                                                                                                                            |  | Foreign currency and exchange rate fluctuations which may make our dollar-denominated products more expensive in those foreign markets where we sell our products in United States
dollars or could expose us to currency rate fluctuation risks to the extent we do not adequately hedge these foreign currency sales;
|                                                                                                                                                                                                                             |  |                                                                                                                                                                                                                                                                                                                        
|                                                                                                                                                                                                                            |  | Costs associated with future litigation, including securities litigation or litigation relating to the use or ownership of intellectual property;                                                                                                                                                                      
|                                                                                                                                                                                                                             |  |                                                                                                                                                                                                                                                                                                                        
|                                                                                                                                                                                                                            |  | Acquisition costs or other non-recurring charges in connection with the acquisition of companies, products or technologies; and                                                                                                                                                                                        
|                                                                                                                                                                                                                             |  |                                                                                                                                                                                                                                                                                                                        
|                                                                                                                                                                                                                            |  | General global economic conditions that could adversely affect sales to our customers.                                                                                                                                                                                                                                 

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

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

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

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

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

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

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

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

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

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

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

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

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products that meet these market requirements. It is possible that the market for broadband Internet equipment will develop in a manner that we do not anticipate.

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

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

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

The majority of our Web platforms revenues are derived from the sale of Timbuktu. We anticipate that the market for Timbuktu will grow more slowly than the market for our other Web platforms products and services. In addition,
we rely on a small number of licensees of our Web platforms to promote the use of our Web platforms for building eSites and eStores. As a result, we derive a substantial portion of the recurring revenues from our Web platforms products from a small
number of large customers. The extent and nature of the promotions by licensees of our Web platforms are outside of our control. If licensees of our eSite and eStore Web platforms do not successfully promote our eSite and eStore Web platforms to
their customers, we will not generate recurring revenues from royalties on eSites and eStores promoted by licensees of our Web platforms. If these customers were to choose a competitive platform, this could lead to reduced revenues and adversely
impact our results.

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

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

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

We expect that sales of our broadband Internet equipment may account for a larger percentage of our total revenues in future periods. Because our broadband Internet equipment products are generally sold at lower gross
margins than

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our Web platforms products and sales volumes of our lower margin ADSL products is increasing, our overall gross margins will likely decrease. Further, we expect that the market
for broadband Internet equipment, in particular DSL products, will become increasingly competitive and that we will be forced to lower the prices we charge for our broadband Internet equipment in the future. As the average selling price of our
routers declines, our gross margins related to such products, as well as our overall gross margins, are likely to decline.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Business interruptions could adversely affect our business.

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

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

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

| |  | Variations in our quarterly operating results;                         
|- |  | -----------------------------------------------------------------------
|  |  |                                                                        
| |  | Changes in securities analysts estimates of our financial performance;

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| |  | Changes in market valuations of similar companies;                                                                                                                                                    
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  |  |                                                                                                                                                                                                       
| |  | Announcements by us or our competitors of technological innovations, new products or enhancements, significant contracts, acquisitions, strategic partnerships, joint ventures or
capital commitments;
|  |  |                                                                                                                                                                                                       
| |  | Losses of major customers, major projects with major customers or the failure to complete significant licensing transactions;                                                                         
|  |  |                                                                                                                                                                                                       
| |  | Additions or departures of key personnel;                                                                                                                                                             
|  |  |                                                                                                                                                                                                       
| |  | Volatility generally of securities of companies in our industry;                                                                                                                                      
|  |  |                                                                                                                                                                                                       
| |  | General conditions in the broadband communications industry, in particular the DSL market, or the domestic and worldwide economies;                                                                   
|  |  |                                                                                                                                                                                                       
| |  | Decreases or delays in purchases by significant customers;                                                                                                                                            
|  |  |                                                                                                                                                                                                       
| |  | A shortfall in revenue or earnings from securities analysts expectations or other announcements by securities analysts;                                                                              
|  |  |                                                                                                                                                                                                       
| |  | Our ability to protect and exploit our intellectual property or defend against the intellectual property rights of others; and                                                                        
|  |  |                                                                                                                                                                                                       
| |  | Developments in our relationships with customers, distributors and suppliers.                                                                                                                         

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

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

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

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

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

|PART I. | FINANCIAL INFORMATION                                      
|------- | -----------------------------------------------------------
|Item 3. | Quantitative and Qualitative Di
sclosures About Market Risk

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

Interest Rate Risk

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

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|                                                                                                          |  | December 31, 2002 |        | December 31, 2001 |  
|--------------------------------------------------------------------------------------------------------- |  | ----------------- | ------ | ----------------- | -
|                                                                                                          |  |                   |        |                   |  
|Principal (notional) amounts in United States dollars:                                                    |  | Cost basis        |        | Fair market value |  
|                                                                                                          |  |                   |        |                   |  
|                                                                                                          |  | (in thousands)    |        |                   |  
|Cash equivalents  fixed rate (a)                                                                         |  | $                 | 14,867 |                   | $
|                                                                                                          |  |                   |        |                   |  
|                                                                                                         
|(a)  Cash equivalents represent the portion of our investment portfolio that mature in less than 90
days.



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

Foreign Currency Exchange
Risk

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

|                                                       |  | December 31, 2002 |       | December 31, 2001 | 
|------------------------------------------------------ |  | ----------------- | ----- | ----------------- | 
|                                                       |  |                   |       |                   | 
|Principal (notional) amounts in United States dollars: |  | Exchange rate     |       | Carrying amount   | 
|                                                       |  |                   |       |                   | 
|                                                       |  | (in thousands)    |       |                   | 
|Accounts receivable denominated in Euros               |  | $                 | 1,341 |                   | 
|                                                       |  |                   |       |                   | 

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

|                                       |  | December 31, 2002 |                 | December 31, 2001 | 
|-------------------------------------- |  | ----------------- | --------------- | ----------------- | 
|                                       |  |                   |                 |                   | 
|Principal (notional) amounts in Euros: |  |                   | Carrying amount |                   | 
|                                       |  |                   |                 |                   | 
|                                       |  | (in thousands)    |                 |                   | 
|Currency exchange forward contract # 1 |  | $                 | 477             |                   | 
|Currency exchange forward contract # 2 |  | $                 | 197             |                   | 
|Currency exchange forward contract # 3 |  | $                 |                |                   | 

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

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PART I.    FINANCIAL INFORMATION Item 4.      
Controls and Procedures

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

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

Additionally, our President and Chief Executive Officer and Chief Financial
Officer determined, as of a date within ninety (90) days of the date of this report, that there were no significant changes in our internal controls or in other factors that could significantly affect our internal controls subsequent to the date of
their evaluation. The design of any system of controls and procedures is based upon certain assumptions about the likelihood of future events. There can be no assurance that any design will succeed in achieving its stated goals under all potential
future conditions.

PART II.    
OTHER INFORMATION Item 6.        
Exhibits and Reports on Form 8-K

|(a) | Exhibits                                                                                
|--- | ----------------------------------------------------------------------------------------
|    |                                                                                         
|    | Exhibit Number                                                                          
|    |                                                                                         
|    | 99.1                                                                                    
|    |                                                                                         
|(b) | We did not file any reports on Form 8-K during the three months ended December 31, 2002.

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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:  February 14, 2003 | NETOPIA, INC.
|------------------------ | -------------
|                         | (Registrant) 
|                         |              
|                         |              
|                         | By:          
|                         |              
|                         |              
|                         |              
|                         |              
|                         |              
|                         | By:          
|                         |              
|                         |              

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CERTIFICATION

|I, Alan B. Lefkof, certify that:
|--------------------------------
|                                
|1.                              
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|2.                              
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|3.                              
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|4.                              
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|5.                              
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|6.                              
|                                
|Date: February 14, 2003         
|                                
|                                
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|                                
|                                
|                                

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CERTIFICATION

|I, William D. Baker, certify that:
|----------------------------------
|                                  
|1.                                
|                                  
|2.                                
|                                  
|3.                                
|                                  
|4.                                
|                                  
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|5.                                
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|6.                                
|                                  
|Date: February 14, 2003           
|                                  
|                                  
|                                  
|                                  
|                                  
|                                  

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