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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q



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



For the quarterly period ended December 31, 2004



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



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Netopia, Inc.

(Exact name of registrant as specified in its charter)



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



6001 Shellmound
Street, 4thFloor

Emeryville, California 94608

(Address of principal executive offices, including Zip Code)



(510) 420-7400

(Registrants telephone number, including area code)



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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  x    No ̈



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



As of February 8, 2005, there were 25,118,712 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.                       |  | Unaudited Condensed Consolidated Financial Statements                                                           |  | 2   
|                              |  |                                                                                                                
|                              |  | Unaudited condensed consolidated balance sheets at December 31, 2004 and September 30, 2004                     |  | 2   
|                              |  |                                                                                                                
|                              |  | Unaudited condensed consolidated statements of operations for the three months ended December 31, 2004 and 2003 |  | 3   
|                              |  |                                                                                                                
|                              |  | Unaudited condensed consolidated statements of cash flows for the three months ended December 31, 2004 and 2003 |  | 4   
|                              |  |                                                                                                                
|                              |  | Notes to unaudited condensed consolidated financial statements                                                  |  | 5   
|                              |  |                                                                                                                
|Item 2.                       |  | Management's Discussion and Analysis of Financial Condition and Results of Operations                           |  | 18  
|                              |  |                                                                                                                
|Item 3.                       |  | Quantitative and Qualitative Disclosures About Market Risk                                                      |  | 35  
|                              |  |                                                                                                                
|Item 4.                       |  | Controls and Procedures                                                                                         |  | 37  
|                              | 
|PART II. OTHER INFORMATION    |  |                                                                                                                
|                              |  |                                                                                                                
|Item 1.                       |  | Legal Proceedings                                                                                               |  | 39  
|                              |  |                                                                                                                
|Item 6.                       |  | Exhibits and Reports on Form 8-K                                                                                |  | 41  
|                              | 
|Signatures                    |  | 42                                                                                                             



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##### Table of Contents

PART I  FINANCIAL INFORMATION



On
February 1, 2005, we filed with the Securities and Exchange Commission (SEC) our Annual Report on Form 10-K for the fiscal year ended September 30, 2004 (the 2004 10-K). The 2004 10-K amends our Annual Reports on Form 10-K
previously filed for the fiscal years ended September 30, 2003 and September 30, 2002, and our previously filed Quarterly Reports on Form 10-Q for the fiscal quarters ended March 31, 2004 and December 31, 2003, to reflect the restatements of our
consolidated financial statements for all such previously reported periods. This Quarterly Report on Form 10-Q should be read in conjunction with the 2004 10-K, in which we explain the restatements of our consolidated financial statements.



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ITEM 1. UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS



NETOPIA, INC. AND SUBSIDIARIES

Unaudited Condensed Consolidated Balance Sheets



|                                                                                                                                                                                |  |                  |          |   |                     |   |          |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------- | -------- | - | ------------------- | - | -------- | -
|                                                                                                                                                                                |  | December 31,2004 |          |   | September 30, 2004* |  
|                                                                                                                                                                                |  | (in thousands)   |         
|Assets                                                                                                                                                                          |  |                  |          |   |                     |   |          |  
|                                                                                                                                                                                |  |                 
|Current assets:                                                                                                                                                                 |  |                  |          |   |                     |   |          |  
|Cash and cash equivalents                                                                                                                                                       |  | $                | 23,838   |   |                     | $ | 23,973   |  
|Trade accounts receivable, net of allowances for doubtful accounts of $87 and $111, respectively.                                                                               |  |                  | 17,537   |   |                     |   | 17,812   |  
|Inventories, net                                                                                                                                                                |  |                  | 7,324    |   |                     |   | 6,280    |  
|Prepaid expenses and other current assets                                                                                                                                       |  |                  | 1,048    |   |                     |   | 1,226    |  
|                                                                                                                                                                                |  |                  |          |   |                     |   |          |  
|Total current assets                                                                                                                                                            |  |                  | 49,747   |   |                     |   | 49,291   |  
|                                                                                                                                                                                |  |                 
|Furniture, fixtures and equipment, net                                                                                                                                          |  |                  | 2,620    |   |                     |   | 2,694    |  
|Acquired technology and other intangible assets, net                                                                                                                            |  |                  | 3,604    |   |                     |   | 4,016    |  
|Goodwill                                                                                                                                                                        |  |                  | 1,668    |   |                     |   | 1,668    |  
|Long-term investments                                                                                                                                                           |  |                  | 1,032    |   |                     |   | 1,032    |  
|Deposits and other assets                                                                                                                                                       |  |                  | 808      |   |                     |   | 886      |  
|                                                                                                                                                                                |  |                  |          |   |                     |   |          |  
|TOTAL ASSETS                                                                                                                                                                    |  |                  | 59,479   |   |                     |   | 59,587   |  
|                                                                                                                                                                                |  |                  |          |   |                     |   |          |  
|Liabilities and Stockholders Equity                                                                                                                                            |  |                  |          |   |                     |   |          |  
|                                                                                                                                                                                |  |                 
|Current liabilities:                                                                                                                                                            |  |                  |          |   |                     |   |          |  
|Accounts payable                                                                                                                                                                |  |                  | 13,668   |   |                     |   | 9,827    |  
|Accrued compensation                                                                                                                                                            |  |                  | 2,227    |   |                     |   | 2,582    |  
|Accrued liabilities                                                                                                                                                             |  |                  | 1,779    |   |                     |   | 3,806    |  
|Deferred revenue                                                                                                                                                                |  |                  | 1,679    |   |                     |   | 1,679    |  
|Current portion of borrowings under term loans                                                                                                                                  |  |                  | 42       |   |                     |   | 104      |  
|Other current liabilities                                                                                                                                                       |  |                  | 57       |   |                     |   | 53       |  
|                                                                                                                                                                                |  |                  |          |   |                     |   |          |  
|Total current liabilities                                                                                                                                                       |  |                  | 19,452   |   |                     |   | 18,051   |  
|                                                                                                                                                                                |  |                 
|Long-term liabilities:                                                                                                                                                          |  |                  |          |   |                     |   |          |  
|Other long-term liabilities                                                                                                                                                     |  |                  | 451      |   |                     |   | 406      |  
|                                                                                                                                                                                |  |                  |          |   |                     |   |          |  
|Total liabilities                                                                                                                                                               |  |                  | 19,903   |   |                     |   | 18,457   |  
|                                                                                                                                                                                |  |                  |          |   |                     |   |          |  
|Stockholders equity:                                                                                                                                                           |  |                  |          |   |                     |   |          |  
|Common stock: $0.001 par value, 50,000,000 shares authorized; 25,118,087 and 24,717,503 shares issued and outstanding at December 31, 2004 and
September 30, 2004, respectively |  |                  | 25       |   |                     |   | 25       |  
|Additional paid-in capital                                                                                                                                                      |  |                  | 166,359  |   |                     |   | 166,245  |  
|Other Comprehensive Income (loss)                                                                                                                                               |  |                  | (27      | ) |                     |   |         |  
|Accumulated deficit                                                                                                                                                             |  |                  | (126,781 | ) |                     |   | (125,140 | )
|                                                                                                                                                                                |  |                  |          |   |                     |   |          |  
|Total stockholders equity                                                                                                                                                      |  |                  | 39,576   |   |                     |   | 41,130   |  
|                                                                                                                                                                                |  |                  |          |   |                     |   |          |  
|TOTAL LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                      |  | $                | 59,479   |   |                     | $ | 59,587   |  
|                                                                                                                                                                                |  |                  |          |   |                     |   |          |  

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|* | Derived from the audited consolidated balance sheet dated September 30, 2004 included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2004.
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------



See accompanying notes to unaudited condensed
consolidated financial statements.





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##### Table of Contents

NETOPIA, INC. AND SUBSIDIARIES

Unaudited Condensed Consolidated Statements of Operations



|                                                 |  |                                        |        |   |       |   |       
|------------------------------------------------ |  | -------------------------------------- | ------ | - | ----- | - | ------
|Three Months Ended December 31,                  |  | 2004                                   |        |   | 2003*
|                                                 |  | (in thousands, except pershare amount)
|REVENUES:                                        |  |                                        |        |   |       |   |       
|Broadband equipment                              |  | $                                      | 26,197 |   |       | $ | 23,657
|Broadband software and services                  |  |                                        | 3,121  |   |       |   | 4,652 
|                                                 |  |                                        |        |   |       |   |       
|Total revenues                                   |  |                                        | 29,318 |   |       |   | 28,309
|                                                 |  |                                        |        |   |       |   |       
|COST OF REVENUES:                                |  |                                        |        |   |       |   |       
|Broadband equipment                              |  |                                        | 19,945 |   |       |   | 16,450
|Broadband software and services                  |  |                                        | 266    |   |       |   | 208   
|Amortization of acquired technology              |  |                                        | 300    |   |       |   | 300   
|                                                 |  |                                        |        |   |       |   |       
|Total cost of revenues                           |  |                                        | 20,511 |   |       |   | 16,958
|                                                 |  |                                        |        |   |       |   |       
|GROSS PROFIT                                     |  |                                        | 8,807  |   |       |   | 11,351
|                                                 |  |                                       
|OPERATING EXPENSES:                              |  |                                        |        |   |       |   |       
|Research and development                         |  |                                        | 3,206  |   |       |   | 3,951 
|Selling and marketing                            |  |                                        | 5,085  |   |       |   | 5,026 
|General and administrative                       |  |                                        | 2,195  |   |       |   | 1,235 
|Amortization of intangible assets                |  |                                        | 86     |   |       |   | 86    
|                                                 |  |                                        |        |   |       |   |       
|Total operating expenses                         |  |                                        | 10,572 |   |       |   | 10,298
|                                                 |  |                                        |        |   |       |   |       
|OPERATING INCOME (LOSS)                          |  |                                        | (1,765 | ) |       |   | 1,053 
|Other income (loss), net                         |  |                                        | 148    |   |       |   | 168   
|                                                 |  |                                        |        |   |       |   |       
|Provision for income taxes                       |  |                                        | 24     |   |       |   | 57    
|                                                 |  |                                       
|NET INCOME (LOSS)                                |  | $                                      | (1,641 | ) |       | $ | 1,164 
|                                                 |  |                                        |        |   |       |   |       
|Per share data, loss from continuing operations: |  |                                        |        |   |       |   |       
|Basic net income (loss) per share                |  | $                                      | (0.07  | ) |       | $ | 0.05  
|Common shares used in the per share calculations |  |                                        | 24,748 |   |       |   | 22,236
|                                                 |  |                                       
|Per share data, net loss:                        |  |                                        |        |   |       |   |       
|Basic and diluted net income (loss) per share    |  | $                                      | (0.07  | ) |       | $ | 0.04  
|Common shares used in the per share calculations |  |                                        | 24,748 |   |       |   | 26,020

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|* | See our Annual Report on Form 10-K for the fiscal year ended September 30, 2004 for a description of the restatements of financial results for prior periods.
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------



See accompanying notes to unaudited condensed
consolidated financial statements.



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NETOPIA, INC. AND SUBSIDIARIES

Unaudited Condensed Consolidated Statements of Cash Flows



|                                                                                         |  |                |        |   |      |   |        |  
|---------------------------------------------------------------------------------------- |  | -------------- | ------ | - | ---- | - | ------ | -
|Three Months Ended December 31,                                                          |  | 2004           |        |   | 2003 |  
|                                                                                         |  | (in thousands) |       
|Cash flow from operating activities:                                                     |  |                |        |   |      |   |        |  
|Net loss                                                                                 |  | $              | (1,641 | ) |      | $ | 1,164  |  
|Adjustments to reconcile net income (loss) to net cash provided by operating activities: |  |                |        |   |      |   |        |  
|Depreciation & amortization                                                              |  |                | 981    |   |      |   | 1,218  |  
|Cumulative Translation Adjustment                                                        |  |                | (27    | ) |      |   |       |  
|Charge for impairment of capitalized software/dev costs                                  |  |                |       |   |      |   | 26     |  
|Changes in allowance for doubtful accounts                                               |  |                |       |   |      |   | 71     |  
|Restructure costs                                                                        |  |                | (439   | ) |      |   |       |  
|Changes in operating assets and liabilities (timing differences):                        |  |                |        |   |      |   |        |  
|(Increase) decrease in accounts receivable                                               |  |                | 275    |   |      |   | (1,464 | )
|(Increase) decrease in inventory                                                         |  |                | (1,044 | ) |      |   | (2,353 | )
|(Increase) decrease in prepaid & other current assets                                    |  |                | 178    |   |      |   | (85    | )
|(Increase) decrease in deposits and other assets                                         |  |                | 78     |   |      |   | 36     |  
|Increase (decrease) in accounts payable                                                  |  |                | 3,841  |   |      |   | 1,393  |  
|Increase (decrease) in accrued payables                                                  |  |                | (355   | ) |      |   | 591    |  
|Increase (decrease) in deferred revenue                                                  |  |                |       |   |      |   | (37    | )
|Increase (decrease) in other liabilities                                                 |  |                | (1,539 | ) |      |   | (266   | )
|                                                                                         |  |                |        |   |      |   |        |  
|Net cash provided by operating activities                                                |  |                | 308    |   |      |   | 294    |  
|                                                                                         |  |                |        |   |      |   |        |  
|Cash flow from investing activities:                                                     |  |                |        |   |      |   |        |  
|Purchase of furniture, fixtures and equipment                                            |  |                | (495   | ) |      |   | (326   | )
|Acquisition spending                                                                     |  |                |       |   |      |   | (1,386 | )
|                                                                                         |  |                |        |   |      |   |        |  
|Net cash used in investing activities                                                    |  |                | (495   | ) |      |   | (1,712 | )
|                                                                                         |  |                |        |   |      |   |        |  
|Cash provided by (used in) financing activities:                                         |  |                |        |   |      |   |        |  
|Increase (decrease) in borrowings                                                        |  |                | (62    | ) |      |   | (62    | )
|Increase (decrease) in common stock                                                      |  |                | 114    |   |      |   | 5,695  |  
|                                                                                         |  |                |        |   |      |   |        |  
|Net cash provided by financing activities                                                |  |                | 52     |   |      |   | 5,633  |  
|                                                                                         |  |                |        |   |      |   |        |  
|Net increase (decrease) in cash and cash equivalents                                     |  |                | (135   | ) |      |   | 4,215  |  
|Cash and cash equivalents, beginning of period                                           |  |                | 23,973 |   |      |   | 22,208 |  
|                                                                                         |  |                |        |   |      |   |        |  
|Cash and cash equivalents, end of period                                                 |  | $              | 23,838 |   |      | $ | 26,423 |  
|                                                                                         |  |                |        |   |      |   |        |  
|Supplemental disclosures of cash flow activities:                                        |  |                |        |   |      |   |        |  
|Income taxes paid                                                                        |  | $              | 28     |   |      | $ | 20     |  
|                                                                                         |  |                |        |   |      |   |        |  
|Interest paid                                                                            |  | $              | 3      |   |      | $ | 3      |  
|                                                                                         |  |                |        |   |      |   |        |  
|Supplemental disclosures of non-cash investing and financing activities:                 |  |                |        |   |      |   |        |  
|Issuance of common stock for acquisition of businesses                                   |  | $              |       |   |      | $ | 1,249  |  
|                                                                                         |  |                |        |   |      |   |        |  



See accompanying notes
to unaudited condensed consolidated financial statements.



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NETOPIA, INC. AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements



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



We develop, market and support broadband and wireless (Wi-Fi) products and services that enable our carrier and service provider customers to simplify and
enhance the delivery of broadband services to their residential and business-class customers. Our product and service offerings enable carriers and broadband service providers to (i) deliver to their customers feature-rich broadband modems, routers
and gateways, (ii) utilize software that allows remote management of equipment located at their customers premises, and (iii) provide value-added services to enhance revenue generation and reduce support costs. Our broadband modems, routers
and gateways are installed by the customers of carrier and broadband service providers to obtain high-speed, always-on access to the Internet. Our digital subscriber line (DSL) and other broadband gateways are often bundled with virtual private
networking (or VPN) capabilities that allow more secure communications over the Internet, firewall protection, parental controls, hot spot access, Web content filtering, combined VoIP and data services, hosting of web sites that we call eSites, and
hosting of web stores that we call eStores. Our Netopia Broadband Server (NBBS) software platform enables remote support and management of installed broadband gateways and centralized service provisioning for value-added broadband services such as
parental controls or hot spot access. This software platform allows carriers and broadband service providers to provide support to their customers on a remote basis and can reduce the cost of installation and broadband service provisioning over the
lifetime of the customer. We also offer Timbuktu and eCare software products for enterprise help desk customers and IT organizations. These products allow help desks to provide support on a remote basis when computer users experience problems or
require additional software upgrades with their desktop or laptop computers.



|(2) | Basis of Presentation
|--- | ---------------------



The accompanying unaudited condensed consolidated financial statements included in this Form 10-Q have been prepared pursuant to the rules and regulations
of the SEC. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to those rules and regulations.
These interim financial statements are unaudited, but reflect all adjustments that are, in the opinion of management, necessary to fairly present a statement of results for the interim periods presented. The results of operations for the interim
periods reported below do not necessarily indicate the results expected for the full fiscal year or for any future period.



These condensed consolidated financial statements should be read in conjunction with the Companys consolidated financial statements and related
footnotes thereto in the Companys Annual Report on Form 10-K for the fiscal year ended September 30, 2004. The 2004 10-K amends our Annual Reports on Form 10-K previously filed for the fiscal years ended September 30, 2003 and September 30,
2002, and our previously filed Form 10-Qs for the fiscal quarters ended December 31, 2003 and March 31, 2004, to reflect the restatements of our consolidated financial statements for all such previously reported periods.



Summary of Significant Accounting Policies



Derivatives and Hedging Activities: We recognize all derivatives on
the balance sheet at fair value. On the date we enter into a derivative contract, we designate the derivative as a hedge of a forecasted transaction or of the variability of cash flows to be received or paid related to a recognized asset or
liability (cash flow hedge or a contract not qualifying for hedge accounting (fair value derivative). For fair value derivatives, we report changes in the fair values in current period other income. We formally document the
relationship between hedging instruments and hedged items. We formally assess and document, both at the inception of the hedge and on an ongoing basis, if the derivatives we use are highly effective in offsetting changes in cash flows of hedged
items. If we determine that a derivative is not highly effective as a hedge, we discontinue hedge accounting. We discontinue hedge accounting prospectively when (1) a derivative is no longer highly effective in



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offsetting changes in cash flows of a hedged item, (2) a derivative expires or is sold, terminated or exercised, (3) a derivative is designated as a hedge,
because it is unlikely that a forecasted transaction will occur, or (4) we determine that designation of a derivative as a hedge is no longer appropriate.



When we discontinue hedge accounting because it is probable that a forecasted transaction will not occur, we continue to carry the derivative on the
balance sheet at its fair value with changes in fair value included in earnings, and immediately recognize gains and losses that were accumulated in other comprehensive income in earnings. When we discontinue hedge accounting because the hedging
instrument is sold, terminated or no longer designated (dedesignated), the amount reported in other comprehensive income up to date of the sale, termination or dedesignation continues to be reported in other comprehensive income until the forecasted
transaction effects earnings. In all other situations in which we discontinue hedge accounting, the derivative will be carried at its fair value on the balance sheet, with changes in its fair value recognized in current period earnings.



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



The fair value of each option grant and share purchased under the
Employee Stock Purchase Plan are estimated on the date of grant or share purchase using the Black-Scholes option-pricing model with the following estimates used in conjunction with the Black-Scholes option-pricing model:



|                                |  |      |   |  |      |  
|------------------------------- |  | ---- | - |  | ---- | -
|Three months ended December 31, |  | 2004 |   |  | 2003 |  
|Expected life (in years)        |  | 3.28 |   |  | 3.32 |  
|Expected volatility             |  | 345  | % |  | 768  | %
|Risk-free interest rate         |  | 3.25 |   |  | 2.37 |  
|Expected dividend yield         |  |     |   |  |     |  



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



|                                |  |      |   |  |      |  
|------------------------------- |  | ---- | - |  | ---- | -
|Three months ended December 31, |  | 2004 |   |  | 2003 |  
|Expected life (in years)        |  | 2    |   |  | 2    |  
|Expected volatility             |  | 202  | % |  | 261  | %
|Risk-free interest rate         |  | 3.49 |   |  | 3.77 |  
|Expected dividend yield         |  |     |   |  |     |  



As required by SFAS
No. 148, Accounting for Stock-Based Compensation, Transition and Disclosure, the following table illustrates the effect on our net loss and net loss per share if we had recorded compensation costs based on the estimated grant date fair
value defined by SFAS No. 123 for all granted stock-based awards (in thousands, except per share amounts):



|                                                                                                                |  |                                      |        |   |      |   |       |  
|--------------------------------------------------------------------------------------------------------------- |  | ------------------------------------ | ------ | - | ---- | - | ----- | -
|Three Months Ended December 31,                                                                                 |  | 2004                                 |        |   | 2003 |  
|                                                                                                                |  | (in thousands, except pershare data) |       
|Net income (loss), as reported                                                                                  |  | $                                    | (1,641 | ) |      | $ | 1,164 |  
|Add: Total stock-based employee compensation expense included in the determination of net loss, as reported     |  |                                      |       |   |      |   |      |  
|Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards |  |                                      | 1,371  |   |      |   | 1,651 |  
|                                                                                                                |  |                                      |        |   |      |   |       |  
|Pro forma net loss                                                                                              |  | $                                    | (3,012 | ) |      | $ | (487  | )
|                                                                                                                |  |                                     
|Basic net income (loss) per share  as reported                                                                 |  | $                                    | (0.07  | ) |      | $ | 0.05  |  
|Diluted net income (loss) per share  as reported                                                               |  | $                                    | (0.07  | ) |      | $ | 0.04  |  
|                                                                                                                |  |                                     
|Basic net income (loss) per share  Pro Forma                                                                   |  | $                                    | (0.12  | ) |      | $ | (0.02 | )
|Diluted net income (loss) per share  Pro Forma                                                                 |  | $                                    | (0.12  | ) |      | $ | (0.02 | )



The Black-Scholes
Single Option weighted average fair value of employee stock options granted during the three months ended December 31, 2004 and 2003 was $2.74 and $8.73, respectively.



Estimates: The preparation of financial statements and related disclosures in conformity with accounting principles
generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Estimates are used for, but not limited to, the accounting
for doubtful accounts, inventory reserves, depreciation and amortization, asset impairments, sales returns, warranty costs, income taxes, hedging effectiveness determination and contingencies. Actual results could differ from these estimates.



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



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



|                 |  |                   |       |                   |   |      
|---------------- |  | ----------------- | ----- | ----------------- | - | -----
|                 |  | December 31, 2004 |       | September 30,2004
|                 |  | (in thousands)   
|Raw materials    |  | $                 | 804   |                   | $ | 1,595
|Work in process  |  |                   | 132   |                   |   | 448  
|Finished goods   |  |                   | 6,388 |                   |   | 4,237
|                 |  |                   |       |                   |   |      
|Inventories, net |  | $                 | 7,324 |                   | $ | 6,280
|                 |  |                   |       |                   |   |      



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



In December 2003, the Financial Accounting Standards Board (FASB) released a revision to FASB Interpretation No. 46 (FIN 46),
Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51. FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not
have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. A public entity shall apply the
provisions of the FIN 46 revision no later than the end of the first reporting period that ends after March 15, 2004. However, a public entity shall apply FIN 46 to entities considered to be special-purpose entities no later than as of the end of
the first reporting period that ends after December 15, 2003. The Company does not believe the adoption of this standard will have a material impact on our condensed consolidated financial statements.



In March 2004, the Emerging Issues Task Force (EITF) ratified
the consensus reached on paragraphs 6 through 23 of Issue No. 03-01 (EITF 03-1), The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments. EITF 03-1 requires that certain quantitative and
qualitative disclosures should be required for debt and marketable equity securities classified as available-for-sale or held-to-maturity under SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities and SFAS No.
124, Accounting for Certain Investments Held by Not-for-Profit Organizations that are impaired at the balance sheet date but for which an other-than-temporary impairment has not been recognized. The Company does not believe the adoption
of this standard will have a material impact on our condensed consolidated financial statements.



In July 2004, the EITF issued EITF Issue No. 02-14, Whether an Investor Should Apply the Equity Method of Accounting to Investments Other Than
Common Stock. This issue addresses the determination of whether an investment is in-substance common stock and when to perform that evaluation, but does not address the determination of whether an investor has the ability to exercise
significant influence over the operating and financial policies of the investee. The pronouncement is effective for fiscal periods beginning after September 15, 2004. For existing investments, the investor should make an initial determination as to
whether the investment is in-substance common stock based on the circumstances existing as of the date of first application of this issue. The Company does not believe the adoption of this standard will have a material impact on our condensed
consolidated financial statements.



|(4) | Goodwill and Other Intangible Assets
|--- | ------------------------------------



The Companys intangible assets at December 31, 2004 consist primarily of goodwill acquired in connection with the acquisitions of JadeSail and
WebOrder which the Company is not amortizing, and other intangible assets acquired in connection with the JadeSail and Cayman acquisitions, which the Company is amortizing on a straight-line basis over their estimated useful lives.



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The following tables details the Companys goodwill, maintained in its broadband software and
services reporting unit, for the three months ended as December 31, 2004:



|                                 |  |                 |  |                             |       |                                 |   |                           |  |                            |   |  |   |      
|-------------------------------- |  | --------------- |  | --------------------------- | ----- | ------------------------------- | - | ------------------------- |  | -------------------------- | - |  | - | -----
|                                 |  | Acquisitiondate |  | Balance atSeptember 30,2004 |       | Goodwillacquiredduringtheperiod |   | Goodwillimpairmentcharges |  | Balance atDecember 31,2004
|                                 |  | (in thousands) 
|Broadband software and services: |  |                 |  |                             |       |                                 |   |                           |  |                            |   |  |   |      
|JadeSail                         |  | Oct-03          |  | $                           | 1,149 |                                 | $ |                          |  | $                          |  |  | $ | 1,149
|WebOrder                         |  | Mar-00          |  |                             | 519   |                                 |   |                          |  |                            |  |  |   | 519  
|                                 |  |                 |  |                             |       |                                 |   |                           |  |                            |   |  |   |      
|Total Goodwill                   |  |                 |  | $                           | 1,668 |                                 | $ |                          |  | $                          |  |  | $ | 1,668
|                                 |  |                 |  |                             |       |                                 |   |                           |  |                            |   |  |   |      



The following tables
detail the Companys other intangible assets, by reporting unit, for the three months ended as of December 31, 2004:



|                                 |  |                 |  |                             |       |                                               |   |                     |  |   |                            |   |  |   |      
|-------------------------------- |  | --------------- |  | --------------------------- | ----- | --------------------------------------------- | - | ------------------- |  | - | -------------------------- | - |  | - | -----
|                                 |  | Acquisitiondate |  | Balance atSeptember 30,2004 |       | Otherintangibleassetsacquiredduring theperiod |   | Amortizationexpense |  |   | Balance atDecember 31,2004
|                                 |  | (in thousands) 
|Broadband equipment:             |  |                 |  |                             |       |                                               |   |                     |  |   |                            |   |  |   |      
|Acquired technology              |  | Oct-03          |  | $                           | 197   |                                               | $ |                    |  | $ | (12                        | ) |  | $ | 185  
|Acquired technology              |  | Oct-01          |  |                             | 3,234 |                                               |   |                    |  |   | (288                       | ) |  |   | 2,946
|Sales channel relationships      |  | Oct-01          |  |                             | 345   |                                               |   |                    |  |   | (86                        | ) |  |   | 259  
|Subtotal                         |  |                 |  |                             | 3,776 |                                               |   |                    |  |   | (386                       | ) |  |   | 3,390
|                                 |  |                 |  |                             |      
|Broadband software and services: |  |                 |  |                             |       |                                               |   |                     |  |   |                            |   |  |   |      
|Marketing license                |  | Jan-03          |  |                             | 240   |                                               |   |                    |  |   | (26                        | ) |  |   | 214  
|Subtotal                         |  |                 |  |                             | 240   |                                               |   |                    |  |   | (26                        | ) |  |   | 214  
|                                 |  |                 |  |                             |       |                                               |   |                     |  |   |                            |   |  |   |      
|Total Other Intangibles          |  |                 |  | $                           | 4,016 |                                               | $ |                    |  | $ | (412                       | ) |  | $ | 3,604
|                                 |  |                 |  |                             |       |                                               |   |                     |  |   |                            |   |  |   |      



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|(5) | Per Share Calculations
|--- | ----------------------



Basic net income (loss) per share is based on the weighted average number of shares of common stock outstanding during the period. Diluted net income
(loss) per share is based on the weighted average number of shares of common stock outstanding during the period plus potential dilutive shares from options outstanding using the treasury stock method. All potential dilutive shares have been
excluded from the computation of the diluted loss per share for the three months ended December 31, 2004, as their effect on the loss per share was anti-dilutive. The following chart details the Companys per share calculations for the periods
indicated:



|                                                    |  |                                          |        |   |      |   |       
|--------------------------------------------------- |  | ---------------------------------------- | ------ | - | ---- | - | ------
|Three months ended December 31, 2004                |  | 2004                                     |        |   | 2003
|                                                    |  | (in thousands; except per share amounts)
|Calculation of basic net income (loss) per share:   |  |                                          |        |   |      |   |       
|Net income (loss)                                   |  | $                                        | (1,641 | ) |      | $ | 1,164 
|Weighted average basic shares outstanding           |  |                                          | 24,748 |   |      |   | 22,236
|                                                    |  |                                          |        |   |      |   |       
|Basic net income (loss) per share                   |  | $                                        | (0.07  | ) |      | $ | 0.05  
|                                                    |  |                                          |        |   |      |   |       
|Calculation of diluted net income (loss) per share: |  |                                          |        |   |      |   |       
|Net income (loss)                                   |  | $                                        | (1,641 | ) |      | $ | 1,164 
|Weighted average diluted shares outstanding         |  |                                          | 24,748 |   |      |   | 26,020
|                                                    |  |                                          |        |   |      |   |       
|Diluted net income (loss) per share                 |  | $                                        | (0.07  | ) |      | $ | 0.04  
|                                                    |  |                                          |        |   |      |   |       



For the three months
ended December 31, 2004, potential dilutive common shares excluded from the computation of diluted loss per share consisted of options to purchase common stock totaling 296,451 shares, with a weighted average exercise price of $2.74.



|(6) | Segment, Geographic and Significant Customer Information
|--- | --------------------------------------------------------



Segment Information: The Company applies the provisions of SFAS No. 131,Disclosures about Segments of an Enterprise and Related
Information, which establishes standards for the reporting by public business enterprises of information about operating segments, products and services, geographic areas, and major customers. The Company operates in two segments,
broadband equipment and broadband software and services. The Company evaluates performance based on net revenues and gross profits from operations of these two segments, which is detailed for the three months ended December 31, 2004 and 2003 as
follows:



|                   |  |                    |        |   |                               |   |       |       |  |   |                    |   |  |                               |        |   |       |   |       |   |  |   |        |  
|------------------ |  | ------------------ | ------ | - | ----------------------------- | - | ----- | ----- |  | - | ------------------ | - |  | ----------------------------- | ------ | - | ----- | - | ----- | - |  | - | ------ | -
|                   |  | Q1-05              |        |   | Q1-04                         |  
|                   |  | Broadbandequipment |        |   | BroadbandSoftware andServices |   |       | Total |  |   | Broadbandequipment |   |  | BroadbandSoftware andServices |        |   | Total |  
|Revenue            |  | $                  | 26,197 |   |                               | $ | 3,121 |       |  | $ | 29,318             |   |  | $                             | 23,657 |   |       | $ | 4,652 |   |  | $ | 28,309 |  
|Cost of revenues   |  |                    | 20,233 |   |                               |   | 278   |       |  |   | 20,511             |   |  |                               | 16,738 |   |       |   | 220   |   |  |   | 16,958 |  
|                   |  |                    |        |   |                               |  
|Gross profit       |  |                    | 5,964  |   |                               |   | 2,843 |       |  |   | 8,807              |   |  |                               | 6,919  |   |       |   | 4,432 |   |  |   | 11,351 |  
|Gross margin       |  |                    | 22.8   | % |                               |   | 91    | %     |  |   | 30                 | % |  |                               | 29.2   | % |       |   | 95    | % |  |   | 40     | %
|Unallocated        |  |                    |        |   |                               |   |       |       |  |   |                    |   |  |                               |        |   |       |   |       |   |  |   |        |  
|operating expenses |  |                    |        |   |                               |   |       |       |  |   | 10,572             |   |  |                               |        |   |       |   |       |   |  |   | 10,298 |  
|                   |  |                    |        |   |                               |   |       |       |  |   |                    |   |  |                               |        |   |       |   |       |   |  |   |        |  
|Operating loss     |  |                    |        |   |                               |   |       |       |  | $ | (1,765             | ) |  |                               |        |   |       |   |       |   |  | $ | 1,053  |  
|                   |  |                    |        |   |                               |   |       |       |  |   |                    |   |  |                               |        |   |       |   |       |   |  |   |        |  



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Geographic Information: The Company sells its products and provides services worldwide
through a direct sales force, independent non-exclusive distributors and value-added resellers. The Company operates primarily in four regions: United States, Europe, Canada, and Asia Pacific. Revenues outside of the United States are primarily
export sales denominated in United States dollars or Euros. Disaggregated financial information regarding the Companys revenues by geographic region for the three months ended December 31, 2004 and 2003 is as follows:



|                                |  |                 |        |  |      |   |  |   |        |  |    |  
|------------------------------- |  | --------------- | ------ |  | ---- | - |  | - | ------ |  | -- | -
|Three months ended December 31, |  | 2004            |        |  | 2003 |  
|                                |  | ( in thousands) |       
|Europe                          |  | $               | 9,121  |  | 31   | % |  | $ | 12,048 |  | 43 | %
|Canada                          |  |                 | 317    |  | 1    | % |  |   | 171    |  | 1  | %
|Asia Pacific and other          |  |                 | 589    |  | 2    | % |  |   | 685    |  | 2  | %
|                                |  |                 |        |  |      |   |  |   |        |  |    |  
|Subtotal international revenue  |  |                 | 10,027 |  | 34   | % |  |   | 12,904 |  | 46 | %
|United States                   |  |                 | 19,291 |  | 66   | % |  |   | 15,405 |  | 54 | %
|                                |  |                 |        |  |      |   |  |   |        |  |    |  
|Total revenues                  |  | $               | 29,318 |  |      |   |  | $ | 28,309 |  |    |  
|                                |  |                 |        |  |      |   |  |   |        |  |    |  



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



Customer Information: The Company sells its products to incumbent local exchange carriers (ILECs), competitive local exchange carriers (CLECs), distributors, Internet service providers
(ISPs) and directly to end-users. Disaggregated financial information regarding the Companys customers that accounted for 10% or more of the Companys revenue for the three months ended December 31, 2004 and 2003 is as
follows:



|                                |  |                |       |  |      |   |  |   |       |  |    |  
|------------------------------- |  | -------------- | ----- |  | ---- | - |  | - | ----- |  | -- | -
|Three months ended December 31, |  | 2004           |       |  | 2003 |  
|                                |  | (in thousands) |      
|BellSouth                       |  | $              | 7,142 |  | 24   | % |  | $ | 932   |  | 3  | %
|Swisscom AG                     |  |                | 4,212 |  | 14   | % |  |   | 8,262 |  | 29 | %



For the three months
ended December 31, 2004 and 2003, there were two customers and one customer, respectively, that each individually represented at least 10% of the Companys revenues and in the aggregate, accounted for 39% and 32%, respectively, of the
Companys total revenues. No other customers during the three months ended December 31, 2004 and 2003 accounted for 10% or more of the Companys total revenues.



The following table sets forth the accounts receivable balance for customers with balances at December 31, 2004 and 2003,
which were at least 10% of the total accounts receivable balance:



|                                |  |                 |       |  |      |   |  |       |  |    |  
|------------------------------- |  | --------------- | ----- |  | ---- | - |  | ----- |  | -- | -
|Three months ended December 31, |  | 2004            |       |  | 2003 |  
|                                |  | ( in thousands) |      
|Eircom                          |  | $               | 3,085 |  | 18   | % |  | 1207  |  | 7  | %
|Swisscom                        |  |                 | 2,954 |  | 17   | % |  | 6,322 |  | 36 | %
|BellSouth                       |  |                 | 2,951 |  | 17   | % |  | 283   |  | 2  | %



|(7) | Investment in Non-Public Entities
|--- | ---------------------------------



At December 31, 2004 the Company owned 1,850,000 shares of MegaPath, which represents approximately a 1.8% interest. MegaPath offers high-speed broadband
access to small and medium size businesses. Although there is no public market for MegaPaths stock, the Company believes that the market value of its long-term investment in MegaPath is not less than the Companys $1.0 million carrying
value at December 31, 2004 because MegaPaths most recent financing used a significantly higher valuation.



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##### Table of Contents

During the three months ended December 31, 2004 and 2003 MegaPath purchased $11,000 and $0.3 million,
respectively, of the Companys products. At December 31, 2004, MegaPaths accounts receivable with the Company was $2,000.



|(8) | Restructuring Cost
|--- | ------------------



During the three months ended September 30,2004, the Company recorded a restructuring charge of $1.0 million, primarily consisting of employee termination
costs, wind down costs associated with the closure of a development office in Germany, including intangible costs. The Companys policy is to maintain accruals relating to restructurings for up to two years unless the Company has had definitive
closure of the specific liabilities accrued prior to the two-year final review date. Detail of the Companys remaining liabilities relating to its restructuring activities as of December 31, 2004 is as follows:



|                                          |  |                               |      |   |            |   |     |        |  |   |      |  
|----------------------------------------- |  | ----------------------------- | ---- | - | ---------- | - | --- | ------ |  | - | ---- | -
|                                          |  | Severance and Related Charges |      |   | Facilities |   |     | Totals | 
|                                          |  | (in thousands)                |     
|Accrued liabilities at September 30, 2004 |  | $                             | 473  |   |            | $ | 27  |        |  | $ | 500  |  
|Restructuring charges                     |  |                               |     |   |            |   |    |        |  |   |     |  
|Amount paid                               |  |                               | (423 | ) |            |   | (16 | )      |  |   | (439 | )
|                                          |  |                               |      |   |            |   |     |        |  |   |      |  
|Accrued liabilities at December 31, 2004  |  | $                             | 50   |   |            | $ | 11  |        |  | $ | 61   |  
|                                          |  |                               |      |   |            |   |     |        |  |   |      |  



|(9) | Credit Facility
|--- | ---------------



In December 2004, the Company amended its credit facility agreement with Silicon Valley Bank, which resulted in an extension and amendments to the
tangible net worth covenant. The new covenant requires that the Company must maintain a minimum tangible net worth of $27 million plus 50% of the Companys net income in each fiscal quarter commencing with the first fiscal quarter ended
December 31, 2004. For the fiscal quarter ending March 31, 2005, the tangible net worth required by this amendment is $23 million plus 50% of the Companys net income. For fiscal quarter ending June 30, 2005, the tangible net worth requirement
is $19 million plus 50% of the Companys net income. In July 2005, the tangible net worth covenant will be reset based on mutually agreed terms and shall continue effective thereafter, as well as amending Collection of Accounts, Filing of the
Transaction Reports, Limits on the Revolving Loans, Collateral Monitoring Fee and Interest Rate on the Loans as noted below. The Company must also maintain an adjusted quick ratio, as defined as the ratio of (i) the Companys
unrestricted cash maintained at Silicon Valley Bank plus cash equivalents maintained at Silicon Valley Bank plus receivables and investments made on behalf of the Company through Silicon Valley Banks Investment Product Services Division (ISP
Division) to (ii) the Companys current liabilities plus the outstanding principal amount of any obligations less deferred revenues, of not less than 1.25 to 1 from April 30, 2003, and each month ending thereafter.



The Credit Facility bears interest at a rate equal to the prime rate (the
rate announced by Silicon Valley Bank as its prime rate) plus 1.00% per annum. As provided in the December 2004 amendment, as long as no Default or Event of Default has occurred and is continuing, and as long as the Company maintains
profitability as of the end of each fiscal quarter within the two-consecutive-fiscal-quarter-period most recently ended, the Credit Facility will bear interest equal to Silicon Valley Banks prime rate only. At December 31, 2004,
the prime rate for Silicon Valley Bank was 5.0%. The Company may borrow under the Credit Facility in order to finance working capital requirements for new products and customers, and otherwise for general corporate purposes in the normal
course of business.



As of December 31, 2004, the Company had
no outstanding borrowings under the Credit Facility and had a borrowing availability of approximately $11.8 million.



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On February 25, 2003, Silicon Valley Bank made a term loan to the Company in the original principal
amount of $0.2 million. The principal amount of Term Loan A is payable in twenty-four equal monthly payments of principal in the amount of $8,333.33 per month, commencing on March 1, 2003 and continuing until paid in full. The remaining balance of
$16,667 of Term Loan A, which is expected to be repaid within two months, is recorded as a current liability on the Companys December 31, 2004 condensed consolidated balance sheet. Term Loan A bears interest at a rate equal to Silicon Valley
Banks prime rate plus 0.75% per annum. As provided in the December 2004 amendment, as long as no Default or Event of Default has occurred and is continuing, and as long as the Company maintains profitability as of the end of each fiscal
quarter, Term Loan A will bear interest equal to Silicon Valley Banks prime rate only. At December 31,2004, the Silicon Valley Banks prime rate for Term Loan A was 5.25%. Upon the repayment of any portion of Term
Loan A, such portion may not be re-borrowed. The outstanding principal balance of Term Loan A shall be reserved from the amount of credit facility otherwise available to the Company.



Term Loan B. On February 25, 2003, Silicon Valley Bank made a term loan to the Company in the original principal
amount of $0.3 million. The principal amount of Term Loan B is payable in twenty-four equal monthly payments of principal in the amount of $12,500.00 per month, commencing on March 1, 2003 and continuing until paid in full. The remaining balance of
$15,000 of Term Loan B, which is expected to be repaid within two months, is recorded as a current liability on the Companys December 31, 2004 condensed consolidated balance sheet Term Loan B bears interest at a rate equal to Silicon Valley
Banks prime rate plus 1.00% per annum. As provided in the December 2004 amendment, as long as no Default or Event of Default has occurred and is continuing, and as long as the Company maintains profitability as of the end of each fiscal quarter,
Term Loan B will bear interest at a rate equal to Silicon Valley Banks prime rate only. At December 31,2004, the Silicon Valley Banks prime rate for Term Loan B was 5.25%. Upon the repayment of any portion of Term
Loan B, such portion may not be re-borrowed.



|(10) | Other Income (Loss), Net
|---- | ------------------------



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



|                                |  |                |     |   |      |   |     |  
|------------------------------- |  | -------------- | --- | - | ---- | - | --- | -
|Three months ended December 31, |  | 2004           |     |   | 2003 |  
|                                |  | (in thousands) |    
|Interest income                 |  | $              | 92  |   |      | $ | 42  |  
|Interest expense                |  |                | (3  | ) |      |   | (29 | )
|Other income (expense)          |  |                | 59  |   |      |   | 155 |  
|                                |  |                |     |   |      |   |     |  
|Total other income (loss), net  |  | $              | 148 |   |      | $ | 168 |  
|                                |  |                |     |   |      |   |     |  



|(11) | Financial Instruments
|---- | ---------------------



The Company generates revenues and cash receipts in non-U.S. dollars in addition to incurring a portion of its operating expenses in foreign currency,
primarily the Euro. The Company uses forward currency contracts and hedges forecasted transactions in accordance with SFAS 133,Accounting for Derivative Instruments and Hedging Activities, as amended. The Company recognizes derivative
instruments and hedging activities as either assets or liabilities on the balance sheet and measures them at fair value. Gains and losses resulting from changes in fair value are accounted for depending on the use of the derivative and whether it is
designated and qualifies for hedge accounting.



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##### Table of Contents

Hedging of Foreign Currency Assets and Liabilities



The Company hedges its foreign currency assets and liabilities, primarily
trade accounts receivable and trade accounts payable, with foreign exchange forwards. These derivative instruments hedge assets and liabilities that are denominated in foreign currencies and are carried at fair value with changes in the fair value
recorded as other income (loss). These derivative instruments do not subject the Company to material balance sheet risk due to exchange rate movements because gains and losses on these derivatives are largely offset by gains and losses resulting
from remeasurement of the foreign currency denominated assets and liabilities (in accordance withSFAS 52 ForeignCurrency Translation) being hedged. At December 31, 2004, the outstanding balance sheet hedging derivatives had
maturities of 150 days or less.



|                                      |  |                   |       |                   |        |                |        |                |   |          |  |                |  |       
|------------------------------------- |  | ----------------- | ----- | ----------------- | ------ | -------------- | ------ | -------------- | - | -------- |  | -------------- |  | ------
|                                      |  | December 31, 2004 |       | December 31, 2003
|Principal (notional) amounts in Euro: |  | Carryingamount    |       | SpotRate          |        | SettlementDate |        | Carryingamount |   | SpotRate |  | SettlementDate
|Currency exchange forward contract #1 |  | $                 | 405   |                   | 1.3544 |                | Jan-05 |                | $ | 165      |  | 1.1835         |  | Jan-04
|Currency exchange forward contract #2 |  | $                 | 609   |                   | 1.3544 |                | Jan-05 |                |   |         |  |               |  |      
|Currency exchange forward contract #3 |  | $                 | 135   |                   | 1.3544 |                | Feb-05 |                |   |         |  |               |  |      
|Currency exchange forward contract #4 |  | $                 | 2,701 |                   | 1.3544 |                | Mar-05 |                |   |         |  |               |  |      



|(12) | Other Comprehensive Income (loss)
|---- | ---------------------------------



The table below reflects the changes in other comprehensive income for the three months ended December 31, 2004 which are derived from the translation of our foreign
entities into our reporting currency, United States dollars, for reporting purposes:



|                                  |  |                                   |   |                                              |     |   |                                             |   |                               |   |     |  
|--------------------------------- |  | --------------------------------- | - | -------------------------------------------- | --- | - | ------------------------------------------- | - | ----------------------------- | - | --- | -
|Other Comprehensive Income (loss) |  | BeginningBalanceSeptember 30,2004 |   | Net Change ofcurrent periodhedgingactivities |     |   | Reclassificationinto earningscurrent period |   | EndingBalanceDecember 31,2004 |  
|                                  |  | (in thousands)                    |  
|Cumulative Translation Adjustment |  | $                                 |  |                                              | (27 | ) |                                             |  |                               | $ | (27 | )



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##### Table of Contents

|(13) | Litigation
|---- | ----------



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



In August 2004, the first of four purported class action
complaints, Valentin Serafimov, on behalf of himself and all others similarly situated, v. Netopia, Inc., Alan B. Lefkof and William D. Baker, was filed in the United States District Court for the Northern District of California. The complaint
alleged violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended. The complaint alleged that during the purported class period, November 6, 2003 and July 6, 2004, we made materially false, misleading and incomplete
statements and issued false and misleading reports regarding our earnings, product costs, and sales to foreign customers. The other three complaints that subsequently were filed made additional related claims based on the same announcements and
allegations of misstatements. As provided in the Private Securities Litigation Reform Act of 1995, the plaintiffs in these actions filed motions to consolidate and to appoint lead plaintiff and lead plaintiff counsel. On December 3, 2004, the court
issued an order consolidating the cases under the name In re Netopia, Inc. Securities Litigation, and appointing a lead plaintiff and plaintiffs counsel. The lead plaintiff has not filed its 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 case vigorously.



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



On October 29, 2004, we were advised by the Securities and Exchange Commission that an informal inquiry previously commenced by the Securities and Exchange Commission had
become the subject of a formal order of investigation. This investigation is to determine whether the federal securities laws have been violated. We cooperated fully with the informal inquiry, and we are cooperating fully with the formal
investigation. Responding to the formal investigation will likely continue to require significant attention and resources of management. If the Securities and Exchange Commission elects to pursue an enforcement action, the defense against this type
of action could be costly and require additional management resources. If we were unsuccessful in defending against this or other investigations or proceedings, we could face civil or criminal penalties that would seriously harm our business and
results of operations.



In January 2005, we were notified by the Occupational
Health and Safety Administration (OSHA) that Netopia was named in an administrative complaint filed by two former employees alleging violations of



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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 allege the Company terminated them in retaliation for their participation in the Internal Accounting Review conducted by the audit committee. We filed a response to the complaint on January 21, 2005 with
OSHA. (The Internal Accounting Review is described in greater detail in the 2004 10-K in Item 7, Managements Discussion and Analysis of Financial Condition and Results of Operations.) The agency has not determined whether it will conduct an
investigation into this matter. We believe that we have strong defenses and intend to defend the complaint vigorously.



In February 2005, we were served with a complaint filed in the County Court of Dallas County, Texas by the two former employees who filed the OSHA administrative
complaint described above. The complaint names the Company and Alan Lefkof as defendants, and asserts claims for defamation and breach of contract. We believe that we have strong defenses to the claims asserted in the complaint. We intend to defend
the cases vigorously.



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



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.



|(14) | Other Events
|---- | ------------



On October 18, 2004, a Nasdaq Listings Qualification Panel (Panel) notified the Company that the Panel had denied the Companys request for continued inclusion on The Nasdaq National Market. The
Companys common stock was delisted from The Nasdaq National Market effective with the open of business on October 20, 2004. This action followed the Companys appeal to the Panel for a listing extension after the Company did not meet the
time requirement to file its Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2004. Commencing October 20, 2004, quotations for the Companys common stock appear in the National Daily Quotations Journal, often referred to as
the pink sheets, where subscribing dealers can submit bid and ask prices on a daily basis. The Companys trading symbol on the pink sheets is NTPA.PK.



On October 21, 2004, the Company announced the resignation of William D. Baker as the
Companys Senior Vice President, Finance and Operations, and Chief Financial Officer and the appointment of Mark H. Perry as the Companys Interim Senior Vice President and Chief Financial Officer.



On October 29, 2004, we were advised by the Securities and Exchange Commission that an
informal inquiry previously commenced by the Securities and Exchange Commission had become the subject of a formal order of investigation. This investigation is to determine whether the federal securities laws have been violated. We cooperated fully
with the informal inquiry, and we are cooperating fully with the formal investigation. Responding to the formal investigation will likely continue to require significant attention and resources of management. If the Securities and Exchange
Commission elects to pursue an enforcement action, the defense against this type of action could be costly and require additional management resources. If we were unsuccessful in defending against this or other investigations or proceedings, we
could face civil or criminal penalties that would seriously harm our business and results of operations.



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##### Table of Contents

We have devoted substantial resources and managements time in connection with the Internal Accounting Review
referred to below. This effort resulted in the restatement of our financial statements for the fiscal years ended September 30, 2002 and 2003, and our interim financial statements for fiscal quarters ended December 31, 2003 and March 31, 2004. As a
result of the Internal Accounting Review commenced in July 2004, the filing of both the Quarterly Report on Form 10-Q for the third fiscal quarter ended June 30, 2004 and the 2004 10-K were delayed beyond the designated filing deadlines and
subsequently filed with the SEC on February 1, 2005.



On February 1, 2005 we
restated our consolidated statements for the fiscal years ended September 30, 2002 and 2003 and for all quarters from December 31, 2001 through March 31, 2004, inclusive. All applicable financial information in the consolidated financial statements
in the 2004 10-K gives effect to the restatements. Accordingly, the financial statements for those fiscal periods that have been included in the Companys previous filings with the Securities and Exchange Commission or included in previous
announcements should not be relied upon.



|(15) | Internal Accounting Review
|---- | --------------------------



The results of the Internal Accounting Review are fully described in the 2004 10-K. As described therein, during the three months ended December 31, 2004, we recognized
$278,500 of software license and maintenance revenue previously recorded in the quarter ended September 30, 2003.



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##### Table of Contents

PART I  FINANCIAL INFORMATION



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



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



Company Overview



We develop, market and support broadband and wireless (Wi-Fi) products and services that enable our carrier and service provider customers
to simplify and enhance the delivery of broadband services to their residential and business-class customers. Our product and service offerings enable carriers and broadband service providers to (i) deliver to their customers feature-rich broadband
modems, routers and gateways, (ii) utilize software that allows remote management of equipment located at their customers premises, and (iii) provide value added services to enhance revenue generation and reduce support costs for their
customers. Our broadband modems, routers and gateways are installed by the customers of carrier and broadband service providers to obtain high-speed, always-on access to the Internet. Our digital subscriber line (DSL) and other broadband gateways
are often bundled with virtual private networking (VPN) capabilities that allow more secure communications over the Internet, firewall protection, parental controls, hot spot access, Web content filtering, combined voice and data services, hosting
of web sites that we call eSites, and hosting of web stores that we call eStores. Our Netopia Broadband Server (NBBS) software platform products enable remote support and management of installed broadband gateways and centralized service
provisioning for value-added broadband services such as parental controls or hot spot access. This architecture allows carriers and broadband service providers to provide support to their customers on a remote basis and potentially reduce the cost
of installation and broadband service provisioning over the lifetime of the customer. We also offer Timbuktu and eCare software products for enterprise help desk customers and IT organizations. These products allow help desks to provide support on a
remote basis when computer users experience problems or require additional software upgrades for their desktop or laptop computers.



Broadband Equipment. We have developed a comprehensive family of broadband Internet modems, routers and gateways, which allow the transport of
high-speed data over carrier networks including the local copper loop and new deployments of fiber-optic networks. This family of products serves many of wide area network (WAN) interfaces including DSL, Ethernet and T1, and LAN interfaces including
Wi-Fi and Ethernet. Our broadband Internet products are designed to deliver high performance, excellent reliability, scalability, and affordability, and to be a platform from which our carrier and service provider customers can offer their customers
additional services and applications. We believe key components to our success are comprehensive interoperability with leading central office DSL equipment, a common firmware platform across all versions of our broadband Internet products, and
technology such as our 3-D Reachtechnology which we believe gives our Wi-Fi products
greater and more reliable wireless coverage than that of many of our competitors. The substantial majority of our revenues are generated from sales of our broadband Internet products, in particular our DSL modems, routers and gateways. During the
three months ended December 31, 2004 and 2003, revenue from the sale of our broadband



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##### Table of Contents

Internet products have accounted for 89% and 84%, respectively, of our total revenues. When reading our condensed
consolidated statement of operations, revenues and cost of revenues related to the sale of our Broadband equipment are classified as broadband equipment.



Broadband Software and Services. Our service delivery platform includes the Netopia Broadband Server software (NBBS), which
enables carrier and service providers to manage remotely Netopia and other third party devices and to deliver value-added broadband services. The NBBS platform includes modules that perform different functions: Zero Touch provisioning
for the initial installation of broadband equipment at the customer premises and ongoing remote administration and support; Hot Spot Manager for the provisioning, authentication and management of hot spot venue access; Parental Controls for Web
content filtering and email and chat management; VPN Policy Manager for the setup and administration of secure VPN enabled WAN networks. Our eCommerce solution provides no assembly required Web sites and online stores that we call eSites
and eStores, with a wide variety of vertical market content packages to suit many needs, from franchisees to sole proprietors. Our systems management software includes Timbuktu, a systems management tool providing remote computer control,
configuration, support and file transfer. We hold one United States patent relating to Timbuktu systems management software. The term of this patent is through August 2010. During the three months ended December 31, 2004 and 2003, revenue from the
sale of our broadband software and services have accounted for 11% and 16%, respectively, of our total revenues. When reading our condensed consolidated statement of operations, revenues and cost of revenues related to the sale of our broadband
software and services are classified as Broadband software and services.



We primarily market and sell our products in the United States, Canada, Europe and the Asia Pacific region through a field sales organization and through selected distributors. Our broadband equipment products are generally sold directly to
our carrier and service provider customers or in some cases to distributors who then resell our products. Our broadband software and services products are generally sold directly to our customers. We primarily sell our products to:



| |  |  | Telecommunications carriers, including: incumbent local exchange carriers (ILECs), such as Swisscom AG, SBC Communications Inc., BellSouth Telecommunications, Inc., eircom Ltd.,
Belgacom and Verizon Communications Inc.; competitive local exchange carriers (CLECs), including Covad Communications Group, Inc. and NextGenTel; and Internet service providers (ISPs) and managed service providers (MSPs), including EarthLink, Inc.,
MegaPath Networks, Inc. and Netifice Communications, Inc.;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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



We expect that the success of our operations will remain substantially dependent upon our ability to develop and enhance products that meet the needs of both the residential and business market for ADSL and Wi-Fi
services and requirements of our ILEC customers. Our major customers are significantly larger than we are, and are able to exert a high degree of influence over our business. For example, our larger customers may be able to reschedule or cancel
orders without significant penalty and may force lengthy approval and purchase processes before purchasing our products.



Critical Accounting Policies and Estimates



Managements discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been
prepared in accordance with United States generally accepted accounting principles. We review the accounting policies used in reporting our financial results on a regular basis. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. On an ongoing basis, we evaluate our processes used to develop estimates, including those related to revenue, accounts receivable, inventories,
investments, intangible assets and goodwill. 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



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outcomes being different from those on which we based our assumptions. These estimates and judgments are reviewed by management on an ongoing basis. The
Audit Committee 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. We believe the following critical
accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.



You should read the Annual Report on Form 10-K for the fiscal year ended September 30, 2004 for information pertaining to our critical accounting policies which include
the following:



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



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



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



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



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



Liquidity and Capital Resources



The following sections discuss the effects of changes in our balance sheets, cash flows and commitments on our liquidity and capital resources. As of December 31, 3004,
our principal source of liquidity included cash and cash equivalents in the amount of $23.8 million, a credit facility with a maximum borrowing capacity of up to $11.8 million from which we had no outstanding borrowings at December 31, 2004, and two
term loans from which we had a total amounts outstanding of approximately $42,000.



Cash and Cash Equivalents. The following table sets forth our cash and cash equivalents as of December 31 and September 30, 2004.



|                          |  |                   |                 |                    |   |          |  |   |      |   |  |    |  
|------------------------- |  | ----------------- | --------------- | ------------------ | - | -------- |  | - | ---- | - |  | -- | -
|                          |  | December 31, 2004 |                 | September 30, 2004 |   | Decrease | 
|                          |  |                   | $             % |                   
|                          |  | (in thousands)    |                
|Cash and cash equivalents |  | $                 | 23,838          |                    | $ | 23,973   |  | $ | (135 | ) |  | -1 | %



For the three months ended December
31, 2004, cash and cash equivalents decreased primarily due to the use of cash to fund our operating activities and capital equipment purchases.



Net Cash Provided by Operating Activities



During the three months ended December 31, 2004, our operating activities generated $0.2 million of cash. Excluding the changes in operating assets and liabilities, our
operating activities used $1.2 million of cash primarily due to our net loss. Changes in our operating assets and liabilities generated $1.4 million of cash primarily as a result of increased accounts payable and accounts receivable offset by
decreases in other accrued liabilities and inventory purchases.



Net Cash
Used in Investing Activities



During the three months ended December 31,
2004, investing activities used approximately $0.4 million of cash for the purchase of capital equipment primarily for use in our development and manufacturing operations.



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##### Table of Contents

Net Cash Provided by Financing Activities



During the three months ended December 31, 2004, we generated $0.1 million of cash, primarily due to the proceeds we received from the
issuance of our common stock, offset by payments to the Companys term loans.



Commitments



As of December 31, 2004, we had commitments that
consisted of facilities and equipment under operating lease agreements, borrowings under term loans and purchase commitments primarily for inventory. Purchase obligations are comprised of purchase commitments with our contract manufacturers. Our
contract manufacturers procure component inventory on our behalf based on our production orders. We are obligated to purchase component inventory that the contract manufacturer procures in accordance with the orders, unless cancellation is given
within applicable lead times. These commitments and obligations are reflected in our financial statements once goods or services have been received or payments related to the obligations become due. The following is a schedule of our future minimum
cash payments with respect to such commitments.



|                           |  |                |       |      |   |      |  |      |     |      |   |            |  |        |   |  |   |   |  |   |      
|-------------------------- |  | -------------- | ----- | ---- | - | ---- |  | ---- | --- | ---- | - | ---------- |  | ------ | - |  | - | - |  | - | -----
|                           |  | Fiscal Years  
|                           |  | 2005 (a)       |       | 2006 |   | 2007 |  | 2008 |     | 2009 |   | Thereafter |  | Totals
|                           |  | (In thousands)
|Contractual obligation     |  |                |       |      |   |      |  |      |     |      |   |            |  |        |   |  |   |   |  |   |      
|Purchase obligations       |  | $              | 5,196 |      | $ |     |  | $    |    |      | $ |           |  | $      |  |  | $ |  |  | $ | 5,196
|Property lease obligations |  |                | 873   |      |   | 938  |  |      | 966 |      |   | 650        |  |        |  |  |   |  |  |   | 3,427
|Term loan                  |  |                | 42    |      |   |     |  |      |    |      |   |           |  |        |  |  |   |  |  |   | 42   
|                           |  |                |       |      |   |      |  |      |     |      |   |            |  |        |   |  |   |   |  |   |      
|Totals                     |  | $              | 6,111 |      | $ | 938  |  | $    | 966 |      | $ | 650        |  | $      |  |  | $ |  |  | $ | 8,665
|                           |  |                |       |      |   |      |  |      |     |      |   |            |  |        |   |  |   |   |  |   |      

---

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



At December 31, 2004, we had no borrowings under our credit facility and had an outstanding balance of approximately $42,000 borrowed under
our term loans. We currently believe we have enough cash and cash equivalents and that our business activities will be generate sufficient cash to cover our working capital needs for at least the next twelve months. To the extent our business does
not generate sufficient cash to cover our working capital needs, we would utilize our credit facility, which currently has a maximum borrowing capacity of up to $15.0 million. As of December 31, 2004, our borrowing availability under our credit
facility was approximately $11.8 million and we did not have any material commitments for capital expenditures.



Trade Accounts Receivable, Net. The following table sets forth our trade accounts receivables, net as of December 31, 2004 and September 30, 2004.



|                               |  |                   |             |                    |   |          |  |   |      |   |  |    |  
|------------------------------ |  | ----------------- | ----------- | ------------------ | - | -------- |  | - | ---- | - |  | -- | -
|                               |  | December 31, 2004 |             | September 30, 2004 |   | Decrease | 
|                               |  |                   | $         % |                   
|                               |  | (in thousands)    |             |                    |   |          |  |  
|Trade accounts receivable, net |  | $                 | 17,537      |                    | $ | 17,812   |  | $ | (275 | ) |  | -2 | %



Changes in our trade accounts
receivable, net balances are primarily due to the timing of sales within the quarter, increased revenues and collections performance.





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##### Table of Contents

Inventories. The following table sets forth our inventories, net as of December 31, 2004 and September 30, 2004.



|                 |  |                  |                 |                   |   |          |  |   |       |  |    |  
|---------------- |  | ---------------- | --------------- | ----------------- | - | -------- |  | - | ----- |  | -- | -
|                 |  | December 31,2004 |                 | September 30,2004 |   | Increase | 
|                 |  |                  | $             % |                  
|                 |  | (in thousands)   |                 |                   |   |          | 
|Inventories, net |  | $                | 7,324           |                   | $ | 6,280    |  | $ | 1,044 |  | 17 | %



Inventory consists primarily of raw
material, work in process, and finished goods. Inventory increased primarily due to an increase of finished goods inventory, which included ocean shipments of in-transit finish goods for which title had not transferred to the customers. Inventory
levels may increase or decrease in the future if customers do not provide accurate forecasts, sell-through and on-hand inventory information, thereby impairing ability to correctly forecast expected customer demand, or if customers defer or
otherwise delay purchases or shipments. As a result of rapidly changing technology and customer requirements, the Company continues to closely monitor its inventory requirements and balance the need to maintain adequate inventory levels to ensure
competitive lead times against the risk of inventory obsolescence.



Results
of Operations for the Three Months Ended December 31, 2004 and 2003



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



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|                                    |  |                |        |   |      |     |   |                     |   |        |  |     |   |  |   |        |   |  |      |  
|----------------------------------- |  | -------------- | ------ | - | ---- | --- | - | ------------------- | - | ------ |  | --- | - |  | - | ------ | - |  | ---- | -
|Three Months Ended December 31,     |  | 2004           |        |   | 2003 |     |   | Increase / Decrease |  
|                                    |  | (in thousands) |        |   | $    |     |   | %                   |  
|REVENUES:                           |  |                |        |   |      |     |   |                     |   |        |  |     |   |  |   |        |   |  |      |  
|Broadband equipment                 |  | $              | 26,197 |   |      | 89  | % |                     | $ | 23,657 |  | 84  | % |  | $ | 2,540  |   |  | 11   | %
|Broadband software and service      |  |                | 3,121  |   |      | 11  | % |                     |   | 4,652  |  | 16  | % |  |   | (1,531 | ) |  | -33  | %
|                                    |  |                |        |   |      |     |   |                     |   |        |  |     |   |  |   |        |   |  |      |  
|Total revenues                      |  |                | 29,318 |   |      | 100 | % |                     |   | 28,309 |  | 100 | % |  |   | 1,009  |   |  | 4    | %
|                                    |  |                |        |   |      |     |   |                     |   |        |  |     |   |  |   |        |   |  |      |  
|COST OF REVENUES:                   |  |                |        |   |      |     |   |                     |   |        |  |     |   |  |   |        |   |  |      |  
|Broadband equipment                 |  |                | 19,945 |   |      | 68  | % |                     |   | 16,450 |  | 58  | % |  |   | 3,495  |   |  | 21   | %
|Broadband software and service      |  |                | 266    |   |      | 1   | % |                     |   | 208    |  | 1   | % |  |   | 58     |   |  | 28   | %
|Amortization of acquired technology |  |                | 300    |   |      | 1   | % |                     |   | 300    |  | 1   | % |  |   |       |   |  | 0    | %
|                                    |  |                |        |   |      |     |   |                     |   |        |  |     |   |  |   |        |   |  |      |  
|Total cost of revenues              |  |                | 20,511 |   |      | 70  | % |                     |   | 16,958 |  | 60  | % |  |   | 3,553  |   |  | 21   | %
|                                    |  |                |        |   |      |     |   |                     |   |        |  |     |   |  |   |        |   |  |      |  
|GROSS PROFIT                        |  |                | 8,807  |   |      | 30  | % |                     |   | 11,351 |  | 40  | % |  |   | (2,544 | ) |  | -22  | %
|OPERATING EXPENSES:                 |  |                |        |   |      |     |   |                     |   |        |  |     |   |  |   |        |   |  |      |  
|Research and development            |  |                | 3,206  |   |      | 11  | % |                     |   | 3,951  |  | 14  | % |  |   | (745   | ) |  | -19  | %
|Selling and marketing               |  |                | 5,085  |   |      | 17  | % |                     |   | 5,026  |  | 18  | % |  |   | 59     |   |  | 1    | %
|General and administrative          |  |                | 2,195  |   |      | 7   | % |                     |   | 1,235  |  | 4   | % |  |   | 960    |   |  | 78   | %
|Amortization of intangible assets   |  |                | 86     |   |      | 0   | % |                     |   | 86     |  | 0   | % |  |   |       |   |  | 0    | %
|                                    |  |                |        |   |      |     |   |                     |   |        |  |     |   |  |   |        |   |  |      |  
|Total operating expenses            |  |                | 10,572 |   |      | 36  | % |                     |   | 10,298 |  | 36  | % |  |   | 274    |   |  | 3    | %
|                                    |  |                |        |   |      |     |   |                     |   |        |  |     |   |  |   |        |   |  |      |  
|OPERATING INCOME (LOSS)             |  |                | (1,765 | ) |      | -6  | % |                     |   | 1,053  |  | 4   | % |  |   | (2,818 | ) |  | -268 | %
|Other income (expense), net         |  |                | 148    |   |      | 1   | % |                     |   | 168    |  | 1   | % |  |   | (20    | ) |  | -12  | %
|                                    |  |                |        |   |      |     |   |                     |   |        |  |     |   |  |   |        |   |  |      |  
|Income (loss) before income taxes   |  |                | (1,617 | ) |      | -6  | % |                     |   | 1,221  |  | 4   | % |  |   | (2,838 | ) |  | -232 | %
|                                    |  |                |        |   |      |     |   |                     |   |        |  |     |   |  |   |        |   |  |      |  
|Provision for Income Taxes          |  |                | 24     |   |      | 0   | % |                     |   | 57     |  | 0   | % |  |   | (33    | ) |  | -58  | %
|                                    |  |                |        |   |      |     |   |                     |   |        |  |     |   |  |   |        |   |  |      |  
|Net Income (loss)                   |  | $              | (1,641 | ) |      | -6  | % |                     | $ | 1,164  |  | 4   | % |  | $ | (2,805 | ) |  | -241 | %
|                                    |  |                |        |   |      |     |   |                     |   |        |  |     |   |  |   |        |   |  |      |  



REVENUES



Total revenues for the three months ended December 31, 2004 increased from the three months
ended December 31, 2003 to $29.3 million or 4% from $28.3 million primarily due to increased revenues from the sale of our broadband equipment products partially offset by reduced revenues from the sale of our broadband software and services.



Broadband Equipment. Broadband equipment revenues increased for the
three months ended December 31, 2004 to $26.2 million or 11% from $23.7 million for the three months ended December 31, 2003. The majority of the increase was attributed to the sales of residential-class products, where ASP declines were more than
offset by volume increases. The remainder of the revenue increase was for business-class products where ASP declines were more than offset by volume increases. The mix of broadband equipment sales changes as we continue to win new customers, which
serve the residential market for ADSL broadband Internet services. Residential-class products, and ADSL products in general generate a lower average unit-selling price than similar business-class products. We believe that increased sales volumes
from new customers and new opportunities with existing customers will help offset any declines in revenues resulting from lower ASPs. See the Product Volume and Average Selling Price Information section below, which sets forth our
volumes and average selling prices.



Broadband software and services.
Broadband software and services revenues decreased to $3.1 million or 33% for the three months ended December 31, 2004 from $4.7 million for the three months ended December 31, 2003 due primarily from decreased sales of our broadband software
licenses.



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Product Volumes and Average Selling Price Information



The following table sets forth for three months ended December 31, 2004 and 2003, volumes
and average selling prices, excluding accessories, of our broadband equipment products. The decline in average selling prices resulted from increased unit sales of lower price residential class products as compared to higher price business class
products, and competitive market conditions generally. We expect that average-selling prices will continue to decline.



|                                |  |                |     |      |   |                     |  |   |    |   |  |    |  
|------------------------------- |  | -------------- | --- | ---- | - | ------------------- |  | - | -- | - |  | -- | -
|                                |  |                |     |      |   | Increase / Decrease | 
|Three months ended December 31, |  | 2004           |     | 2003 |   | $             %     | 
|                                |  | (in thousands) |    
|Product volumes                 |  |                | 306 |      |   | 262                 |  |   | 44 |   |  | 17 | %
|Average selling prices          |  | $              | 86  |      | $ | 90                  |  | $ | (4 | ) |  | -4 | %



COST OF REVENUES



Cost of revenues consists primarily of material costs of broadband equipment products. Total
cost of revenues increased to $20.5 million or 21% for the three months ended December 31, 2004 from $17 million for the three months ended December 31, 2003, primarily as a result of increased sales volumes of broadband equipment and component cost
increases. To the extent that component costs continue to increase as a result of improved general economic conditions and customer demand, we expect cost of revenues as a percent of total revenues may continue to fluctuate or increase in the
future. To help offset any cost increases, we are trying to negotiate with our contract manufacturers to reduce their costs based on our increasing volumes, and we are continuing to pursue product redesigns and alternative, lower cost components for
our products in an effort to reduce our overall product material costs. However, there is no certainty that we will be successful.



Gross Margin



Gross margins for the three months ended December 31, 2004 and 2003 were 30% and 40%, respectively. The decrease in gross margins was primarily the result of higher component costs.



Broadband equipment. Broadband equipment gross margins decreased to 23% for the three
months ended December 31, 2004 from 29% for the same period in the prior year. The decrease was primarily due to average selling price decreases, increased component and product costs and the inclusion of amortization expense related to acquired
technologies. The primary factors influencing our broadband equipment gross margins are product mix, ability to reduce product costs, increased cost absorption resulting from increased volumes, and the timing of these cost reductions relative to
market pricing conditions.



Broadband software and services. Broadband
software and services gross margins for the three months ended December 31, 2004 was 91% compared to 95% for the same period in the prior year. The decrease in gross margins was primarily the result of fixed labor costs associated with decreased
revenues.



Broadband equipment products have a lower average gross margin than
broadband software and services products. Accordingly, to the extent we sell more broadband equipment, overall gross margins will be lower. In the past, gross margins have varied significantly and will likely vary significantly in the future. Our
gross margins depend primarily on:



| |  |  | The continued shift in mix towards a greater percentage of sales of our broadband equipment than of broadband software and services, which typically have higher gross margins;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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| |  |  | Increased sales of residential-class broadband equipment which have lower average selling prices than business-class broadband equipment;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------



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



| |  |  | The cost of personnel and equipment associated with manufacturing support and manufacturing engineering;
| | - |  | --------------------------------------------------------------------------------------------------------



| |  |  | Provision for excess inventory;
| | - |  | -------------------------------



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



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



OPERATING EXPENSES



Research and Development. Research and development (R&D) expenses consist primarily of employee related expenses, depreciation and amortization, development related expenses such as product
prototyping, design and testing, and overhead allocations. R&D expenses for the three months ended December 31, 2004 decreased to $3.2 or 19% from $4 million for the three months ended December 31, 2003.



We expect to continue to allocate substantial resources to product and technological
development, and R&D expenses may increase in the future. We believe our process for developing software results in software that is essentially completed concurrently with the establishment of technological feasibility, and therefore we do not
capitalize software development costs.



Selling and Marketing. Selling
and marketing expenses consist primarily of salary and commission expenses for our sales force and related travel expenses, advertising and promotional expenses, product marketing, customer service and support costs. Selling and marketing expenses
for the three months ended December 31, 2004 increased to $5.1 million or 1% from $5 million for the three months ended December 31, 2003. The increase for the three months ended December 31, 2004 compared to the same period in the prior year was
primarily due to increased commission expense as a result of increased sales. We expect that selling and marketing expenses will remain near current levels for the remainder of the current fiscal year, and will fluctuate largely as a result of
commission expenses that are related to increases or decreases in sales.



General and Administrative. General and administrative (G&A) expenses consist primarily of employee related expenses, legal and accounting fees, and insurance costs. G&A expenses for the three months ended
December 31, 2004 increased to $2.2 million or 78% compared to $1.2 million for the same period in the prior year. This increase in G&A expenses for the three months ended December 31, 2004 was primarily due to increased legal and professional
fees related to our Internal Accounting Review described above and to the restatement of previously filed financial statements.



We anticipate that G&A expenses for fiscal year 2005 will increase as a result of the ongoing legal expenses related to the SEC investigation and private securities
litigation resulting from the Internal Accounting Review and the restatements of our financial statements, as well as increased expenses related to implementation of Section 404 of the Sarbanes-Oxley Act, which requires our management to assess the
effectiveness of our internal controls over financial reporting.



Amortization of Other Intangible Assets. For the three months ended December 31, 2004 and 2003, amortization of other intangible assets represents the amortization of intangible assets with identifiable lives related to our
acquisition of Cayman (See Note 4 of Notes to Unaudited Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q).



Restructuring Costs. There were no restructuring costs for the three months ended December 31, 2004 and 2003.



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Risk Factors



The following risk factors discussed below should be considered carefully in evaluating our business because such factors may have a significant impact on our business,
operating results and financial condition. As a result of 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, 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 December 31, 2004, we incurred a net loss of $1.6 million and generated $0.2 million of cash for operating activities. We incurred losses
from continuing operations of $9.0 million and $8.3 million for the fiscal years ended September 30, 2004 and 2003 respectively, and used $5.2 million and $5.4 million of cash during the fiscal years ended September 30, 2004 and 2003, respectively.
Our cash and cash equivalents totaled $23.8 million at December 31, 2004. We may not be able to reach, sustain or increase profitability or generate cash on a quarterly or annual basis, which could significantly harm our business.



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



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



If we are unable to resolve pending private securities litigation and the SEC investigation related to and arising out of the restatement of our consolidated financial statements in a timely and economic manner, our business could be
significantly harmed.



We currently are named as a defendant in a
consolidated private securities action brought as a purported class action. In addition, there are purported derivative actions pending in state and federal court in California. We also are the subject of a formal order of investigation by the
Securities and Exchange Commission to determine whether the federal securities laws have been violated. Responding to the formal order of investigation will require significant attention and resources of management. If the SEC elects to pursue an
enforcement action, the defense could be costly and require additional management resources. If we were unsuccessful in defending against this or other investigations or proceedings, we could face civil or criminal penalties that would seriously
harm our business and results of operations. Defending against the securities class action and derivative actions also will likely require significant attention and resources of management and, regardless of the outcome, result in significant legal
expense. If our defenses ultimately are unsuccessful, or if we are unable to achieve a favorable settlement, we could we liable for large damage awards that could seriously harm our business and results of operations. While we have provided notice
of the securities class action and derivative actions to our directors and officers liability insurance carriers, the insurance carriers have not agreed to pay for our legal expenses incurred in defending against these actions or agreed that they
are responsible to pay any damages that ultimately could be awarded to the plaintiffs. Furthermore, we have only a limited amount of insurance, and even if our insurers agree to make payments under the policies, the damage awards or settlements may
be greater than the amount of insurance, and we would in all cases be liable for any amounts in excess of our insurance policy limits.



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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 this could reduce our revenues and 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;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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



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



| |  |  | Government regulation.
| | - |  | ----------------------



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, a parental controls service, and hosting of eSites and eStores. We can offer no assurance that our strategy of
enabling bundled service offerings will be widely accepted. If telecommunications carriers and service providers do not continue to expand their deployments of DSL and other broadband services, our revenues could decline and our business could be
significantly harmed.



We expect our revenues to become 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 that are
working to expand our sales in the ILEC channel both domestically and internationally. There continue to be barriers associated with such sales including, but not limited to, lengthy product evaluation cycles, the ability to dislodge competitors
whose products are currently being utilized, long-term product deployment cycles and intense price pressures. ILECs currently obtain equipment from our competitors, 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 penetrate further the ILEC market for our products and services, our business may be materially and adversely affected.



We expect our revenues to become increasingly dependent on our ability to
develop 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 Internet equipment products primarily to CLECs and ISPs serving the small business market for DSL Internet connectivity. As a result
of our acquisitions of Cayman in October 2001 and DoBox in March 2002 and our internal development initiatives, we believe that we now have products and technology that allow us to compete effectively for sales of Internet equipment to ILECs serving
the residential market. There are numerous risks associated with our entrance into 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; and
| | - |  | ---------------------------------------------------------------------------------------------



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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.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------



If we are unable to increase our sales to ILECs and our market share of residential class
broadband gateways, 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 both the three months ended December 31, 2004 and the fiscal
year ended September 30, 2004, there were five and four customers, respectively, that each individually represented at least 5% of our revenues and in the aggregate, accounted for 70% and 60%, respectively, of our total revenues. Our revenues will
decline and our business may be significantly harmed if one or more of our significant customers stop buying our products, or reduce or delay purchases of our products.



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



A substantial portion of our revenues is derived from
sales to international customers, mainly in Europe. For the three months ended December 31, 2004 and the fiscal year ended September 30, 2004, our international sales represented 34% and 44%, respectively, of our total revenues. We expect sales to
international customers to continue to comprise a significant portion of our revenues. Sales of broadband equipment products to many 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 in Europe.



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



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



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



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



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



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



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



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



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



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



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



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



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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 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 Altiris, Inc., Computer Associates International, Inc., CrossTec Corporation, Expertcity, Inc., LANDesk Software, Inc.,
Microsoft Corporation and Symantec Corporation. We anticipate intense competition from some of these companies because some of these competitors provide their products to consumers at no cost.



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



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 December 31, 2004, our revenues have ranged from $18.9 million to $29.3 million, and our net results have ranged from $51,000 of income to a loss of
$6.1 million. As a result, we believe that period-to-period comparisons of our operating results are not necessarily meaningful. Investors should not rely on the results of any one quarter or series of quarters as an indication of our future
performance.



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



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



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



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



| |  |  | 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 ADSL products within our family of broadband equipment;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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



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



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



We purchase the semiconductor chips for our broadband 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, including increased demand industry-wide. Because we
generally have been unable to pass component price increases along to our customers, our gross margins and operating results have been harmed as a result of component price increases. If we are unable to obtain a sufficient quantity of these
semiconductor chips in a timely manner for any reason, sales of our broadband equipment products could be delayed or halted. Further, we could also be forced to redesign our broadband equipment products and qualify new suppliers of semiconductor
chip sets. The resulting stoppage or delay in selling our products and the expense of redesigning our products would adversely affect our business.



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



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



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



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



Our Netopia Broadband Server (NBBS) software platform enables network operations centers of broadband service providers the ability to remotely manage, support, and troubleshoot installed broadband gateways, thereby
providing the potential for reducing support costs. We believe that NBBS can assist us in differentiating our products and services from those of our competitors. However, NBBS is a relatively new product that to date has not generated significant
revenues, and we cannot provide any assurance that NBBS it 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 continue to experience declining gross margins due to price competition and an increase in sales of lower margin broadband equipment as a percentage of our total revenue.



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



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



The majority of our broadband software and services revenues are derived from the sale of
software products for corporate help desks, including Timbuktu and eCare. For the three months ended December 31, 2004 and the fiscal year ended September 30, 2004, revenues from these help desk applications were 66% and 70%, respectively, of total
revenues for our broadband software and services products. We anticipate that the market for Timbuktu will grow more slowly than the market for our other broadband software products and services. We also have not generated significant revenues to
date from the NBBS software platform. In addition, we rely on a small number of licensees to promote the use of our broadband software and services for building web sites and stores. As a result, we derive the majority of the recurring revenues from
our broadband software and services products from fewer than five customers. The extent and nature of the promotions by licensees of our broadband software and services are outside of our control. If licensees of our eSite and eStore software do not
successfully promote web sites and stores to their customers, we will not generate continued recurring revenues. If these customers were to choose a competitive platform, this could lead to reduced revenues and adversely impact our results.



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



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



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



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



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



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



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



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



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



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



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



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



We believe that a small number of stockholders hold a large portion of our common stock. One of our directors owns approximately 3.7% of our common stock outstanding at
February 8, 2005. To the extent any of our large stockholders decides to sell substantial amounts of our common stock in the public market over a short period of time, based on the historic trading volumes, we expect the market price of our common
stock could fall.



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



Our industry and industries
on which our business depends may be affected by changes in regulations. For example, we depend on telecommunications service providers for sales of our broadband 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:



| |  |  | 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. In the past, securities class action litigation has often been brought against a company following periods of volatility in market price of its securities.
We have recently experienced significant volatility in the price of our stock. We currently are and may in the future be the target of securities litigation. Securities litigation could result in substantial costs and divert managements
attention and resources, which could seriously harm our business.



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



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



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PART I  FINANCIAL INFORMATION



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



Cash Equivalents



Our exposure to market risks for changes in interest rates primarily relates to our investment portfolio. Our investments are made in accordance with an investment policy approved by our Board of Directors, which aims
at minimizing credit risk through the diversification of our investments. Maturities of our investments are typically 90 days or less. The investments are classified as held-to-maturity and properly carried on our condensed consolidated balance
sheets at its original purchase price. Our investment instruments are subject to changes in the interest rate and credit rating risk. Additionally, the value of our investments may be impaired temporarily or permanently. Due in part to these risk
factors, our investment income may decline and we may suffer losses in principal. We do not use derivatives to reduce or eliminate our exposure to changes in interest rates or credit ratings.



The table below presents the market value of our investment portfolio at December 31, 2004
and September 30, 2004. All investments mature in 90 days or less:



|                 |  |                  |                 |                   |   |          |  |   |     |  |   |  
|---------------- |  | ---------------- | --------------- | ----------------- | - | -------- |  | - | --- |  | - | -
|                 |  | December 31,2004 |                 | September 30,2004 |   | Increase | 
|                 |  |                  | $             % |                  
|                 |  | (in thousands)   |                 |                   |   |          | 
|Cash equivalents |  | $                | 21,229          |                   | $ | 20,955   |  | $ | 274 |  | 1 | %



Other Interest Rate Risks



Our 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 December 31, 2004. The credit facility bears interest at a rate equal to the prime rate (the rate announced by Silicon Valley Bank as its prime
rate) as long as no default or event of default has occurred and is continuing, and as long as we maintain profitability as of the end of each fiscal quarter. If a default or an event of default has occurred and is continuing or we cannot
maintain profitability, the interest rate on the credit facility would change to the prime rate plus 0.75% per annum. To the extent interest rates increase and we make borrowings under the credit facility, we would incur increase interest expense.



Foreign Currency



Our exposure to foreign exchange risk relates primarily to sales and corresponding
receivables made to international customers denominated in Euros and employee-related expenses for employees based in Euro-zone countries. We are subject to risks typical of an international business including, but not limited to, differing economic
conditions and tax structures, other regulations and restrictions and foreign exchange rate volatility. Accordingly, our future results could be materially adversely affected by changes in these or other factors. To minimize the effects of potential
short-term fluctuations on our operating result stemming from our exposure to foreign currency changes, we enter into currency exchange forward contracts. These contracts guarantee a predetermined exchange rate at the time the contract is purchased.
In December 2004, we entered into forward contracts to hedge the exposure to changes in the fair value of our accounts receivable for February and March 2004, which were denominated in Euros. All currency exchange contracts have a maturity of less
than one year.



The table below presents the carrying value, in United States
dollars, of accounts receivables denominated in Euros at December 31, 2004 and 2003. The accounts receivable at December 31, 2004 are valued at the United States/Euro exchange rate as of December 31, 2004 and the accounts receivable at December 31,
2003 are valued at the United States/Euro exchange rate as of December 31, 2003. The carrying values approximate fair value at December 31, 2004 and 2003.



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|                                                       |  |                   |       |                   |        |                  |   |               |  |       
|------------------------------------------------------ |  | ----------------- | ----- | ----------------- | ------ | ---------------- | - | ------------- |  | ------
|                                                       |  | December 31, 2004 |       | December 31, 2003
|Principal (notional) amounts in United States Dollars: |  | Carrying amounts  |       | Exchange rate     |        | Carrying amounts |   | Exchange Rate
|Accounts receivable denominated in Euros               |  | $                 | 3,971 |                   | 1.3399 |                  | $ | 2,173         |  | 1.2296



The table below presents the carrying
values of our currency exchange forward contracts, in United States dollars, at December 31, 2004 and 2003. The carrying values approximate fair value at December 31, 2004 and 2003.



|                                      |  |                   |       |                   |        |                 |        |                 |   |           |  |                 |  |       
|------------------------------------- |  | ----------------- | ----- | ----------------- | ------ | --------------- | ------ | --------------- | - | --------- |  | --------------- |  | ------
|                                      |  | December 31, 2004 |       | December 31, 2003
|Principal (notional) amounts in Euro: |  | Carrying amount   |       | Spot Rate         |        | Settlement Date |        | Carrying amount |   | Spot Rate |  | Settlement Date
|Currency exchange forward contract #1 |  | $                 | 405   |                   | 1.3544 |                 | Jan-05 |                 | $ | 165       |  | 1.1835          |  | Jan-04
|Currency exchange forward contract #2 |  | $                 | 609   |                   | 1.3544 |                 | Jan-05 |                 |   |          |  |                |  |      
|Currency exchange forward contract #3 |  | $                 | 135   |                   | 1.3544 |                 | Feb-05 |                 |   |          |  |                |  |      
|Currency exchange forward contract #4 |  | $                 | 2,701 |                   | 1.3544 |                 | Mar-05 |                 |   |          |  |                |  |      



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PART I  FINANCIAL INFORMATION



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



Evaluation of disclosure controls and procedures



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



Changes in internal controls



During the three months ended December 31, 2004, there were no changes in our internal controls over financial reporting that have materially affected, or are reasonably
likely to materially affect, our internal controls over financial reporting.



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



In response to the matters discovered in connection with the Internal Accounting Review, we have taken steps to strengthen control processes and procedures to identify,
rectify and prevent the recurrence of the circumstances that resulted in our determination to restate prior period financial statements. In addition to the changes in internal controls listed below, we intend to correct the identified weaknesses in
our internal controls and procedures that led to the restatements by taking the following steps, among others:



| |  |  | Making changes in our personnel, including the appointment of a new senior sales executive and a new Interim Chief Financial Officer;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------



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



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



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



We believe changes to our system of internal controls and our disclosure controls and procedures will be adequate to provide reasonable assurance that the objectives of
these controls will be met. We intend to review and evaluate the design and effectiveness of our disclosure controls and procedures on an ongoing basis and to improve our controls and procedures over time and to correct any deficiencies that we may
discover in the future. Our goal is to ensure that our senior management has timely access to all



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material financial and non-financial information concerning our business. While we believe the present design of our disclosure controls and procedures is
effective to achieve our goal, future events affecting our business may cause us to modify our disclosure controls and procedures. Furthermore, because of the inherent limitations in all control systems, no evaluation of controls can provide
absolute assurance that all control issues, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or
mistake.



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



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PART II  OTHER INFORMATION



ITEM 1. LEGAL PROCEEDINGS



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



In August 2004, the first of four purported class action complaints, Valentin Serafimov,
on behalf of himself and all others similarly situated, v. Netopia, Inc., Alan B. Lefkof and William D. Baker, was filed in the United States District Court for the Northern District of California. The complaint alleged violations of Sections
10(b) and 20(a) of the Securities Exchange Act of 1934, as amended. The complaint alleged that during the purported class period, November 6, 2003 and July 6, 2004, we made materially false, misleading and incomplete statements and issued false and
misleading reports regarding our earnings, product costs, and sales to foreign customers. The other three complaints that subsequently were filed made additional related claims based on the same announcements and allegations of misstatements. As
provided in the Private Securities Litigation Reform Act of 1995, the plaintiffs in these actions filed motions to consolidate and to appoint lead plaintiff and lead plaintiff counsel. On December 3, 2004, the court issued an order consolidating the
cases under the name In re Netopia, Inc. Securities Litigation, and appointing a lead plaintiff and plaintiffs counsel. The lead plaintiff has not filed its 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 case vigorously.



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



On October 29, 2004, we were advised by the Securities and Exchange Commission that an informal inquiry previously commenced by the Securities and Exchange Commission had become the subject of a formal order of
investigation. This investigation is to determine whether the federal securities laws have been violated. We cooperated fully with the informal inquiry, and we are cooperating fully with the formal investigation. Responding to the formal
investigation will likely continue to require significant attention and resources of management. If the Securities and Exchange Commission elects to pursue an enforcement action, the defense against this type of action could be costly and require
additional management resources. If we were unsuccessful in defending against this or other investigations or proceedings, we could face civil or criminal penalties that would seriously harm our business and results of operations.



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In January 2005, we were notified by the Occupational Health and Safety Administration (OSHA) that Netopia was 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 allege
the Company terminated them in retaliation for their participation in the Internal Accounting Review conducted by the audit committee. We filed a response to the complaint on January 21, 2005 with OSHA. (The Internal Accounting Review is described
in greater detail in the 2004 10-K in Item 7, Managements Discussion and Analysis of Financial Condition and Results of Operations.) The agency has not determined whether it will conduct an investigation into this matter. We believe that we
have strong defenses and intend to defend the complaint vigorously.



In
February 2005, we were served with a complaint filed in the County Court of Dallas County, Texas by the two former employees who filed the OSHA administrative complaint described above. The complaint names the Company and Alan Lefkof as defendants,
and asserts claims for defamation and breach of contract. We believe that we have strong defenses to the claims asserted in the complaint. We intend to defend the cases vigorously.



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



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



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



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



|              |  |                                                                                                               
|------------- |  | --------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description                                                                                                   
|10.13         |  | Amendment to Loan Documents entered into between Netopia, Inc. and Silicon Valley Bank as of December 29, 2004
|              | 
|10.14         |  | Netopia, Inc. 2005 Employee Stock Purchase Plan as adopted December 30, 2004                                  
|              | 
|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 December 31, 2004:
|--- | ---------------------------------------------------------------------------------------------------



| |  |  | On October 6, 2004 we filed a Current Report on Form 8-K, reporting Item 4.01, reporting that the audit committee of our board of directors engaged Burr, Pilger & Mayer LLP
(BP&M) as our independent accountant.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | On October 19, 2004, we filed a Current Report on Form 8-K, reporting Item 3.01, reporting that a Nasdaq Listings Qualification Panel had denied the our request for continued
inclusion on The Nasdaq National Market, and that our common stock would be delisted from The Nasdaq National Market effective with the open of business on October 20, 2004.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | On October 22, 2004, we filed a Current Report on Form 8-K, reporting Item 3.01, reporting that quotations for our common stock will appear in the National Daily Quotations Journal,
often referred to as the pink sheets, effective with the open of business on October 20, 2004.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | On October 27, 2004 we filed a Current Report on Form 8-K, reporting Items 1.01 and 5.02, reporting that we have entered into an Employment Agreement with Mark H. Perry and a
Consulting Agreement with William D. Baker, reporting the resignation of William D. Baker as our Senior Vice President, Finance and Operations, and Chief Financial Officer, effective October 29, 2004, and reporting the appointment of Mark H. Perry
as our Interim Senior Vice President and Chief Financial Officer, effective October 21, 2004.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | On November 3, 2004 we filed a Current Report on Form 8-K, reporting Item 8.01, reporting that we were advised by the Securities and Exchange Commission on October 29, 2004 that the
previously-disclosed informal inquiry that the Securities and Exchange Commission commenced to determine whether the federal securities laws have been violated has become the subject of a formal order of investigation.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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SIGNATURES



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



|                       |  |               |  |                                                                                                       
|---------------------- |  | ------------- |  | ------------------------------------------------------------------------------------------------------
|Date: February 9, 2005 |  | NETOPIA, INC.
|                       |  | (Registrant) 
|                       |  |              
|                       |  | By:           |  | /s/ Alan B. Lefkof                                                                                    
|                       |  |               |  | Alan B. Lefkof                                                                                        
|                       |  |               |  | President and Chief Executive Officer                                                                 
|                       |  |              
|                       |  | By:           |  | /s/ Mark H. Perry                                                                                     
|                       |  |               |  | Mark H. Perry                                                                                         
|                       |  |               |  | Interim Senior Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)



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