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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 March 31, 2006

OR



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

For the transition period from  to

Commission
file number 0-28450

Netopia, Inc.

(Exact name of registrant as specified in its charter)



|                                                              |  |                                       
|------------------------------------------------------------- |  | --------------------------------------
|Delaware                                                      |  | 94-3033136                            
|(State or other jurisdiction ofincorporation or organization) |  | (I.R.S. EmployerIdentification Number)

6001 Shellmound Street, 4thFloor

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

Yes  þ    No ̈

Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act.

Large accelerated filer ̈Accelerated filer  þ                Non-accelerated filer ̈

Indicate by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act):

Yes ̈No  þ

As of May 8, 2006, there were 25,823,748 shares
of the Registrants common stock outstanding.



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##### Table of Contents

NETOPIA, INC.

Form 10-Q

Table of Contents



|                              |  |                                                                                                                                   |  |     
|----------------------------- |  | --------------------------------------------------------------------------------------------------------------------------------- |  | ----
|                              |  |                                                                                                                                   |  | Page
|PART I. FINANCIAL INFORMATION |  |                                                                                                                                  
|                              |  |                                                                                                                                  
|Item 1.                       |  | Condensed Consolidated Financial Statements                                                                                       |  | 1   
|                              |  |                                                                                                                                  
|                              |  | Condensed Consolidated Balance Sheets at March 31, 2006 and September 30, 2005                                                    |  | 1   
|                              |  |                                                                                                                                  
|                              |  | Condensed Consolidated Statements of Operations for the three and six months ended March 31, 2006 and 2005                        |  | 2   
|                              |  |                                                                                                                                  
|                              |  | Condensed Consolidated Statements of Cash Flows for the six months ended March 31, 2006 and 2005                                  |  | 3   
|                              |  |                                                                                                                                  
|                              |  | Condensed Consolidated Statements of Stockholders Equity and Comprehensive Loss for the six months ended March 31, 2006 and 2005 |  | 4   
|                              |  |                                                                                                                                  
|                              |  | Notes to Condensed Consolidated Financial Statements                                                                              |  | 5   
|                              |  |                                                                                                                                  
|Item 2.                       |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                                             |  | 17  
|                              |  |                                                                                                                                  
|Item 3.                       |  | Quantitative and Qualitative Disclosures About Market Risk                                                                        |  | 36  
|                              | 
|PART II. OTHER INFORMATION    |  |                                                                                                                                  
|                              |  |                                                                                                                                  
|Item 1.                       |  | Legal Proceedings                                                                                                                 |  | 37  
|                              |  |                                                                                                                                  
|Item 4.                       |  | Submission of Matters to a Vote of Security Holders                                                                               |  | 39  
|                              |  |                                                                                                                                  
|Item 6.                       |  | Exhibits and Reports on Form 8-K                                                                                                  |  | 40  
|                              | 
|Signatures                    |  | 40                                                                                                                               
|                              | 
|Certifications                |  |                                                                                                                                  



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##### Table of Contents

PART I  FINANCIAL INFORMATION



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

NETOPIA, INC.

Condensed Consolidated Balance Sheets

(in thousands, except share and per share amounts)



|                                                                                                  |  |               |          |   |                       |   |          |  
|------------------------------------------------------------------------------------------------- |  | ------------- | -------- | - | --------------------- | - | -------- | -
|                                                                                                  |  | March 31,2006 |          |   | September 30,2005 (1) |  
|                                                                                                  |  | (Unaudited)   |          |   |                       |  
|Assets                                                                                            |  |               |          |   |                       |   |          |  
|Current assets:                                                                                   |  |               |          |   |                       |   |          |  
|Cash and cash equivalents                                                                         |  | $             | 22,407   |   |                       | $ | 22,234   |  
|Trade accounts receivable, net of allowances for doubtful accounts of $128 and $144, respectively |  |               | 18,786   |   |                       |   | 16,208   |  
|Inventories                                                                                       |  |               | 6,395    |   |                       |   | 8,718    |  
|Prepaid expenses and other current assets                                                         |  |               | 2,250    |   |                       |   | 1,102    |  
|                                                                                                  |  |               |          |   |                       |   |          |  
|Total current assets                                                                              |  |               | 49,838   |   |                       |   | 48,262   |  
|Property and equipment, net                                                                       |  |               | 2,503    |   |                       |   | 2,623    |  
|Intangible assets, net                                                                            |  |               | 3,377    |   |                       |   | 4,037    |  
|Equity investment                                                                                 |  |               | 1,032    |   |                       |   | 1,032    |  
|Deposits and other assets                                                                         |  |               | 372      |   |                       |   | 481      |  
|                                                                                                  |  |               |          |   |                       |   |          |  
|TOTAL ASSETS                                                                                      |  | $             | 57,122   |   |                       | $ | 56,435   |  
|                                                                                                  |  |               |          |   |                       |   |          |  
|Liabilities and Stockholders Equity                                                              |  |               |          |   |                       |   |          |  
|Current liabilities:                                                                              |  |               |          |   |                       |   |          |  
|Accounts payable                                                                                  |  |               | 10,847   |   |                       |   | 12,525   |  
|Deferred revenue                                                                                  |  |               | 3,998    |   |                       |   | 2,946    |  
|Other current liabilities                                                                         |  |               | 4,580    |   |                       |   | 4,737    |  
|                                                                                                  |  |               |          |   |                       |   |          |  
|Total current liabilities                                                                         |  |               | 19,425   |   |                       |   | 20,208   |  
|Long-term liabilities:                                                                            |  |               |          |   |                       |   |          |  
|Deferred revenue, long term                                                                       |  |               | 179      |   |                       |   | 109      |  
|Other long-term liabilities                                                                       |  |               | 192      |   |                       |   | 246      |  
|                                                                                                  |  |               |          |   |                       |   |          |  
|TOTAL LIABILITIES                                                                                 |  |               | 19,796   |   |                       |   | 20,563   |  
|                                                                                                  |  |               |          |   |                       |   |          |  
|Stockholders equity:                                                                             |  |               |          |   |                       |   |          |  
|Common stock: $0.001 par value, 50,000,000 shares authorized;                                     |  |               |          |   |                       |   |          |  
|25,754,455 and 25,428,412 shares issued and outstanding at                                        |  |               |          |   |                       |   |          |  
|March 31, 2006 and September 30, 2005, respectively                                               |  |               | 25       |   |                       |   | 25       |  
|Additional paid-in capital                                                                        |  |               | 171,423  |   |                       |   | 168,075  |  
|Accumulated other comprehensive income                                                            |  |               | 49       |   |                       |   | 45       |  
|Accumulated deficit                                                                               |  |               | (134,171 | ) |                       |   | (132,273 | )
|                                                                                                  |  |               |          |   |                       |   |          |  
|Total stockholders equity                                                                        |  |               | 37,326   |   |                       |   | 35,872   |  
|                                                                                                  |  |               |          |   |                       |   |          |  
|TOTAL LIABILITIES AND STOCKHOLDERS EQUITY                                                        |  | $             | 57,122   |   |                       | $ | 56,435   |  
|                                                                                                  |  |               |          |   |                       |   |          |  



|(1) | Derived from the audited Consolidated Balance Sheet dated September 30, 2005 included in Netopias Annual Report on Form 10-K for the fiscal year ended September 30,
2005.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------

See accompanying notes.



Page 1



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##### Table of Contents

NETOPIA, INC.

Condensed Consolidated Statements of Operations

Unaudited

(in thousands, except per
share amounts)



|                                      |  |                             |        |      |                           |        |      |  |   |        |   |  |   |        |  
|------------------------------------- |  | --------------------------- | ------ | ---- | ------------------------- | ------ | ---- |  | - | ------ | - |  | - | ------ | -
|                                      |  | Three Months EndedMarch 31, |        |      | Six Months EndedMarch 31, |       
|                                      |  | 2006                        |        | 2005 |                           |        | 2006 |  |   | 2005   |  
|REVENUES:                             |  |                             |        |      |                           |        |      |  |   |        |   |  |   |        |  
|Broadband equipment                   |  | $                           | 22,715 |      | $                         | 22,247 |      |  | $ | 43,766 |   |  | $ | 48,444 |  
|Broadband software and services       |  |                             | 5,161  |      |                           | 2,976  |      |  |   | 8,008  |   |  |   | 6,097  |  
|                                      |  |                             |        |      |                           |        |      |  |   |        |   |  |   |        |  
|Total revenues                        |  |                             | 27,876 |      |                           | 25,223 |      |  |   | 51,774 |   |  |   | 54,541 |  
|                                      |  |                             |        |      |                           |        |      |  |   |        |   |  |   |        |  
|COST OF REVENUES:                     |  |                             |        |      |                           |        |      |  |   |        |   |  |   |        |  
|Broadband equipment                   |  |                             | 15,386 |      |                           | 16,307 |      |  |   | 29,897 |   |  |   | 36,252 |  
|Broadband software and services       |  |                             | 581    |      |                           | 384    |      |  |   | 1,109  |   |  |   | 650    |  
|Amortization of acquired technology   |  |                             | 300    |      |                           | 300    |      |  |   | 600    |   |  |   | 600    |  
|                                      |  |                             |        |      |                           |        |      |  |   |        |   |  |   |        |  
|Total cost of revenues                |  |                             | 16,267 |      |                           | 16,991 |      |  |   | 31,606 |   |  |   | 37,502 |  
|                                      |  |                             |        |      |                           |        |      |  |   |        |   |  |   |        |  
|GROSS PROFIT                          |  |                             | 11,609 |      |                           | 8,232  |      |  |   | 20,168 |   |  |   | 17,039 |  
|OPERATING EXPENSES:                   |  |                             |        |      |                           |        |      |  |   |        |   |  |   |        |  
|Research and development              |  |                             | 4,182  |      |                           | 3,403  |      |  |   | 8,111  |   |  |   | 6,609  |  
|Selling and marketing                 |  |                             | 4,899  |      |                           | 4,582  |      |  |   | 9,752  |   |  |   | 9,667  |  
|General and administrative            |  |                             | 2,118  |      |                           | 2,029  |      |  |   | 4,537  |   |  |   | 4,224  |  
|Amortization of intangible assets     |  |                             |       |      |                           | 87     |      |  |   |       |   |  |   | 173    |  
|Restructuring costs                   |  |                             |       |      |                           | 98     |      |  |   |       |   |  |   | 98     |  
|                                      |  |                             |        |      |                           |        |      |  |   |        |   |  |   |        |  
|Total operating expenses              |  |                             | 11,199 |      |                           | 10,199 |      |  |   | 22,400 |   |  |   | 20,771 |  
|                                      |  |                             |        |      |                           |        |      |  |   |        |   |  |   |        |  
|OPERATING INCOME/(LOSS)               |  |                             | 410    |      |                           | (1,967 | )    |  |   | (2,232 | ) |  |   | (3,732 | )
|Other income, net                     |  |                             | 195    |      |                           | 155    |      |  |   | 359    |   |  |   | 303    |  
|                                      |  |                             |        |      |                           |        |      |  |   |        |   |  |   |        |  
|INCOME (LOSS) BEFORE INCOME TAXES     |  |                             | 605    |      |                           | (1,812 | )    |  |   | (1,873 | ) |  |   | (3,429 | )
|Provision for income taxes            |  |                             | 11     |      |                           | 20     |      |  |   | 25     |   |  |   | 44     |  
|                                      |  |                             |        |      |                           |        |      |  |   |        |   |  |   |        |  
|NET INCOME (LOSS)                     |  | $                           | 594    |      | $                         | (1,832 | )    |  | $ | (1,898 | ) |  | $ | (3,473 | )
|                                      |  |                             |        |      |                           |        |      |  |   |        |   |  |   |        |  
|Net income (loss) per common share:   |  |                             |        |      |                           |        |      |  |   |        |   |  |   |        |  
|Basic                                 |  | $                           | 0.02   |      | $                         | (0.07  | )    |  | $ | (0.07  | ) |  | $ | (0.14  | )
|                                      |  |                             |        |      |                           |        |      |  |   |        |   |  |   |        |  
|Diluted                               |  | $                           | 0.02   |      | $                         | (0.07  | )    |  | $ | (0.07  | ) |  | $ | (0.14  | )
|                                      |  |                             |        |      |                           |        |      |  |   |        |   |  |   |        |  
|Shares used in per-share calculation: |  |                             |        |      |                           |        |      |  |   |        |   |  |   |        |  
|Basic                                 |  |                             | 25,643 |      |                           | 25,038 |      |  |   | 25,545 |   |  |   | 24,892 |  
|                                      |  |                             |        |      |                           |        |      |  |   |        |   |  |   |        |  
|Diluted                               |  |                             | 25,944 |      |                           | 25,038 |      |  |   | 25,545 |   |  |   | 24,892 |  
|                                      |  |                             |        |      |                           |        |      |  |   |        |   |  |   |        |  

See accompanying notes. Net income (loss) for the three and six months ended March 31, 2006 includes
stock-based compensation expense of $1,328,596 and $2,542,354, respectively, under Statement of Financial Accounting Standards (SFAS) 123(R), Share Based Payment. There was no stock-based compensation expense under SFAS 123,
Accounting for Stock-Based Compensation, in the three and six months ended March 31, 2005 because the Company had not yet adopted the recognition provisions of SFAS 123. Net loss including pro forma stock-based compensation expense
as previously disclosed in the notes to the Condensed Consolidated Financial Statements in the Form 10-Q for the three and six months ended March 31, 2005 was $3.0 million and $6.1 million, respectively, or a loss of $(0.12) and $(0.24),
respectively, per basic and diluted share. See Note 7 to the Condensed Consolidated Financial Statements for additional information.



Page 2



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##### Table of Contents

NETOPIA, INC.

Condensed Consolidated Statements of Cash Flows

Unaudited

(in thousands)



|                                                                                        |  |                           |        |   |      |   |        |  
|--------------------------------------------------------------------------------------- |  | ------------------------- | ------ | - | ---- | - | ------ | -
|                                                                                        |  | Six Months EndedMarch 31, |       
|                                                                                        |  | 2006                      |        |   | 2005 |  
|Cash flows from operating activities:                                                   |  |                           |        |   |      |   |        |  
|Net loss                                                                                |  | $                         | (1,898 | ) |      | $ | (3,473 | )
|Adjustments to reconcile net loss to net cash provided by operating activities:         |  |                           |        |   |      |   |        |  
|Depreciation and amortization                                                           |  |                           | 1,512  |   |      |   | 1,839  |  
|Stock-based compensation related to employee stock options and employee stock purchases |  |                           | 2,564  |   |      |   |        |  
|Changes in allowance for doubtful accounts                                              |  |                           | (16    | ) |      |   | 16     |  
|Restructuring costs                                                                     |  |                           |        |   |      |   | (443   | )
|Changes in operating assets and liabilities:                                            |  |                           |        |   |      |   |        |  
|Trade accounts receivable                                                               |  |                           | (2,562 | ) |      |   | 2,551  |  
|Inventories                                                                             |  |                           | 2,323  |   |      |   | (245   | )
|Prepaid expenses and other assets                                                       |  |                           | (1,148 | ) |      |   | 632    |  
|Accounts payable and accrued liabilities                                                |  |                           | (1,850 | ) |      |   | (48    | )
|Deferred revenue                                                                        |  |                           | 1,122  |   |      |   | (382   | )
|Other liabilities                                                                       |  |                           | (39    | ) |      |   | (2,058 | )
|                                                                                        |  |                           |        |   |      |   |        |  
|Net cash provided by (used in) operating activities                                     |  |                           | 8      |   |      |   | (1,611 | )
|                                                                                        |  |                           |        |   |      |   |        |  
|Cash flow from investing activities:                                                    |  |                           |        |   |      |   |        |  
|Purchase of furniture, fixtures and equipment                                           |  |                           | (623   | ) |      |   | (827   | )
|                                                                                        |  |                           |        |   |      |   |        |  
|Net cash used in investing activities                                                   |  |                           | (623   | ) |      |   | (827   | )
|                                                                                        |  |                           |        |   |      |   |        |  
|Cash flow from financing activities:                                                    |  |                           |        |   |      |   |        |  
|Repayment of term loans                                                                 |  |                           |        |   |      |   | (104   | )
|Proceeds from the issuance of common stock                                              |  |                           | 784    |   |      |   | 1,303  |  
|                                                                                        |  |                           |        |   |      |   |        |  
|Net cash provided by financing activities                                               |  |                           | 784    |   |      |   | 1,199  |  
|                                                                                        |  |                           |        |   |      |   |        |  
|Effect of changes in foreign currency exchange rates                                    |  |                           | 4      |   |      |   | (20    | )
|Net increase (decrease) in cash and cash equivalents                                    |  |                           | 173    |   |      |   | (1,259 | )
|Cash and cash equivalents, beginning of period                                          |  |                           | 22,234 |   |      |   | 23,973 |  
|                                                                                        |  |                           |        |   |      |   |        |  
|Cash and cash equivalents, end of period                                                |  | $                         | 22,407 |   |      | $ | 22,714 |  
|                                                                                        |  |                           |        |   |      |   |        |  

See accompanying notes.



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##### Table of Contents

Netopia, Inc.

Condensed Consolidated Statements of Stockholders Equity and Comprehensive Loss

Unaudited

(in
thousands, except share amounts)



|                                                                                                |  |              |  |                          |    |                     |   |         |                                              |   |          |                            |  |   |     |   |  |   |        |  
|----------------------------------------------------------------------------------------------- |  | ------------ |  | ------------------------ | -- | ------------------- | - | ------- | -------------------------------------------- | - | -------- | -------------------------- |  | - | --- | - |  | - | ------ | -
|                                                                                                |  |              |  | AdditionalPaid-inCapital |    | Accumulated Deficit |   |         | AccumulatedOther Comprehensive Income
(Loss) |   |          | Total Stockholders Equity | 
|                                                                                                |  | Common Stock |  |                          |    |                    
|                                                                                                |  | Shares       |  | Amount                   |    |                     |   |        
|Six Months Ended March 31, 2005                                                                 |  |              |  |                          |    |                     |   |         |                                              |   |          |                            |  |   |     |   |  |   |        |  
|Balance, September 30, 2004                                                                     |  | 24,717,503   |  | $                        | 25 |                     | $ | 166,245 |                                              | $ | (125,140 | )                          |  | $ |    |   |  | $ | 41,130 |  
|Net Loss                                                                                        |  |              |  |                          |    |                     |   |         |                                              |   | (3,473   | )                          |  |   |     |   |  |   | (3,473 | )
|Foreign Currency Translation adjustments                                                        |  |              |  |                          |    |                     |   |         |                                              |   |          |                            |  |   | (20 | ) |  |   | (20    | )
|                                                                                                |  |              |  |                          |    |                     |   |         |                                              |   |          |                            |  |   |     |   |  |   |        |  
|Comprehensive Loss                                                                              |  |              |  |                          |    |                     |   |         |                                              |   |          |                            |  |   |     |   |  |   | (3,493 | )
|Exercise of stock options                                                                       |  | 223,190      |  |                          |   |                     |   | 574     |                                              |   |          |                            |  |   |     |   |  |   | 574    |  
|Issuance of common stock under ESPP                                                             |  | 261,651      |  |                          |   |                     |   | 729     |                                              |   |          |                            |  |   |     |   |  |   | 729    |  
|                                                                                                |  |              |  |                          |    |                     |   |         |                                              |   |          |                            |  |   |     |   |  |   |        |  
|Balance, March 31, 2005                                                                         |  | 25,202,344   |  | $                        | 25 |                     | $ | 167,548 |                                              | $ | (128,613 | )                          |  | $ | (20 | ) |  | $ | 38,940 |  
|                                                                                                |  |              |  |                          |    |                     |   |         |                                              |   |          |                            |  |   |     |   |  |   |        |  
|Six Months Ended March 31, 2006                                                                 |  |              |  |                          |    |                     |   |         |                                              |   |          |                            |  |   |     |   |  |   |        |  
|Balance, September 30, 2005                                                                     |  | 25,428,412   |  | $                        | 25 |                     | $ | 168,075 |                                              | $ | (132,273 | )                          |  | $ | 45  |   |  | $ | 35,872 |  
|Net Loss                                                                                        |  |              |  |                          |    |                     |   |         |                                              |   | (1,898   | )                          |  |   |     |   |  |   | (1,898 | )
|Foreign Currency Translation adjustments                                                        |  |              |  |                          |    |                     |   |         |                                              |   |          |                            |  |   | 4   |   |  |   | 4      |  
|                                                                                                |  |              |  |                          |    |                     |   |         |                                              |   |          |                            |  |   |     |   |  |   |        |  
|Comprehensive Loss                                                                              |  |              |  |                          |    |                     |   |         |                                              |   |          |                            |  |   |     |   |  |   | (1,894 | )
|Exercise of stock options                                                                       |  | 90,758       |  |                          |   |                     |   | 188     |                                              |   |          |                            |  |   |     |   |  |   | 188    |  
|Issuance of common stock under ESPP                                                             |  | 235,285      |  |                          |   |                     |   | 596     |                                              |   |          |                            |  |   |     |   |  |   | 596    |  
|Stock-based compensation expense related to employee stock options and employee stock purchases |  |              |  |                          |    |                     |   | 2,564   |                                              |   |          |                            |  |   |     |   |  |   | 2,564  |  
|                                                                                                |  |              |  |                          |    |                     |   |         |                                              |   |          |                            |  |   |     |   |  |   |        |  
|Balance, March 31, 2006                                                                         |  | 25,754,455   |  | $                        | 25 |                     | $ | 171,423 |                                              | $ | (134,171 | )                          |  | $ | 49  |   |  | $ | 37,326 |  
|                                                                                                |  |              |  |                          |    |                     |   |         |                                              |   |          |                            |  |   |     |   |  |   |        |  

See accompanying notes



Page 4



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##### Table of Contents

NETOPIA, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)



|(1) | Description of Business
|--- | -----------------------

Netopia, Inc. (the
Company) is a developer and provider of high performance broadband customer premises networking equipment and carrier-class software for the remote management of broadband services and equipment. The Company also develops and provides
broadband enabled services and remote management software for enterprises technical support, help-desks and personal computers.



|(2) | Summary of Significant Accounting Policies
|--- | ------------------------------------------

Fiscal Year:The Companys fiscal year is the 12-months ended September 30.

Basis of Presentation:The
accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with United States generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01
of Regulation S-X. Accordingly, they do not include all disclosures required by accounting principles generally accepted in the United States of America. The accompanying Condensed Consolidated Financial Statements should be read in conjunction with
the consolidated financial statements and notes thereto included in the Companys Annual Report on Form 10-K for the fiscal year ended September 30, 2005.

In the opinion of management, the unaudited interim financial statements included herein reflect all adjustments, consisting of normal recurring adjustments, necessary to present fairly the Companys consolidated
financial position and the results of operations and cash flows for the periods presented. The results of operations for the periods presented are not necessarily indicative of the results that may be expected for the fiscal year ending
September 30, 2006 (fiscal year 2006).

Stock-Based Compensation:On October 1, 2005, the Company adopted SFAS
123(R), which requires the measurement and recognition of compensation expense for share-based payment awards made to the Companys employees and directors, including employee stock options and employee stock purchases related to the Employee
Stock Purchase Plan (ESPP), based on estimated fair values.

The Company adopted SFAS 123(R) using the modified prospective
method, which requires us to record compensation expense for all awards granted after the date of adoption, and for the unvested portion of previously granted awards that remain outstanding at the date of adoption. Accordingly, prior period amounts
presented herein have not been restated to reflect the adoption of SFAS 123(R). The fair value concepts were not changed significantly in SFAS 123(R); however, in adopting SFAS 123(R), companies must choose among alternative valuation models and
amortization assumptions. After assessing alternative valuation models and amortization assumptions, the Company will continue using the Black-Scholes option-pricing formula. The Company recognizes compensation cost on a straight-line basis over the
requisite service period for each separately vesting portion of share-based payment awards as if the award was, in substance, multiple awards. The Company will reconsider use of this model if additional information becomes available in the future
that indicates another model would be more appropriate, or if grants issued in future periods have characteristics that cannot be reasonably estimated using this model. Under SFAS No. 123, Accounting for Stock Based Compensation
(SFAS 123), the Company was not required to estimate forfeitures in expense calculation for the stock compensation pro forma footnote disclosure; however, SFAS 123(R) requires an estimate of forfeitures and upon adoption the Company
changed methodology to include an estimate of forfeitures. The adoption of SFAS 123(R) had no effect on cash flows from operating activities.



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Per Share Calculations: Basic net income (loss) per share is computed using the weighted-average
number of common shares outstanding during the period. Diluted net income per share is computed using the weighted-average number of common shares and dilutive potential common shares outstanding. Diluted net loss per share is computed using the
weighted-average number of common shares and excludes dilutive potential common shares outstanding, as their effect is antidilutive. Dilutive potential common shares consist of employee stock options, which in aggregate were approximately
7.5 million options outstanding at March 31, 2006.

Statement of Financial Accounting Standards No. 128, Earnings per
Share, requires that employee stock options be treated as potential common shares outstanding in computing diluted earnings per share. Diluted shares outstanding include the dilutive effect of in-the-money options, which is calculated based on
the average share price for each fiscal period using the treasury stock method. Under the treasury stock method, the amount the employee must pay for exercising stock options, the amount of compensation cost for future service that the Company has
not yet recognized, and the amount of tax benefits, if any, that would be recorded in additional paid-in capital when the award becomes deductible are assumed to be used to repurchase shares.

Estimates: The preparation of financial statements in conformity with United States generally accepted accounting principles requires management to
make estimates and judgments that affect the amounts reported in the Condensed Consolidated Financial Statements and accompanying notes. Estimates are used for revenue recognition, allowance for doubtful accounts and sales returns, reserves for
excess and obsolete inventory, warranty costs, compensation expense for share-based payment awards, investment impairments, income taxes, service costs, and loss contingencies, among others. The actual results experienced by the Company may differ
materially from managements estimates.

Reclassifications: Certain reclassifications have been made to prior year balances in
order to conform to the current years presentation.

Fair Value of Financial Instruments: The fair value of cash and cash
equivalents, accounts receivable and accounts payable for all periods presented approximates their respective carrying amounts because of the short maturity of these financial instruments.



|(3) | Intangible Assets
|--- | -----------------

Intangible assets consisted of
goodwill and purchased intangibles, as follows:



|                              |  |               |        |   |                   |   |        |  
|----------------------------- |  | ------------- | ------ | - | ----------------- | - | ------ | -
|(in thousands)                |  | March 31,2006 |        |   | September 30,2005 |  
|Goodwill                      |  | $             | 1,668  |   |                   | $ | 1,668  |  
|Purchased intangibles         |  |               | 8,615  |   |                   |   | 8,615  |  
|                              |  |               |        |   |                   |   |        |  
|                              |  |               | 10,283 |   |                   |   | 10,283 |  
|                              |  |               |        |   |                   |   |        |  
|Less accumulated amortization |  |               | (6,906 | ) |                   |   | (6,246 | )
|                              |  |               |        |   |                   |   |        |  
|Intangible Assets, net        |  | $             | 3,377  |   |                   | $ | 4,037  |  
|                              |  |               |        |   |                   |   |        |  

Goodwill:The Companys goodwill resulted from the acquisitions of JadeSail in October
2003 and WebOrder in March 2000, each of which became part of the broadband software and services segment.



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Purchased Intangibles:At March 31, 2006, the Companys purchased intangible assets
consisted of developed product technology and a marketing agreement. The table below presents details of the Companys purchased intangible assets. The Companys purchased intangible assets are allocated primarily to the broadband
equipment segment.



|                            |  |            |       |   |                    |   |     |       |  |   |       |  
|--------------------------- |  | ---------- | ----- | - | ------------------ | - | --- | ----- |  | - | ----- | -
|(in thousands)              |  | Technology |       |   | MarketingAgreement |   |     | Total | 
|Balance, September 30, 2005 |  | $          | 2,232 |   |                    | $ | 137 |       |  | $ | 2,369 |  
|Amortization                |  |            | (600  | ) |                    |   | (60 | )     |  |   | (660  | )
|                            |  |            |       |   |                    |   |     |       |  |   |       |  
|Balance, March 31, 2006     |  | $          | 1,632 |   |                    | $ | 77  |       |  | $ | 1,709 |  
|                            |  |            |       |   |                    |   |     |       |  |   |       |  

The Companys purchased intangible assets will be fully amortized by the end of fiscal year
2007. Estimated future amortization is $650,000 for the remaining six months of fiscal year 2006 and $1,059,000 in fiscal year 2007.



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

Inventories consisted of the
following:



|                |  |               |       |                   |   |      
|--------------- |  | ------------- | ----- | ----------------- | - | -----
|(in thousands)  |  | March 31,2006 |       | September 30,2005
|Raw materials   |  | $             | 1,328 |                   | $ | 1,783
|Work in process |  |               | 141   |                   |   | 43   
|Finished goods  |  |               | 4,926 |                   |   | 6,892
|                |  |               |       |                   |   |      
|Total           |  | $             | 6,395 |                   | $ | 8,718
|                |  |               |       |                   |   |      



|(5) | Property and Equipment
|--- | ----------------------

Property and equipment
consisted of the following:



|                               |  |               |         |   |                   |   |         |  
|------------------------------ |  | ------------- | ------- | - | ----------------- | - | ------- | -
|(in thousands)                 |  | March 31,2006 |         |   | September 30,2005 |  
|Computers                      |  | $             | 7,538   |   |                   | $ | 7,064   |  
|Machinery and equipment        |  |               | 3,436   |   |                   |   | 3,415   |  
|Furniture and fixtures         |  |               | 1,687   |   |                   |   | 1,684   |  
|Manufacturing tooling          |  |               | 1,406   |   |                   |   | 1,310   |  
|Leasehold improvements         |  |               | 405     |   |                   |   | 376     |  
|                               |  |               |         |   |                   |   |         |  
|                               |  |               | 14,472  |   |                   |   | 13,849  |  
|Less: accumulated depreciation |  |               | (11,969 | ) |                   |   | (11,226 | )
|                               |  |               |         |   |                   |   |         |  
|Total                          |  | $             | 2,503   |   |                   | $ | 2,623   |  
|                               |  |               |         |   |                   |   |         |  



|(6) | Warranty Liability
|--- | ------------------

Warranty liability is recorded
as a component of other current liabilities on the Companys Condensed Consolidated Balance Sheets. For the Companys broadband equipment products, the Company generally provides a one-year to two-year warranty. The Company generally does
not offer a warranty on its broadband software and services products. The Company accrues for its estimated product warranty costs at the time of shipment. Product warranty costs are estimated based upon the Companys historical experience.



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The following table summarizes the activity related to the product warranty liability:



|                               |  |                             |     |   |                           |   |     |      |  |   |      |   |  |   |      |  
|------------------------------ |  | --------------------------- | --- | - | ------------------------- | - | --- | ---- |  | - | ---- | - |  | - | ---- | -
|                               |  | Three Months EndedMarch 31, |     |   | Six Months EndedMarch 31, |  
|(in thousands)                 |  | 2006                        |     |   | 2005                      |   |     | 2006 |  |   | 2005 |  
|Balance at beginning of period |  | $                           | 277 |   |                           | $ | 170 |      |  | $ | 310  |   |  | $ | 140  |  
|Utilized                       |  |                             | (62 | ) |                           |   | (63 | )    |  |   | (121 | ) |  |   | (129 | )
|Charged to costs and expenses  |  |                             | 45  |   |                           |   | 31  |      |  |   | 71   |   |  |   | 127  |  
|                               |  |                             |     |   |                           |   |     |      |  |   |      |   |  |   |      |  
|Balance at end of period       |  | $                           | 260 |   |                           | $ | 138 |      |  | $ | 260  |   |  | $ | 138  |  
|                               |  |                             |     |   |                           |   |     |      |  |   |      |   |  |   |      |  



|(7) | Stock Option Plans
|--- | ------------------

The Company has three
share-based plans under which non-qualified and incentive stock options have been granted to employees, non-employees and board members. Stock options generally vest over service periods that range from 2 to 4 years. We also have an employee stock
purchase plan for all eligible employees.

1996 Stock Option Plan. In April 1996, the Company adopted the 1996 Stock Option Plan (the
1996 Plan) providing 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. Included in the 1996 Plan is a provision for the automatic grant of non-statutory options to non-employee directors of the Company. The current provisions relating to the automatic grant of options to
directors are described below.

2000 Stock Incentive Plan. In October 2000, the Company adopted the 2000 Stock Incentive Plan (the
2000 Plan) providing 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. Officers and directors will not receive any additional awards under the 2000 Plan. A restricted stock award is an offer by the Company to sell to an eligible person shares that are subject to
restrictions. The purchase price of shares sold pursuant to a restricted stock award will be determined by the Compensation Committee on the date the restricted stock award is granted and may be not less than the par value of the shares on the date
of grant. Restricted stock awards shall be subject to such restrictions as the Board of Directors or the Compensation Committee may impose. As of March 31, 2006, there were no restricted stock awards granted under the 2000 Plan.

2002 Equity Incentive Plan. In December 2001, the Company adopted the 2002 Equity Incentive Plan (the 2002 Plan) providing for the issuance of
incentive or non-statutory options, stock awards and other equity awards to directors, employees, and non-employee consultants. The Companys stockholders approved the 2002 Plan at the Annual Stockholder Meeting in January 2002. 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



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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. Included in the 2002 Plan is a provision for the automatic grant of non-statutory options to non-employee directors of the Company. The current provisions relating to the automatic grant of options to directors are described
below.

The initial number of shares of common stock available for issuance under the 2002 Plan was 750,000 shares. The number of shares of
common stock available for issuance under the 2002 Plan automatically increases on the first trading day of each calendar year beginning 2003 by an amount equal to four and three-quarter percent (4.75%) of the shares of common stock outstanding
on December 31 of the immediately preceding calendar year, provided, however, that no such automatic annual increase may exceed 1,000,000 shares. As a result of this automatic increase provision, an additional 1,000,000, 1,000,000, 1,000,000
and 898,081 shares of common stock became available on January 3, 2006, January 3, 2005, January 2, 2004 and January 2, 2003, respectively, for issuance under the 2002 Plan.

Automatic Option Grant Programs in Stock Option Plans. Amendments to the Companys Automatic Option Grant Programs that are included in the
1996 Stock Option Plan and 2002 Equity Incentive Plan to increase the number of options granted to non-employee directors of the Company were approved at the Companys Annual Meeting of Stockholders in January 2003. As amended, the Automatic
Option Grant Programs provide that each non-employee director who is first elected or appointed on or after the date of the 2003 Annual Meeting of Stockholders will receive the grant of an option to purchase 50,000 shares of common stock. This
initial grant vests ratably over a four year period, subject to continued service as a director. The Automatic Option Grant Programs also provide for the grant on the date of each annual stockholder meeting beginning with the 2003 Annual Meeting of
Stockholders of (a) an option to purchase 15,000 shares of common stock to each non-employee director, and (b) an additional option to purchase 5,000 shares of common stock to each non-employee director who is a member of the Audit
Committee of the Companys Board of Directors. The automatic annual grant vests one year after the grant date, subject to continued service as a director.

On October 1, 2005, the Company adopted SFAS 123(R), which requires the measurement and recognition of compensation expense for share-based payment awards made to the Companys employees and directors,
including employee stock options and employee stock purchases related to the Employee Stock Purchase Plan. Accordingly, stock-based compensation cost is measured at grant date, based on the estimated fair value of the award, and is recognized as
expense over the employee requisite service period. The Companys stock compensation is accounted for as an expense and an addition to equity. The Company previously applied Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees, and related interpretations and provided the required pro forma disclosures of SFAS 123, Accounting for Stock-Based Compensation.

Prior to the adoption of SFAS 123(R)

Prior to the adoption of SFAS 123(R), the Company provided the disclosures required under SFAS 123 as amended by SFAS 148, Accounting for Stock-Based Compensation  Transition and Disclosures. No employee stock-based
compensation was reflected in net loss for the three and six month periods ended March 31, 2005, because all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant.



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Impact of adoption of SFAS 123(R)

The Company elected to adopt the modified prospective application method as provided by SFAS 123(R). Accordingly, during the three and six months ended
March 31, 2006, the Company recorded stock-based compensation cost totaling the amount that would have been recognized had the fair value method been applied since the effective date of SFAS 123. Previously reported amounts have not been
restated. The following table summarizes the classification of stock-based compensation expense related to employee stock options and employee stock purchases under SFAS 123(R) for the three months and six months ended March 31, 2006, which was
allocated as follows:



|                                                                |  |                                  |       |                                |   |      
|--------------------------------------------------------------- |  | -------------------------------- | ----- | ------------------------------ | - | -----
|(in thousands)                                                  |  | Three Months EndedMarch 31, 2006 |       | Six Months EndedMarch 31, 2006
|Stock-based compensation expense was included in:               |  |                                  |       |                                |   |      
|Cost of revenues  broadband equipment                          |  | $                                | 39    |                                | $ | 68   
|                                                                |  |                                  |       |                                |   |      
|Research and development                                        |  |                                  | 411   |                                |   | 959  
|Selling and marketing                                           |  |                                  | 255   |                                |   | 481  
|General and administrative                                      |  |                                  | 623   |                                |   | 1,034
|                                                                |  |                                  |       |                                |   |      
|Stock-based compensation expense included in operating expenses |  |                                  | 1,289 |                                |   | 2,474
|                                                                |  |                                  |       |                                |   |      
|Stock-based compensation expense included in net income (loss)  |  | $                                | 1,328 |                                | $ | 2,542
|                                                                |  |                                  |       |                                |   |      

The table below reflects basic and diluted net income (loss) per share for the three months and six
months ended March 31, 2006 compared with the pro forma information for the three months and six months ended March 31, 2005 (in thousands except per-share amounts):



|                                                                                                |  |                             |       |      |                           |        |      |  |   |        |   |  |   |        |  
|----------------------------------------------------------------------------------------------- |  | --------------------------- | ----- | ---- | ------------------------- | ------ | ---- |  | - | ------ | - |  | - | ------ | -
|                                                                                                |  | Three Months EndedMarch 31, |       |      | Six Months EndedMarch 31, |       
|(in thousands except per share amounts)                                                         |  | 2006                        |       | 2005 |                           |        | 2006 |  |   | 2005   |  
|Net loss - as reported for the prior period                                                     |  |                             | N/A   |      | $                         | (1,832 | )    |  |   | N/A    |   |  | $ | (3,473 | )
|Stock-based compensation expense related to employee stock options and employee stock purchases |  | $                           | 1,328 |      |                           | 1,211  |      |  | $ | 2,542  |   |  |   | 2,583  |  
|                                                                                                |  |                             |       |      |                           |        |      |  |   |        |   |  |   |        |  
|Net income (loss) - including the effect of stock-based compensation expense                    |  | $                           | 594   |      | $                         | (3,043 | )    |  | $ | (1,898 | ) |  | $ | (6,056 | )
|                                                                                                |  |                             |       |      |                           |        |      |  |   |        |   |  |   |        |  
|Basic and diluted loss per share  as reported for the prior period                             |  |                             | N/A   |      | $                         | (0.07  | )    |  |   | N/A    |   |  | $ | (0.14  | )
|                                                                                                |  |                             |       |      |                           |        |      |  |   |        |   |  |   |        |  
|Basic and diluted income (loss) per share - including the effect of stock-based compensation    |  | $                           | 0.02  |      | $                         | (0.12  | )    |  | $ | (0.07  | ) |  | $ | (0.24  | )
|                                                                                                |  |                             |       |      |                           |        |      |  |   |        |   |  |   |        |  

As of October 1, 2005, the Company had an unrecorded deferred stock-based compensation balance
related to stock options of $5.7 million before estimated forfeitures. In the Companys pro forma disclosure prior to the adoption of SFAS 123(R), the Company accounted for forfeitures upon occurrence. SFAS 123(R) requires forfeitures to be
estimated at the time of grant and revised if necessary in subsequent periods if actual forfeitures differ from those estimates. Accordingly, as of October 1, 2005, the Company estimated that the stock based compensation awards not expected to
vest was $0.9 million, and therefore, the unrecorded deferred stock-based compensation balance related to stock options was adjusted to $4.8 million after forfeitures.

During the six months ended March 31, 2006, the Company granted 1,973,625 stock options with an estimated total grant-date fair value of $5.5 million. Of this amount, the Company estimated that the stock-based
compensation for awards not expected to vest was $1.3 million.

During the six months ended March 31, 2006, the Company recorded
stock-based compensation related to stock options of $2.5 million.

As of March 31, 2006, the unrecorded deferred stock-based
compensation balance related to stock options was $7.3 million net of estimated forfeitures. The amount of stock based compensation capitalized, as inventory on March 31, 2006 was $22,000. The Company elected not to capitalize any stock-based
compensation to inventory at October 1, 2005 when the provisions of SFAS 123(R) were initially adopted.



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Stock Option Plans

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model using the following estimates:



|                             |  |      |   |  |      |  
|---------------------------- |  | ---- | - |  | ---- | -
|Three Months Ended March 31, |  | 2006 |   |  | 2005 |  
|Expected life (in years)     |  | 3.09 |   |  | 3.23 |  
|Expected volatility          |  | 124  | % |  | 355  | %
|Risk-free interest rate      |  | 4.83 | % |  | 3.96 | %
|Expected dividend yield      |  |     |   |  |     |  

The Black-Scholes weighted average fair value of employee stock options granted during the six
months ended March 31, 2006 and 2005 was $2.77 and $2.94, respectively.

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



|                                     |  |                     |   |  |                                |     
|------------------------------------ |  | ------------------- | - |  | ------------------------------ | ----
|Stock options                        |  | Shares underOptions |   |  | Weighted averageexercise price
|Outstanding as of September 30, 2005 |  | 5,709,856           |   |  | $                              | 4.33
|Options granted                      |  | 525,000             |   |  |                                | 2.68
|Options exercised                    |  | (40,761             | ) |  |                                | 2.17
|Options cancelled                    |  | (45,734             | ) |  |                                | 3.84
|                                     |  |                     |   |  |                                |     
|Outstanding as of December 31, 2005  |  | 6,148,361           |   |  |                                | 4.20
|Options granted                      |  | 1,448,625           |   |  |                                | 3.37
|Options exercised                    |  | (49,997             | ) |  |                                | 1.98
|Options cancelled                    |  | (88,702             | ) |  |                                | 3.02
|                                     |  |                     |   |  |                                |     
|Outstanding as of March 31, 2006     |  | 7,458,287           |   |  |                                | 4.07
|                                     |  |                     |   |  |                                |     
|Exercisable as of March 31, 2006     |  | 4,356,028           |   |  | $                              | 4.58
|                                     |  |                     |   |  |                                |     

Employee Stock Purchase Plan

Under the Companys ESPP, rights to purchase shares are granted during the second and fourth quarter of each fiscal year. The value of rights to
purchase shares granted were estimated at the date of grant using the following weighted average assumptions:



|                             |  |          |  |      |  
|---------------------------- |  | -------- |  | ---- | -
|Three Months Ended March 31, |  | 2006     |  | 2005 |  
|Expected life (in years)     |  | 0.5 to 2 |  | 2    |  
|Expected volatility          |  | 51%92%  |  | 230  | %
|Risk-free interest rate      |  | 4.82     |  | 3.80 |  
|Expected dividend yield      |  |         |  |     |  

Pursuant to the guidance in SFAS 123(R) and Staff Accounting Bulletin No. 107 (SAB 107), the
Company uses historical volatility as an estimate of expected volatility for purposes of calculating stock-based compensation expense using the Black-Scholes model. During the first 6 months of fiscal 2006, the Company changed its assumption of
historical volatility from 10 years to a range of 6 months to 2 years for purposes of calculating stock-based compensation expense related to share-based payment awards under the Companys ESPP. The Company believes that a range of 6 months to
2 years results in a more accurate estimate of expected volatility for the purpose of valuing stock-based compensation related to the Companys ESPP.



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|(8) | Commitments and Contingencies
|--- | -----------------------------

Operating Lease
Commitments.The Company conducts its operations in leased facilities under operating lease agreements expiring at various dates through 2014. The following is a summary of future minimum rental payments required under these leases that have
initial or remaining non-cancelable lease terms in excess of one year (the 2006 amount is for the six months remaining in the fiscal year):



|                           |  |                          |     |      |   |       |  |      |       |      |   |            |  |       |     |  |   |     |  |   |      
|-------------------------- |  | ------------------------ | --- | ---- | - | ----- |  | ---- | ----- | ---- | - | ---------- |  | ----- | --- |  | - | --- |  | - | -----
|                           |  | Year ended September 30,
|(in thousands)             |  | 2006                     |     | 2007 |   | 2008  |  | 2009 |       | 2010 |   | Thereafter |  | Total
|Property lease obligations |  | $                        | 693 |      | $ | 1,409 |  | $    | 1,106 |      | $ | 466        |  | $     | 335 |  | $ | 110 |  | $ | 4,119
|                           |  |                          |     |      |   |       |  |      |       |      |   |            |  |       |     |  |   |     |  |   |      

Purchase Commitments with Outsourcing Manufacturers and Suppliers.The Company has purchase
commitments with its outsourcing manufacturers. Our outsourcing manufacturers procure component inventory on our behalf based on our production orders. The Company is obligated to purchase component inventory that the outsourcing manufacturer
procures in accordance with the orders, unless cancellation is given within applicable lead times. These commitments are reflected in our financial statements as a liability once title for goods has transferred, services have been received and/or
payments related to the obligations become due. At March 31, 2006, purchase commitments totaled $23.3 million of which $0.7 million represented non-inventory purchase commitments with suppliers.

Foreign Currency Derivatives.The Company has entered into foreign currency forward contracts to hedge foreign currency denominated receivables.
Forward contracts involve agreements to sell foreign currency at specified rates at future dates. The following table presents the fair value amount of currency exchange forward contracts:



|                                              |  |                |       |                    |        |                   |          |        |   |          |  |                |  |         
|--------------------------------------------- |  | -------------- | ----- | ------------------ | ------ | ----------------- | -------- | ------ | - | -------- |  | -------------- |  | --------
|(Amount in thousands, except spot rate)       |  | March 31, 2006 |       | September 30, 2005
|Principal (notional) amounts in U.S. dollars: |  | Amount         |       | SpotRate           |        | SettlementDate(s) |          | Amount |   | SpotRate |  | SettlementDate
|Forward exchange contract #1                  |  | $              | 2,043 |                    | 1.2076 |                   | Apr-2006 |        | $ | 2,148    |  | 1.211          |  | Oct-2005
|Forward exchange contract #2                  |  |                | 1,208 |                    | 1.2076 |                   | May-2006 |        |   |          |  |                |  |         
|Forward exchange contract #3                  |  |                | 595   |                    | 1.2076 |                   | Jun-2006 |        |   |          |  |                |  |         
|                                              |  |                |       |                    |        |                   |          |        |   |          |  |                |  |         
|                                              |  | $              | 3,846 |                    |        |                   |          |        | $ | 2,148    |  |                |  |         

Litigation.We were named as a defendant in an action in the United States Bankruptcy Court
for the Northern District of California entitled E. Lynn Schoenmann, trustee of NorthPoint Communications, Inc. v. Netopia. In this action, the trustee of the bankruptcy estate of NorthPoint Communications, Inc. (NorthPoint)
sought to recover approximately $1.2 million that NorthPoint paid to us within the 90-day preference period before NorthPoint filed for bankruptcy in January 2001. In March 2006, the bankruptcy court approved the settlement of this action, pursuant
to which we made a payment to the plaintiff in the amount $300,000 in consideration of a release of all claims. The settlement was recorded as an expense in the three months ended December 31, 2005.

On March 29, 2006, the United States Securities and Exchange Commission (SEC) instituted and simultaneously settled an administrative
cease-and-desist proceeding against us. Without admitting or denying the SECs findings, we have agreed to cease and desist from future violations of Sections 13(a) and 13(b)(2)(A)-(B) of the Exchange Act, and Rules 12b-20, 13a-1, 13a-11
and 13a-13 promulgated thereunder. The settlement is consistent with our announcement on July 22, 2005 that we had submitted an offer of settlement to the staff of the Division of Enforcement of the SEC to resolve an investigation into our
disclosures and accounting practices, primarily related to our restatement of our financial statements for the fiscal years ended September 30, 2003 and 2002.

On March 29, 2006, we also announced that we had learned that the SEC had filed and simultaneously settled charges against Alan B. Lefkof, our President and Chief Executive Officer.



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Without admitting or denying the SECs allegations, Mr. Lefkof agreed to consent to the entry of an order with respect to violations of Sections
17(a)(2)-(3) of the Securities Act of 1933, as amended, and Rule 13b2-1 promulgated under the Exchange Act, and aiding and abetting our violations of Sections 13(a) and 13(b)(2)(A)-(B) of the Exchange Act, and Rules 12b-20 and 13a-11
promulgated thereunder, in connection with a Report on Form 8-K and exhibit furnished to the SEC on July 6, 2004. Mr. Lefkof also agreed to pay a civil penalty.

On December 3, 2004, the United States District Court for the Northern District of California issued an order consolidating previously filed purported class action cases under the name In re Netopia, Inc.
Securities Litigation, and appointing lead plaintiffs and plaintiffs counsel. On June 29, 2005, the lead plaintiffs filed their consolidated amended complaint. The consolidated amended complaint alleges violations of Sections 10(b)
and 20(a) of the Securities Exchange Act of 1934, as amended (the Exchange Act). The consolidated amended complaint alleges that during the purported class period, November 6, 2003 through August 16, 2004, we made false and
misleading statements or failed to disclose material facts, and that the market price of our common stock was artificially inflated as a result of such alleged conduct. We believe that we have strong defenses to the claims asserted in the
consolidated amended complaint. We intend to defend the case vigorously. We currently cannot estimate the extent of the potential damages in this dispute.

In August 2004, the first of four purported derivative actions, Freeport Partners, LLC, Derivatively on Behalf of Nominal Defendant Netopia, Inc., v. Alan B. Lefkof, William D. Baker, Reese M. Jones, Harold S. Wills,
Robert Lee and Netopia, Inc., was filed in the United States District Court for the Northern District of California. Two purported derivative actions are pending in the United States District Court for the Northern District of California, and two
related purported derivative actions are pending in the Superior Court of California for the County of Alameda. These actions make claims against our officers and directors arising out of the alleged misstatements described above in connection with
the purported class action described above. In November 2004, the derivative plaintiffs agreed to coordinate the four derivative actions. The parties have agreed to a stay of the federal derivative actions, which was ordered by the court in January
2005. The state actions have been consolidated under the name In re Netopia, Inc. Derivative Litigation. On March 3, 2006, the plaintiffs filed their consolidated amended complaint. We believe that we have strong defenses to the claims
asserted in the complaints as initially filed. We intend to defend the cases vigorously. We currently cannot estimate the extent of the potential damages in this dispute.

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

In January 2005, we were notified by the Occupational Health and Safety Administration (OSHA) that we were named in an
administrative complaint filed by two former employees alleging violations of Section 806 of the Corporate and Criminal Fraud Accountability Act of 2002, 18 U.S.C. § 1514A, also known as the Sarbanes-Oxley Act. The former employees alleged
that we terminated them in retaliation for their participation in the internal accounting review conducted by the audit committee in 2004. On May 11, 2005, following its investigation, OSHA advised us that the complaint was determined to have
no merit. On August 31, 2005, the two former employees refiled these claims in the United States District Court for the Northern District of Texas in an action entitled Frankl v. Netopia et al. The complaint names the Company and certain
current and former officers and directors as defendants. The plaintiffs will be filing a motion to stay this action. We believe that our defenses to this action are strong and intend to defend it vigorously. We currently cannot estimate the extent
of the potential damages in this dispute. One of the plaintiffs in this action is a defendant in an action filed on March 29, 2006 and pending in the United States District Court for the Northern District of California entitled Securities
and Exchange Commission v. Skoulis, Frankl et al.

Defending against the government investigations, the private securities class action,
the derivative actions and other litigation matters described above will likely continue to require significant attention and resources of management and, regardless of the outcome, result in significant legal expense. If our defenses ultimately are
unsuccessful, or if we are unable to achieve a favorable settlement, we could be liable for large damage awards that could seriously harm our business and results of



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operation. While we have provided notice of the government investigations and the litigation matters described above to our directors and officers liability
insurance carriers, the insurance carriers have raised certain coverage issues and to date have not reimbursed us for all legal expenses incurred, and may not agree that they are responsible to pay any damages that ultimately could be awarded to the
plaintiffs. Furthermore, we have only a limited amount of insurance, and even if our insurers agree to make payments under the policies, the legal expenses and damage awards or settlements may be greater than the amount of insurance, and we would in
all cases be liable for any amounts in excess of our insurance policy limits.

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



|(9) | Segment, Geographic and Major Customer Information
|--- | --------------------------------------------------

Segment Information:The Company generates revenues from two primary groups, (i) broadband equipment and (ii) broadband software and services. Financial information regarding the operating segments was as follows:



|                                   |  |                              |        |   |                             |   |       |       |  |   |                    |   |  |                             |        |   |       |   |       |   |  |   |        |  
|---------------------------------- |  | ---------------------------- | ------ | - | --------------------------- | - | ----- | ----- |  | - | ------------------ | - |  | --------------------------- | ------ | - | ----- | - | ----- | - |  | - | ------ | -
|                                   |  | Three months ended March 31, |       
|                                   |  | 2006                         |        |   | 2005                        |  
|(in thousands, except percentages) |  | Broadbandequipment           |        |   | BroadbandSoftware& Services |   |       | Total |  |   | Broadbandequipment |   |  | BroadbandSoftware& Services |        |   | Total |  
|Revenues                           |  | $                            | 22,715 |   |                             | $ | 5,161 |       |  | $ | 27,876             |   |  | $                           | 22,247 |   |       | $ | 2,976 |   |  | $ | 25,223 |  
|Cost of revenues                   |  |                              | 15,674 |   |                             |   | 593   |       |  |   | 16,267             |   |  |                             | 16,595 |   |       |   | 396   |   |  |   | 16,991 |  
|                                   |  |                              |        |   |                             |   |       |       |  |   |                    |   |  |                             |        |   |       |   |       |   |  |   |        |  
|Gross profit                       |  |                              | 7,041  |   |                             |   | 4,568 |       |  |   | 11,609             |   |  |                             | 5,652  |   |       |   | 2,580 |   |  |   | 8,232  |  
|Gross margin                       |  |                              | 31     | % |                             |   | 89    | %     |  |   | 42                 | % |  |                             | 25     | % |       |   | 87    | % |  |   | 33     | %
|Unallocated operating expenses     |  |                              |        |   |                             |   |       |       |  |   | 11,199             |   |  |                             |        |   |       |   |       |   |  |   | 10,199 |  
|                                   |  |                              |        |   |                             |   |       |       |  |   |                    |   |  |                             |        |   |       |   |       |   |  |   |        |  
|Operating income (loss)            |  |                              |        |   |                             |   |       |       |  | $ | 410                |   |  |                             |        |   |       |   |       |   |  | $ | (1,967 | )
|                                   |  |                              |        |   |                             |   |       |       |  |   |                    |   |  |                             |        |   |       |   |       |   |  |   |        |  



|                                   |  |                            |        |   |                             |   |       |       |  |   |                    |   |  |                             |        |   |       |   |       |   |  |   |        |  
|---------------------------------- |  | -------------------------- | ------ | - | --------------------------- | - | ----- | ----- |  | - | ------------------ | - |  | --------------------------- | ------ | - | ----- | - | ----- | - |  | - | ------ | -
|                                   |  | Six months ended March 31, |       
|                                   |  | 2006                       |        |   | 2005                        |  
|(in thousands, except percentages) |  | Broadbandequipment         |        |   | BroadbandSoftware& Services |   |       | Total |  |   | Broadbandequipment |   |  | BroadbandSoftware& Services |        |   | Total |  
|Revenues                           |  | $                          | 43,766 |   |                             | $ | 8,008 |       |  | $ | 51,774             |   |  | $                           | 48,444 |   |       | $ | 6,097 |   |  | $ | 54,541 |  
|Cost of revenues                   |  |                            | 30,473 |   |                             |   | 1,133 |       |  |   | 31,606             |   |  |                             | 36,828 |   |       |   | 674   |   |  |   | 37,502 |  
|                                   |  |                            |        |   |                             |   |       |       |  |   |                    |   |  |                             |        |   |       |   |       |   |  |   |        |  
|Gross profit                       |  |                            | 13,293 |   |                             |   | 6,875 |       |  |   | 20,168             |   |  |                             | 11,616 |   |       |   | 5,423 |   |  |   | 17,039 |  
|Gross margin                       |  |                            | 31     | % |                             |   | 86    | %     |  |   | 39                 | % |  |                             | 24     | % |       |   | 89    | % |  |   | 31     | %
|Unallocated operating expenses     |  |                            |        |   |                             |   |       |       |  |   | 22,400             |   |  |                             |        |   |       |   |       |   |  |   | 20,771 |  
|                                   |  |                            |        |   |                             |   |       |       |  |   |                    |   |  |                             |        |   |       |   |       |   |  |   |        |  
|Operating loss                     |  |                            |        |   |                             |   |       |       |  | $ | (2,232             | ) |  |                             |        |   |       |   |       |   |  | $ | (3,732 | )
|                                   |  |                            |        |   |                             |   |       |       |  |   |                    |   |  |                             |        |   |       |   |       |   |  |   |        |  

Geographic Information: The Company sells most of its products through its field
sales organization, with a small portion of sales through distributors and resellers. Most of the Companys sales are to telecommunication carriers and service providers in the United States and Europe through our field sales force. Our field
sales force is geographically disbursed within the United States and Europe and we have a sales office in Paris, France. Most of our sales in Europe are to customers in Switzerland and Ireland.



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Sales outside of the United States are primarily export sales denominated in United States Dollars or Euros. Information
regarding the Companys revenues by geographic region was as follows:



|                                    |  |                              |        |  |                            |   |  |      |        |  |      |   |  |   |        |  |     |   |  |   |        |  |     |  
|----------------------------------- |  | ---------------------------- | ------ |  | -------------------------- | - |  | ---- | ------ |  | ---- | - |  | - | ------ |  | --- | - |  | - | ------ |  | --- | -
|                                    |  | Three months ended March 31, |        |  | Six months ended March 31, |  
|Region (in thousands and % revenue) |  | 2006                         |        |  | 2005                       |   |  | 2006 |        |  | 2005 |  
|Europe                              |  | $                            | 9,018  |  | 32                         | % |  | $    | 8,288  |  | 33   | % |  | $ | 17,740 |  | 34  | % |  | $ | 17,409 |  | 32  | %
|Other international                 |  |                              | 242    |  | 1                          | % |  |      | 714    |  | 3    | % |  |   | 685    |  | 1   | % |  |   | 1,620  |  | 3   | %
|                                    |  |                              |        |  |                            |   |  |      |        |  |      |   |  |   |        |  |     |   |  |   |        |  |     |  
|Total international revenue         |  |                              | 9,260  |  | 33                         | % |  |      | 9,002  |  | 36   | % |  |   | 18,425 |  | 35  | % |  |   | 19,029 |  | 35  | %
|United States                       |  |                              | 18,616 |  | 67                         | % |  |      | 16,221 |  | 64   | % |  |   | 33,349 |  | 65  | % |  |   | 35,512 |  | 65  | %
|                                    |  |                              |        |  |                            |   |  |      |        |  |      |   |  |   |        |  |     |   |  |   |        |  |     |  
|Total revenues                      |  | $                            | 27,876 |  | 100                        | % |  | $    | 25,223 |  | 100  | % |  | $ | 51,774 |  | 100 | % |  | $ | 54,541 |  | 100 | %
|                                    |  |                              |        |  |                            |   |  |      |        |  |      |   |  |   |        |  |     |   |  |   |        |  |     |  

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

Customer Information: The Companys largest customers are service providers. They include regional, national, and international
telecommunications carriers, as well as Internet Service Providers.

The following tables set forth customers and revenue amounts that were
10% or more of total revenues reported for the period:



|                             |  |                              |       |  |                            |   |  |      |               |  |      |   |       |   |        |   |    |   |               |   |        |  |    |  
|---------------------------- |  | ---------------------------- | ----- |  | -------------------------- | - |  | ---- | ------------- |  | ---- | - | ----- | - | ------ | - | -- | - | ------------- | - | ------ |  | -- | -
|                             |  | Three months ended March 31, |       |  | Six months ended March 31, |  
|(in thousands and % revenue) |  | 2006                         |       |  | 2005                       |   |  | 2006 |               |  | 2005 |  
|BellSouth                    |  | $                            | 7,241 |  | 26                         | % |  | $    | 3,978         |  | 16   | % |       | $ | 11,218 |   | 22 | % |               | $ | 11,217 |  | 21 | %
|Swisscom AG                  |  |                              | 5,115 |  | 18                         | % |  |      | 3,634         |  | 14   | % |       |   | 10,005 |   | 19 | % |               |   | 7,846  |  | 14 | %
|AT&T (formerly SBC)          |  |                              | 3,068 |  | 11                         | % |  |      | less than 10% |  |      |   | 5,377 |   | 10     | % |    |   | less than 10% |  
|eircom Ltd.                  |  |                              | 2,666 |  | 10                         | % |  |      | 2,867         |  | 11   | % |       |   | 5,484  |   | 11 | % |               |   | 5,314  |  | 10 | %

The following tables sets forth customer balances that were 10% or more of accounts receivable and
the percentage of total accounts receivable



|                                         |  |                |       |  |    |  
|---------------------------------------- |  | -------------- | ----- |  | -- | -
|(in thousands and % accounts receivable) |  | March 31, 2006 |      
|BellSouth                                |  | $              | 3,871 |  | 21 | %
|Swisscom                                 |  | $              | 2,671 |  | 14 | %
|New European Customer                    |  | $              | 2,082 |  | 11 | %
|eircom Ltd.                              |  | $              | 1,984 |  | 11 | %



|                                         |  |                    |       |  |    |  
|---------------------------------------- |  | ------------------ | ----- |  | -- | -
|(in thousands and % accounts receivable) |  | September 30, 2005 |      
|Swisscom                                 |  | $                  | 3,326 |  | 21 | %
|BellSouth                                |  | $                  | 2,612 |  | 16 | %
|eircom Ltd.                              |  | $                  | 1,682 |  | 10 | %



|(10) | Credit Facility
|---- | ---------------

Under the Companys amended
credit facility agreement with Silicon Valley Bank, the credit limit is $10 million, the interest rate is Silicon Valley Banks prime rate, and the term or maturity date is June 27, 2007. The amended credit facility contains financial
covenants related to liquidity and net worth as well as other nonfinancial covenants. Covenants require that the Company maintain an adjusted quick ratio (described below) of 1.25 and the credit facility will be subject to formula based credit
limits if the adjusted quick ratio falls below 1.50. Covenants also require the Company to maintain a minimum tangible net worth of $28 million at September 30, 2005; subsequently the minimum tangible new worth declines every few months to $24
million at September 30, 2006 and thereafter, unless reset. The facility is secured by substantially all of the assets of the Company. The adjusted quick ratio is the ratio of (i) the Companys unrestricted cash, cash
equivalents and investments maintained at Silicon Valley Bank plus net receivables to (ii) the Companys current liabilities plus the outstanding principal amount of any borrowings under the facility less deferred revenues. The
Company may borrow under the credit facility in



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order to finance working capital requirements for new products and customers, and otherwise for general corporate purposes in the normal course of business.
As of March 31, 2006, the Company was in compliance with the covenants, had access to approximately $9.6 million of the credit facility and had no outstanding borrowings. The Company has approximately $200,000 of outstanding letters of credit
and $200,000 of cash management reserves that reduce the amount of available credit on the credit facility to $9.6 million.



|(11) | Research and Development
|---- | ------------------------



|                              |  |                    |       |  |                    |   |  |          |       |  |    |   |  |    |  
|----------------------------- |  | ------------------ | ----- |  | ------------------ | - |  | -------- | ----- |  | -- | - |  | -- | -
|                              |  | Three Months Ended |       |  | Three Months Ended |   |  | % Change |      
|(in thousands & % of revenue) |  | 2006               |       |  | 2005               |   | 
|Research and development      |  | $                  | 4,182 |  | 15                 | % |  | $        | 3,403 |  | 13 | % |  | 23 | %
|                              |  |                    |       |  |                    |   |  |          |       |  |    |   |  |    |  
|                              |  | Six Months Ended   |       |  | Six Months Ended   |   |  | % Change |      
|                              |  | 2006               |       |  | 2005               |   | 
|Research and development      |  | $                  | 8,111 |  | 16                 | % |  | $        | 6,609 |  | 12 | % |  | 23 | %
|                              |  |                    |       |  |                    |   |  |          |       |  |    |   |  |    |  

Research and development (R&D) expenses consist primarily of employee related
expenses, depreciation and amortization, development related expenses such as product prototyping, design and testing, and overhead. Impacting comparability, stock-based compensation expense was 12 and 14 percentage points, respectively of the 23%
increase in R&D expense in the three and six months ended March 31, 2005. The remaining increase in R&D expense reflected an increase in the R&D headcount and salaries.



|(12) | Other Income, Net
|---- | -----------------

Other income, net, primarily
consisted of interest income earned on cash and cash equivalents, interest expense related to the credit facility and realized and unrealized gains and losses on foreign currency transactions. The following table summarizes the Companys other
income, net:



|                        |  |                             |     |   |                           |   |     |      |  |   |      |   |  |   |     |  
|----------------------- |  | --------------------------- | --- | - | ------------------------- | - | --- | ---- |  | - | ---- | - |  | - | --- | -
|                        |  | Three Months EndedMarch 31, |     |   | Six Months EndedMarch 31, |  
|(in thousands)          |  | 2006                        |     |   | 2005                      |   |     | 2006 |  |   | 2005 |  
|Interest income         |  | $                           | 210 |   |                           | $ | 109 |      |  | $ | 429  |   |  | $ | 201 |  
|Interest expense        |  |                             | (11 | ) |                           |   | (10 | )    |  |   | (21  | ) |  |   | (13 | )
|Other income (expense)  |  |                             | (4  | ) |                           |   | 56  |      |  |   | (49  | ) |  |   | 115 |  
|                        |  |                             |     |   |                           |   |     |      |  |   |      |   |  |   |     |  
|Total other income, net |  | $                           | 195 |   |                           | $ | 155 |      |  | $ | 359  |   |  | $ | 303 |  
|                        |  |                             |     |   |                           |   |     |      |  |   |      |   |  |   |     |  



|(13) | Subsequent Event
|---- | ----------------

As of March 31, 2006, the
Company held an equity investment in Megapath, Inc. The Companys investment consisted of shares of preferred stock in Megapath, Inc. and had a carrying value of $1.032 million.

In April 2006, Netifice Communications, Inc. acquired all of Megapath, Inc.s capital stock in exchange for a combination of cash and shares of
Netifice Communications Inc., Series 2 Preferred Stock. As part of that transaction, the Company received $0.7 million in cash and 1.7 million shares of Series 2 Preferred Stock of Netifice Communications, Inc. in exchange for
its investment in Megapath, Inc.



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##### Table of Contents

PART I  FINANCIAL INFORMATION



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

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

Company Overview

Netopia, Inc. (the Company) is a
developer and provider of high performance broadband customer premises networking equipment and carrier-class software for the remote management of broadband services and equipment. The Company also develops and provides broadband enabled services
and remote management software for enterprises technical support, help-desks and personal computers.

Our broadband equipment includes modems,
routers and gateways, and related accessories for use at the premises. Our equipment enables advance high-speed broadband access and services. DSL technologies and standards used to transmit data over copper lines, including integrated wireless (or
Wi-Fi) access, are a technology focus for our equipment. The largest customers for our equipment are telecommunications carriers. These customers deploy our equipment at their broadband customers premises, including residences and distributed
businesses.

Our management software enables carriers to remotely manage our gateways, as well as gateways from third party suppliers, and to deploy new
broadband services. Our software enables broadband service providers and enterprises to remotely respond to service problems and calls and to automate the maintenance of the gateways and broadband services. Our solution also provides for the
efficient delivery of value added services. NBBS, or Netopia Broadband Server, is the brand name for our remote management software, which we license on both a server license and hosted basis.

We also license and host software for remotely managing networks of personal computers. This software is licensed under the brand names Timbuktu and eCare. eCare is a
solution designed for enterprise technical service support and help desks. Our solutions enable remote problem solving and management of distributed desktop or personal computers.

We sell Web site services, including Web site hosting, development, and tools for Web site development. We offer a Hot-Spot solution and service for distributed enterprises, such as restaurants, hotels and other
venues that offer wireless Internet access to their customers. We offer a Parental Controls service that provides content filtering and other controls over access to the Internet.

Our broadband equipment is manufactured by outsourced manufacturers in Thailand, China and Mexico. The components included in our equipment are high-quality industry standard components provided by leading vendors. We
work closely with the providers of silicon chips, circuits and switches, antennae and other high-technology components in the development of our products. We develop and maintain the embedded software called firmware included in our equipment.



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The markets in which we compete are highly competitive. We continuously strive to make advances and compete based on
forward-looking technology and service innovations, superior performance and quality, and by identifying solutions and opportunities for our customers to attract and retain customers, improve productivity, reduce costs, and achieve competitive
advantage.

Overview of Operating Results

We are
focusing on revenue growth for both our broadband networking equipment and our software and services. Our objective is to increase sales to existing customers and to attract new customers. Our goal is to leverage our strengths in DSL technologies to
meet market requirements for higher bandwidth services, including IPTV, being provided by telecommunications and Internet service providers. This focus includes achieving design wins and field trials for higher performance gateways utilizing new
technologies, including VDSL2 and ADSL2+ Bonded technologies as well as other innovations. Software and services revenue growth is largely dependent on sales and revenue from our NBBS remote management software.

We believe that we made progress toward our 2006 revenue growth goals during the first half of our fiscal year ended September 30, 2006. Both our NBBS remote
management software and broadband equipment performed well. In our second quarter ended March 31, 2006, we completed three transactions for our NBBS remote management software, of which the most significant was with BellSouth. These software
transactions were the cause of the $2.2 million increase in our software and services revenue and were a significant contribution to our net results. In our broadband equipment segment, we achieved two milestones. First, we successfully completed a
field trial with a new European customer for our ADSL Wi-Fi equipment and shipped $2.1 million of equipment, which was recorded as deferred revenue for our second fiscal quarter. We expect to recognize this revenue in our third quarter ending
June 30, 2006. Second, we received our first production order for VDSL2 equipment for shipment into Switzerland in our third fiscal quarter. Our progress to date with VDSL2 equipment in Switzerland has helped our products to be more broadly
considered by other new customers, particularly in Europe. Our equipment is undergoing lab tests with a number of prospective new customers. While these lab tests provide an opportunity for growth in our broadband equipment segment, we do not expect
to receive any potential volume orders before calendar year 2007, if at all, and the receipt of orders is contingent upon the successful completion of field trials among other factors. We expect that our broadband equipment revenue will be
sequentially higher in the third quarter ending June 30, 2006 as compared with the second quarter ended March 31, 2006, because of revenue recognized on higher unit shipments, including those to the new European customer discussed above.
We expect that software and services revenues will be sequentially lower in the third quarter ending June 30, 2006 as compared with the second quarter ended March 31, 2006, because we expect to have a lower level of NBBS remote management
software revenue. We are actively pursuing new NBBS remote management software revenue opportunities.

Overall gross margin rates for the first half of
fiscal year 2006 improved year-over-year. We increased our software and services revenue by $2 million and this contributed to most of the gross margin improvement. In addition, equipment gross margins have steadily improved from 24% in the first
half of fiscal year 2005 to 31% in the first half of fiscal year 2006. This improvement mostly reflected the benefit of cost reductions, and secondarily from a greater mix of Wi-Fi broadband equipment sales and a greater mix of business-class
broadband equipment sales. We expect that our overall gross margin will be sequentially lower in the third quarter ending June 30, 2006 as compared with the second quarter ended March 31, 2006, because we expect to have a lower level of
NBBS remote management software revenue, which tends to be high margin. Looking forward, gross margin rates are expected to be volatile because of fluctuations in the mix of revenues from equipment and software and services. For example, the gross
margin is expected to be higher in periods that we achieve a higher mix of software and services revenues, such as in the second quarter of fiscal year 2006 when we recognized the revenue from the license of our NBBS remote management software to
BellSouth. In addition, we expect broadband equipment revenues to grow, in part, from sales of residential-class broadband equipment, which carry a lower gross margin rate than sales of business-class equipment, which could cause a decline in the
gross margin rate.



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In the first quarter of fiscal year 2006, we recorded a $300,000 charge related to settlement of a bankruptcy preference
claim related to a customer that went bankrupt and ceased operations several years ago. We began to include stock compensation expense in our Statement of Operations as of the beginning of fiscal year 2006 and this caused an increase in operating
expenses on a year-over-year basis. In the first half of fiscal year 2006, we recorded $2.5 million of stock compensation expense. Stock compensation expenses will impact future quarters with similar or increasing levels of expenses as a result of
new stock option grants made to both new and current employees, and these expenses will impact year-over-year trends. We continue to grant stock options to employees in an effort to align employee interests with the interests of shareholders as well
as to attract and retain key employees. Excluding the impact of stock compensation expense, operating expenses were lower because legal costs were lower in the first half of fiscal year 2006 compared with the first half of fiscal year 2005, in part,
because of insurance reimbursements of legal costs.

Beginning in fiscal year 2006, we adopted SFAS 123(R) on a modified prospective basis. The following
table summarizes the classification of stock-based compensation expense related to employee stock options and employee stock purchases under SFAS 123(R) for the three months and six months ended March 31, 2006, which was allocated as follows:



|                                                                |  |                                  |       |                                |   |      
|--------------------------------------------------------------- |  | -------------------------------- | ----- | ------------------------------ | - | -----
|(in thousands)                                                  |  | Three Months EndedMarch 31, 2006 |       | Six Months EndedMarch 31, 2006
|Stock-based compensation expense was included in:               |  |                                  |       |                                |   |      
|Cost of revenues  broadband equipment                          |  | $                                | 39    |                                | $ | 68   
|                                                                |  |                                  |       |                                |   |      
|Research and development                                        |  |                                  | 411   |                                |   | 959  
|Selling and marketing                                           |  |                                  | 255   |                                |   | 481  
|General and administrative                                      |  |                                  | 623   |                                |   | 1,034
|                                                                |  |                                  |       |                                |   |      
|Stock-based compensation expense included in operating expenses |  |                                  | 1,289 |                                |   | 2,474
|                                                                |  |                                  |       |                                |   |      
|Stock-based compensation expense included in net income (loss)  |  | $                                | 1,328 |                                | $ | 2,542
|                                                                |  |                                  |       |                                |   |      

The table below reflects basic and diluted net income (loss) per share for the three months and six months ended
March 31, 2006 compared with the pro forma information for the three months and six months ended March 31, 2005 (in thousands except per-share amounts):



|                                                                                                |  |                             |       |      |                           |        |      |  |   |        |   |  |   |        |  
|----------------------------------------------------------------------------------------------- |  | --------------------------- | ----- | ---- | ------------------------- | ------ | ---- |  | - | ------ | - |  | - | ------ | -
|                                                                                                |  | Three Months EndedMarch 31, |       |      | Six Months EndedMarch 31, |       
|(in thousands)                                                                                  |  | 2006                        |       | 2005 |                           |        | 2006 |  |   | 2005   |  
|Net loss - as reported for the prior period                                                     |  |                             | N/A   |      | $                         | (1,832 | )    |  |   | N/A    |   |  | $ | (3,473 | )
|Stock-based compensation expense related to employee stock options and employee stock purchases |  | $                           | 1,328 |      |                           | 1,211  |      |  | $ | 2,542  |   |  |   | 2,583  |  
|                                                                                                |  |                             |       |      |                           |        |      |  |   |        |   |  |   |        |  
|Net income (loss) - including the effect of stock-based compensation expense                    |  | $                           | 594   |      | $                         | (3,043 | )    |  | $ | (1,898 | ) |  | $ | (6,056 | )
|                                                                                                |  |                             |       |      |                           |        |      |  |   |        |   |  |   |        |  
|Basic and diluted loss per share  as reported for the prior period                             |  |                             | N/A   |      | $                         | (0.07  | )    |  |   | N/A    |   |  | $ | (0.14  | )
|                                                                                                |  |                             |       |      |                           |        |      |  |   |        |   |  |   |        |  
|Basic and diluted income (loss) per share - including the effect of stock-based compensation    |  | $                           | 0.02  |      | $                         | (0.12  | )    |  | $ | (0.07  | ) |  | $ | (0.24  | )
|                                                                                                |  |                             |       |      |                           |        |      |  |   |        |   |  |   |        |  



|(1) | Net income (loss) and net income (loss) per share prior to fiscal year 2006 did not include stock-based compensation expense related to employee stock options and employee stock
purchases under SFAS 123 because we did not adopt the recognition provisions of SFAS 123.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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|(2) | Stock-based compensation expense prior to fiscal year 2006 is calculated based on the pro forma application of SFAS 123 as previously disclosed in the notes to the Consolidated
Financial Statements.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(3) | Net loss and net loss per shares prior to fiscal year 2006 represents pro forma information based on SFAS 123 as previously disclosed in the notes to the Consolidated Financial
Statements.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Our net results in the first half of fiscal year 2006 was a loss of $1.9 million and income of $600,000 for the second quarter.
Stock compensation costs were $1.3 million and $2.5 million for the three and six months ended March 31, 2006. The net income in the second quarter reflected the benefit of increased software and services revenue and increased gross margins.
Our net results in future periods will depend on our ability to grow our equipment revenues and to complete software and services transactions, particularly those involving our NBBS remote management software. The trend in our net results may be
volatile from quarter to quarter. We expect that we will have a net loss in the third quarter of fiscal year 2006, because we expect to have a lower level of NBBS remote management software revenue.

We utilize non-GAAP measures in the management of our business. When we evaluate our core operating performance trends and potential to generate cash in the future, we
use non-GAAP measures that exclude a number of items, including non-cash stock compensation, non-cash amortization of acquisition-related intangibles, and settlements. While we find it helpful to exclude certain items in evaluating trends and our
potential to generate cash, we believe that financial measures based on GAAP are the best overall measure of our operating performance and non-GAAP measures are not intended to be a substitute for GAAP measures.

Cash of $22.4 million at March 31, 2006, remained fairly flat compared with September 30, 2005. We continue to have no long-term debt and a $10 million credit
line with approximately $9.6 million available for borrowings.

Critical Accounting Policies and Estimates

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

You should read our Annual Report on Form 10-K for the fiscal year ended September 30, 2005 for information pertaining to our critical accounting policies, which
include the following:



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



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



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



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



| |  |  | Allowance for sales returns;
| | - |  | ----------------------------



| |  |  | Service accrual;
| | - |  | ----------------



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##### Table of Contents

| |  |  | Product warranty; and
| | - |  | ---------------------



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

Liquidity and Capital Resources

The following sections discuss the effects of changes in our balance sheets, cash flows and commitments on our liquidity and capital resources. As of
March 31, 2006, our principal sources of liquidity included cash and cash equivalents in the amount of $22.4 million and a credit facility, which has a credit limit of $10 million. We had no outstanding borrowings against our credit facility at
March 31, 2006, and approximately $400,000 of the credit facility is used for credit purposes, including letters of credit and reserves for cash management services. In addition, our liquidity benefits from our practice of purchasing most of
our inventory from outsourced manufacturers. Our outsourced manufacturers utilize their financial resources to procure raw materials and maintain facilities to manufacture products based on purchase orders received from us. We believe our cash and
cash equivalents and cash expected to be generated by our business activities will be sufficient to meet our working capital needs for at least the next twelve months.

Cash and Cash Equivalents.



|                                 |  |                |        |                    |   |          |  |   |     |  |   |  
|-------------------------------- |  | -------------- | ------ | ------------------ | - | -------- |  | - | --- |  | - | -
|                                 |  | March 31, 2006 |        | September 30, 2005 |   | Increase | 
|(in thousands except percentage) |  |                |        | $                  |   | %        | 
|Cash and cash equivalents        |  | $              | 22,407 |                    | $ | 22,234   |  | $ | 173 |  | 1 | %
|                                 |  |                |        |                    |   |          |  |   |     |  |   |  

For the six months ended March 31, 2006, cash and cash equivalents increased primarily as a result of cash
provided by proceeds from issuance of common stock, most of which was offset by capital equipment purchases. We did not have off-balance sheet transactions at March 31, 2006 or September 30, 2005.

Net Cash Provided by Operating Activities

Net cash provided by
operating activities totaled $8,000 for the six months ended March 31, 2006, compared to a use of $1.6 million for the six months ended March 31, 2005. Excluding the changes in operating assets and liabilities, our operating activities
provided $2.2 million of cash for the six months ended March 31, 2006 and this reflects that depreciation, amortization and non-cash charges for stock-based compensation exceeded our net loss. Changes in our operating assets and liabilities
used $2.1 million of cash primarily as a result of an increase in accounts receivable and other current assets, partially offset by an increase in deferred revenue. These changes in operating assets and liabilities reflected $2.1 million of
shipments to a new customer in Europe, which was recorded in accounts receivable and deferred revenue, and with the corresponding deferred costs recorded in other current assets, as of March 31, 2006. Cash used or provided by inventory and
accounts payable tend to fluctuate from period to period with the timing of inventory purchases and payments.

Net Cash Used in Investing Activities

Net cash used in investing activities totaled $623,000 for the six months ended March 31, 2006, compared to $827,000 used in the six months ended
March 31, 2005. Investing activities consisted of the purchase of capital equipment, including manufacturing tooling and information technology equipment.

Net Cash Provided by Financing Activities

Net cash provided from financing activities totaled $784,000 for the six months ended
March 31, 2006, compared to $1.2 million for the six months ended March 31, 2005. For the six months ended March 31, 2006, financing activities consisted of the issuance of common stock pursuant to the ESPP and from the exercise of
stock options. For the six months ended March 31, 2005, financing activities consisted of the issuance of common stock pursuant to the ESPP and from the exercise of stock options, offset by $104,000 of repayments of term loans.



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Commitments

Operating Lease Commitments.The Company conducts its operations in leased facilities under operating lease agreements expiring at various dates through 2014. The following is a summary of future minimum rental payments required
under these leases that have initial or remaining non-cancelable lease terms in excess of one year (the 2006 amount is for the six months remaining in the fiscal year):



|                           |      |                          |      |  |      |       |      |   |       |  |            |     |       |   |     |  |   |     |  |   |      
|-------------------------- | ---- | ------------------------ | ---- |  | ---- | ----- | ---- | - | ----- |  | ---------- | --- | ----- | - | --- |  | - | --- |  | - | -----
|(in thousands)             |      | Year ended September 30,
|                           | 2006 |                          | 2007 |  | 2008 |       | 2009 |   | 2010  |  | Thereafter |     | Total
|Property lease obligations |      | $                        | 693  |  | $    | 1,409 |      | $ | 1,106 |  | $          | 466 |       | $ | 335 |  | $ | 110 |  | $ | 4,119
|                           |      |                          |      |  |      |       |      |   |       |  |            |     |       |   |     |  |   |     |  |   |      

Purchase Commitments with Outsourcing Manufacturers and Suppliers.The Company has purchase commitments
with its outsourcing manufacturers. Our outsourcing manufacturers procure component inventory on our behalf based on our production orders. The Company is obligated to purchase component inventory that the outsourcing manufacturer procures in
accordance with the orders, unless cancellation is given within applicable lead times. These commitments are reflected in our financial statements as a liability once goods or services have been received by us or payments related to the obligations
become due. At March 31, 2006, purchase commitments totaled $24.2 million.

Foreign Currency Derivatives.The Company has entered into foreign
currency forward contracts to hedge foreign currency denominated receivables. Forward contracts involve agreements to sell foreign currency at specified rates at future dates. The following table presents the value of currency exchange forward
contracts, in United States dollars, at March 31, 2006 and September 30, 2005.



|                                              |  |                |       |                    |   |                   |  |          |  |          |       |                |   |       |  |         
|--------------------------------------------- |  | -------------- | ----- | ------------------ | - | ----------------- |  | -------- |  | -------- | ----- | -------------- | - | ----- |  | --------
|(Amount in thousands, except spot rate)       |  | March 31, 2006 |       | September 30, 2005
|Principal (notional) amounts in U.S. dollars: |  | Amount         |       | SpotRate           |   | SettlementDate(s) |  | Amount   |  | SpotRate |       | SettlementDate
|Forward exchange contract #1                  |  | $              | 2,043 |                    | $ | 1.2076            |  | Apr-2006 |  | $        | 2,148 |                | $ | 1.211 |  | Oct-2005
|Forward exchange contract #2                  |  |                | 1,208 |                    |   | 1.2076            |  | May-2006 |  |          |       |                |   |       |  |         
|Forward exchange contract #3                  |  |                | 595   |                    |   | 1.2076            |  | Jun-2006 |  |          |       |                |   |       |  |         
|                                              |  |                |       |                    |   |                   |  |          |  |          |       |                |   |       |  |         
|                                              |  | $              | 3,846 |                    |   |                   |  |          |  | $        | 2,148 |                |   |       |  |         



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Results of Operations for the Three Months and Six Months Ended March 31, 2006 and 2005

This data has been derived from the Statements of Operations elsewhere in this Form 10-Q and in our Annual Report on Form 10-K for the fiscal year ended
September 30, 2005. The operating results for any period should not be considered indicative of results for any future period. This information should be read in conjunction with the Financial Statements and Notes thereto included elsewhere in
this Form 10-Q and in the Annual Report on Form 10-K for the fiscal year ended September 30, 2005.

REVENUES



|                                                                 |  |      |        |  |      |   |  |        |        |  |     |   |  |    |  
|---------------------------------------------------------------- |  | ---- | ------ |  | ---- | - |  | ------ | ------ |  | --- | - |  | -- | -
|Three Months Ended March 31, (in thousands & percent of revenue) |  | 2006 |        |  | 2005 |   |  | Change |       
|Broadband equipment                                              |  | $    | 22,715 |  | 81   | % |  | $      | 22,247 |  | 88  | % |  | 2  | %
|Broadband software and service                                   |  |      | 5,161  |  | 19   | % |  |        | 2,976  |  | 12  | % |  | 73 | %
|                                                                 |  |      |        |  |      |   |  |        |        |  |     |   |  |    |  
|Total revenues                                                   |  | $    | 27,876 |  | 100  | % |  | $      | 25,223 |  | 100 | % |  | 11 | %
|                                                                 |  |      |        |  |      |   |  |        |        |  |     |   |  |    |  



|                                                               |  |      |        |  |      |   |  |        |        |  |     |   |  |     |  
|-------------------------------------------------------------- |  | ---- | ------ |  | ---- | - |  | ------ | ------ |  | --- | - |  | --- | -
|Six Months Ended March 31, (in thousands & percent of revenue) |  | 2006 |        |  | 2005 |   |  | Change |       
|Broadband equipment                                            |  | $    | 43,766 |  | 84   | % |  | $      | 48,444 |  | 89  | % |  | -10 | %
|Broadband software and service                                 |  |      | 8,008  |  | 16   | % |  |        | 6,097  |  | 11  | % |  | 31  | %
|                                                               |  |      |        |  |      |   |  |        |        |  |     |   |  |     |  
|Total revenues                                                 |  | $    | 51,774 |  | 100  | % |  | $      | 54,541 |  | 100 | % |  | -5  | %
|                                                               |  |      |        |  |      |   |  |        |        |  |     |   |  |     |  

An increase in software and services revenue was the primary cause of the 11% increase in total revenues for the
three months ended March 31, 2006, compared with the same period of the prior year.

For the six months ended March 31, 2006, the increase in
software and service revenue was offset by a decline in equipment revenue, and the net effect was a 5% decrease in total revenues for the comparative six month periods.

Broadband Equipment.An increase in broadband equipment units shipped was the primary reason for the increase in broadband equipment revenue for the three months ended March 31, 2006,
compared with the same period of the prior year. A mix shift toward sales of Wi-Fi enabled ADSL broadband equipment offset most of the decline in overall average selling prices. Wi-Fi enabled ADSL broadband equipment carries a higher selling price
than ADSL broadband equipment sold without Wi-Fi. In part, this reflects the value of the Wi-Fi antenna.

A decrease in the volume of broadband equipment
units shipped was the primary reason for the decrease in broadband equipment revenue for the six months ended March 31, 2006, compared with the same period of the prior year. Most of the decline related to reduced equipment sales to BellSouth
for its wholesale customers and these sales mostly benefited the first quarter of the prior fiscal year.

The table below includes broadband equipment unit
sales volumes and average selling prices. The amounts exclude accessories unit volumes and revenue from the calculation of average selling prices.



|                             |  |                             |         |                           |   |         |  |      |         |  |   |        
|---------------------------- |  | --------------------------- | ------- | ------------------------- | - | ------- |  | ---- | ------- |  | - | -------
|                             |  | Three Months EndedMarch 31, |         | Six Months EndedMarch 31,
|                             |  | 2006                        |         | 2005                      |   | 2006    |  | 2005
|Equipment unit sales volumes |  |                             | 265,000 |                           |   | 248,000 |  |      | 513,000 |  |   | 554,000
|Average selling prices       |  | $                           | 82      |                           | $ | 84      |  | $    | 82      |  | $ | 82     

We expect that broadband equipment revenue will be sequentially higher in the third quarter ending June 30,
2006 as compared with the second quarter ended March 31, 2006. In particular, we successfully completed a field trial with a new European customer for our ADSL Wi-Fi equipment and shipped $2.1 million of equipment, which was recorded as
deferred revenue for our second fiscal quarter ended March 31, 2006, and we expect to recognize this as revenue in our third quarter ending June 30, 2006.



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##### Table of Contents

Broadband Software and Services.In the second quarter ended March 31, 2006, we recognized a
significant amount of revenue related to our NBBS remote management software. This revenue was from the license and hosting of NBBS remote management software and caused the comparative three and six month increases in software and services revenue.
In particular, during the second quarter ended March 31, 2006, we completed a license of our NBBS remote management software to BellSouth and the license revenue had been recognized as deferred revenue since the period ended September 30,
2005. We expect to continue to receive maintenance revenues in the future related to this license. Revenue from our other software and services revenue declined in the three and six months ended March 31, 2006, by approximately $100,000 and
$400,000, respectively, compared with the same periods of the prior fiscal year. These declines resulted from lower license sales of our system management software, Timbuktu and netOctopus Enterprise. We expect software and services revenues to be
sequentially lower in the third quarter ending June 30, 2006 as compared with the second quarter ended March 31, 2006, because we expect to have a lower level of NBBS remote management software revenue.

GROSS MARGIN



|                                                                 |  |      |        |  |      |   |  |                         |       |  |    |   |  |   |  
|---------------------------------------------------------------- |  | ---- | ------ |  | ---- | - |  | ----------------------- | ----- |  | -- | - |  | - | -
|Three Months Ended March 31, (in thousands & percent of revenue) |  | 2006 |        |  | 2005 |   |  | Percentage Point Change |      
|Broadband equipment                                              |  | $    | 7,041  |  | 31   | % |  | $                       | 5,652 |  | 25 | % |  | 6 | %
|Broadband software and service                                   |  |      | 4,568  |  | 89   | % |  |                         | 2,580 |  | 87 | % |  | 2 | %
|                                                                 |  |      |        |  |      |   |  |                         |       |  |    |   |  |   |  
|Total gross margin                                               |  | $    | 11,609 |  | 42   | % |  | $                       | 8,232 |  | 33 | % |  | 9 | %
|                                                                 |  |      |        |  |      |   |  |                         |       |  |    |   |  |   |  



|                                                               |  |      |        |  |      |   |  |                         |        |  |    |   |  |    |  
|-------------------------------------------------------------- |  | ---- | ------ |  | ---- | - |  | ----------------------- | ------ |  | -- | - |  | -- | -
|Six Months Ended March 31, (in thousands & percent of revenue) |  | 2006 |        |  | 2005 |   |  | Percentage Point Change |       
|Broadband equipment                                            |  | $    | 13,293 |  | 30   | % |  | $                       | 11,616 |  | 24 | % |  | 6  | %
|Broadband software and service                                 |  |      | 6,875  |  | 86   | % |  |                         | 5,423  |  | 89 | % |  | -3 | %
|                                                               |  |      |        |  |      |   |  |                         |        |  |    |   |  |    |  
|Total gross margin                                             |  | $    | 20,168 |  | 39   | % |  | $                       | 17,039 |  | 31 | % |  | 8  | %
|                                                               |  |      |        |  |      |   |  |                         |        |  |    |   |  |    |  

The total amount of gross profit and the overall gross margin percentage rate improved in the three and six months
ended March 31, 2006, compared with the same period of the prior fiscal year because of increased software and services revenue, which earns higher gross margin rates than sales of broadband equipment and improvements in the gross margin
percentage rate earned on sales of broadband equipment.

Broadband Equipment.The improvement in the gross margin rate earned on sales
of broadband equipment mostly reflected the benefit of cost reductions, and secondarily a greater mix of Wi-Fi and business-class broadband equipment sales. Sales of business-class and Wi-Fi broadband equipment tend to earn a higher gross margin
rate than sales of residential-class broadband equipment. We believe that the residential-class broadband equipment market is larger than the business-class broadband equipment market, and we are seeking to increase our sales of residential-class
broadband equipment. If we are successful in increasing our sales of residential-class broadband equipment, our broadband equipment gross margin rates may decline because sales of this class of equipment tends to earn a lower gross margin rate than
sales of business-class broadband equipment. In seeking to increase sales of residential-class broadband equipment, our goal is to increase the total amount of broadband equipment gross profit.

Broadband Software and Services.Increased software and services revenue caused an increase in the amount of gross profit earned on these sales. In
the second quarter ended March 31, 2006, we recognized revenue related to our NBBS remote management software and this was the first quarter for us to recognize a significant amount of revenue from sales of this product. It was the gross margin
earned on revenue from the license and hosting of NBBS remote management software that caused the comparative three and six month increases in the amount of gross profit earned on software and services revenue. We expect that software and services
gross profit will be sequentially lower in the third quarter ending June 30, 2006 as compared with the second quarter ended March 31, 2006, because we expect to have a lower level of revenue and corresponding gross profit from sales of
NBBS remote management software.



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##### Table of Contents

RESEARCH AND DEVELOPMENT



|                                                                 |  |      |       |  |      |   |  |        |       |  |    |   |  |    |  
|---------------------------------------------------------------- |  | ---- | ----- |  | ---- | - |  | ------ | ----- |  | -- | - |  | -- | -
|Three Months Ended March 31, (in thousands & percent of revenue) |  | 2006 |       |  | 2005 |   |  | Change |      
|Research and development                                         |  | $    | 4,182 |  | 15   | % |  | $      | 3,403 |  | 13 | % |  | 23 | %
|                                                                 |  |      |       |  |      |   |  |        |       |  |    |   |  |    |  



|                                                               |  |      |       |  |      |   |  |        |       |  |    |   |  |    |  
|-------------------------------------------------------------- |  | ---- | ----- |  | ---- | - |  | ------ | ----- |  | -- | - |  | -- | -
|Six Months Ended March 31, (in thousands & percent of revenue) |  | 2006 |       |  | 2005 |   |  | Change |      
|Research and development                                       |  | $    | 8,111 |  | 16   | % |  | $      | 6,609 |  | 12 | % |  | 23 | %
|                                                               |  |      |       |  |      |   |  |        |       |  |    |   |  |    |  

Research and development (R&D) expenses consist primarily of employee related expenses,
depreciation and amortization, development related expenses such as product prototyping, design and testing, and overhead.

Stock based compensation
expense was 12 and 14 percentage points, respectively of the 23% increase in R&D expense in the three and six months ended March 31, 2005. The remaining increase in R&D expense reflected an increase in the R&D headcount and
salaries. For the three and six months ended March 31, 2006, $411,000 and $959,000 of R&D expense, respectively, was non-cash stock-based compensation expense recorded pursuant to the October 1, 2005 prospective adoption of SFAS
123(R). This amounted to 1% and 2% of revenue for the three and six months ended March 31, 2006, respectively.

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

SELLING
AND MARKETING



|                                                                 |  |      |       |  |      |   |  |        |       |  |    |   |  |   |  
|---------------------------------------------------------------- |  | ---- | ----- |  | ---- | - |  | ------ | ----- |  | -- | - |  | - | -
|Three Months Ended March 31, (in thousands & percent of revenue) |  | 2006 |       |  | 2005 |   |  | Change |      
|Selling and marketing                                            |  | $    | 4,899 |  | 18   | % |  | $      | 4,582 |  | 18 | % |  | 7 | %
|                                                                 |  |      |       |  |      |   |  |        |       |  |    |   |  |   |  



|                                                               |  |      |       |  |      |   |  |        |       |  |    |   |  |   |  
|-------------------------------------------------------------- |  | ---- | ----- |  | ---- | - |  | ------ | ----- |  | -- | - |  | - | -
|Six Months Ended March 31, (in thousands & percent of revenue) |  | 2006 |       |  | 2005 |   |  | Change |      
|Selling and marketing                                          |  | $    | 9,752 |  | 19   | % |  | $      | 9,667 |  | 18 | % |  | 1 | %
|                                                               |  |      |       |  |      |   |  |        |       |  |    |   |  |   |  

Selling and marketing expenses consist primarily of salary, stock-based compensation and commission expenses for
our sales force and related travel expenses and advertising and promotional expenses.

Stock based compensation expense caused almost all of the 7%
increase in Selling and Marketing expense in the three months ended March 31, 2005 compared with the same period of the prior year. Without stock compensation expense, Selling and Marketing expenses would have declined in the six months ended
March 31, 2005 compared with the same period of the prior year. This decrease reflected an increase in the allocation of technical support expense to cost of sales. For the three and six months ended March 31, 2006, $255,000 and $481,000
of Selling and Marketing expense was non-cash stock-based compensation expense recorded pursuant to the October 1, 2005 prospective adoption of SFAS 123(R). This amounted to 1% of revenue for the three and six months ended March 31, 2006.



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GENERAL AND ADMINISTRATIVE



|                                                                 |  |      |       |  |      |   |  |        |       |  |   |   |  |   |  
|---------------------------------------------------------------- |  | ---- | ----- |  | ---- | - |  | ------ | ----- |  | - | - |  | - | -
|Three Months Ended March 31, (in thousands & percent of revenue) |  | 2006 |       |  | 2005 |   |  | Change |      
|General and administrative                                       |  | $    | 2,118 |  | 8    | % |  | $      | 2,029 |  | 8 | % |  | 4 | %
|                                                                 |  |      |       |  |      |   |  |        |       |  |   |   |  |   |  



|                                                               |  |      |       |  |      |   |  |        |       |  |   |   |  |   |  
|-------------------------------------------------------------- |  | ---- | ----- |  | ---- | - |  | ------ | ----- |  | - | - |  | - | -
|Six Months Ended March 31, (in thousands & percent of revenue) |  | 2006 |       |  | 2005 |   |  | Change |      
|General and administrative                                     |  | $    | 4,537 |  | 9    | % |  | $      | 4,224 |  | 8 | % |  | 7 | %
|                                                               |  |      |       |  |      |   |  |        |       |  |   |   |  |   |  

General and administrative (G&A) expenses consist primarily of employee related expenses, legal
and accounting fees, and insurance costs.

Stock based compensation expense caused the increases in G&A expense in the three and six months ended
March 31, 2005 compared with the same periods of the prior year. Without stock compensation expense, G&A expenses would have declined in the three and six months ended March 31, 2005 compared with the same periods of the prior year.
This decrease is because of lower legal costs, partially offset by a $300,000 litigation settlement charge recorded in the first quarter of fiscal year 2006. The lower legal costs, in part, reflect the benefit of insurance reimbursements in the six
months ended March 31, 2005.

For the three and six months ended March 31, 2006, $623,000 and $1.0 million of G&A expense was non-cash
stock-based compensation expense recorded pursuant to the October 1, 2005 prospective adoption of SFAS 123(R). This was 2% of revenue for the three and six months ended March 31, 2006.

AMORTIZATION OF PURCHASED INTANGIBLE ASSETS

Amortization of
purchased intangible assets included in operating expenses was zero for the three and six months ended March 31, 2006 compared to $87,000 and $173,000 for the three and six months ended March 31, 2005, respectively. The corresponding
intangible asset became fully amortized at September 30, 2005.

RESTRUCTURING COSTS

Restructuring costs included in operating expenses were zero for the three and six months ended March 31, 2006 compared to $98,000 for the three and six months ended
March 31, 2005. During the three and six months ended March 31, 2005, we recorded a restructuring charge of $98,000, primarily employee termination and wind down costs associated with the closure of a sales office in the Netherlands and
the Germany development office.



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Risk Factors

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

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

During the three months ended March 31, 2006, we had net income of $0.6 million and provided approximately $8,000 of cash for operating
activities. In each of the past three fiscal years ended September 30, we used approximately $1.8 million, $5.2 million and $5.4 million, respectively, of cash for operating activities. Our cash and cash equivalents totaled $22.4 million at
March 31, 2006. We may not be able to sustain or increase profitability or generate cash on a quarterly or annual basis, which could significantly harm our business.

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

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

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

We currently are named as a defendant in a consolidated private securities action brought as a
purported class action. In addition, there are purported derivative actions pending in state and federal court in California. We also have learned that the United States Attorney for the Northern District of California has opened an investigation
following a referral by the SEC. We do not know the scope or focus of the investigation by the United States Attorneys office. If we were unsuccessful in defending against this or other investigations or proceedings, we could face civil or
criminal penalties that would seriously harm our business and results of operations. Defending against the private securities class action, the derivative actions and other government investigations and litigation matters related to the restatements
also will likely continue to require significant attention and resources of management and, regardless of the outcome, result in significant legal expense. If our defenses ultimately are unsuccessful, or if we are unable to achieve a favorable
settlement, we could be liable for large damage awards that could seriously harm our business and results of operations. While we have provided notice of the government investigations and the other litigation matters to our directors and officers
liability insurance carriers, the insurance carriers have raised certain coverage issues and have not reimbursed us for all legal expenses incurred, and may not agree that they are responsible to pay any damages that ultimately could be awarded to
the plaintiffs. Furthermore, we have only a limited amount of insurance, and even if our insurers agree to make payments under the policies, the legal expenses and damage awards or



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settlements may be greater than the amount of insurance, and we would in all cases be liable for any amounts in excess of our insurance policy limits.

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

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



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



| |  |  | Improved business opportunities provided by deployment of broadband services by our Incumbent Local Exchange Carriers (ILECs) and other customers;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------



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



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



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

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

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

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

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

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



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



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



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

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

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

We rely on a small number of customers for a large
portion of our revenues. For the three months ended March 31, 2006 and 2005, there were four and three customers, respectively, that each individually represented at least 10% of our revenues and in the aggregate, accounted for 65% and 42%,
respectively, of our total revenues. Our largest customer, BellSouth Telecommunications, Inc., has entered into an agreement pursuant to which it will merge into AT&T (formerly SBC) following regulatory and shareholder approvals. While AT&T
also is one of our largest customers, we believe that our market share is larger at BellSouth than at AT&T, which we believe buys a significantly larger volume of broadband equipment from 2Wire, Inc., one of our competitors. AT&T also
recently made an investment in 2Wire. There is no guarantee that BellSouth will continue to buy our broadband equipment in the same volumes following the merger with AT&T. Others of our major customers also are reported to be acquisition
targets. The telecommunications industry generally is experiencing consolidation as companies merge and acquire other companies. Our revenues will decline and our business may be significantly harmed if one or more of our significant customers stop
buying our products, or reduce or delay purchases of our products for any reason, including industry consolidation.

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

A substantial portion of
our revenues is derived from sales to international customers, mainly in Europe. For the three months ended March 31, 2006 and 2005, our international sales represented 33% and 36%, respectively, of our total revenues. We expect sales to
international customers to continue to comprise a significant portion of our revenues. Sales of broadband equipment products to certain of our European customers are denominated in Euros. For our international sales that continue to be denominated
in United States dollars, fluctuations in currency exchange rates could cause our products and services to become relatively more expensive to our foreign customers, which could result in decreased sales of our products and services. In addition,
changes in the value of the Euro relative to the United States dollar could adversely affect our operating results to the extent we do not adequately hedge sales denominated in Euros.

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

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



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



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



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



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



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



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



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

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

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

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

In the market for broadband equipment, we
primarily compete with 2Wire, Inc., Westell Technologies, Inc., Siemens AG (through its Siemens Subscriber Networks, Inc. subsidiary, formerly known as Efficient Networks), Thomson Corporation and ZyXEL Communications Co. In the market for our
broadband software and services products, we primarily compete with Motive, Inc., Supportsoft, Inc., 2Wire, Inc., Altiris, Inc., Computer Associates International, Inc., CrossTec Corporation, Expertcity, Inc., LANDesk Software, Inc., Microsoft
Corporation and Symantec Corporation.

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

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

Our revenues
and operating results have varied in the past and are likely to vary in the future from quarter to quarter. For example, during the past eight quarters ended March 31, 2006, our revenues have ranged from $23.4 million to $29.3 million, and our
net income (loss) has ranged from $0.6 million net income to ($6.1) million net loss. As a result, we believe that period-to-period comparisons of our operating results are not necessarily meaningful. Investors should not rely on the results of any
one quarter or series of quarters as an indication of our future performance.

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



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



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



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



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



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



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



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

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

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

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

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

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

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



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suppliers of components. For example, all broadband equipment imported into the European Union effective June 30, 2006 must comply with the Directive
2002/95/EC of the European Parliament on the restriction of the use of certain hazardous substances. The government of Switzerland has adopted similar new regulations effective June 30, 2006. Compliance with these regulations has required us to
redesign certain of our broadband equipment and to qualify different components. Any stoppage or delay in selling our products related to a failure to redesign successfully our broadband equipment if and when required would seriously harm our
reputation and business.

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

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

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

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

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

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

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

We anticipate that the market for Timbuktu may continue to decline or grow more slowly than the market for our
other broadband software products and services. We also have not generated significant revenue to date from the NBBS software platform in which we have made and expect to continue to make a



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significant investment of development resources. We derive the majority of the recurring revenues from our broadband software and services products from
fewer than five customers. If licensees of our eSite and eStore software do not successfully promote web sites and stores to their customers, our recurring revenues may decrease. If these licensees were to choose a competitive platform, our
recurring revenues would decline and adversely impact our results.

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

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

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

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

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

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

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

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

We rely upon certain software, firmware and hardware designs that we license from third parties, including firmware that is integrated with our internally developed
firmware and used in our products. We cannot be certain that these third-party licenses will continue to be available to us on commercially



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reasonable terms. The loss of, or inability to maintain, such licenses could result in product shipment delays until equivalent firmware is developed or
licensed, and integrated into our products, which would seriously harm our business.

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

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

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

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

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

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

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

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



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



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



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



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



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



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



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In recent years the stock market in general, and the market for shares of high technology stocks in particular, have
experienced extreme price fluctuations, which often have been unrelated to the operating performance of affected companies. There can be no assurance that the market price of our common stock will not experience significant fluctuations in the
future as it has in the past, including fluctuations that are unrelated to our performance. Securities class action litigation has often been brought against a company following periods of volatility in market price of its securities. We currently
are and may in the future be the target of securities litigation. Securities litigation has resulted and is expected to continue to result in substantial costs and diversion of managements attention and resources, which could seriously harm
our business.

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

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

Changes in the accounting treatment of stock options has and will adversely affect our results of
operations.

In December 2004, the FASB issued SFAS 123R, which is a revision of SFAS 123. SFAS 123R requires all share-based payments to employees,
including grants of employee stock options, to be recognized in the financial statements based on their fair values and does not permit pro forma disclosure as an alternative to financial statement recognition. The adoption of the SFAS 123R fair
value method effective as of October 1, 2005 has and will have a significant adverse impact on our results of operations because the stock-based compensation expense is charged directly against our reported earnings. See Note 2 and 7 to the
Consolidated Condensed Financial Statements included in this Form 10-Q for further details.



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PART I  FINANCIAL INFORMATION



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

Interest Rate Risks

Our potential market interest rate risk for borrowings relates primarily to the rate charged by Silicon Valley Bank
under our credit facility, from which we had no borrowings at March 31, 2006. The credit facility bears interest at a rate equal to the prime rate (the rate announced by Silicon Valley Bank as its prime rate). To the extent interest
rates increase and we make borrowings under the credit facility, we would incur increased interest expense.

Foreign Currency Risks

Our exposure to foreign exchange risk relates primarily to sales and corresponding receivables made to international customers whose transactions are denominated in
Euros. We are subject to risks related to fluctuations in foreign exchange rates. To minimize the effects of potential short-term fluctuations on our operating result stemming from our exposure to foreign currency exchange fluctuations, we enter
into foreign exchange forward contracts. These contracts guarantee a predetermined exchange rate at the time the contract is purchased. Our currency exchange contracts typically have maturities of three months or less. See Note 8 to the Consolidated
Condensed Financial Statements included in this Form 10-Q for further details.



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PART II  OTHER INFORMATION



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

We were named as a defendant in an action in the
United States Bankruptcy Court for the Northern District of California entitled E. Lynn Schoenmann, trustee of NorthPoint Communications, Inc. v. Netopia. In this action, the trustee of the bankruptcy estate of NorthPoint Communications, Inc.
(NorthPoint) sought to recover approximately $1.2 million that NorthPoint paid to us within the 90-day preference period before NorthPoint filed for bankruptcy in January 2001. In March 2006, the bankruptcy court approved the settlement
of this action, pursuant to which we made a payment to the plaintiff in the amount $300,000 in consideration of a release of all claims. The settlement was recorded as an expense in the three months ended December 31, 2005.

On March 29, 2006, the United States Securities and Exchange Commission (SEC) instituted and simultaneously settled an administrative cease-and-desist
proceeding against us. Without admitting or denying the SECs findings, we have agreed to cease and desist from future violations of Sections 13(a) and 13(b)(2)(A)-(B) of the Exchange Act, and Rules 12b-20, 13a-1, 13a-11 and 13a-13
promulgated thereunder. The settlement is consistent with our announcement on July 22, 2005 that we had submitted an offer of settlement to the staff of the Division of Enforcement of the SEC, to resolve an investigation into our disclosures
and accounting practices, primarily related to our restatement of our financial statements for the fiscal years ended September 30, 2003 and 2002.

On
March 29, 2006, we also announced that we had learned that the SEC had filed and simultaneously settled charges against Alan B. Lefkof, our President and Chief Executive Officer. Without admitting or denying the SECs allegations,
Mr. Lefkof agreed to consent to the entry of an order with respect to violations of Sections 17(a)(2)-(3) of the Securities Act of 1933, as amended, and Rule 13b2-1 promulgated under the Exchange Act, and aiding and abetting our violations
of Sections 13(a) and 13(b)(2)(A)-(B) of the Exchange Act, and Rules 12b-20 and 13a-11 promulgated thereunder, in connection with a Report on Form 8-K and exhibit furnished to the SEC on July 6, 2004. Mr. Lefkof also agreed to pay a
civil penalty.

On December 3, 2004, the United States District Court for the Northern District of California issued an order consolidating previously
filed purported class action cases under the name In re Netopia, Inc. Securities Litigation, and appointing lead plaintiffs and plaintiffs counsel. On June 29, 2005, the lead plaintiffs filed their consolidated amended complaint.
The consolidated amended complaint alleges violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended (the Exchange Act). The consolidated amended complaint alleges that during the purported class period,
November 6, 2003 through August 16, 2004, we made false and misleading statements or failed to disclose material facts, and that the market price of our common stock was artificially inflated as a result of such alleged conduct. We believe
that we have strong defenses to the claims asserted in the consolidated amended complaint. We intend to defend the case vigorously. We currently cannot estimate the extent of the potential damages in this dispute.

In August 2004, the first of four purported derivative actions, Freeport Partners, LLC, Derivatively on Behalf of Nominal Defendant Netopia, Inc., v. Alan B. Lefkof,
William D. Baker, Reese M. Jones, Harold S. Wills, Robert Lee and Netopia, Inc., was filed in the United States District Court for the Northern District of California. Two purported derivative actions are pending in the United States District Court
for the Northern District of California, and two related purported derivative actions are pending in the Superior Court of California for the County of Alameda. These actions make claims against our officers and directors arising out of the alleged
misstatements described above in connection with the purported class action described above. In November 2004, the derivative plaintiffs agreed to coordinate the four derivative actions. The parties have agreed to a stay of the federal derivative
actions, which was ordered by the court in January 2005. The state actions have been consolidated under the name In re Netopia, Inc. Derivative Litigation. On March 3, 2006, the plaintiffs filed their consolidated amended complaint. We
believe that we have strong defenses to the claims asserted in the complaints as initially filed. We intend



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to defend the cases vigorously. We currently cannot estimate the extent of the potential damages in this dispute.

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

In January 2005, we were notified by the Occupational Health and Safety Administration (OSHA)
that we were named in an administrative complaint filed by two former employees alleging violations of Section 806 of the Corporate and Criminal Fraud Accountability Act of 2002, 18 U.S.C. § 1514A, also known as the Sarbanes-Oxley Act. The
former employees alleged that we terminated them in retaliation for their participation in the internal accounting review conducted by the audit committee in 2004. On May 11, 2005, following its investigation, OSHA advised us that the complaint
was determined to have no merit. On August 31, 2005, the two former employees refiled these claims in the United States District Court for the Northern District of Texas in an action entitled Frankl v. Netopia et al. The complaint names
the Company and certain current and former officers and directors as defendants. The plaintiffs will be filing a motion to stay this action. We believe that our defenses to this action are strong and intend to defend it vigorously. We currently
cannot estimate the extent of the potential damages in this dispute. One of the plaintiffs in this action is a defendant in an action filed on March 29, 2006 and pending in the United States District Court for the Northern District of
California entitled Securities and Exchange Commission v. Skoulis, Frankl et al.

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



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|ITEM 4. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
|------- | ---------------------------------------------------

On
January 31, 2006, we held our Annual Stockholder Meeting in Emeryville, California. At the Annual Stockholder Meeting, the stockholders voted on the following proposals:



| | 1. | To elect six (6) directors to serve until the 2007 Annual Stockholder Meeting or until their successors have been elected and qualified or until their earlier resignation,
death or removal; and
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 2. | To ratify the appointment of Burr, Pilger & Mayer LLP as our independent registered public accounting firm for the fiscal year ending September 30, 2006.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------

The votes cast for, against or withheld, as well as the number of abstentions, is set forth below as to each matter voted upon at the
meeting:



|                                                                            |  |            |  |          
|--------------------------------------------------------------------------- |  | ---------- |  | ---------
|                                                                            |  | For        |  | Withheld 
|Item 1: Election of Directors                                               |  |            |  |          
|Harold S. Wills                                                             |  | 20,921,330 |  | 2,262,434
|Alan B. Lefkof                                                              |  | 21,794,346 |  | 1,389,418
|J. Francois Crepin                                                          |  | 21,878,457 |  | 1,305,305
|Reese M. Jones                                                              |  | 21,819,778 |  | 1,363,986
|Robert Lee                                                                  |  | 21,879,457 |  | 1,304,307
|Howard T. Slayen                                                            |  | 20,718,023 |  | 2,465,741
|                                                                            |  |           
|Item 2: Ratify Appointment of Independent Registered Public Accounting Firm |  |            |  |          
|For                                                                         |  | 21,905,266 |  |          
|Against                                                                     |  | 77,706     |  |          
|Abstain                                                                     |  | 1,200,792  |  |          
|Broker Non-Vote                                                             |  | 0          |  |          



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

(a) Exhibits



|              |  |                                                                                                   
|------------- |  | --------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description                                                                                       
|31.1          |  | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|              | 
|31.2          |  | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|              | 
|32.1          |  | Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|              | 
|32.2          |  | Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

(b) We filed the following Current Reports on Form 8-K during the three months ended March 31, 2006:



| |  |  | On January 6, 2006, we filed a Current Report on Form 8-K, reporting Items 1.01, 8.01 and 9.01, reporting that Raymond J. Smets had joined the Company as its new Senior Vice
President, Sales and Marketing, as well as certain other information.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | On January 24, 2006, we filed a Current Report on Form 8-K, reporting Items 2.02 and 9.01, reporting our financial results for the first fiscal quarter ended December 31,
2005, as well as certain other information.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | On January 25, 2006, we filed a Current Report on Form 8-K, reporting Item 5.02, reporting that the Board of Directors had appointed J. Francois Crepin as a member of the
Compensation Committee and the Technology Strategy Committee, and that the Board of Directors had appointed Reese M. Jones and Alan B. Lefkof to the newly created Technology Strategy Committee, as well as certain other information.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | On March 29, 2006, we filed a Current Report on Form 8-K, reporting Items 1.01, 8.01 and 9.01, reporting that the Securities and Exchange Commission had instituted and
simultaneously settled an administrative cease-and-desist proceeding against Netopia, that the Securities and Exchange Commission had filed and simultaneously settled charges against Alan B. Lefkof, our President and Chief Executive Officer, as well
as certain other information.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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:May 10, 2006 |  |  |  | NETOPIA, INC. (Registrant)
|                  |  |  |  |                           
|                  |  |  |  |                            |  | By: |  | /s/ Alan B. Lefkof                                                                    
|                  |  |  |  |                            |  |     |  | Alan B. Lefkof                                                                        
|                  |  |  |  |                            |  |     |  | President and Chief Executive Officer                                                 
|                  |  |  |  |                           
|                  |  |  |  |                            |  | By: |  | /s/ Charles Constanti                                                                 
|                  |  |  |  |                            |  |     |  | Charles Constanti                                                                     
|                  |  |  |  |                            |  |     |  | Vice President and Chief Financial Officer(Principal Financial and Accounting Officer)



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