NETOPIA INC, 10-K405, 1999-12-29

NETOPIA INC
10-K405, 1999-12-29
COMPUTER INTEGRATED SYSTEMS DESIGN

Previous: GANNETT WELSH & KOTLER FUNDS, 24F-2NT, 1999-12-29

Next: TRAVIS BOATS & MOTORS INC, 10-K, 1999-12-29

<PAGE>

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

----------------

FORM 10-K
(Mark One)
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934

For the fiscal year ended September 30, 1999 or

[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934

For the transition period from to

Commission file number 0-28450

----------------

NETOPIA, INC.
(Exact name of registrant as specified in its charter)

<TABLE>
<S> <C>
Delaware 94-3033136
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
</TABLE>

2470 Mariner Square Loop
Alameda, California 94501
(Address of principal executive offices, including Zip Code)

----------------

(510) 814-5100
(Registrant's telephone number, including area code)

----------------

Indicate by check whether the registrant (1) has filed all reports required
to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [_]

Indicate by check if disclosure of delinquent filers pursuant to Item 405 of
regulation S-K is not contained herein, and will not be contained, to the best
of the Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in this Form 10-K or any amendment to this Form 10-
K. Yes [X] No [_]

As of December 1, 1999 there were 16,240,651 shares of the Registrant's
Common Stock outstanding. The aggregate market value of the Common Stock held
by non-affiliates of the registrant, based on the closing price of the Common
Stock as reported on The Nasdaq Stock Market on December 1, 1999 was
approximately $751,276,458.

DOCUMENTS INCORPORATED BY REFERENCE

The Registrant's definitive Proxy Statement for its Annual Stockholders
Meeting to be held on February 29, 2000 is incorporated by reference in Part
III of this Form 10-K.

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>

NETOPIA, INC.
FORM 10-K

TABLE OF CONTENTS

<TABLE>
<CAPTION>
Page
----

<S> <C> <C>
PART I

ITEM 1. Description of Business................................................................ 2

ITEM 2. Properties............................................................................. 17

ITEM 3. Legal Proceedings...................................................................... 18

ITEM 4. Submission of Matters to a Vote of Security Holders.................................... 18

PART II

ITEM 5. Market for Netopia's Common Stock and Related Stockholder Matters...................... 19

ITEM 6. Selected Financial Data................................................................ 20

ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.. 22

ITEM 7(a). Quantitative and Qualitative Disclosures About Market Risk............................. 40

ITEM 8. Financial Statements and Supplementary Data............................................ 40

ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure... 64

PART III

ITEM 10. Directors and Executive Officers of the Registrant..................................... 64

ITEM 11. Executive Compensation................................................................. 65

ITEM 12. Security Ownership of Certain Beneficial Owners and Management......................... 65

ITEM 13. Certain Relationships and Related Transactions......................................... 65

PART IV

ITEM 14. Exhibits, Financial Schedules and Reports on Form 8-K.................................. 66

Index to Exhibits................................................................................. 67

Signatures ....................................................................................... 68
</TABLE>
<PAGE>

PART I.

ITEM 1. DESCRIPTION OF BUSINESS

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

Company Background

We provide Internet and electronic commerce infrastructure that enables
small and medium size businesses to easily and cost effectively connect to the
Internet, establish and enhance their presence, and conduct business and
electronic commerce on the Web. We offer high-speed, multi-user, plug-and-play
Internet connectivity products and Web platforms for creating and hosting Web
sites, creating and hosting electronic commerce stores, and conducting real-
time Internet communications.

Our Internet connectivity products enable small and medium size businesses
to take advantage of high-speed Internet access technologies and, in
particular, digital subscriber line (DSL). Our DSL Internet connectivity
products, including routers, digital service units, filtering bridges, security
appliances and modems, provide small and medium size businesses with a flexible
and scaleable platform that can be easily integrated into existing business
infrastructures. In addition to supporting various Internet connectivity
technologies, our Internet connectivity products are designed to be plug-and-
play and incorporate many value-added features such as virtual private
networking and firewall protection.

Our Web platform is a "no assembly required" Web site and electronic
commerce solution that enables small and medium size businesses to easily
create their own customized, interactive Web sites or electronic commerce
enabled Web sites, which we call E-stores. Our Web platforms provide
affordable, value-added functionality and flexibility to our users' Web sites.
We have developed over 50 customizable Web site content packages for businesses
across a wide range of industries. Our Web platforms also include collaboration
and communication capabilities for remote groups as well as for help desk,
server and Web site administrators.

Our principal offices are located at 2470 Mariner Square Loop, Alameda,
California 94501 and our telephone number is (510) 814-5100. We were
incorporated in California in 1986 as Farallon Computing, Inc., and were
reincorporated in Delaware in June 1996. In November 1997, we changed our
corporate name from Farallon Communications Inc. to Netopia, Inc.

Events Occurring After September 30, 1999

On October 13, 1999, we acquired StarNet Technologies, Inc. (StarNet), in a
merger transaction in which StarNet merged into a newly formed, wholly owned,
subsidiary of the Company. StarNet has been developing a voice channel
technology architecture that allows the transmission of up to eight voice lines
over a DSL line along with the simultaneous transmission of standard data
packets. We intend to integrate StarNet's technology into our Internet
connectivity product development and begin offering voice and data integrated
access devices. Any delay in the completion of the development of the products
would cause us to incur additional unplanned

2
<PAGE>

development expenses as well as result in the loss or deferral of customer
purchases, either of which could adversely affect our business.

We will account for the transaction under the purchase method. The aggregate
consideration constituting the purchase price is approximately $27.5 million at
closing which includes $1.0 million of potential earnout payments and may
increase by up to an additional $4.9 million depending on the actual amount of
potential earnout payments. See Management's Discussion and Analysis of
Financial Condition and Results of Operations and Note 10 of "Notes To
Consolidated Financial Statements."

Our acquisitions involve numerous risks, including the use of significant
amounts of our cash, diversion of the attention of our management from our core
business, loss of key employees and significant expenses and write-offs. The
success of this acquisition depends upon our ability to retain the acquired
employees and to timely and successfully develop, manufacture and gain market
acceptance for the products and technology we acquired. If we are unable to
successfully address these risks, our business may be harmed.

Industry Background

The Internet has emerged as a vitally important global medium for
communication and commerce, enabling millions of people to share information
and transact business electronically. The increasing utility of the Internet
and the availability of new technologies that enable advanced capabilities,
such as real-time communication, collaboration and electronic commerce, are
compelling businesses and other organizations to establish a Web presence. In
addition, the possibility of losing a competitive edge to companies that
maximize the benefits of the Internet is also a significant motivating factor
for many such companies to utilize the Internet in their everyday business.
These factors have compelled businesses to adopt complex network communications
and computing systems in order to access the Internet.

Changes in telecommunications regulation in the United States and globally
have enabled new entrants, such as competitive local exchange carriers (CLECs),
Internet service providers (ISPs) and cable companies to challenge traditional
telephone companies in providing telecommunications services. Simultaneously,
the demand for high-speed Internet access has grown dramatically due to the
increasing use of data-intensive multimedia in Web sites and the development of
electronic commerce. As a result, service providers have rushed to deploy new
technologies that allow them to quickly and cost-effectively provide a full
range of voice, data and video services. One such technology is digital
subscriber line (DSL), which enables data transmission speeds of 128 Kbps to 52
Mbps using the existing copper wire infrastructure. DSL delivers "always on"
availability, eliminating the tedious dial-up process associated with
traditional modem technologies. DSL is a point-to-point technology that
connects the end user to a telecommunications service provider's central
office, or to an intermediate hub. DSL equipment is deployed at each end of the
copper wire and the transmission speed depends on the length and condition of
the existing wire. Thus, growing competition in the telecommunications industry
and the proliferation of DSL have greatly increased the availability and
lowered the cost of high-speed Internet access.

The Small Business Administration defines small businesses as those with
less than 100 employees. According to Access Media International, or AMI, this
category of businesses currently totals approximately 15.7 million businesses
in five of the leading industrialized nations, including approximately 7.2
million businesses in the United States. As a result of the proliferation of
the Internet, and in an attempt to realize some of the benefits it provides,
small and medium size businesses are increasingly attempting to use the
Internet to maintain Web sites, access critical business information and
communicate more effectively with employees, customers and business partners.

Small and medium size businesses, however, typically do not have the
internal resources necessary to establish high-speed access to or maximize the
potential benefits of the Internet. For example, many of these businesses
currently use low-speed, single-user, dial-up connections to the Internet. Most
of these businesses also lack a well-staffed, experienced information
technology department. Thus, small and medium size

3
<PAGE>

businesses are discovering that installing, configuring and developing Web
sites and networking systems, obtaining high-speed digital services, such as
DSL and arranging for an Internet connection from an Internet service provider
can be costly and burdensome, even for companies with sophisticated technical
support. We believe traditional vendors of Internet networking products and
services historically have not offered solutions specifically designed for
users who may not have access to sophisticated technical support.

This lack of information technology resources and expertise, coupled with an
industry environment that currently does little to address the needs of small
and medium size businesses, has constrained the ability of many such businesses
to fully realize the benefits of the Internet.

The Netopia Solution

We provide Internet and electronic commerce infrastructure that enables
small and medium size businesses to easily and cost-effectively connect to the
Internet, establish and enhance their presence, and conduct business and
electronic commerce on the Web. We offer high-speed, multi-user, plug-and-play
Internet connectivity products and Web platforms for creating and hosting Web
sites, creating and hosting electronic commerce stores, and conducting real-
time Internet communications.

Our Internet connectivity products enable small and medium size businesses
to take advantage of high-speed Internet access technologies, and in particular
digital subscriber line (DSL). Our customer premise DSL Internet connectivity
products, including routers, digital service units, filtering bridges, security
appliances and modems, provide small and medium size businesses with a flexible
and scaleable platform that can be easily integrated into existing business
infrastructures. In addition to supporting various Internet connectivity
technologies, our Internet connectivity products are designed to be plug-and-
play and incorporate many value-added features, such as virtual private
networking and firewall protection.

Our Web platforms include "no assembly required" Web site and electronic
commerce solutions that enable small and medium size businesses to easily
create their own customized, interactive Web sites or electronic commerce
enabled Web sites, which we call E-stores. These Web site services provide
affordable, value-added functionality and flexibility to our users for their
Web sites. We have developed over 50 customizable Web site content packages for
businesses across a wide range of industries. Our Web platforms also include
collaboration and communication capabilities for remote groups as well as for
help desk, server and Web site administrators.

We have developed extensive relationships that provide wide distribution of
our products and enable us to help our customers install complete, plug-and-
play Internet and electronic commerce infrastructure that is reliable, cost-
effective and easy to use. Our relationships include Internet service providers
(ISPs) such as PSINet and Verio, Internet portals such as Netscape Netcenter
and Citigroup's Bizzed.com, and competitive local exchange carriers (CLECs)
such as NorthPoint Communications, Rhythms NetConnections and Covad. In
addition, we have established relationships with telecommunications equipment
suppliers, such as Carrier Access, Copper Mountain, Nokia and Lucent and our
development relationships with next generation technology providers CopperCom,
Jetstream Communications and TollBridge Technologies.

Strategy

Our objective is to be a leading provider of Internet and electronic
commerce infrastructure that enables small and medium size businesses to easily
and cost-effectively connect to the Internet, establish and enhance their
presence and conduct business and electronic commerce on the Web. Key elements
of our strategy include the following:

. Target The Small And Medium Size Business Market. We target small and
medium size businesses that seek high-speed Internet connectivity, Web
site creation and hosting, and electronic commerce products and services.
We believe the demand for these services is rapidly growing and
underserved by

4
<PAGE>

other vendors of Internet products and services. We believe small and
medium size businesses generally do not have the financial resources or
technical expertise necessary to establish and maintain a competitive Web
presence. As a result, this market requires plug-and-play products and
services which are easy to use and cost-effective. We believe that we have
developed a specific expertise in serving the needs of this market. We
intend to continue to develop products and services that meet these needs.

. Leverage Strategic Relationships With Internet Service Providers,
Internet Portals And Other Distribution Channels. We believe that the
distribution channels for high-speed Internet access and broadband
Internet applications are converging. Our combined Internet connectivity
and Web platform products provide competitive differentiation and have
enabled us to establish strong distribution relationships and recruit new
strategic partners. Our relationships include Internet service providers
(ISPs) such as PSINet and Verio, Internet portals such as Netscape
Netcenter and Citigroup's Bizzed.com and competitive local exchange
carriers (CLECs) such as NorthPoint Communications, Rhythms
NetConnections and Covad. In addition, we have established relationships
with telecommunications equipment suppliers, such as our relationships
with Carrier Access, Copper Mountain, Nokia and Lucent and our
development relationships with next generation technology providers
CopperCom, Jetstream Communications and TollBridge Technologies. We
intend to leverage and expand these successful distribution relationships
and take further advantage of opportunities to cross-sell our products
and services.

. Provide Complete, Plug-And-Play Customer Premise DSL Internet
Connectivity Products. We provide a comprehensive suite of customer
premise DSL Internet connectivity products. Our multi-user, plug-and-play
products provide affordable, high-speed Internet connectivity. Our
products include routers, modems, bridges, security appliances and
digital service units. We also provide value-added, proprietary
applications which increase the functionality of our connectivity
solutions, including encryption, virtual private network and firewall
protection. We intend to continue to develop new generations of our
equipment for emerging DSL standards. We also intend to continue to add
functionality, such as integrated voice and data access devices resulting
from our acquisition of StarNet, which will enable us to meet the
changing needs of small and medium size businesses and to further
differentiate our products.

. Enable Small And Medium Size Businesses To Leverage The Internet. We
provide robust Web platforms for easily creating, enhancing and hosting
Web sites, and providing electronic commerce capability. We have
developed over 50 different Web site content packages. These provide
industry-specific design, data and functionality, which can be used as
is, or can be easily customized to meet specific end-user needs. Our Web
platforms also provide real-time Internet communication and collaboration
capabilities. We intend to enhance our Web platforms to include new
features and functionality, including additional industry content
packages and further ability to create and remodel Web sites with minimal
technical expertise.

. Maintain And Extend Technology Leadership. We believe that we have
industry-leading, high-speed Internet connectivity products and Web
platform services. We believe an important competitive advantage is the
ability to fully integrate our products into those of other
telecommunications equipment providers. We also believe that timely
introduction of our products and services is necessary for our success.
We therefore have developed close working relationships with leading
central office equipment providers such as Copper Mountain and Nokia. For
example, through our relationship with Copper Mountain, we have fully
integrated our DSL equipment into Copper Mountain's central office
architecture. We believe this was the first such product available. We
will continue to develop relationships with other leading central office
equipment providers, and we intend to integrate future generations of our
DSL equipment into their architectures. In addition, we will continue to
provide our customers with new functionality by developing relationships
with providers of related and complementary technologies. For example, we
have relationships with leading voice over DSL gateway developers
Jetstream Communications, TollBridge Technologies and CopperCom.
Furthermore, we will continue to incorporate new features and
functionality into our Web platform products and services,

5
<PAGE>

either through internal development or by acquiring technology where
appropriate, to enable small and medium size businesses to conduct an
increasingly broad range of business activities on the Web.

. Leverage Brand Name Recognition And Customer Support Infrastructure. We
believe that we have established a leading brand name with companies
seeking high-speed DSL Internet connectivity and Web platform services.
In addition, we believe that we are recognized by distribution partners
and end-users as providers of outstanding customer service and support.
We believe that continuing to strengthen the Netopia brand name will
facilitate market acceptance of new products and services. We intend to
leverage our reputation and expertise in providing complete, easy-to-use,
plug-and-play solutions to more fully penetrate our target market. In
addition, we will continue to leverage our positive brand name
recognition and our customer support organization to promote the sale of
our products and services.

Products and Services

6
<PAGE>

Internet Connectivity Products

Our Internet connectivity products provide cost-effective, high-speed,
multi-user, plug-and-play solutions for Internet access. Our customer premise
Internet connectivity products offer small and medium size businesses the
flexibility to use the communication technology which best meets their needs
for economy and performance. Our Internet connectivity products are summarized
in the following table.

<TABLE>
<CAPTION>
Estimated
Internet Access U.S. Street
Technology Our Products Functions and Features Price
- -----------------------------------------------------------------------------
<C> <C> <S> <C>
Digital Subscriber Routers* Provide a shared and $450-$700
Line (DSL) permanent connection to
the Internet at speeds up
to 1.6 Mbps and offer a
cost-effective solution
for customers that
require an "always on"
Internet presence for
applications such as
hosting a Web server or
conducting electronic
commerce through an
online store.
- -----------------------------------------------------------------------------
Integrated Provide a high- $100-$150
Access Device performance DSL module to
Modules enable Carrier Access
Corporation, or CAC, to
integrate voice and data
over digital subscriber
line technology. Also, by
using, the CAC Access
Bank II/SDSL product in
combination with our DSL
routers, digital service
units or filtering
bridges, customers have a
cost-effective method of
utilizing the same T1
line for both their voice
and data needs.
- -----------------------------------------------------------------------------
Digital Provide a cost-effective $650-$700
Service Units* method to migrate
Internet access from a T1
or 56K digital dataphone
service connection to DSL
without having to replace
or disrupt current
network hardware or
infrastructure.
- -----------------------------------------------------------------------------
Filtering Provide a shared, $650-$700
Bridges* permanent connection to
the Internet using the
simplicity of a bridged
connection with the added
security of packet
filtering and Internet
protocol (IP) based
remote management.
- -----------------------------------------------------------------------------
Security Provide customers with $2,800-$3,000
Appliances "always on" Internet
connections, such as DSL,
cost effective, high
performance firewall
protection with virtual
private networking and
bandwidth allocation.
- -----------------------------------------------------------------------------
Modems* Provide single users and $275-$325
small local area networks
a dedicated connection to
the Internet with upload
and download speeds up to
1.04 Mbps
- -----------------------------------------------------------------------------
*These DSL products include models that are fully
integrated with Copper Mountain's CopperView management
for CopperEdge central office access concentrators. This
full integration enhances the reliability, ease-of-use
and management functions of each of our DSL products.
These products are also interoperable with Lucent's
Stinger and Nokia's ATM/DSL D50 Speedlink digital
subscriber line central office access concentrators.
- -----------------------------------------------------------------------------
Cable Routers Provide a shared $500-$600
connection to the
Internet through
theEthernet port on a
cable modem.
- -----------------------------------------------------------------------------
TI and Frame Relay Routers Provide a dedicated, $800-$1,300
high-speed, shared
connection to the
Internet through a
traditional T1 leased
line service.
- -----------------------------------------------------------------------------
Integrated Services Routers Provide shared Internet $450-$1,100
Digital Network access at speeds up to
(ISDN) 128 Kbps over an
integrated services
digital network phone
line.
- -----------------------------------------------------------------------------
56K Digital Routers Provide a shared, $800-$1,050
Dataphone Service dedicated connection to
the Internet at 56 Kbps
or 64 Kbps speeds through
a traditional digital
dataphone leased line
service.
- -----------------------------------------------------------------------------
Dual Analog Routers Provide an entry-level $600-$700
solution for Internet
connections that will
work over standard analog
phone lines. By
aggregating as many as
three analog telephone
lines, our dual analog
routers provide shared
Internet access at speeds
up to 168 Kbps.
</TABLE>

7
<PAGE>

Internet Connectivity Products' Value-Added Features

In addition to supporting various Internet connectivity technologies, our
Internet connectivity products are designed to be plug-and-play and incorporate
many value-added features. We believe these features provide small and medium
size businesses with additional ease-of-use, security and cost savings
benefits, and differentiate our Internet connectivity products from those of
our competitors. Some of these features include:

. A design architecture that allows customers to change to faster Internet
connectivity technologies by simply exchanging the wide area network
module card within the router. For example, a business that currently
uses our integrated services digital network (ISDN) router can upgrade
the router to support higher speed DSL technology by simply replacing the
wide area network module card rather than having to purchase an entirely
new router;

[Depiction of expanded view of Internet router, exposing the wide area network
card]

. Built-in secure virtual private networking to interconnect remote
offices, mobile workers and businesses over the Internet. Optional
hardware acceleration for encryption and compression enhances virtual
private networking performance;

. Built-in firewall to protect businesses from intruders accessing a
network from the Internet;

. An integrated Ethernet hub with an uplink switch to easily create or
expand a local area network;

. An automated startup application that allows plug-and-play router
configuration and Web monitoring that displays real-time router
connection information;

. An integrated dynamic host configuration protocol (DHCP) server to
automate the configuration of computers on a local area network, and an
integrated dynamic host configuration protocol client to automate
configuration of the wide area network ports on the router;

. Network address translation (NAT) to provide the convenience and economy
of using one or a few internet protocol addresses while hiding the local
area network's internet protocol addresses from intruders;

. An integrated trivial file transfer protocol (TFTP) client that allows
rapid downloading of updated router operating software, or firmware, to
allow users faster access to enhanced router functionality; and

. Support for multiple protocol routing so networks which operate on
different protocols can be connected.

We also offer buyers of our Internet connectivity products "Customer Care,
Guaranteed!" service programs, including "Up & Running, Guaranteed!" These
service programs assist customers in ordering and provisioning the
telecommunication carrier line, and obtaining and establishing their service
from an Internet service provider. These programs also provide for the remote
configuration of the router, assist in the installation and configuration of
the client server software and provide technical support for our product line.
Toll-free technical support is included with this service program for 60 days,
with extended service programs available for up to three years.

We compete in markets characterized by continuing technological advancement,
changes in customer requirements and evolving industry standards. To compete
successfully, we must design, develop, manufacture and sell new or enhanced
products that provide increasingly higher levels of performance, reliability
and

8
<PAGE>

compatibility. For example, we anticipate that voice over DSL technology will
become an important feature of future DSL router products. As a result, we
believe we will need to successfully develop, introduce and market voice over
DSL functionality in our products. Additionally, we will need to continue to
integrate our DSL router technology with the architectures of leading central
office equipment providers in order to enhance the reliability, ease-of-use and
management functions of all of our DSL products. Currently, our router products
are fully integrated with Copper Mountain's CopperView management for
CopperEdge central office access concentrators and are interoperable with
Lucent's Stinger and Nokia's ATM/DSL D50 Speedlink digital subscriber line
central office access concentrators. However, we may not be able to
successfully develop, introduce, enhance or market these or other products
necessary to our future success. In addition, any delay in developing,
introducing or marketing these or other products would seriously harm our
business.

9
<PAGE>

Web Platforms

Our Web platforms enable small and medium size businesses and other
organizations to utilize the benefits of having a Web presence, conducting
electronic commerce and communicating in real time with customers and
colleagues over the Internet. Our Web platform products and services are
summarized in the following table.

<TABLE>
<CAPTION>
Estimated
Supported Our Products U.S. Street
Platforms and Services Functions and Features Price
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Netscape Navigator or Web sites Provide an easy-to-use and cost-effective way to set up a Web site on $20
Microsoft Internet the Internet without requiring any knowledge of hypertext markup per month
Explorer versions 3.02 language (HTML), programming skills or a technical staff to maintain
and higher the site. As part of our Web site platform, we have created over 50 Web
site content packages targeted to an industry or common interest group.
Our Web site content packages are ''no assembly required'' Web sites
that come pre-populated with information and functionality useful to
that targeted industry or group. We currently offer Web site content
packages for the following business categories:

Air Conditioning Vendors Doctors Mortgage Brokers
Animal Breeders Electronics Stores Portfolio Managers
Antique Dealers Entertainers Publishers
Appliance Shops Financial Planners Real Estate Brokers
Arts and Craft Stores Florists Recruiters
Beauty Salons Furniture Stores Restaurants
Bed and Breakfasts Golf Shops Sales Professionals
Bicycle Shops Health Care Services Securities Analysts
Boutiques Health Clubs Software Firms
Building Contractors Home Inspectors Specialty Services
Car Dealerships Home Offices Tax Consultants
Career Counselors Insurance Brokers Toyshops
Caterers Janitorial Services Transport Providers
Clergy Journalists Travel Agents
Consultants Kennels Tutors
Couriers Landscapers Wine Stores
Day Care Providers Lawyers
Dentists Manufacturers
- ------------------------------------------------------------------------------------------------------------------------------------
Netscape Navigator or E-stores Enable users to upgrade their Web site in order to sell their product $60-$150
Microsoft Internet or service over the Internet without requiring any knowledge of per month
Explorer versions 3.02 hypertext markup language (HTML), programming skills or a technical
and higher staff to maintain the store. Product catalog Web pages in the Web site
are enhanced with shopping cart functionality and credit card capture
and authorization capabilities to offer a seamless shopping experience
for the Web site visitor. E-store owners have complete back-end
financial reconciliation for their electronic transactions.
- ------------------------------------------------------------------------------------------------------------------------------------
Sun Solaris v2.51 or Site server Enables Internet service providers, competitive local exchange Individual
higher and Netscape carriers, Internet portals, associations and others to offer their pricing
Enterprise Server 3.5.1 members or customers hosted Web sites and electronic commerce stores
or higher using our entire Web platform.
- ------------------------------------------------------------------------------------------------------------------------------------
Windows 3.X Timbuktu Pro Enables users to communicate and collaborate in real time over the $20-$90
Windows 95 Internet and within Intranets with other Timbuktu Pro users. Our per seat
Windows 98 Timbuktu Pro product family also includes Timbuktu Web Seminar for
Windows NT Internet conferencing and netOctopus network systems management tools.
Mac OS
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

Some companies are offering Web presence and enhancement products at no
cost. In some instances, we believe these companies are not charging for such
products and services because they are generating revenue from their Web sites
from other sources, such as advertising or subscription fees. If such free
products and services become widely used, the market for our Web platform
products may be more limited.

10
<PAGE>

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

11
<PAGE>

Strategic Distribution Relationships

We have developed many strategic relationships related to the distribution
of our products. These relationships are listed in the following table.

<TABLE>
<CAPTION>
Internet
Distribution Connectivity Web
Channel Company Products Platforms
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Internet Service Providers Bell Atlantic X
Big Planet X
Bell South X
British Telecom X
Concentric Network X X
Earthlink Network X X
Epoch Networks X
France Telecom (Wanadoo) X X
Freeserve X
PSINet X
Telecom Italia (Telecom Italia Net) X X
UUNET Technologies X
Verio (and over 400 additional Internet X
service providers)
- ------------------------------------------------------------------------------------------------------------------------
Competitive Local Exchange Carriers (CLECs) Birch Telecom X X
Covad Communications X
DSL.net X
ICG Communications X
Jato Communications X X
KKF.net X
MCIWorldCom X
NorthPoint Communications X
Rhythms NetConnections X
- ------------------------------------------------------------------------------------------------------------------------
Internet Portals and Industry Associations American Dental Association X
(ADA Electronic Commerce Company)
Citigroup Inc.'s Bizzed.com X
Tribune Co.'s Blackvoices.com X
Yahoo! GeoCities X
Intuit quicken.com X
National Home Office Association X
Netscape Netcenter X
theseniornetwork.com X
Virgin Biznet X
- ------------------------------------------------------------------------------------------------------------------------
Two-Tier Distributors Ingram Micro X X
Merisel X X
Softway International X X
Tech Data X X
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>

12
<PAGE>

Strategic Product Development Relationships

We have developed many strategic relationships related to product
development. These relationships are listed in the following table.

Product Development Company Product
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Digital Subscriber Line Alcatel DSL Internet connectivity products
Carrier Access Corporation
Copper Mountain
Lucent
Nokia
Virata
- ------------------------------------------------------------------------------------------------------------------------
Voice over Digital Subscriber Line CopperCom DSL Internet connectivity products
Jetstream Communications
TollBridge Technologies
- ------------------------------------------------------------------------------------------------------------------------
Electronic Commerce Concentric Network E-store
CyberCash
CyberSource
Intershop Communications
WebOrder
- ------------------------------------------------------------------------------------------------------------------------
Internet/Intranet Communications Allen Systems Group Timbuktu Pro
Computer Associates
Microsoft
Pixion (PictureTalk)
Remedy
Tivoli Systems
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>

Distribution, Sales and Marketing

We sell our products and related maintenance, support and other services
through distributors, Internet service providers (ISPs), telecommunications
service providers, value-added resellers (VARs) and directly by us.
Historically, a significant portion of our revenues have been generated by
selling our products through two-tier distribution channels and we expect this
trend to continue. Our marketing strategy is to achieve broad market
penetration by utilizing multiple distribution channels including the use of
two-tier distributors, direct sales and telemarketing, portals, Internet
service providers, telecommunications providers, value-added resellers and
electronic marketing and distribution. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."

Two-Tier Distributors. Our major distributors in North America are Ingram
Micro and Tech Data which distribute our products to Internet service
providers, resellers, value-added resellers, dealers and dealer chains.
Internationally, we distribute our products through approximately 63
distributors in 32 countries. In Europe, distributors sell primarily in France,
Italy and the United Kingdom, and, in the Pacific Rim, distributors sell
primarily in Japan. We provide periodic training in the development of Internet
and electronic commerce infrastructure to value-added resellers who purchase
our products primarily from distributors, and we have recruited approximately
1,500 Internet value-added resellers for the sale of our products. Our
agreements with distributors can generally be terminated without cause and do
not provide for minimum purchase commitments. Additionally, the agreements
provide price protection and grant the distributors limited rights to return
unsold inventories of our products in exchange for new purchases. Ingram Micro
has accounted for:

. 10% of our total revenues for the fiscal year ended September 30, 1999;

. 12% of our total revenues for the fiscal year ended September 30, 1998;
and,

. 14% of our total revenues for the fiscal year ended September 30, 1997.

No other customers during the fiscal years ended September 30, 1999, 1998
and 1997 accounted for 10% or more of our total revenues. We do not have a
purchase contract with Ingram Micro that obligates them to continue to purchase
our products. As a result, Ingram Micro could cease purchasing our products at
any time.

13
<PAGE>

Our revenues will decline and our losses will increase if we lose one or
more of our significant distributors or customers or if our key distributors or
customers reduce or delay purchases of our products. During the fiscal year
ended September 30, 1999, our top three customers and distributors who each
individually represented at least 5% of our total revenues accounted for
approximately 21% of our total revenues as a group. In this period, sales to
Ingram Micro represented approximately 10% of our total revenues. In the years
ended September 30, 1998 and 1997, our distributors and customers who each
individually represented at least 5% of our total revenues accounted for
approximately 16% and 20% of our total revenues, respectively. We do not have
purchase contracts with any of our customers that obligate them to continue to
purchase our products and these customers could cease purchasing our products
at any time.

Internet Service Providers And Telecommunications Providers (Including
Competitive Local Exchange Carriers). We have formed strategic relationships
with Internet service providers and telecommunication providers that assist us
in developing, distributing and marketing our products. For example, to assist
customers in establishing their Internet access, Web sites and/or E-stores, and
to increase sales of our products, we have formed, over several years,
strategic relationships with PSINet, Verio, Concentric Network, UUNET
Technologies, France Telecom and approximately 400 other Internet service
providers. More recently, our extensive Internet service provider relationships
facilitated our development of relationships with emerging competitive local
exchange carriers, such as NorthPoint Communications, Rhythms NetConnections,
Jato Communications and Covad Communications.

The purchasers of our DSL Internet connectivity products are primarily
emerging competitive telecommunications service providers such as NorthPoint
Communications and Covad Communications. We depend upon the ability of such
competitive telecommunications service providers to successfully offer DSL
services. These competitive telecommunications service providers are competing
with traditional regional telephone companies. Traditional regional telephone
companies may have a number of competitive advantages over their new
competitors, including greater resources, name recognition and access to
customers. Also, traditional regional telephone companies may restrict, or
attempt to restrict, the ability of competitive telecommunications service
providers to install DSL equipment at the regional telephone companies' central
offices.

Internet Portals And Industry Associations. We utilize common interest
communities to assist us in developing, distributing and marketing our
products. Historically, large numbers of Internet users initiated their entry
to the Internet through Web sites which provided an organized view across
numerous, unrelated potential areas of interest. These Web sites are known as
horizontal portals. Increasingly, Web sites are being created which serve as an
Internet entry point to more narrowly focused common interest groups. These Web
sites are known as vertical portals. Additionally, industry organizations,
professional groups, franchise organizations and other common interest groups
are utilizing the Internet to conduct business. We believe each of these groups
concentrates users and/or organizations whose needs can be served by our
products. To increase sales of our products, we have established licensing
and/or revenue sharing arrangements with horizontal portals (such as Netscape
Netcenter and Yahoo!GeoCities), vertical portals (such as American Dental
Association and theseniornetwork.com) and other common interest groups (such as
National Home Office Association).

Direct Sales To Business Customers. Our direct sales and telemarketing force
focuses on large opportunities to sell our products to business customers. Our
sales force assists end users by providing solutions for their needs related to
Internet connectivity, establishing and enhancing their presence, and
conducting business on the Web, including electronic commerce, communication
and collaboration. In addition, the sales force provides pre-sales, promotional
and order management support to distributors, Internet service providers,
telecommunications service providers, Internet portals, resellers and value-
added resellers, identifies new opportunities for product development and
provides general market information to management. Timbuktu Pro software is
currently the primary product sold through this channel. We intend to expand
sales of our products through this channel by contracting with new telesales
organizations and opening an additional international telesales office.

14
<PAGE>

Other Marketing. We utilize several other marketing programs, such as our
online Web site, trade advertising, participation in trade shows and press
briefings on strategy and new products to support the sale and distribution of
our products. Through these marketing programs, we seek to build brand name
recognition, stimulate demand and inform distribution channels about the
capabilities and benefits of our products.

Customer Service and Support

We believe that effective customer support is a key criterion used in
selecting our products. Network managers and administrators, Internet service
providers, value-added resellers (VARs), distributors, resellers, consultants
and other experienced technical experts utilize our toll-free telephone support
lines, fax and online support services to access our internal technical
databases and support personnel. Additionally, support personnel are trained to
satisfy the needs of customers and end users who are not technical experts and
do not have access to sophisticated technical support. We believe that our
support programs have been successful in creating brand loyalty through our
focused support of the specialized needs of these customers and end users, and
through the easy-to-use, plug-and-play design of our products.

With "Customer Care, Guaranteed!" service programs including "Up and
Running, Guaranteed!," we remotely configure our Internet routers and assist
users in setting up service with the user's telephone company and Internet
service provider. Once unique in the industry, this concept has been adopted by
a number of our competitors. However, we believe that our program remains the
most comprehensive in the market. Our expertise in solving technical problems
enables us to commit our resources to analyze any problem a customer or end
user may have, even if it involves a product from another company. The effect
of these activities is to build customer loyalty to us as the single source for
Internet connectivity solutions.

Research and Development

We believe that our future business and operating results depend in part on
our ability to continue to enhance existing products and develop new products
in a timely manner. We continuously evaluate the needs of our distribution
channel partners and end users to provide them with new products incorporating
new technologies and standards.

We are focused on delivering Internet connectivity products to meet the
voice and data needs of small and medium size businesses. These products are
expected to include a family of integrated access devices that combine voice
and related services, such as high quality dial tone, caller identification,
call waiting and three-way calling, and data services, such as routing and
security, over DSL. In addition, we intend to continue to integrate future
generations of our DSL equipment into the leading central office equipment
providers' architectures and to develop additional DSL technologies on existing
and new routing platforms.

Our Web platforms have been designed to facilitate the integration of both
current and future Internet technologies. We will continue to add new
capabilities to these products, including a platform for easy-to-use Web site
enhancement, advanced addressing techniques, electronic commerce reporting
enhancements, faxing, video and multimedia presentations. All functionality
will be accessible from standard PCs running standard Internet browsers. Future
enhancements will also accommodate new computer systems, including handheld
computers, wireless devices and other new popular platforms.

We have historically devoted a significant amount of our resources to
research and development. Research and development expenses were $9.2 million
for the fiscal year ended September 30, 1999 and $7.2 million for each of the
fiscal years ended September 30, 1998 and 1997. We expect to continue to devote
substantial resources to product and technological development.

Competition

The markets for our products, services and subscribers are intensely
competitive, highly fragmented and characterized by rapidly changing
technology, evolving industry standards, price competition and frequent new

15
<PAGE>

product introductions. A number of companies offer products that compete with
one or more of our products. 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. Our current and prospective competitors include original equipment
manufacturers, product manufacturers of Internet connectivity products,
developers of Internet presence and Web site software and developers of remote
control and collaboration software.

In the Internet connectivity products market, we compete primarily with
3Com, Lucent Technologies, Cayman Systems, Cisco Systems, Efficient Networks,
FlowPoint, Ramp Networks and several other companies. In addition to these
competitors, there have been a growing number of announcements by other
companies that they intend to enter the DSL router market. Further, some
competitors offer low-cost or no-cost support programs that are similar to our
"Up & Running, Guaranteed!" program.

In the market for Web sites and electronic commerce platforms, we compete
with Homestead Technologies, IBM, Inc. Online, Site Architects, Sitematic,
Verio, Yahoo!Geocities and several other companies. In the market for our
remote control and enterprise software, we compete primarily with Computer
Associates, Intel, Microcom (Compaq), Microsoft, Vector Networks, Stac
Software, Symantec, Tivoli Systems (IBM) and several other companies.

Many of our current and potential competitors in all three 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 customers 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 three 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.

We believe that the principal competitive factors in our markets are:

. Product feature, function and reliability;

. Customer service and support;

. Price and performance;

. Ease of use;

. Brand name recognition;

. Strategic alliances;

. Size and scope of distribution channels;

. Timeliness of new product introductions;

. Breadth of product line; and

. Size and loyalty of customer base.

We cannot assure you that we will be able to compete successfully in the
future. Our inability to successfully compete would seriously harm our
business.

16
<PAGE>

Intellectual Property And Other Proprietary Rights

Our ability to compete is dependent in part on our proprietary rights and
technology. We rely primarily on a combination of patent, copyright and
trademark laws, trade secrets, confidentiality procedures and contractual
provisions to protect our proprietary rights. We generally enter into
confidentiality or license agreements with our employees, resellers,
distributors, customers and potential customers and limit access to the
distribution of our software, hardware designs, documentation and other
proprietary information. However, in some instances, we may find it necessary
to release our source code to certain parties. For example, we entered into a
product development agreement pursuant to which we released certain source code
to a third party in the People's Republic of China.

Despite our efforts to protect our proprietary rights, unauthorized parties
may attempt to copy aspects of our products or obtain and use information that
we regard as proprietary. Policing unauthorized use of our products is
difficult, and there is no guarantee that the safeguards that we employ will
protect our intellectual property and other valuable competitive information.
For example, in selling our Timbuktu Pro software, we often rely on license
cards that are included in our products and are not signed by licensees.
Therefore, such licenses may be unenforceable under the laws of certain
jurisdictions. In addition, the laws of some foreign countries where our
products are or may be manufactured or sold, particularly developing countries
including various countries in Asia, such as the People's Republic of China, do
not protect our proprietary rights as fully as do the laws of the United
States. We rely upon certain software, firmware and hardware designs that we
license from third parties, including firmware that is integrated with our
internally developed firmware and used in our products to perform key
functions. We cannot be certain that these third-party licenses will continue
to be available to us on commercially reasonable terms. The loss of, or
inability to maintain, such licenses could result in shipment delays or
reductions until equivalent firmware is developed, identified, licensed and
integrated which would seriously harm our business.

Employees

As of December 1, 1999, we employed 271 persons, including 82 in sales and
marketing, 91 in research and development, 45 in customer service and support,
27 in manufacturing operations, and 26 in general and administrative functions.
We also contract with consultants who provide us short and long-term services
in various areas of our business.

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

ITEM 2. PROPERTIES

Each of the facilities we occupy is leased for a term of one to nine years.
We believe that our existing facilities are adequate for our current needs and
that additional space sufficient to meet our needs for the foreseeable future
will be available on reasonable terms. Since our California facilities are
located near major earthquake fault lines, in the event of a major earthquake,
our business could be seriously harmed.

We currently lease:

. 49,000 square feet of office space for our headquarters in Alameda,
California. This site is used for research and development,
administration, customer service and sales and marketing activities. We
have

17
<PAGE>

leased this facility for a five-year term, expiring on December 31, 2002.
We have a five-year renewal option on this facility which, if exercised,
would commence on January 1, 2003.

. A portion (currently approximately 14,500 square feet) of a 29,000
square foot warehouse in San Leandro, California to accommodate our
distribution center, where we receive and maintain our inventory and
ship our products. This facility is currently subleased from Farallon
Communications, an affiliate of Gores Technology Group, for a term
expiring on December 31, 2002.

. 7,000 square feet of research and development office space in Lawrence,
Kansas. This facility is currently leased for a one-year term, expiring
on June 30, 2000.

. 7,000 square feet of research and development office space in Fremont,
California. This facility is currently leased for a five-year term,
expiring on December 1, 2004.

. 4,500 square feet of sales office space in Dallas, Texas for our
software telesales group. The facility is currently leased for a five-
year term, expiring on July 31, 2003.

. 4,250 square feet of research and development office space in Orem,
Utah. The facility is currently leased for a three-year term, expiring
February 28, 2002.

. Other office space with less than 2,000 square feet per location in
Paris, France; Neunkirchen am Brand, Germany; Maastricht, The
Netherlands; Springfield, Virginia; and San Jose, California used
primarily for sales and research and development.

ITEM 3. LEGAL PROCEEDINGS

From time to time we are involved in litigation incidental to the conduct of
our business. We are not party to any lawsuit or proceeding that, in our
opinion, is likely to seriously harm our business.

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

There were no matters submitted to a vote of our security holders during the
fourth quarter ended September 30, 1999.

18
<PAGE>

PART II

ITEM 5. MARKET FOR NETOPIA'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS

Since our initial public offering in June 1996, our common stock has been
traded on the Nasdaq National Market under the symbol NTPA. The following table
sets forth the range of quarterly intra-day high and low sale prices of our
common stock on the Nasdaq National Market for the last three fiscal years
ended September 30, 1999, 1998 and 1997.

<TABLE>
<CAPTION>
1999 1998 1997
--------------- -------------- --------------
High Low High Low High Low
------- ------- ------- ------ ------- ------
<S> <C> <C> <C> <C> <C> <C>
Fourth fiscal quarter ended
September 30................... $42.625 $17.375 $11.500 $4.375 $7.8125 $4.125
Third fiscal quarter ended
June 30........................ 37.000 8.250 10.875 5.625 5.500 3.500
Second fiscal quarter ended
March 31....................... 9.9375 5.250 6.375 4.125 6.500 4.000
First fiscal quarter ended
December 31.................... $11.250 $ 3.625 $ 9.000 $5.000 $15.250 $6.125
</TABLE>

On December 1, 1999, the closing price of our common stock as reported on
the Nasdaq National Market was $54.00 per share.

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

. Variations in our quarterly operating results;

. Changes in securities analysts' estimates of our financial performance;

. Changes in market valuations of similar companies;

. Announcements by us or our competitors of significant contracts,
acquisitions, strategic partnerships, joint ventures or capital
commitments;

. Losses of major customers or the failure to complete significant
licensing transactions;

. Additions or departures of key personnel; and

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

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

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

19
<PAGE>

ITEM 6. SELECTED FINANCIAL DATA

In the tables below, we provide you with our selected consolidated financial
data. We have prepared this information using our audited consolidated
financial statements for the fiscal years ended September 30, 1999, 1998, 1997,
1996 and 1995. These consolidated financial statements have been audited by
KPMG LLP, our independent auditors.

When you read this selected financial data, it is important that you read it
along with Management's Discussion and Analysis of Financial Condition and
Results of Operations, the historical consolidated financial statements and
related notes included elsewhere in this prospectus.
<TABLE>
<CAPTION>
Fiscal years ended September 30,
---------------------------------------------
1999 1998 1997 1996 1995
-------- -------- ------- ------- -------
(in thousands, except for per share
amounts)
<S> <C> <C> <C> <C> <C>
Revenues........................ $ 44,151 $ 24,836 $20,170 $16,718 $ 6,569
Cost of revenues................ 16,243 7,955 6,396 3,811 674
-------- -------- ------- ------- -------
Gross profit................ 27,908 16,881 13,774 12,907 5,895
Operating expenses:
Research and development...... 9,211 7,201 7,177 7,603 5,905
Selling and marketing......... 20,221 14,404 11,288 9,410 4,463
General and administrative.... 3,654 3,380 2,945 2,835 2,364
Acquired in-process research
and development (1).......... 4,205 -- -- -- --
Amortization of goodwill (2).. 543 -- -- -- --
-------- -------- ------- ------- -------
Total operating expenses.... 37,834 24,985 21,410 19,848 12,732
-------- -------- ------- ------- -------
Operating loss.............. (9,926) (8,104) (7,636) (6,941) (6,837)
Other income, net............... 2,066 2,222 1,869 1,040 815
-------- -------- ------- ------- -------
Loss from continuing
operations before
income taxes............... (7,860) (5,882) (5,767) (5,901) (6,022)
Income tax provision (benefit)
(3)............................ -- 2,155 (2,217) (4,619) (2,732)
-------- -------- ------- ------- -------
Loss from continuing
operations................. (7,860) (8,037) (3,550) (1,282) (3,290)
Discontinued operations, net of
taxes (4)...................... -- (2,496) 3,021 4,983 5,796
-------- -------- ------- ------- -------
Net income (loss)........... $ (7,860) $(10,533) $ (529) $ 3,701 $ 2,506
======== ======== ======= ======= =======
Per share data, continuing
operations:
Basic and diluted loss per
share........................ $ (0.60) $ (0.69) $ (0.31) $ (0.13) $ (0.36)
======== ======== ======= ======= =======
Shares used in the per share
calculations................. 13,092 11,687 11,335 9,890 9,148
======== ======== ======= ======= =======
Per share data, discontinued
operations:
Basic income (loss) per
share........................ $ -- $ (0.21) $ 0.27 $ 0.50 $ 0.63
======== ======== ======= ======= =======
Diluted income (loss) per
share........................ $ -- $ (0.21) $ 0.24 $ 0.46 $ 0.61
======== ======== ======= ======= =======
Common shares used in the
calculations of basic
income per share............. -- 11,687 11,335 9,890 9,148
======== ======== ======= ======= =======
Common and common equivalent
shares used in
the calculations of diluted
income per share............. -- 11,687 12,350 10,887 9,522
======== ======== ======= ======= =======
Per share data, net income
(loss):
Basic net income (loss) per
share........................ $ (0.60) $ (0.90) $ (0.05) $ 0.37 $ 0.27
======== ======== ======= ======= =======
Diluted net income (loss) per
share........................ $ (0.60) $ (0.90) $ (0.05) $ 0.34 $ 0.26
======== ======== ======= ======= =======
Common shares used in the
calculations of basic
net income (loss) per share.. 13,092 11,687 11,335 9,890 9,148
======== ======== ======= ======= =======
Common and common equivalent
shares used in the
calculations of diluted net
income (loss) per share...... 13,092 11,687 11,335 10,887 9,522
</TABLE>

20
<PAGE>

<TABLE>
<CAPTION>
September 30,
---------------------------------------
1999 1998 1997 1996 1995
------- ------- ------- ------- -------
(in thousands)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash, cash equivalents and short-term
investments.......................... $69,483 $42,095 $41,636 $37,145 $17,643
Working capital....................... 74,428 38,152 49,979 49,469 21,755
Total assets.......................... 95,969 56,292 61,001 61,618 33,872
Long-term liabilities................. 544 260 361 46 218
Total stockholders' equity............ $85,079 $44,801 $53,977 $53,143 $24,279
</TABLE>
- --------
(1) As a result of our acquisitions of Serus and netOctopus in December 1998,
we allocated a portion of the purchase price to in-process research and
development. We allocated $3.9 million to in-process research and
development related to the acquisition of Serus, and we allocated $400,000
to in-process research and development related to the acquisition of
netOctopus.
(2) Amortization of goodwill represents the amounts we allocated to intangible
assets related to our acquisitions of Serus and netOctopus. We are
amortizing these intangible assets over four years.
(3) See Note 6 of Notes to Consolidated Financial Statements.
(4) In August 1998, we sold our LAN Division. The disposition has been
accounted for as a discontinued operation in accordance with Accounting
Principles Board Opinion No. 30, and prior period consolidated financial
statements have been restated to reflect the LAN Division's operations as
a discontinued operation. See Note 3 of Notes to Consolidated Financial
Statements.

21
<PAGE>

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

The following discussion and analysis of our financial condition and results
of operations should be read in conjunction with "Selected Consolidated
Financial Data" and our consolidated financial statements and notes thereto
appearing elsewhere in this report. This discussion and analysis contains
forward-looking statements that involve risks, uncertainties and assumptions.
Our actual results may differ materially from those anticipated in these
forward-looking statements as a result of certain factors, including, but not
limited to, those set forth under "Other Factors That You Need To Be Aware Of
Which May Affect Our Future Operating Results" and elsewhere in this report.

Overview

We sell our products and related maintenance, support and other services
through distributors, Internet service providers (ISPs), telecommunication
service providers, value-added resellers (VARs) and directly to end users.
Historically, a significant portion of our revenues has been generated by
selling our products through two-tier distribution channels, and we expect this
trend to continue.

For the fiscal years ended September 30, 1999, 1998 and 1997:

. Revenues from two-tier distributors accounted for 42%, 45% and 43% of
our total revenues, respectively;

. Our three largest distributors, in total, accounted for 19%, 21% and 24%
of our total revenues, respectively; and

. Ingram Micro, a worldwide distributor of computer technology products
and services, accounted for 10%, 12% and 14% of our total revenues,
respectively. No other customers during the fiscal year ended
September 30, 1999, 1998 and 1997 accounted for 10% or more of our total
revenues.

We do not have purchase contracts with any of our customers that obligate
them to continue to purchase our products and these customers could cease
purchasing our products at any time which could seriously harm our business.

Historically, a significant portion of our revenues has been derived from
customers outside of the United States, and we expect this trend to continue.
For the fiscal years ended September 30, 1999, 1998 and 1997, international
revenues accounted for 28%, 33% and 27% of our total revenues, respectively.

Our international revenues are currently denominated in United States
dollars, and revenues generated by our international distributors are paid to
us in United States dollars.

Our revenues are derived from the sale of hardware and software products and
include license revenues for our Web site server and Timbuktu Pro software,
recurring revenues from our Web sites and E-stores and sales of our Internet
connectivity products and fees for related services. We recognize revenue from
the sale of our hardware products upon shipment. We recognize revenues from
licenses of computer software provided that a firm purchase order has been
received, the software and related documentation have been shipped, collection
of the resulting receivable is deemed probable, and no other significant vendor
obligations exist. We recognize maintenance and service revenues over the
period in which the services are provided. Certain of our sales are made to
customers under agreements permitting limited rights of return for stock
balancing or with

22
<PAGE>

protection for future price decreases. We record revenue net of an estimated
allowance for returns and price protection. Any product returns or price
decreases in the future that exceed our allowances may seriously harm our
business. Although the Company has experienced revenue growth over the last
five years, there can be no assurance that the Company will be profitable on a
quarterly or annual basis.

We provide end users of our products with a 90-day limited warranty on
single-user versions of our Timbuktu Pro software and a one-year limited
warranty on our Internet connectivity products. We permit end users to return
Timbuktu Pro and our Internet connectivity products for replacements or for
refund of the full purchase price if the products do not perform as warranted.
Our Web sites are provided on an "as is" basis, and therefore we do not
generally offer a warranty on this product. End users of our Web sites are
offered a free 30-day evaluation period to evaluate the product prior to
purchase and thereafter can discontinue their service at any time at no cost.
In the past, we have not encountered material warranty claims. In the future,
if warranty claims exceed our reserves for such claims, our business would be
seriously harmed. Additionally, we attempt to further limit our liability to
end users through disclaimers of special, consequential and indirect damages
and similar provisions. However, we cannot assure you that such limitations of
liability will be legally enforceable.

In our first fiscal quarter of 1999, we completed two acquisitions. In the
first transaction, we purchased substantially all of the assets and assumed
certain liabilities and the existing operations of Serus LLC, a Utah limited
liability company (Serus). We are continuing Serus's development of a Java-
based Web site editing software product which would allow Web site owners to
modify and edit the appearance of their Web site through their Web browser with
minimal knowledge of hypertext markup language (HTML). We have currently begun
marketing the products both independently and along with our Web site and site
server platform to allow users more flexibility in customizing their Web sites.
In accordance with the Serus Asset Purchase Agreement, we acquired
substantially all of the assets and assumed certain liabilities of Serus and
its existing operations which included in-process research and development. In
the second transaction, we purchased from Network Associates substantially all
of the assets and assumed certain liabilities related to the netOctopus systems
management software. The netOctopus software is a suite of administration tools
under development that allows for simultaneous system support of multiple users
across Mac OS computer networks. We have completed the development of the
Windows versions of the netOctopus software products in fiscal 1999 and have
begun marketing the netOctopus products both independently and along with our
Timbuktu Pro enterprise software. In accordance with the netOctopus Purchase
Agreement, we acquired substantially all of the assets and assumed certain
liabilities related to the netOctopus software and its existing operations,
which included in-process research and development.

In our fourth fiscal quarter of 1998, we sold our LAN Division through which
we had developed and sold LAN products primarily for Apple computers. The sale
of the LAN Division has been accounted for as a discontinued operation and
prior period consolidated financial statements have been restated to reflect
the discontinuation of the LAN Division. The LAN Division's operations,
products and the market in which it competed were no longer considered core to
our Internet business strategy. As a result, we sold the LAN Division's
products, accounts receivable, inventory, property and equipment, intellectual
property and other related assets, to Farallon Communications, an affiliate of
Gores Technology Group, and a Delaware corporation. Farallon Communications
also assumed certain accounts payable and other liabilities of the LAN
Division. See Note 3 of Notes to Condensed Financial Statements.

Events Occurring After September 30, 1999

On October 13, 1999, we closed a transaction to purchase StarNet
Technologies, Inc. (StarNet), a California corporation in a merger transaction
in which StarNet merged into a newly formed, wholly owned, subsidiary of the
Company. StarNet has been developing a voice channel architecture that allows
the transmission of up to eight voice lines over a digital subscriber line
along with the simultaneous transmission of standard data packets. We intend to
integrate StarNet's technology into our Internet connectivity product
development and begin offering voice and data integrated access devices. Any
delay in the completion of the

23
<PAGE>

development of the products would cause us to incur additional unplanned
development expenses as well as the loss of or deferral of customer purchases,
either of which could adversely affect our business.

We will account for the transaction under the purchase method. The aggregate
consideration is approximately $27.5 million at closing (which includes $1.0
million of potential earnout payments) and may increase up to an additional
$4.9 million depending on the actual amount of potential earnout payments. See
Note 10 of "Notes To Consolidated Financial Statements."

The acquisition will result in goodwill and other intangible assets of $21.8
million which will be amortized over three to four years and a one time charge
for acquired in-process research and development in the amount of $5.7 million
which will be recorded in the first quarter of fiscal year 2000.

The Company used the income approach to appraise the value of the business
and projects acquired. Such method takes into consideration the stage of
completion of the projects and estimates related to expected future revenues,
expenses and cash flows which are then discounted back to present day amounts.
Based upon these estimates, material net cash flows from the acquired business
are expected to occur during the calendar year 2000. These cash flows were
discounted using a weighted average discount rate of 20%. Based upon the
expenses incurred and the development time invested in the products prior to
the acquisition and the estimated expenses and development time to complete the
products, the Company determined the products purchased in aggregate, including
products under development and completed products, to be approximately 73%
complete at the time of acquisition.

We believe we followed recent guidance disseminated by the SEC in our
valuation of the assets acquired and liabilities assumed and, in particular, in
the valuation of in-process research and development. However, in the event
that it is determined that we did not properly value such assets and
liabilities, we may have to re-state the charges to operations taken in
connection with such transactions.

In the course of integrating StarNet into our business operations, we may
discover facts or circumstances that were not known nor apparent to us before
we acquired StarNet or during our financial and technical due diligence reviews
of StarNet. There can be no assurance that we will not encounter difficulties
when integrating the operations of StarNet, or that we will achieve the
specific benefits expected from the integration of StarNet. The acquisition of
StarNet involves a number of additional risks, including:

. Technical risks related to the completion of on-going development
efforts;

. Assimilation of new operations and personnel;

. The diversion of resources from our existing business;

. Integration of StarNet's respective equipment, product and service
offerings, networks and technologies, financial and information systems
and brand names;

. Coordination of geographically separated facilities and work forces;

. Management challenges associated with the integration of the companies;

. Coordination of their respective engineering, selling, marketing and
service efforts;

. Assimilation of new management personnel; and

. Maintenance of standards, controls, procedures and policies.

The process of integrating StarNet's operations, including its personnel,
could cause interruption of, or loss in momentum in our business and
operational activities, including those of StarNet. In addition, StarNet's
employees, who may be key to the integration effort or our ongoing operations
may choose not to continue to work for us following the closing of the
acquisition. Any delays in the completion of the technology development would
cause us to incur additional unplanned development expenses as well as the loss
or deferral of customer purchases, either of which could adversely affect our
business.

24
<PAGE>

Results of Operations

The following table sets forth for the periods indicated, certain statement
of operations data as well as such data expressed as a percentage of revenues.
<TABLE>
<CAPTION>
Fiscal years ended
September 30,
----------------------------
1999 1998 1997
------- -------- -------
(in thousands)
<S> <C> <C> <C>
Statement of operations data:
Revenues.................................... $44,151 $ 24,836 $20,170
Cost of revenues............................ 16,243 7,955 6,396
------- -------- -------
Gross profit............................ 27,908 16,881 13,774
Operating expenses:
Research and development.................. 9,211 7,201 7,177
Selling and marketing..................... 20,221 14,404 11,288
General and administrative................ 3,654 3,380 2,945
Acquired in-process research and
development.............................. 4,205 -- --
Amortization of goodwill.................. 543 -- --
------- -------- -------
Total operating expenses................ 37,834 24,985 21,410
------- -------- -------
Operating loss.......................... (9,926) (8,104) (7,636)
Other income, net........................... 2,066 2,222 1,869
------- -------- -------
Loss from continuing operations before
income taxes............................. (7,860) (5,882) (5,767)
Income tax provision (benefit).............. -- 2,155 (2,217)
------- -------- -------
Loss from continuing operations........... (7,860) (8,037) (3,550)
Discontinued operations:
Income from discontinued operations, net
of taxes................................. -- 602 3,021
Loss on sale of discontinued operations,
net of taxes............................. -- (3,098) --
------- -------- -------
Net loss................................ $(7,860) $(10,533) $ (529)
======= ======== =======
As a percentage of revenues:
Revenues.................................... 100.0% 100.0% 100.0%
Cost of revenues............................ 36.8 32.0 31.7
------- -------- -------
Gross profit............................ 63.2 68.0 68.3
Operating expenses:
Research and development.................. 20.9 29.0 35.6
Selling and marketing..................... 45.8 58.0 56.0
General and administrative................ 8.3 13.6 14.6
Acquired in-process research and
development.............................. 9.5 -- --
Amortization of goodwill.................. 1.2 -- --
------- -------- -------
Total operating expenses................ 85.7 100.6 106.2
------- -------- -------
Operating loss.......................... (22.5) (32.6) (37.9)
Other income, net........................... 4.7 8.9 9.3
------- -------- -------
Loss from continuing operations before
income taxes............................. (17.8) (23.7) (28.6)
Income tax provision (benefit).............. -- 8.7 (11.0)
------- -------- -------
Loss from continuing operations........... (17.8) (32.4) (17.6)
Discontinued operations:
Income from discontinued operations, net
of taxes................................. -- 2.4 15.0
Loss on sale of discontinued operations,
net of taxes............................. -- (12.4) --
------- -------- -------
Net loss................................ (17.8)% (42.4)% (2.6)%
======= ======== =======
</TABLE>

25
<PAGE>

Fiscal Years Ended September 30, 1999, 1998 and 1997

Revenue. Our revenues increased 77.8% to $44.1 million in fiscal 1999 from
$24.8 million in fiscal 1998, which increased 23.1% from $20.2 million in
fiscal 1997

The increase in fiscal 1999 was primarily due to:

. Increased sales of our DSL Internet connectivity products, which were not
available until the latter part of our fourth quarter in fiscal 1998 in
North America, and not available until fiscal 1999 internationally;

. Increased license sales of the Web site and site server products as well
as increased volume license sales of our Timbuktu Pro Windows software
and acquired netOctopus products which were not available during fiscal
1998;

. Increased sales of our integrated services digital Network (ISDN)
Internet router internationally, primarily as a result of our
relationship with France Telecom Wanadoo; and

. Increased sales of our T1 Frame Relay and analog Internet connectivity
products.

These increases were partially offset by decreased sales of our integrated
services digital network Internet routers in North America as demand for DSL
products increased, and decreased sales of the Mac OS version of Timbuktu Pro
software.

. The increase in fiscal 1998 was primarily due to:

. Increased sales of the Windows version of Timbuktu Pro software,
particularly volume site licenses;

. Increased sales of our integrated services digital network (ISDN)
Internet router internationally, primarily as a result of our
relationship with Wanadoo; and,

. Increased sales of our frame relay Internet router in North America which
was not available during the entire 1997 fiscal year.

These increases were partially offset by decreased sales of the Mac OS
version of Timbuktu Pro software and price competition related to our
integrated services digital network Internet router in North America.

During fiscal years 1999 and 1998, our Internet connectivity products,
particularly our internet routers, had experienced increasing price competition
from both domestic and foreign manufacturers of similar products. We expect
that our Internet connectivity products will continue to experience increasing
price competition as well as competition from alternative technologies.
Increased price or technology competition could seriously harm our business. A
substantial portion of our revenues from Internet connectivity products is
derived from non-DSL routers. We anticipate that in the future the market for
such non-DSL products will decrease and that sales of our non-DSL products will
decline as a percentage of our total revenues. Accordingly, our revenues will
not grow if we are unable to continue to introduce, market and sell our DSL
Internet connectivity products.

During fiscal years 1999 and 1998, revenues from the Mac OS version of
Timbuktu Pro software were adversely affected by declining sales of Mac OS
computers and Apple's loss of market share. During fiscal 2000, we expect
revenue from the Mac OS version of Timbuktu Pro software to continue to decline
in absolute dollars and as a percent of revenue, and we expect continued price
competition related to our Internet connectivity products.

The sale of our Web site and site server products is dependent upon our
ability to leverage these products to generate revenue streams from the
licensing of the technology to future customers and partners and accounts based
on monthly service. These products have existed for only a limited period of
time, and, as a result, are relatively unproven. Growth in revenues from our
Web site and site server products will be heavily dependent on recurring
revenue from Web sites created by licensees. Our failure to retain these
customers or our inability to attract new customers or licensees would
seriously harm our business.

26
<PAGE>

International revenues increased 49.5% to $12.2 million in fiscal 1999 from
$8.2 million in fiscal 1998, which increased 47.6% from $5.5 million in fiscal
1997. The increase in both fiscal 1999 and 1998 was primarily due to increased
sales of our Internet routers, particularly our integrated services digital
network (ISDN) Internet router as a result of the Wanadoo service.
International revenues accounted for 28%, 33% and 27% of our total revenues for
the fiscal years ended September 30, 1999, 1998 and 1997, respectively.
International revenues declined as a percentage of total revenues in fiscal
1999 primarily due to increasing sales of our Internet connectivity and Web
platform products in the United States.

The following table provides a breakdown of revenue by region expressed as a
percentage of total revenues for the periods presented.
<TABLE>
<CAPTION>
Fiscal years
ended
September 30,
----------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Europe..................................................... 22% 25% 19%
Pacific Rim................................................ 3 5 5
Canada and other........................................... 3 3 3
--- --- ---
Subtotal international revenues.......................... 28 33 27
United States.............................................. 72 67 73
--- --- ---
Total revenues........................................... 100% 100% 100%
=== === ===
</TABLE>

Although international revenues as a percentage of total revenue decreased
in fiscal 1999, a substantial portion of our revenues was derived from sales to
international customers, and we expect sales to international customers to
continue. While our international sales are typically denominated in United
States dollars, fluctuations in currency exchange rates could cause our
products and services to become relatively more expensive to our foreign
customers. This could lead to decreased sales and/or profitability of our
products and services.

Gross Margin. Our total gross margin decreased to 63.2% in fiscal 1999 from
68.0% fiscal 1998, which decreased from 68.3% in fiscal 1997.

The decrease in fiscal 1999 was primarily due to:

. Increased sales of our Internet connectivity products, which have a lower
gross margin than our Web platform products; and

. Declining average selling prices as a result of price competition.

These decreases were partially offset by an increased proportion of volume
and server license sales of our Web platform products.

The decrease in fiscal 1998 was primarily due to the write-down of our
single-user integrated services digital network modem inventory which totaled
approximately $200,000. This write-down was a result of the shift in our
strategic focus to provide multi-user Internet connectivity products rather
than single-user Internet connectivity products.

In the past, our gross margin has varied significantly and will likely vary
significantly in the future. Our gross margins depend primarily on:

. The mix of hardware and software products sold;

. Pricing strategies;

. Royalties paid to third parties;

. Standard cost changes;

27
<PAGE>

. New versions of existing products; and

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

Our Web platform products have a significantly higher average gross margin
than our Internet connectivity products. Accordingly, to the extent we sell
more Internet connectivity products than Web platform products, our gross
margins would be lower. We expect that sales of our Internet connectivity
products may account for a larger percentage of our total revenues in future
periods. Further, we expect that the market for Internet connectivity products,
in particular DSL products, will become increasingly competitive and that we
will be forced to lower the prices we charge for our Internet connectivity
products in the future. As the average selling price of our routers declines,
our gross margins related to such products, and in general, are likely to
decline.

Research and Development. Our research and development expenses increased
27.9% to $9.2 million in fiscal 1999 from $7.2 million in fiscal 1998. Research
and development expenses remained unchanged between fiscal 1998 and fiscal
1997.

The increase in fiscal 1999 was primarily due to:

. Increased employee and development related expenses as a result of our
acquisitions of Serus and netOctopus in December 1998; and

. Increased development expenses related to our DSL Internet connectivity
products.

These increases were partially offset by reduced software localization
expenses.

Although our research and development expenses remained unchanged between
fiscal 1998 and 1997, third party contractor expenses increased but were offset
by reduced product localization expenses.

We expect to continue to devote substantial resources to product and
technological development, and as a result of our acquisition of StarNet
Technologies, Inc., we expect our research and development expenses to increase
in fiscal 2000. Historically, we have believed that our process for developing
software is essentially completed concurrently with the establishment of
technological feasibility, and we have not capitalized any internal software
development costs to date. However, for the fiscal year ended September 30,
1999, we capitalized $656,000 of development costs incurred subsequent to the
delivery of a working model, under a development agreement with third parties.

Selling and Marketing. Our selling and marketing expenses increased 40.4% to
$20.2 million in fiscal 1999 from $14.4 million in fiscal 1998, which increased
27.6% from $11.3 million in fiscal 1997.

The increase in fiscal 1999 was primarily due to:

. Increased advertising, promotional and distribution channel development
expenses related primarily to our Web site platform and DSL Internet
connectivity products; and

. Increased headcount and other employee related expenses as a result of
our acquisitions in December 1998 of Serus and netOctopus.

The increase in fiscal 1998 was primarily due to:

. Increased headcount in our selling and marketing groups; and

. Increased advertising, promotional and distribution channel development
expenses related to the introduction of new products.

28
<PAGE>

We believe that our selling and marketing expenses will increase in absolute
dollars in fiscal 2000 as a result of:

. Our acquisition of StarNet Technologies, Inc.;

. Increased advertising and promotion campaigns related to our Web site and
electronic commerce platform as well as our Internet connectivity
products;

. The expansion of our Timbuktu Pro and Web site telesales staff.

General and Administrative. Our general and administrative expenses
increased 8.1% to $3.7 million in fiscal 1999 from $3.4 million in fiscal 1998,
which increased 14.8% from $2.9 million in fiscal 1997. The increase in fiscal
1999 was primarily due to:

. Increased employee related expenses;

. Increased use of third party contractors, temporary and legal services;
and

. Increased accruals related to bad debt reserves.

These expenses were partially offset by reduced occupancy costs related to
our Alameda facility as a result of the sale of the LAN Division.

The increase in fiscal 1998 was primarily due to the increase in bad-debt
expense and increased facility related costs, partially offset by decreased use
of information systems contractors.

Acquired In-Process Research and Development. Based upon an independent
third party valuation analysis of our acquisitions of Serus and netOctopus, we
allocated one time charges of approximately $3.9 million of the Serus purchase
price and $400,000 of the netOctopus purchase price to acquired in-process
research and development. See Note 2 of "Notes To Consolidated Financial
Statements."

On October 13, 1999, we closed a transaction to purchase StarNet
Technologies, Inc. The purchase price was $27.5 million of which, based upon an
independent third party valuation analysis, we intend to allocate $5.7 million
to acquired in-process research and development in the first quarter of fiscal
2000.

Amortization of Goodwill. Amortization of goodwill represents the
amortization of such amounts allocated to intangible assets related to our
acquisitions of Serus and netOctopus, both of which were completed in December
1998. The amount allocated to intangible assets related to the Serus
transaction was $2.1 million and the amount allocated to intangible assets
related to the netOctopus transaction was $700,000. We are amortizing the
intangible assets related to these transactions over four years. In October
1999, we recorded $100,000 of the $300,000 earnout opportunity related to the
netOctopus transaction to intangible assets.

As part of our independent third party valuation analysis related to our
acquisition of StarNet, we intend to allocate $4.8 million to goodwill and
$17.1 million to other intangible assets during the three months ended December
31, 1999. We will begin amortizing the amount allocated to goodwill quarterly
over four years and the amount allocated to other intangible assets quarterly
over three years beginning in the first quarter of fiscal 2000. Accordingly, we
anticipate recording amortization charges for goodwill and other intangible
assets of approximately $6.9 million in fiscal 2000 relating to our acquisition
of StarNet.

29
<PAGE>

Other Income, Net. Other income, net, primarily represents interest we earn
on our cash, cash equivalents and short-term investments. Other income, net,
decreased 7.0% to $2.1 million for the fiscal year ended September 30, 1999
from $2.2 million for the fiscal year ended September 30, 1998, which increased
18.9% from $1.9 million in fiscal 1997. The decrease was primarily due to the
cash used for the acquisitions of Serus and netOctopus and for operating
activities. This decrease was partially offset by the cash raised from our
secondary offering in August 1999. We expect interest income to increase in
absolute dollars and as a percentage of revenues primarily due to the cash
raised through the secondary offering of our common stock in August 1999.

Income Tax Benefit. We did not record an income tax benefit for the fiscal
year ended September 30, 1999 primarily due to continued substantial
uncertainty regarding our ability to realize our tax assets. The tax expense
recorded in fiscal 1998 was primarily related to the increase in the valuation
allowance against deferred tax assets. We recorded a tax benefit of $2.2
million in fiscal 1997 relating to our net operating loss in such year.

Discontinued Operations. Income from discontinued operations during fiscal
1998 and 1997 of $602,000 and $3.0 million respectively, represents the
operating income, net of taxes of the discontinued operations. See Note 3 of
Notes to Consolidated Financial Statements.

The net book value of the LAN Division approximated the fair value of the
consideration received. Accordingly, the loss on sale of discontinued
operations of $3.1 million in the fiscal year ended September 30, 1998,
primarily represents costs and transaction expenses incurred and accrued as a
result of the sale of the LAN Division. Such expenses are directly attributable
to the sale transaction and were primarily related to projected costs of
abandoned facilities, investment advisory, legal and accounting fees and
certain expenses related to employees of the LAN Division.

Liquidity and Capital Resources

We have funded our operations to date primarily through the private sale of
equity securities and the initial public offering of our common stock. As of
September 30, 1999, we had cash, cash equivalents and short-term investments
representing 72% of total assets.

Our operating activities used $8.4 million of cash in fiscal 1999, and
$926,000 of cash in fiscal 1998, and generated $4.9 million of cash in fiscal
1997. The cash used in fiscal 1999 was primarily due to supporting our
operating activities as well as the increase in accounts receivable and
inventory levels, and the reduction of accounts payable and accrued liabilities
related to the sale of the LAN Division. The cash used to support our
operations in the fiscal year ended September 30, 1998 was primarily due
expenses related to the sale of the LAN Division and increased advertising and
promotional expenses related to the introduction of new products. The cash
generated by operations in fiscal 1997 was primarily due to collection of
accounts receivable and decreased inventory, partially offset by reductions of
accounts payable and other accrued liabilities.

Cash provided by investing activities for the fiscal year ended September
30, 1999 was primarily due to proceeds from the sale and maturity of short-term
investments partially offset by:

. The purchase of short term investments;

. The acquisitions of Serus and netOctopus;

. The purchase of capital equipment;

. The acquisition of intangible assets; and

. Our investment in Northpoint Communications Group, Inc.

30
<PAGE>

The cash provided by investing activities for the fiscal year ended
September 30, 1998 was primarily due to:

. Proceeds from the sale of short-term investments; and

. Proceeds from the sale of the LAN Division.

The cash provided by investing activities for the fiscal year ended
September 30, 1998 was partially offset by:

. Purchases of short term investments;

. The acquisition of a trademark license related to the Netscape Internet
portal for our web site business operations; and

. Purchases of capital equipment.

The cash used in investing activities during fiscal 1997 was primarily
related to the purchase of short-term investments and capital equipment.

We expect that our capital expenditures will increase in future periods to
support new product development and production.

Cash provided by our financing activities for the fiscal year ended
September 30, 1999, was primarily related to:

. The $41.3 million, net of underwriting discounts and commissions, raised
from our secondary offering completed in August;

. $2.8 million from the exercise of employee stock options; and

. $855,000 from activities related to our Employee Stock Purchase Plan.

The financing activities for the fiscal years ended September 30, 1998 and
1997 was primarily related from the exercise of stock options and activities
related to our Employee Stock Purchase Plan.

Our principal commitments consist primarily of leases on our headquarters
facilities and certain operating equipment. See Note 8 of Notes to
Consolidated Financial Statements.

On October 13, 1999 we paid $8.4 million in cash to acquire StarNet
Technologies, Inc. Accordingly, our cash and cash equivalent balances will
decrease in our first quarter of fiscal 2000 from the balances presented in
our financial statements for the fiscal year ended September 30, 1999. We
believe that our existing cash, cash equivalents and short-term investments
will be adequate to meet our cash needs for working capital, capital
expenditures and earnouts related to our acquisitions for at least the next
twelve months. We may require substantial capital to finance our future growth
and fund our ongoing research and development activities during fiscal 2000
and thereafter. Our capital requirements will depend on many factors,
including:

. Acceptance of and demand for our products;

. The number and timing of acquisitions;

. The costs of developing new products;

. The costs associated with our expansion; and

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

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

31
<PAGE>

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

In April 1999, we purchased $999,988 of Series D-1 preferred stock of
NorthPoint Communications. Upon the initial public offering of the common stock
of NorthPoint Communications, which occurred on May 5, 1999, our Series D-1
preferred stock converted into 55,555 shares of Class B common stock. As a
Series D-1 purchaser, we have agreed not to transfer any Series D-1 preferred
stock or Class B common stock to any non-affiliated third party until March
2000. We have also agreed not to acquire more than 10% of NorthPoint
Communications' voting stock without NorthPoint Communications' consent until
March 2002. In addition, as a Series D-1 purchaser, we have agreed to vote any
voting securities held by us as recommended by NorthPoint Communications' Board
of Directors, except with respect to votes pursuant to the protective
provisions in NorthPoint Communications' Certificate of Incorporation. As of
September 30, 1999, the market value of these shares was approximately
$1,027,768.

Recent Accounting Pronouncements

During the first quarter of fiscal 1999, we adopted Statement of Position
(SOP) No. 97-2, Software Revenue Recognition (SOP 97-2). The provisions of SOP
97-2 have been applied to transactions entered into beginning October 1, 1998.
SOP 97-2 generally requires revenue earned on software arrangements involving
multiple elements such as software products, upgrades, enhancements,
postcontract customer support, installation and training to be allocated to
each element based on the relative fair values of the elements. The fair values
of an element must be based on evidence which is specific to the vendor. The
revenue allocated to software products, including specified upgrades or
enhancements generally is recognized upon delivery of the products. The revenue
allocated to post contract customer support generally is recognized ratably
over the term of the support, and revenue allocated to service elements
generally is recognized as the services are performed. If evidence of the fair
value for all elements of the arrangement does not exist, all revenue from the
arrangement is deferred until such evidence exists or until all elements are
delivered. The adoption of SOP 97-2 did not have a material impact on our
consolidated results of operations.

In December 1998, the American Institute of Certified Public Accountants'
(AICPA) Accounting Standards Executive Committee (AcSEC) issued SOP 98-9 which
amends paragraphs 11 and 12 of SOP 97-2 to require recognition of revenue using
the "residual method" when (i) there is vendor-specific objective evidence of
the fair values of all undelivered elements in a multiple-element arrangement
that is not accounted for using long-term contract accounting, (ii) vendor-
specific objective evidence of fair value does not exist for one or more of the
delivered elements in the arrangement, and (iii) all revenue-recognition
criteria in SOP 97-2 other than the requirement for vendor-specific objective
evidence of the fair value of each delivered element of the arrangement are
satisfied. Under the residual method, the arrangement fee is recognized as
follows; (a) the total fair value of the undelivered elements, as indicated by
vendor-specific objective evidence, is deferred and subsequently recognized in
accordance with the relevant sections of SOP 97-2, and (b) the difference
between the total arrangement fee and the amount deferred for the undelivered
elements is recognized as revenue related to the delivered elements. We adopted
SOP 98-9 on January 1, 1999. The adoption of SOP 98-9 did not have a material
impact on our consolidated results of operations.

32
<PAGE>

Effective October 1, 1998, we adopted Statement of Financial Accounting
Standards (SFAS) No. 130, Reporting Comprehensive Income. SFAS No. 130
establishes standards for the reporting and disclosure of comprehensive income
and its components which will be presented in association with a company's
financial statements. Comprehensive income is defined as the change in a
business enterprise's equity during the period arising from transactions,
events or circumstances relating to non-owner sources, such as foreign currency
translation adjustments and unrealized gains or losses on available-for-sale
securities. There have been no material differences between net loss and
comprehensive income (loss).

In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS
No. 131, Disclosures About Segments of an Enterprise and Related Information.
SFAS No. 131 establishes annual and interim reporting standards relating to the
disclosure of an enterprise's business segments, products, services, geographic
areas and major customers. Adoption of this standard by us in our annual
financial statements for the fiscal year ended September 30, 1999, did not have
a material effect on our consolidated financial position or results of
operations.

In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts (collectively referred to as
derivatives), and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. If certain conditions are
met, a derivative may be specifically designated and accounted for as (a) a
firm commitment, (b) a hedge of the exposure to variable cash flows of a
forecasted transaction, or (c) a hedge of the foreign currency exposure of a
net investment in a foreign operation, an unrecognized firm commitment, an
available-for-sale security, or a foreign-currency-denominated forecasted
transaction. For a derivative not designated as a hedging instrument, changes
in the fair value of the derivative are recognized in earnings in the period of
change. This statement will be effective for all annual and interim periods for
fiscal years beginning after June 15, 2000. We do not expect the adoption of
SFAS No. 133 will have a material effect on our financial position or results
of operations.

In March, 1998, the AICPA issued SOP 98-1, Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use. SOP 98-1 requires
that certain costs related to the development or purchase of internal-use
software be capitalized and amortized over the estimated useful life of the
software. SOP 98-1 is effective for financial statements issued for fiscal
years beginning after December 15, 1998. We do not expect the adoption of SOP
98-1 will have a material impact on our financial position or results of
operations.

Year 2000 Readiness Disclosure

The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the application year. Any of our programs
or products that have time-sensitive software may recognize a date using "00"
as the year 1900 rather than the year 2000. In addition, the year 2000 is a
leap year, which may also lead to incorrect calculations, functions or systems
failure. As a result, computer systems and software used by many companies may
need to be upgraded to comply with such Year 2000 requirements. In October
1996, we began a "Millennium Project" to determine if any actions needed to be
taken regarding date-related effects to: (i) our software or hardware products;
(ii) our internal operating and desktop computer systems and non-information
technology systems; and (iii) the readiness of our third-party vendors and
business partners.

Through testing, we have determined that our Internet connectivity products;
our Web site and site server products (Site server version 2.3 and later and
all client software versions 2.2.4 and later); our Windows, Mac OS and
Enterprise versions of Timbuktu Pro (versions 1.5 and later); netOctopus; and,
NetJane products, are Year 2000 compliant. Although the majority of our
products are Year 2000 compliant, we believe that the purchasing patterns of
customers and potential customers may be affected by Year 2000 issues as
companies expend significant resources to correct or patch their current
software systems for Year 2000 compliance. These expenditures may result in
reduced funds available to purchase our products which would seriously harm our

33
<PAGE>

business. In addition, even if our products are Year 2000 compliant, other
systems or software used by our customers may not be Year 2000 compliant. The
failure of such non-compliant third-party software or systems could affect the
perceived performance of our products which could seriously harm our business.
Our internal systems include information technology systems such as financial,
order entry, inventory, shipping and customer database computer systems,
desktop computer systems and non-information technology systems such as
telephones and facilities. We have conducted a comprehensive review of our
internal information technology systems such as financial, order entry,
inventory, shipping and customer database computer systems to determine if any
actions need to be taken regarding Year 2000 date-related effects. These
underlying systems are based on a relational database language which identifies
dates based on four digit numbers rather than two digit numbers and therefore
we have determined that the Year 2000 issue will not pose significant
operational problems for these computer systems. We have conducted a
comprehensive inventory and evaluation of our desktop systems. We found
approximately 98% of our desktop systems met our Year 2000 compliance criteria.
Those systems we found not to be compliant were upgraded to compliant systems.
We have identified and prioritized our critical third-party vendors, strategic
partners and suppliers of non-information related products and services
concerning their plans and progress in addressing the Year 2000 problem. We are
also working with key suppliers of products and services to determine that
their operations and products are Year 2000 compliant or to monitor their
progress toward Year 2000 compliance, as appropriate.

We have developed contingency plans that include, among other things, manual
"work-arounds" for software and hardware failures, as well as substitution of
systems, if necessary. We cannot assure you that despite our Year 2000
compliance program there will not be an interruption of operations or other
limitations of system functionality or that we will not incur substantial costs
to avoid such limitations. Any failure to effectively monitor, implement or
improve our internal support systems could seriously harm our business.

To date, we have not incurred material expenses related to our Year 2000
compliance effort other than the investment of employee time and resources. We
estimate that we have spent approximately $130,000 to upgrade certain facility
related items to Year 2000 compliance. While we have dedicated and will
continue to dedicate a substantial amount of time and internal resources
towards our Year 2000 compliance program, we cannot assure you that there will
not be an interruption of operations or other limitations of system
functionality or that we will not incur substantial costs to correct such
limitations. Any failure of our operational, financial, management and
technical support systems could seriously harm our business. Furthermore, we
believe that the purchasing patterns of customers and potential customers
during the three months ended December 31, 1999 may be affected by Year 2000
issues as companies expend significant resources to correct or patch their
current software systems for Year 2000 compliance. These expenditures may
result in reduced funds available to purchase software products such as those
offered by us, which could seriously harm our business. In addition, even if
our products are Year 2000 compliant, other systems or software used by our
customers may not be Year 2000 compliant. The failure of such non-compliant
third-party software or systems could affect the perceived performance of our
products, which could seriously harm our business. The most likely worst case
scenarios would include hardware failure and the failure of infrastructure
services provided by government agencies and other third parties (for example,
electricity, telephone service, water transport and Internet services). In such
worst case scenarios, we would lose customers and revenue which would seriously
harm our business.

34
<PAGE>

Other Factors That You Need To Be Aware Of Which May Affect Our Future
Operating Results

We have a history of losses and negative cash flow, and we expect to incur
losses and negative cash flow in the future.

Our failure to significantly increase our revenues would result in
continuing losses. We incurred losses from continuing operations of $7.9
million, $8.0 million and $3.6 million in the fiscal years ended September 30,
1999, 1998 and 1997, respectively. We expect to incur net losses in the future,
and these losses may be substantial. Further, we expect to incur negative cash
flow in the future. Because of continuing substantial capital expenditures and
product development, sales, marketing and administrative expenses, we will need
to generate significant revenues to achieve profitability and positive cash
flow. Even if we do achieve profitability and positive cash flow, we may not be
able to sustain or increase profitability or cash flow on a quarterly or annual
basis.

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

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

It is likely that in some future quarter or quarters our operating results
will be below the expectations of securities analysts or investors. In such
event, the market price of our common stock may decline significantly.

These variations in our operating results will likely be caused by factors
related to the operation of our business, including:

. Variations in the timing and size of orders for our Internet
connectivity products;

. Our ability to license, and the timing of licenses, of our Web platform
products, particularly site server licenses and Timbuktu Pro;

. The growth rate in the number of Web sites that are built using our Web
platform, from which we derive revenues;

. Loss of significant distributors or customers, or significant decreases
or delays in purchases by significant distributors or customers, such as
Ingram Micro, Softway International and NorthPoint Communications;

. 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 Internet connectivity products as a percentage of our
total revenues;

. The price and availability of chip sets, which we obtain from Conexant
Systems, for our DSL Internet connectivity products;

. The timing and size of expenses, including operating expenses and
expenses of developing new products and product enhancements; and

. Our ability to attract and retain key personnel.

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

. The timing and rate of deployment of DSL services by telecommunications
service providers;

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

35
<PAGE>

. Anticipated price competition in the market for Internet connectivity
products and Web platform products;

. The level of market penetration of our Internet connectivity and Web
platform products relative to those of our competitors; and

. Anticipated increases in competition among producers of Web site
development and Web site server products, including the impact of
products that are available from some of our competitors at no cost.

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

. Costs associated with future litigation, including litigation relating
to the use or ownership of intellectual property;

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

. Foreign currency and exchange rate fluctuations which may make our
dollar-denominated products more expensive in foreign markets or could
expose us to currency rate fluctuation risks if our sales become
denominated in foreign currencies; and

. General global economic conditions which could adversely affect sales to
our customers.

Our limited operating history in DSL Internet connectivity products makes it
difficult to evaluate our prospects.

Our DSL Internet connectivity products have only recently been introduced.
You should consider our prospects in light of the difficulties we may encounter
because these products are at an early stage of development in a relatively
new, rapidly evolving and intensely competitive market. For example, we may not
correctly anticipate market requirements, including requirements for
performance, price, features and compatibility with other DSL equipment. We may
not be able to rapidly introduce innovative new products that meet these market
requirements. It is possible that the market for DSL Internet connectivity
products will develop in a manner that we do not anticipate. Our competitors
have introduced DSL products, some of which may compete effectively against our
DSL products. Such developments could render our DSL products obsolete.

Sales of our DSL Internet connectivity products will decline substantially if
Copper Mountain and Nokia DSL equipment is not widely deployed.

We are dependent on the selection of Copper Mountain and Nokia DSL equipment
by telecommunications service providers that are deploying DSL services.
Historically, substantially all of our sales of DSL routers have been for use
with DSL equipment manufactured by Copper Mountain Networks. We have recently
introduced our DSL routers for use with DSL central office access concentrators
manufactured by Nokia. If Copper Mountain or Nokia DSL equipment is not widely
used in DSL deployments, our business will be seriously harmed.

Substantial sales of our DSL Internet connectivity products will not occur
unless telecommunications service providers initiate substantial deployment of
DSL services.

The success of our DSL Internet connectivity products depends upon whether
telecommunications service providers deploy DSL technologies and upon the
timing of the deployment of such technologies. Factors that will impact such
deployment include:

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

36
<PAGE>

. The development of a viable business model for DSL services, including
the capability to market, sell, install and maintain DSL services;

. Cost constraints, such as installation costs and space and power
requirements at the telecommunications service provider's central
office;

. Lack of compatibility of DSL equipment that is supplied by different
manufacturers;

. Evolving industry standards for DSL technologies; and

. Government regulation.

If telecommunications service providers do not expand their deployment of
DSL services, or if additional telecommunications providers do not offer DSL
services on a timely basis, then our business, financial condition and results
of operations will be seriously harmed.

Other technologies for the high-speed Internet connectivity market will compete
with DSL services.

DSL services are competing with a variety of different high-speed Internet
connectivity technologies, including cable modem, satellite and other wireless
technologies. Many of these technologies will 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 products and services and our revenues and
gross margins may decrease.

We purchase all of the chip sets for our DSL routers from Conexant Systems.

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

Substantially all of our circuit boards are manufactured by Hi-Tech
Manufacturing, or HTM, a contract manufacturer.

Substantially all of our Internet connectivity products include circuit
boards that are manufactured by HTM. Additionally, certain of our DSL routers
are assembled and packaged by HTM. If supplies of circuit boards or DSL routers
from HTM are interrupted for any reason, we will incur significant losses until
we can arrange for alternative sources. Any such interruption may seriously
harm our reputation and business.

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

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

37
<PAGE>

Our revenues will not grow and our losses will increase if we cannot
successfully introduce, market and sell our Web platform.

A substantial majority of revenues from our Web platform is derived from the
sale of Timbuktu Pro. We anticipate that in the future the market for Timbuktu
Pro will grow more slowly than the market for other Web platform products and
services. In addition, we rely on licensees of our Web platform to promote the
use of our Web platform for building Web sites. The extent and nature of the
promotions by licensees of our Web platform are outside of our control. If
licensees of our Web platform do not success fully promote our Web platform, we
will not generate recurring revenues from royalties on Web sites promoted by
licensees of our Web platform.

To be successful, use of our Web platform must become widespread, and this will
require us to rapidly build our sales channel, which we may be unable to do.

Growth in revenues from our Web platform will be heavily dependent on
recurring fees from Web sites created by licensees. Accordingly, to be
successful, our Web platform must become widely used. The sales cycle for
licensing our Web platform can be long. We will be required to build our
internal sales organization and customer support organization to increase the
number of licensees of our Web platform. Because the market for technical sales
and support personnel is intensely competitive, growing our sales and support
organization may be difficult. If we are unable to rapidly establish the
widespread use of our Web platform, it is possible that competing products
could become widely used, reducing the likelihood that we will generate
significant revenues from our Web platform.

We license a substantial portion of our Timbuktu Pro software to a limited
number of large customers and these licenses have a lengthy sales cycle.

A volume license of our Timbuktu Pro software involves a significant
commitment of financial resources by our customers. As a result, volume
licenses of our Timbuktu Pro software have a long sales cycle, and in the past,
we have only sold volume licenses of our Timbuktu Pro software to a small
number of large customers each quarter. Further, volume license sales of
Timbuktu Pro are typically closed in the final weeks of the quarter and the
timing of these licenses may cause our quarterly results to vary. We generally
incur significant expenses in sales and marketing prior to obtaining customer
commitments for the volume licenses of our Timbuktu Pro software. As a result,
our inability to get customer commitments or delays in such commitments due to
the lengthy sales cycles would reduce our revenues and cause our losses to
increase.

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

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

The proceeds we expect to receive for the sale of our LAN Division could be
affected by its future performance under the new owner.

In connection with the sale of our LAN Division in August 1998 to Farallon
Communications, or Farallon, an affiliate of Gores Technology Group, or Gores,
we received consideration which included (i) a two year $1.0 million promissory
note from Farallon, guaranteed by Gores, and (ii) royalties on Farallon's
revenues for a period of five years which are currently recorded on our balance
sheet as an amount receivable of $1.8 million. Because a substantial portion of
Farallon's products are designed for products sold by Apple Computer, or Apple,
the ability of the buyer to make these payments depends in large part upon the
market for Apple's products.

38
<PAGE>

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

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

Our business could be adversely affected by problems associated with the Year
2000.

The risks posed by Year 2000 issues could adversely affect our business in a
number of significant ways. Based on our testing, we believe that our
internally developed systems and technology (including our financial, order
entry, inventory, shipping and customer database systems) are Year 2000
compliant. Nevertheless, our information technology systems could be
substantially impaired or cease to operate due to Year 2000 problems. In
addition, products currently under development are being designed to be Year
2000 compliant. We have developed contingency plans that include, among other
things, manual "work-arounds" for software and hardware failures, as well as
substitution of systems, if necessary. We cannot assure you that despite our
Year 2000 compliance program there will not be an interruption of operations or
other limitations of system functionality or that we will not incur substantial
costs to avoid such limitations. Any failure to effectively monitor, implement
or improve our internal support systems could seriously harm our business.

Additionally, we rely on information technology supplied by third parties,
and many of our customers, vendors, strategic partners and suppliers are also
heavily dependent on information technology systems and on their own third
party information technology. We have identified and prioritized critical
third-party vendors, strategic partners and suppliers of non-information
related products and services concerning their plans and progress in addressing
the Year 2000 issues. Year 2000 problems experienced by any of these third
parties could seriously harm our business. Additionally, the Internet could
face serious disruptions arising from the Year 2000 problem. Many of our
customers and potential customers have implemented policies that prohibit or
strongly discourage making changes or additions to their internal computer
systems until after January 1, 2000. We will experience fewer sales if
potential customers who might otherwise purchase our products and services
delay such purchases and implementations until after January 1, 2000 in an
effort to stabilize their internal computer systems, to cope with the Year 2000
problem or because their information technology budgets have been diverted to
address Year 2000 problems. If our customers and potential customers delay
purchasing or implementing our products and services in preparation for the
Year 2000 problem, our business would be seriously harmed.

We cannot guarantee that any of our customers, suppliers or partners will be
Year 2000 compliant in a timely manner, or that their failure to become Year
2000 compliant will not cause significant disruptions to our business or the
perceived performance of our products. Given the pervasive nature of the Year
2000 problem, we cannot guarantee that disruptions in other industries and
market segments will not adversely affect our business. Moreover, the costs
related to Year 2000 compliance, which thus far have not been material, could
ultimately be significant.

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

Our industry and industries that our business depends on may be affected by
changes in tariffs and regulations. For example, we depend on
telecommunications service providers for sales of our DSL Internet connectivity
products, and companies in the telecommunications industry must comply with
numerous regulations and pay numerous tariffs. If our industry or industries
that we depend on become subject to increases in tariffs and regulations that
lead to corresponding increases in the cost of doing our business or

39
<PAGE>

doing business with us, our revenues could decline. For example, if a
regulatory agency imposed restrictions on DSL service that were not also
imposed on other forms of high-speed Internet access, our business could be
harmed.

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.

ITEM 7(A). QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK

Our exposure to market risk for changes in interest rates relates primarily
to our investment portfolio. We do not use derivative financial instruments for
speculative or trading purposes. We place our investments in instruments that
meet high credit quality standards, as specified in our investment policy. This
policy also limits the amount of credit exposure to any one issue, issuer and
type of instrument. We do not expect any material loss with respect to our
investment portfolio.

The table below presents the carrying value and related weighted-average
interest rates for our investment portfolio. The carrying value approximates
fair value at September 30, 1999. All of our investments mature in twelve
months or less.

<TABLE>
<CAPTION>
1999 1998
---------------------------- ----------------------------
Principal (notional) Carrying Average Carrying Average
amounts in Amount Interest Rate Amount Interest Rate
United States dollars: -------------- ------------- -------------- -------------
(in thousands) (in thousands)
<S> <C> <C> <C> <C>
Cash equivalents --
fixed rate............. $45,893 5.31% $11,657 5.31%
Short-term investments
-- fixed rate.......... 7,940 5.67% 24,461 5.61%
------- -------
$53,833 $36,118
</TABLE>

ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Index to Consolidated Financial Statements

The following consolidated financial statements of Netopia, Inc. are filed
as part of this Report on Form 10-K:

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Consolidated Financial Statements:
Independent Auditors' Report............................................. 41
Consolidated Balance Sheets at September 30, 1999 and 1998............... 42
Consolidated Statements of Operations for the fiscal years ended
September 30, 1999, 1998
and 1997................................................................ 43
Consolidated Statements of Stockholders' Equity for the fiscal years
ended September 30,
1999, 1998 and 1997..................................................... 44
Consolidated Statements of Cash Flows for the fiscal years ended
September 30, 1999, 1998 and 1997....................................... 45
Notes to Consolidated Financial Statements............................... 46
Financial Statement Schedules:
Valuation and Qualifying Accounts........................................ 63
</TABLE>

40
<PAGE>

INDEPENDENT AUDITORS' REPORT

The Board of Directors
Netopia, Inc. and subsidiaries:

We have audited the consolidated financial statements of Netopia, Inc. and
subsidiaries (the Company) as listed in the accompanying index. In connection
with our audits of the consolidated financial statements, we have also audited
the financial statement schedule as listed in the accompanying index. These
consolidated financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and financial statement
schedule based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Netopia,
Inc. and subsidiaries as of September 30, 1999 and 1998 and the results of
their operations and their cash flows for each of the years in the three-year
period ended September 30, 1999 in conformity with generally accepted
accounting principles. Also in our opinion, the related financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth herein.

KPMG LLP

San Francisco, California
October 29, 1999

41
<PAGE>

NETOPIA, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
September 30,
-----------------
1999 1998
-------- -------
(in thousands,
except for share
and per share
amounts)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents................................. $ 61,381 $19,244
Short-term investments.................................... 8,102 22,851
Trade accounts receivable less allowance for doubtful
accounts and returns of $796 and $617, respectively...... 9,852 4,358
Royalties receivable...................................... 361 410
Note receivable........................................... 966 --
Inventories, net.......................................... 3,681 1,591
Prepaid expenses and other current assets................. 1,397 929
-------- -------
Total current assets.................................... 85,740 49,383
Note receivable............................................. -- 900
Royalties receivable........................................ 377 1,372
Furniture, fixtures and equipment, net...................... 2,403 2,068
Intangible assets, net...................................... 2,362 --
Deposits and other assets................................... 5,087 2,569
-------- -------
$ 95,969 $56,292
======== =======
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable.......................................... $ 5,258 $ 5,440
Accrued compensation...................................... 2,170 1,217
Accrued liabilities....................................... 1,564 3,468
Deferred revenue.......................................... 1,343 807
Other current liabilities................................. 11 299
-------- -------
Total current liabilities............................... 10,346 11,231
Long-term liabilities....................................... 544 260
-------- -------
Total liabilities....................................... 10,890 11,491
Commitments and contingencies
Stockholders' equity:
Preferred stock: $0.001 par value, 5,000,000 shares
authorized; none issued or outstanding................... -- --
Common stock: $0.001 par value, 25,000,000 shares
authorized; 15,519,198 and 11,953,908 shares issued and
outstanding at September 30, 1999 and 1998,
respectively............................................. 15 12
Additional paid-in capital................................ 99,978 51,871
Accumulated deficit....................................... (14,942) (7,082)
Accumulated other comprehensive income.................... 28 --
-------- -------
Total stockholders' equity.............................. 85,079 44,801
-------- -------
$ 95,969 $56,292
======== =======
</TABLE>

See accompanying notes to consolidated financial statements.

42
<PAGE>

NETOPIA, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
Fiscal years ended
September 30,
--------------------------
1999 1998 1997
------- -------- -------
(in thousands, except
for per share amounts)
<S> <C> <C> <C>
Revenues:
Internet connectivity products................... $24,460 $ 10,885 $ 8,134
Web platform licenses and services............... 19,691 13,951 12,036
------- -------- -------
44,151 24,836 20,170
Cost of revenues:
Internet connectivity products................... 15,597 7,064 5,258
Web platform licenses and services............... 646 891 1,138
------- -------- -------
16,243 7,955 6,396
------- -------- -------
Gross profit....................................... 27,908 16,881 13,774
Operating expenses:
Research and development......................... 9,211 7,201 7,177
Selling and marketing............................ 20,221 14,404 11,288
General and administrative....................... 3,654 3,380 2,945
Acquired in-process research and development..... 4,205 -- --
Amortization of goodwill and other intangible
assets.......................................... 543 -- --
------- -------- -------
Total operating expenses......................... 37,834 24,985 21,410
------- -------- -------
Operating loss................................. (9,926) (8,104) (7,636)
Other income, net.................................. 2,066 2,222 1,869
------- -------- -------
Loss from continuing operations before income
taxes........................................... (7,860) (5,882) (5,767)
Income tax provision (benefit)..................... -- 2,155 (2,217)
------- -------- -------
Loss from continuing operations................ (7,860) (8,037) (3,550)
Discontinued operations:
Income from discontinued operations, net of
taxes........................................... -- 602 3,021
Loss on sale of discontinued operations, net of
taxes........................................... -- (3,098) --
------- -------- -------
Net loss....................................... $(7,860) $(10,533) $ (529)
======= ======== =======
Comprehensive loss:
Net loss......................................... $(7,860) $(10,533) $ (529)
Other comprehensive income....................... 28 -- --
------- -------- -------
Total comprehensive loss....................... $(7,832) $(10,533) $ (529)
======= ======== =======
Per Share data, continuing operations:
Basic and diluted loss per share................. $ (0.60) $ (0.69) $ (0.31)
======= ======== =======
Common shares used in the per share
calculations.................................... 13,092 11,687 11,335
======= ======== =======
Per share data, net loss:
Basic and diluted net loss per share............. $ (0.60) $ (0.90) $ (0.05)
======= ======== =======
Common shares used in the per share
calculations.................................... 13,092 11,687 11,335
======= ======== =======
</TABLE>

See accompanying notes to consolidated financial statements.

43
<PAGE>

NETOPIA, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
Accumulated
Additional other Retained Total
Common Stock paid-in Deferred comprehensive earnings Stockholders'
Shares Amount capital compensation income (deficit) equity
---------- ------ ---------- ------------ ------------- --------- -------------
(in thousands except for per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C>
Balances, September 30,
1996................... 11,119,961 $12 $49,232 $(81) $-- $ 3,980 $ 53,143
Exercise of stock
options................ 194,535 -- 443 -- -- -- 443
Issuance of common stock
under Employee Stock
Purchase Plan.......... 178,236 -- 833 -- -- -- 833
Issuance of stock
warrants............... -- -- 60 -- -- -- 60
Amortization of deferred
compensation........... -- -- -- 27 -- -- 27
Net loss................ -- -- -- -- -- (529) (529)
---------- --- ------- ---- ---- -------- --------
Balances, September 30,
1997................... 11,492,732 12 50,568 (54) -- 3,451 53,977
---------- --- ------- ---- ---- -------- --------
Exercise of stock
options................ 308,019 -- 729 -- -- -- 729
Issuance of common stock
under Employee Stock
Purchase Plan.......... 153,157 -- 604 -- -- -- 604
Amortization of deferred
compensation........... -- -- -- 24 -- -- 24
Forfeiture of deferred
compensation........... -- -- (30) 30 -- -- --
Net loss................ -- -- -- -- -- (10,533) (10,533)
---------- --- ------- ---- ---- -------- --------
Balances, September 30,
1998................... 11,953,908 12 51,871 -- -- (7,082) 44,801
---------- --- ------- ---- ---- -------- --------
Exercise of stock
options................ 626,013 1 2,834 -- -- -- 2,835
Acceleration and
extension of stock
options................ -- -- 176 -- -- -- 176
Issuance of common stock
under secondary
offering............... 2,330,000 2 41,315 -- -- -- 41,317
Net unrealized
investment gain........ -- -- -- -- 28 -- 28
Issuance of common
shares for
acquisitions........... 409,556 -- 2811 -- -- -- 2,811
Issuance of common stock
under Employee Stock
Purchase Plan.......... 199,721 -- 855 -- -- -- 855
Issuance of non-employee
stock options.......... -- -- 116 -- -- -- 116
Net loss................ -- -- -- -- -- (7,860) (7,860)
---------- --- ------- ---- ---- -------- --------
Balances, September 30,
1999................... 15,519,198 $15 $99,978 $-- $ 28 $(14,942) $ 85,079
========== === ======= ==== ==== ======== ========
</TABLE>

See accompanying notes to consolidated financial statements

44
<PAGE>

NETOPIA, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
Fiscal years ended
September 30,
----------------------------
1999 1998 1997
-------- -------- --------
(in thousands)
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss........................................ $ (7,860) $(10,533) $ (529)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization................. 2,990 995 1,812
Deferred income taxes......................... -- 2,869 (673)
Amortization of deferred compensation......... -- 24 27
Noncash compensation for services............. 292 -- 60
Charge for in-process research and
development.................................. 4,205 -- --
Changes in allowance for doubtful accounts and
returns on accounts receivable............... 179 (40) (201)
Changes in operating assets and liabilities,
net of effects of acquisition:
Trade accounts receivable................... (5,673) 1,549 3,041
Inventories................................. (2,090) (618) 1,874
Prepaid expenses and other current assets... (470) (443) 667
Deposits and other assets................... 637 (127) 49
Accounts payable and accrued liabilities.... (1,133) 5,310 (1,508)
Deferred revenue............................ 627 (67) 87
Other liabilities........................... (94) 155 185
-------- -------- --------
Net cash provided by (used in) operating
activities............................... (8,390) (926) 4,891
-------- -------- --------
Cash flows from investing activities:
Purchase of furniture, fixtures and
equipment.................................... (1,625) (711) (1,111)
Acquisition of trademark license.............. -- (1,000) --
Capitalization of software development costs.. (656) (237) (350)
Proceeds from sale of discontinued
operations................................... -- 2,000 --
Acquisition of long term investment........... (1,000) -- --
Acquisition of technology..................... (4,298) -- --
Purchase of intangibles....................... (1,650) -- --
Purchase of short-term investments............ (19,472) (47,706) (35,900)
Proceeds from the sale of short-term
investments.................................. 34,221 52,047 25,943
-------- -------- --------
Net cash provided by (used in) investing
activities............................... 5,520 4,393 (11,418)
-------- -------- --------
Cash flows from financing activities:
Proceeds from the issuance of common stock,
net.......................................... 45,007 1,333 1,061
-------- -------- --------
Net cash provided by financing
activities............................... 45,007 1,333 1,061
-------- -------- --------
Net increase (decrease) in cash and cash
equivalents.................................... 42,137 4,800 (5,466)
Cash and cash equivalents, beginning of year.... 19,244 14,444 19,910
-------- -------- --------
Cash and cash equivalents, end of year.......... $ 61,381 $ 19,244 $ 14,444
======== ======== ========
Supplemental disclosures of cash flow
activities:
Income taxes paid............................. $ -- $ 193 $ 289
======== ======== ========
Supplemental disclosures of noncash investing
and financing activities:
Issuance of common stock for acquisition of
intangible assets............................ $ 2,811 $ -- $ --
======== ======== ========
Tax benefit of stock options exercised........ $ -- $ -- $ 215
======== ======== ========
Note receivable from sale of discontinued
operations................................... $ -- $ 888 $ --
======== ======== ========
Royalties receivable from sale of discontinued
operations................................... $ -- $ 1,782 $ --
======== ======== ========
Note issued for other assets.................. $ -- $ 800 $ --
======== ======== ========
Warrant received from sale of discontinued
operations................................... $ -- $ 189 $ --
======== ======== ========
</TABLE>

See accompanying notes to consolidated financial statements.

45
<PAGE>

NETOPIA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1) Nature of Business and Summary of Significant Accounting Policies

Nature of Business

Netopia (the "Company") provides Internet and electronic commerce
infrastructure that enables small and medium size businesses to easily and cost
effectively connect to the Internet, establish and enhance their presence, and
conduct business and electronic commerce on the Web. The Company offers high-
speed, multi-user, plug-and-play Internet connectivity products and Web
platforms for creating and hosting Web sites, creating and hosting electronic
commerce stores, and conducting real-time Internet communications.

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries located in France, Germany, and
the Netherlands. All significant intercompany balances and transactions have
been eliminated in consolidation.

Cash Equivalents and Short-Term Investments

Cash equivalents consist of instruments with purchased maturities of 90 days
or less. Certain cash equivalents and all of the Company's investments are
classified as available-for-sale under the provisions of Statement of Financial
Accounting Standards (SFAS) No. 115, Accounting for Certain Investments in Debt
and Equity Securities. The securities are carried at fair value, which
approximates cost.

The amortized cost of available-for-sale debt securities is adjusted for
amortization of premiums and accretion of discounts to maturity. Such
amortization is included in other income, net. Realized gains and losses, and
declines in value judged to be other than temporary on available-for-sale
securities are included in other income, net. The cost of securities sold is
based on the specific identification method. Interest and dividends on
securities classified as available-for-sale are included in other income, net.

Cash equivalents and short-term investments classified as available-for-sale
as of September 30, 1999 and 1998, consisted of the following (in thousands):

<TABLE>
<CAPTION>
September 30,
----------------
1999 1998
------- --------
<S> <C> <C>
U.S. Treasury Securities and obligations of U.S.
Government agencies................................. $ 996 $ 10,554
Corporate debt....................................... 3,015 3,997
Commercial paper..................................... 49,822 21,567
------- --------
$53,833 $ 36,118
======= ========
</TABLE>

The available-for-sale securities as of September 30, 1999 were all due in
one year or less. As of September 30, 1999, the Company had an unrealized gain
on short-term investments of approximately $28,000. Expected maturities may
differ from contractual maturities because issuers of the securities may have
the right to prepay obligations without penalties.

Revenue Recognition

The Company recognizes revenue from sales of its hardware products upon
shipment of the product. The Company recognizes revenues from licenses of
computer software provided that a firm purchase order has been

46
<PAGE>

NETOPIA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

received, the software and related documentation have been shipped, collection
of the resulting receivable is deemed probable, and no other significant vendor
obligations exist. Maintenance and service revenues are recognized over the
period in which services are provided. Certain of the Company's sales are made
to customers under agreements permitting right of return for stock balancing
and price protection. Revenue is recorded net of an estimated allowance for
returns.

In October 1997, the Accounting Standards Executive Committee (AcSec) of the
American Institute of Certified Public Accountants issued Statement of Position
(SOP) No. 97-2, Software Revenue Recognition. The Company adopted SOP 97-2 for
software transactions entered into beginning October 1, 1998. SOP 97-2
generally requires revenue earned on software arrangements involving multiple
elements (i.e., software products, upgrades, enhancements, postcontract
customer support, installation and training) to be allocated to each element
based on the relative fair values of the elements. The fair value of an element
must be based on evidence which is specific to the vendor. The revenue
allocated to software products, including specified upgrades or enhancements
generally is recognized upon delivery of the products. The revenue allocated to
post contract customer support generally is recognized ratably over the term of
the support, and revenue allocated to service elements generally is recognized
as the services are performed. If evidence of the fair value for all elements
of the arrangement does not exist, all revenue from the arrangement is deferred
until such evidence exists or until all elements are delivered. Adoption of SOP
97-2 did not have a material impact on the Company's results of operations.

In December 1998, AcSec issued SOP 98-9, Software Revenue Recognition, With
Respect to Certain Transactions, which requires recognition of revenue using
the "residual method" in a multiple-element arrangement when fair value does
not exist for one or more of the delivered elements in the arrangement. Under
the "residual method," the total fair value of the undelivered elements is
deferred and subsequently recognized in accordance with SOP 97-2. The Company
does not expect a material change to its accounting for revenues as a result of
the provisions of SOP 98-9.

Concentrations of Credit Risk

Financial instruments that potentially expose the Company to concentrations
of credit risk principally consist of cash, cash equivalents, short-term
investments, and accounts receivable.

The Company limits the amounts invested in any one type of investment. The
Company maintains its cash investments with two financial institutions.
Management believes the financial risks associated with such deposits are
minimal.

The Company sells its products primarily through distributors and resellers.
Sales are generally not collateralized, credit evaluations are performed as
appropriate, and allowances are provided for estimated credit losses.
Historically, the Company has not experienced significant losses on trade
receivables from any particular customer, industry, or geographic region.

Inventories

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

Furniture, Fixtures, and Equipment

Furniture, fixtures, and equipment are stated at cost, net of accumulated
depreciation. Depreciation is computed using the straight-line method over the
shorter of estimated useful lives or related lease terms ranging from one to
seven years.

47
<PAGE>

NETOPIA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Impairment of Long-Lived Assets, Including Identifiable Intangibles

The Company evaluates long-lived assets and certain identifiable intangibles
for impairment whenever events or changes in circumstances indicate that the
carrying amount of the asset may not be recoverable. Recoverability of assets
to be held and used is measured by a comparison of the carrying amount of an
asset to future net cash flows expected to be generated by the asset. If such
assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount exceeds the fair value of
the assets. Assets to be disposed of are reported at the lower of carrying
values or fair values, less costs of disposal.

Intangible assets consist of items related to our business combinations.
Goodwill is amortized over a four year period. Acquired technology is being
amortized over its estimated useful life of approximately three years.

Software Development Costs

Research and development costs include costs related to software products
that are expensed as incurred until the technological feasibility of the
product has been established. The Company has defined technological feasibility
as completion of a working model. After technological feasibility is
established, any additional software development costs are capitalized in
accordance with SFAS No. 86, Accounting for the Costs of Computer Software to
Be Sold, Leased, or Otherwise Marketed. Product development costs capitalized
are amortized over a future period.

Amortization of capitalized product development costs begins when the
products are available for general release to customers, and is computed on a
product-by-product basis as the greater of: (i) the ratio of current gross
revenue for a product to the total of current and anticipated future gross
revenues for the product; or (ii) the straight-line method over the remaining
estimated economic life of the product, which is generally two years. All other
research and development expenditures are charged to research and development
expense in the period incurred. During fiscal 1999, 1998 and 1997, $656,000,
$237,000 and $350,000, respectively, of product development cost incurred
subsequent to delivery of a working model, under a development agreement with a
third party, have been capitalized.

Advertising Costs

The Company expenses advertising costs as incurred. Advertising expense was
$1.7 million, $1.3 million and $1.0 million for fiscal 1999, 1998 and 1997,
respectively.

Income Taxes

Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years that those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date. A valuation allowance is provided to
the extent such deferred tax assets may not be realized.

Stock-Based Compensation

The Company has elected to continue to use the intrinsic value-based method
as allowed under Accounting Principles Board (APB) Opinion No. 25, Accounting
for Stock Issued to Employees, to account for all of its stock-based employee
compensation plans. Pursuant to SFAS No. 123, Accounting for Stock-Based

48
<PAGE>

NETOPIA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Compensation, the Company is required to disclose the pro forma effects on
operating results as if the Company had elected to use the fair value approach
to account for all its stock-based employee compensation plans.

Use of Estimates

The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the
consolidated financial statements and the recorded amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.

Per Share Calculations

Basic net income (loss) per share (EPS) 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 and dilutive common equivalent
shares from options and warrants outstanding during the period. No common
equivalent shares are included for loss periods as they would be anti-dilutive.
Dilutive common equivalent shares consist of options and warrants.

Potentially dilutive common shares have been excluded from the computation
of diluted EPS for fiscal 1999, 1998 and 1997 since their effect on EPS is
antidilutive due to the losses incurred in each period. Consequently, the
number of shares in the computations of basic and diluted EPS is the same for
each period. Potentially dilutive common shares which were excluded from the
computation of diluted EPS consisted of options to purchase common stock
totaling 4,040,520 in fiscal 1999, 3,520,899 in fiscal 1998 and 2,867,200 in
fiscal 1997, and warrants to purchase common stock totaling 60,000 in fiscal
1999, 1998 and 1997.

Recent Accounting Pronouncements

In March 1998, AcSec issued SOP 98-1, Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use. SOP 98-1 requires that certain
costs related to the development or purchase of internal-use software be
capitalized and amortized over the estimated useful life of the software. SOP
98-1 is effective for financial statements issued for fiscal years beginning
after December 15, 1998. The Company does not expect the adoption of SOP 98-1
will have a material impact on its results of operations.

In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative and
Hedging Activities. SFAS No. 133 establishes accounting and reporting standards
for derivative instruments (including derivative instruments embedded in other
contracts) and for hedging activities. SFAS No. 133, as amended by SFAS No.
137, is effective for all fiscal quarters of fiscal years beginning after June
15, 2000. To date, the Company has not entered into any derivative financial
instruments or hedging activities.

(2) Acquisitions

On December 17, 1998, the Company closed a transaction to purchase
substantially all of the assets and assume certain liabilities and the existing
operations of Serus LLC ("Serus"), a Utah limited liability company. Serus is
developing a java-based web site editing software product which would allow web
site owners to modify and edit the appearance of their web site through their
web browser with minimal knowledge of Hypertext Markup Language ("HTML"). Upon
completion of the development of such products, Netopia intends to market the
products both independently and along with its Netopia Virtual Office software
platform

49
<PAGE>

NETOPIA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

to allow users more flexibility in customizing their web sites. In accordance
with the Serus Asset Purchase Agreement, Netopia acquired substantially all of
the assets and assumed certain liabilities of Serus and its existing operations
which included in-process research and development. The maximum aggregate
purchase price of the Serus transaction is approximately $7.0 million including
(i) $3.0 million of cash paid on the closing date of the transaction, (ii)
409,556 shares of the Company's Common Stock issued on the closing date, and
(iii) a $1.0 million earnout opportunity based upon certain criteria as set
forth in the Serus Purchase Agreement. The excess purchase price over the net
book value acquired was $6.0 million, of which, based upon the Company's
estimates prepared in conjunction with a third party valuation consultant, $3.9
million was allocated to acquired in-process research and development and $2.1
million was allocated to intangible assets. The amounts allocated to intangible
assets include assembled workforces of $100,000 and goodwill of $2.0 million.
The Company used the income approach to appraise the value of the business and
projects acquired. Such method takes into consideration the stage of completion
of the project and estimates related to expected future revenues, expenses and
cash flows which are then discounted back to present day amounts. Based upon
these estimates, material net cash flows from the acquired business are
expected to begin in the calendar year 2001. These cash flows were discounted
using a discount rate of 44.0%. Based upon the expenses incurred and the
development time invested in the product prior to the acquisition and the
estimated expenses and development time to complete the product, the Company
determined the product to be approximately 85% complete at the time of
acquisition. On November 15, 1999, the Company launched the product and is
marketing the product under the Net Jane product brand name. Since the
acquisition date, the Company expended approximately $664,000 to complete
development of the product. The $1.0 million earnout opportunity described
above shall be accounted for when it is deemed probable that the earnout will
be earned. The Company will amortize goodwill related to the Serus transaction
over the next four years. For the fiscal year ended September 30, 1999,
goodwill amortization related to the Serus transaction was $398,000.

On December 31, 1998, the Company closed a transaction to purchase from
Network Associates' substantially all of the assets and assume certain
liabilities related to the netOctopus systems management software
("netOctopus"). The netOctopus software is a suite of administration tools
under development that allows for simultaneous system support of multiple users
across MacOS computer networks. Upon completion of the development of the
Windows versions of the netOctopus software products, Netopia intends to market
the products both independently and along with its Timbuktu Pro software. In
accordance with the netOctopus Purchase Agreement, Netopia acquired
substantially all of the assets and assumed certain liabilities related to the
netOctopus software and its existing operations which included in-process
research and development. The maximum aggregate purchase price of the
netOctopus transaction was $1.1 million of cash paid on the closing date of the
transaction. In addition, there is a $300,000 earnout opportunity based upon
certain criteria as set forth in the netOctopus Purchase Agreement. The excess
purchase price over the net book value acquired was $1.1 million, of which,
based upon the Company's estimates prepared in conjunction with a third party
valuation consultant, $400,000 was allocated to acquired in-process research
and development and $753,000 was allocated to intangible assets. The amounts
allocated to intangible assets include assembled workforces of $60,000,
developed technology of $540,000 and goodwill of $100,000. The Company used the
income approach to appraise the value of the business and projects acquired.
Such method takes into consideration the stage of completion of the project and
estimates related to expected future revenues, expenses and cash flows which
are then discounted back to present day amounts. Based upon these estimates,
material net cash flows from the acquired business are expected to begin in the
calendar year 2000. These cash flows were discounted using a discount rate of
25.0%. Based upon the expenses incurred and the development time invested in
the product prior to the acquisition and the estimated expenses and development
time to complete the product, the Company determined the product to be
approximately 70% complete at the time of acquisition. In fiscal 1999, the
Company completed the development of the Windows versions of the product. From
the acquisition date, the Company expended approximately $287,000 to complete
development of the product. The Company is

50
<PAGE>

NETOPIA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

amortizing the goodwill related to the netOctopus transaction over the next
four years. During the fiscal year ended September 30, 1999, goodwill
amortization related to the netOctopus transaction was $145,000.

The Company has not presented pro-forma financial statements giving effect
to the aforementioned acquisitions as the pro forma results would not
materially differ from the financial statements presented herein for the fiscal
year ended September 30, 1999.

(3) Discontinued Operations

On August 5, 1998, the Company sold its Farallon Local Area Networking (LAN)
Division (the LAN Division) including the LAN Division's products, accounts
receivable, inventory, property and equipment, intellectual property and other
related assets to Farallon Communications, Inc. (Farallon), formerly known as
Farallon Networking Corporation, a Delaware corporation and an affiliate of
Gores Technology Group (Gores). The consideration the Company received for the
sale of the LAN Division consisted of the following (in thousands):

<TABLE>
<S> <C>
Cash................................. $ 2,000
Note receivable...................... 888
Royalties receivable................. 1,782
Warrants............................. 189
-------
$ 4,859
=======
</TABLE>

The note receivable is for $1.0 million payable on July 31, 2000, bearing
interest at 8% per annum. The value of the note has been discounted to reflect
a rate of 15%, the assumed fair market rate of interest for a similar financial
instrument.

The royalties receivable are based upon Farallon's total annual revenues
over each of the next five fiscal years ending on July 31, 2003. If total
annual revenues of at least $15.0 million are reached, the royalty rate applies
to total revenues, including the first $15.0 million. The royalties to be
received are based on the following schedule:

<TABLE>
<CAPTION>
Royalty Rate on
If Farallon Annual Total Farallon
Revenues are: Revenue Equals
------------------ ---------------
(in thousands)
<S> <C>
Less than $15,001 0.0%
$15,001 - $16,000 1.5%
$16,001 - $17,000 2.5%
greater than $17,000 5.0%
</TABLE>

The value of the royalties accrued at the close of the transaction was based
upon the present value of the Company's assumptions as to the projected future
revenue of the LAN Division. Royalties accrued; however, were not recorded to
the extent that total consideration on the transaction exceeded the net asset
value of the LAN Division assets being sold.

Additionally, the Company received and valued warrants to purchase up to 5%
of the equity of Farallon as of the closing of the transaction.

The disposition of the LAN Division in August 1998 has been accounted for as
a discontinued operation in accordance with APB Opinion No. 30, and prior
period consolidated financial statements have been restated

51
<PAGE>

NETOPIA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

to reflect the LAN Division's operations as a discontinued operation. Revenue
from discontinued operations was $15.1 million and $32.0 million in fiscal 1998
and 1997, respectively. The income from discontinued operations of $602,000 and
$3.0 million in fiscal 1998 and 1997, respectively, represents operating
income, net of taxes, of the discontinued operation. The loss on sale of
discontinued operations of $3.1 million in fiscal 1998 is principally comprised
of the transaction expenses and costs incurred and accrued as a result of the
sale of the LAN Division. Such expenses are directly attributable to the sale
transaction and are primarily related to reserves taken against the lease of
the Company's Alameda, California headquarters, investment advisory, legal and
accounting fees and certain expenses related to employees of the LAN Division.
Of the amount recorded as a loss on the sale of discontinued operations, $1.2
million and $2.5 million is included in accrued liabilities at September 30,
1999 and 1998, respectively.

The following approximates the accrued liabilities of the LAN Division which
are included in the consolidated balance sheets as of September 30, 1999 and
1998 (in thousands):

<TABLE>
<CAPTION>
September 30,
---------------
1999 1998
------- -------
<S> <C> <C>
Facility costs.......................................... $ 1,164 $ 1,700
Employee related costs.................................. -- 300
Service fees............................................ 4 500
------- -------
$ 1,168 $ 2,500
======= =======
</TABLE>
(4) Inventories

Inventories consisted of the following (in thousands):

<TABLE>
<CAPTION>
September 30,
---------------
1999 1998
------- -------
<S> <C> <C>
Raw materials and work in process....................... $ 1,699 $ 1,080
Finished goods.......................................... 1,982 511
------- -------
$ 3,681 $ 1,591
======= =======
</TABLE>

(5) Furniture, Fixtures, and Equipment

Furniture, fixtures, and equipment consisted of the following (in
thousands):

<TABLE>
<CAPTION>
September 30,
----------------
1999 1998
------- -------
<S> <C> <C>
Office equipment....................................... $ 2,684 $ 2,457
Furniture and fixtures................................. 1,637 1,186
Computers.............................................. 8,675 7,757
Leasehold improvements................................. 569 540
------- -------
13,565 11,940
Accumulated depreciation and amortization.............. (11,162) (9,872)
------- -------
$ 2,403 $ 2,068
======= =======
</TABLE>

52
<PAGE>

NETOPIA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

(6) Income Taxes

Total income tax expense (benefit) for the years ended September 30, 1999,
1998 and 1997 is allocated as follows (in thousands):

<TABLE>
<CAPTION>
September 30,
-----------------------
1999 1998 1997
------ ------- --------
<S> <C> <C> <C>
Continuing operations.............................. $ -- $ 2,155 $ (2,217)
Discontinued operations............................ -- 385 1,932
------ ------- --------
$ -- $ 2,540 $ (285)
====== ======= ========
</TABLE>

Income tax expense (benefit) related to continuing operations consisted of
the following (in thousands):

<TABLE>
<CAPTION>
September 30,
-----------------------
1999 1998 1997
----- ------- --------
<S> <C> <C> <C>
Current:
Federal.......................................... $ -- $ (596) $ (1,753)
State............................................ -- (118) (6)
----- ------- --------
-- (714) (1,759)
Deferred:
Federal.......................................... -- 2,191 (378)
State............................................ -- 678 (295)
-----
-- 2,869 (673)
Charge in lieu of taxes attributable to employer
stock option plans............................... -- -- 215
-----
Total........................................... $ -- $ 2,155 $ (2,217)
===== ======= ========
</TABLE>

Income tax expense (benefit) related to continuing operations differs from
the amounts computed by applying the statutory income tax rate of 34% to
pretax loss as a result of the following (in thousands):

<TABLE>
<CAPTION>
September 30,
----------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Computed "expected" tax (benefit) of 34%..... $ (2,672) $ (2,000) $ (1,960)
Change in valuation allowance for deferred
tax assets.................................. 2,772 5,459 512
Tax exempt interest income................... -- -- (163)
Research credits............................. (100) (770) (172)
State tax and other, net..................... -- (534) (434)
-------- -------- --------
$ -- $ 2,155 $ (2,217)
======== ======== ========
</TABLE>

53
<PAGE>

NETOPIA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets are presented below (in thousands):

<TABLE>
<CAPTION>
September 30,
----------------
1999 1998
------- -------
<S> <C> <C>
Deferred tax asset:
Reserves and accruals not currently deductible........... $ 1,373 $ 1,010
Deferred rent............................................ 119 119
Research and other credits............................... 1,882 1,782
Tangible and intangible assets........................... 279 349
Net operating losses..................................... 5,713 2,377
State tax and other, net................................. -- 957
Total deferred assets.................................. 9,366 6,594
------- -------
Less valuation allowance................................. (9,366) (6,594)
------- -------
Net deferred tax assets................................ $ -- $ --
======= =======
</TABLE>

The net change in the total valuation allowance for the years ended
September 30, 1999 and 1998 was increases of $2,772,000 and $6,082,000,
respectively.

At September 30, 1999 and 1998, the Company believed that based upon
available objective evidence, there was sufficient uncertainty regarding the
realizability of its deferred tax assets to warrant a full valuation allowance.
The factors considered included the relative shorter life cycles in the high
technology industry and the uncertainty of longer-term taxable income estimates
related thereto and as a result of the sale of the historically profitable LAN
Division.

At September 30, 1997, the Company believed that based upon the then
available objective evidence, there was sufficient uncertainty regarding the
realizability of certain of its tax assets to warrant a partial valuation
allowance, primarily related to the expected realizability of its research
credit carryforwards. The factors considered included the relative shorter
product life cycles in the high technology industry and the uncertainty of
longer-term taxable income estimates related thereto and limits on the
carryback potential for realizing deferred tax assets.

At September 30, 1999, the Company had net operating loss carryforwards of
approximately $12.0 million for federal tax purposes and $6.0 million for state
tax purposes. If not earlier utilized, the federal net operating loss
carryforwards will expire in 2019 and the state net operating loss
carryforwards will expire in 2004. At September 30, 1999, the Company had
research credit carryforwards of approximately $1.5 million for federal tax
purposes and $382,000 for state tax purposes. If not earlier utilized, the
federal research credit carryforwards will expire in years 2009 through 2019.
The Company's future ability to utilize the net operating loss carryforwards
and research credit carryforwards may be subject to limitations in the event of
ownership changes as defined in the Internal Revenue Code of 1986.

(7) Stockholders' Equity and Stock Option Plan

On April 23, 1996 the Company was reincorporated in the State of Delaware.
The Company's authorized capital consists of 25,000,000 shares of $0.001 par
value common stock and 5,000,000 shares of $0.001 par value Preferred Stock

54
<PAGE>

NETOPIA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Common Stock

The holders of Common Stock are entitled to one vote per share on all
matters to be voted upon by the stockholders. Subject to preferences that may
be applicable to any outstanding Preferred Stock, the holders of common stock
are entitled to receive ratably such dividends, if any, as may be declared from
time to time by the Board of Directors out of funds legally available. In the
event of a liquidation, dissolution or winding up of the Company, the holders
of common stock are entitled to share ratably in all assets remaining after
payment of liabilities, subject to prior distribution rights of Preferred
Stock, if any, then outstanding. The common stock has no preemptive or
conversion rights or other subscription rights.

Preferred Stock

Upon the Company's initial public offering of its Common Stock on June 13,
1996, all shares of issued and outstanding Preferred Stock were converted to
5,591,207 shares of Common Stock. Following the conversion, the Company had no
Preferred Stock outstanding.

Common Stock Warrants

Warrants to purchase 60,000 shares of common stock were issued in fiscal
1997 for consulting services provided. The warrants will expire on April 22,
2002. The exercise price of the warrants was $4.00. The Company recognized an
expense of $60,000 for the estimated fair value of the warrants issued.

Stock Option Plan

On April 16, 1996, the Board adopted the 1996 Stock Option Plan (the 1996
Plan) providing for the issuance of incentive or non-statutory options to
directors, employees, and non-employee consultants. Options are granted at the
discretion of the Board of Directors. As of September 30, 1999 the 1996 Plan
share reserve of 4,170,714 shares is comprised of (i) 4,040,520 shares subject
to outstanding options and (ii) 130,194 shares available for grant.

Incentive stock may be granted at not less than 100% of the fair market
value per share and non-statutory stock options may be granted at not less than
85% of the fair market value per share at the date of grant as determined by
the Board of Directors or committee thereof, except for options granted to a
person owning greater than 10% of the total combined voting power of all
classes of stock of the Company, for which the exercise price of the options
must be not less than 110% of the fair market value.

Included in the 1996 Plan is a provision for the automatic grant of non-
statutory options to non-employee Board of Director members of 25,000 shares on
the effective date of the Company's initial public offering at the initial
offering price. These options were granted to three non-employee Board of
Director members, of which two currently remain on the Company's Board of
Directors. Thereafter, each new director will be granted an option to purchase
25,000 shares of common stock on the date they become a Board member of the
Company at the then current fair market value. Options issued to Directors
after December 31, 1996 will become exercisable in five successive and equal
annual installments over the non-employee Board member's period of continued
service as a Board member, beginning one year from the grant date of the
option.

The Board of Directors, on July 24, 1996, unanimously amended the Notice of
Grant to provide for a four year vesting schedule commencing on the date of the
grant. Grants prior to that date normally vest over five years commencing on
the date of the grant.

55
<PAGE>

NETOPIA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

In the first quarter of fiscal 1999, the Company provided a 90 day extension
of the exercise period for all Farallon employees with outstanding stock
options priced at $4.00 or higher in the Company. This resulted in a total
compensation charge of approximately $35,000. In the fourth quarter of fiscal
1998, in connection with the sale to Gores, the Company provided for an
accelerated vesting period to discretionary employees of Farallon for their
outstanding stock options in the Company. This resulted in a total compensation
charge of approximately $143,500 in fiscal 1998.

In 1990, the Company effected a recapitalization whereby each share of the
Company's common stock outstanding or reserved for issuance upon exercise of
options was converted into a unit for one share of common stock and one share
of Series A Preferred Stock. There are currently no options remaining on the
converted shares. In January 1997, the Company repriced 180,840 outstanding
options to $5.63, no directors or officers of the Company received repriced
options. The options relating to this action are reflected in the table below.

The following table summarizes activity under the 1996 Plan (and its
predecessor):

<TABLE>
<CAPTION>
Incentive Stock
Options
-------------------
Weighted
Shares Average
Under Exercise
Options Price
--------- --------
<S> <C> <C>
Outstanding as of September 30, 1996..................... 1,601,305 $3.64
Options granted.......................................... 1,787,365 5.36
Options exercised........................................ (194,535) 1.17
Options cancelled........................................ (326,935) 8.53
---------
Outstanding as of September 30, 1997..................... 2,867,200 4.32
Options granted.......................................... 1,409,425 5.51
Options exercised........................................ (312,090) 2.40
Options cancelled........................................ (443,636) 4.80
---------
Outstanding as of September 30, 1998..................... 3,520,899 4.90
Options granted.......................................... 1,413,900 11.87
Options exercised........................................ (626,013) 4.55
Options cancelled........................................ (268,266) 6.89
---------
Outstanding as of September 30, 1999..................... 4,040,520 7.26
=========
Exercisable.............................................. 1,596,496 $4.59
=========
</TABLE>

56
<PAGE>

NETOPIA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

The following table summarizes information about stock options outstanding
at September 30, 1999:

<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------ ------------------------
Weighted -
Number of average Number
outstanding remaining Weighted - exercisable Weighted -
shares as of contractual average as of average
September 30, life exercise September 30, exercise
Range of exercise prices 1999 (years) price 1999 price
------------------------ ------------- ----------- ---------- ------------- ----------
<S> <C> <C> <C> <C> <C>
$1.00................... 228,777 1.85 $ 1.00 228,777 $ 1.00
1.20................... 178,940 4.68 1.20 171,374 1.20
1.60 - 4.00............ 237,990 6.38 2.91 174,395 2.72
4.25 - 4.50............ 258,918 7.91 4.38 109,180 4.38
4.63 - 5.19............ 269,189 8.68 4.73 76,868 4.71
5.25 - 5.63............ 633,903 8.06 5.35 264,638 5.33
5.69................... 545,982 8.53 5.69 178,206 5.69
5.75 - 6.75............ 759,500 8.35 6.58 271,823 6.43
6.81 - 11.25........... 331,921 8.84 8.79 77,096 8.64
14.88 - 36.00.......... 595,400 9.52 19.14 44,139 16.89
--------- ---- ------ --------- ------
$1.00 - 36.00........... 4,040,520 7.89 $ 7.26 1,596,496 $ 4.59
========= ==== ====== ========= ======
</TABLE>

1996 Employee Stock Purchase Plan

On April 16, 1996, the Board adopted the 1996 Employee Stock Purchase Plan
(the Purchase Plan) and reserved 300,000 shares of common stock for issuance
under the Purchase Plan. To date an additional 450,000 shares have been
approved for issuance under the Purchase Plan. Employees may purchase shares of
common stock at a price per share that is 85% of the lesser of the fair market
value as of the beginning or the end of the semi-annual option period.

Shares issued under the Purchase Plan totaled 199,721 in fiscal 1999,
153,157 in fiscal 1998 and 178,236 in fiscal 1997. As of September 30, 1999,
531,114 shares have been issued under the Purchase Plan and 218,886 shares were
reserved for future issuances under the plan.

Pro Forma Disclosure -- Compensatory Stock Arrangements

Stock options are granted at not less than the fair market value of the
common stock on the date of grant. All options expire no later than 10 years
from the date of grant. The Company has adopted the disclosure provisions of
SFAS No. 123, Accounting for Stock Based Compensation, which was issued in
October 1995. As permitted by the provisions of SFAS No. 123, the Company
applies APB Opinion 25 and related interpretations in accounting for its stock
option plans.

If the Company had elected to recognize compensation cost based on the fair
value of the options granted at grant date and the fair value of shares
purchased under the plan as prescribed by SFAS No. 123, net income (loss) and
per share results would have been the pro forma amounts indicated in the table
below (in thousands, except per share amounts):

<TABLE>
<CAPTION>
September 30,
---------------------------
1999 1998 1997
-------- -------- -------
<S> <C> <C> <C>
Net income (loss) -- as reported.............. $ (7,860) $(10,533) $ (529)
Net income (loss) -- pro forma................ (12,143) (13,384) (1,109)
Basic and diluted net loss per share -- as
reported..................................... (0.60) (0.90) (0.05)
Basic and diluted net loss per share -- pro
forma........................................ $ (0.93) $ (1.15) $ (0.10)
</TABLE>

57
<PAGE>

NETOPIA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

The effect on net loss and net loss per share is not expected to be
indicative of the effects on results in future years.

The effect of applying SFAS No. 123 for disclosing compensation costs may
not be representative of the effects on reported net loss for the future years
because pro forma net loss reflects compensation costs only for stock options
granted in fiscal 1999, 1998 and 1997. The weighted average fair value of
employee stock options granted during fiscal 1999, 1998 and 1997 was $8.08,
$3.48 and $3.05 respectively.

The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable while the Company's employee stock options have
characteristics significantly different from those of traded options. In
addition, option valuation models require the input of highly subjective
assumptions including the expected stock price volatility. The fair value of
each option grant and share purchased under the Purchase Plan are estimated on
the date of grant or share purchase using the Black-Scholes option-pricing
model with the following assumptions:

<TABLE>
<CAPTION>
Years ended
September 30,
----------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Expected volatility........................................ 95% 84% 70%
Risk-free interest rate.................................... 4.59% 4.25% 5.60%
Expected dividend yield.................................... -- -- --
</TABLE>

The expected lives of options under the Employee Stock Option and Employee
Stock Purchase Plans are estimated at four years and six months, respectively
for all years presented.

(8) Commitments and Contingencies

Leases

The Company conducts its operations in leased facilities and with equipment
under operating lease agreements expiring at various dates through 2004.

The following is a schedule of future minimum rental payments required under
these leases that have initial or remaining non-cancelable lease terms in
excess of one year (in thousands):

<TABLE>
<CAPTION>
Year ending September 30,
-------------------------
<S> <C>
2000.............................................. $1,383
2001.............................................. 1,298
2002.............................................. 1,258
2003.............................................. 138
2004.............................................. 28
thereafter........................................ --
------
Total minimum lease payments.................... $4,105
</TABLE>

Total rental expense for all operating leases amounted to approximately
$1,115,000, $1,244,000 and $1,157,000 for the years ended September 30, 1999,
1998 and 1997, respectively.

Litigation

The Company is involved in various legal matters that have arisen in the
normal course of business. Management believes, after consultation with
counsel, any liability that may result from the disposition of such legal
matters will not have a material adverse effect on the Company's operating
results and financial condition.

58
<PAGE>

NETOPIA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Plan for Savings and Investments

The Company maintains a plan for savings and investments under which
eligible employees may contribute up to 15% of their annual compensation. In
addition, the Company may make discretionary retirement contributions to the
plan. No discretionary retirement contributions were made in any period
presented.

(9)Geographic, Segment and Significant Customer Information

The Company adopted the provisions of SFAS No. 131, Disclosure about
Segments of an Enterprise and Related Information, during fiscal year 1999.
SFAS No. 131 establishes standards for the reporting by public business
enterprises of information about operating segments, products and services,
geographic areas, and major customers. The methodology for determining what
information is reported is based on the organization of operating segments and
the related information that the Chief Operating Decision Maker (CODM) uses for
operational decisions and financial performance assessments. The Company's
Chief Executive Officer (CEO) is considered its CODM. For purposes of making
operating decisions and assessing financial performance, the CEO reviews
financial information presented on a consolidated basis accompanied by
disaggregated information for revenues and gross margins by product group as
well as revenues by geographic region and by customer. Currently, operating
expenses or assets are not disaggregated by product group for purposes of
making operating decisions and assessing performance.

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

<TABLE>
<CAPTION>
Web platform licenses
---------------------------------------
Internet
connectivity Web site Timbuktu Total
products products products products
------------ -------- -------- --------
1999
<S> <C> <C> <C> <C>
Revenues............................... $24,460 $3,826 $15,865 $44,151
Cost of revenues....................... 15,597 13 633 16,243
------- ------ ------- -------
Gross profit........................... 8,863 3,814 15,232 27,908
Unallocated operating expenses......... 37,834
-------
Operating loss....................... (9,926)
Other income, net...................... 2,066
-------
Loss before income taxes............. (7,860)
Income tax provision (benefit)......... --
-------
Loss from continuing operations...... $(7,860)
=======
</TABLE>

59
<PAGE>

NETOPIA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

<TABLE>
<CAPTION>
Web platform licenses
---------------------------------------
Internet
connectivity Web site Timbuktu Total
products products products products
------------ -------- -------- --------
1998
<S> <C> <C> <C> <C>
Revenues............................... $10,884 $692 $13,260 $24,836
Cost of revenues....................... 7,064 16 875 7,955
------- ---- ------- -------
Gross Profit........................... 3,820 676 12,385 16,881
Unallocated operating expenses......... 24,985
-------
Operating loss....................... (8,104)
Other income, net...................... 2,222
-------
Loss from continuing operations
before income taxes................. (5,882)
Income tax provision................... 2,155
-------
Loss from continuing operations...... $(8,037)
=======
</TABLE>

<TABLE>
<CAPTION>
Web platform licenses
---------------------------------------
Internet
connectivity Web site Timbuktu Total
products products products products
------------ -------- -------- --------
1997
<S> <C> <C> <C> <C>
Revenues............................... $8,134 $290 $11,746 $20,170
Cost of revenues....................... 5,258 15 1,123 6,396
------ ---- ------- -------
Gross Profit........................... 2,876 275 10,623 13,774
Unallocated operating expenses......... 21,410
-------
Operating loss....................... (7,636)
Other income, net...................... 1,869
-------
Loss from continuing operations
before income taxes................. (5,767)
Income tax provision................... (2,217)
-------
Loss from continuing operations...... $(3,550)
=======
</TABLE>

The Company sells its products and provides services worldwide through a
direct sales force, independent distributors, and value-added resellers. It
currently operates in five regions, United States, Europe, Asia/Pacific,
Canada, and Latin America. Revenues outside of the United States are primarily
export sales denominated in United States dollars. Disaggregated financial
information regarding the Company's products and services and revenues by
geographic region is as follows (in thousands):

<TABLE>
<CAPTION>
Years ended
September 30,
-----------------------
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
United States...................................... $31,945 $16,670 $14,637
Europe............................................. 9,820 6,215 3,929
Asia/Pacific....................................... 1,066 1,175 1,018
Canada............................................. 1,222 706 542
Latin America...................................... 98 70 44
------- ------- -------
Total revenues................................... $44,151 $24,836 $20,170
======= ======= =======
</TABLE>

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

60
<PAGE>

NETOPIA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

During the years ended September 30, 1999, 1998 and 1997, one customer
accounted for greater than 10% of total revenues and total accounts receivable.
No other customers have accounted for 10% or more of the Company's total
revenue or total accounts receivable for the last three fiscal years.
Significant customer information is as follows:

<TABLE>
<CAPTION>
Percent of total
Percent of total revenue accounts receivable
-------------------------- --------------------------
1999 1998 1997 1999 1998 1997
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Customer A............ 10% 12% 14% 12% 13% 23%
<CAPTION>
Percent of total revenue
from internet connectivity Percent of total revenue
products from web platform licenses
-------------------------- --------------------------
1999 1998 1997 1999 1998 1997
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Customer A............ 61% 50% 52% 39% 50% 48%
</TABLE>

(10) Subsequent Events

On October 13, 1999, the company acquired StarNet Technologies, Inc.,
("StarNet"), a California corporation in a merger transaction in which StarNet
merged into a newly formed, wholly owned, subsidiary of the Company. StarNet
has been developing a voice channel technology architecture that allows the
transmission of up to eight voice lines over a digital subscriber line along
with the simultaneous transmission of standard data packets. The Company
intends to integrate StarNet's technology into its Internet connectivity
product development and begin offering voice and data integrated access
devices. Any delay in the completion of the development of the products would
cause the Company to incur additional unplanned development expenses as well as
the loss or deferral of customer purchases, either of which could adversely
affect the Company's business.

The Company will account for the transaction under the purchase method. The
aggregate consideration constituting the purchase price is approximately $27.5
million at closing (which includes $1.0 million of the potential earnout
payments discussed below), and may increase by up to an additional $4.9 million
depending on the actual amount of potential earnout payments. The aggregate
consideration includes:

. $8.4 million in cash paid on the closing date of the transaction;

. 447,852 shares of the Company's common stock issued on the closing date;

. A series of potential cash earnout payments aggregating up to
approximately $5.9 million at various times after the closing date if
certain technical and revenue milestones are achieved. These earnout
opportunities will be included in the purchase price for accounting
purposes when it is deemed probable that the earnout will be earned. At
the acquisition date, the Company has deemed probable and recorded
approximately $1.0 million in earnout payments;

. The substitution of stock options to purchase the Company's common stock
in replacement of the StarNet options held by StarNet's former employee,
who joined the Company after the closing, valued at approximately
$1.4 million using the following assumptions for valuation purposes:
volatility of 101%, expected life of 4 years, interest rate of 4.9%; and
no dividends; and,

. Transaction costs of approximately $800,000 which include legal fees,
accounting fees, fees paid for an independent fairness opinion, and fees
for other related professional services.

Approximately 30,673 shares of common stock will be held in escrow for a
period of time after the closing to satisfy StarNet's indemnification
obligations under the definitive acquisition agreements.

61
<PAGE>

NETOPIA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

The issuance of shares in the merger was not registered under the Securities
Act of 1933, as amended, in reliance upon the Securities Act's exemption from
the registration requirements for nonpublic offerings, and resale of the shares
is restricted under the Securities Act. The Company has agreed to file a
registration statement on Form S-3 registering the resale of the shares. Resale
of the shares under the registration statement will be subject to certain
customary restrictions.

The acquisition will be accounted for as a purchase and will result in
goodwill and other intangible assets of approximately $21.8 million which will
amortized over three to four years and a charge for acquired in process
research and development of $5.7 million which will be recorded in the first
fiscal quarter of 2000.

The funds used to pay the cash portion of the purchase price were derived
from the Company's existing working capital.

All of StarNet's former full time employees became employees of the Company.
Each of StarNet's founders, and certain other key employees, entered into non-
competition agreements in connection with the acquisition.

62
<PAGE>

FINANCIAL STATEMENT SCHEDULE

Schedule--Valuation and Qualifying Accounts (in thousands)

<TABLE>
<CAPTION>
Charged
Balance at (credited) Balance
beginning to costs and at end of
Description of period expenses Deductions Other (a) period
- ------------------------ ---------- ------------ ---------- --------- ---------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful
accounts:
Fiscal year ended
September 30, 1999.... $ 400 $ 534 $ 355 $ -- $ 579
Fiscal year ended
September 30, 1998.... 566 96 31 231 400
Fiscal year ended
September 30, 1997.... 659 21 114 -- 566
Allowance for returns:
Fiscal year ended
September 30, 1999.... $ 217 $ -- $ -- $ -- $ 217
Fiscal year ended
September 30, 1998.... 561 105 210 239 217
Fiscal year ended
September 30, 1997.... 669 200 308 -- 561
Valuation allowance for
deferred tax assets:
Fiscal year ended
September 30, 1999.... $ 6,594 $ 2,772 $ -- $ -- $ 9,366
Fiscal year ended
September 30, 1998.... 512 6,082 -- -- 6,594
Fiscal year ended
September 30, 1997.... -- 512 -- -- 512
</TABLE>
- --------
(a) Amounts transferred with sale of LAN Division

63
<PAGE>

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

Not applicable

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Our executive officers and directors, and their ages as of December 1, 1999,
are as follows:

<TABLE>
<CAPTION>
Name Age Position
- ------------------------ --- --------------------------------------------------------------
<S> <C> <C>
Alan B. Lefkof (1)...... 46 President, Chief Executive Officer and Director
James A. Clark.......... 43 Vice President and Chief Financial Officer
Didier Cop.............. 45 Vice President International and Marketing, Internet Equipment
David A. Kadish......... 47 Vice President, General Counsel and Secretary
Thomas A. Skoulis....... 43 Senior Vice President and General Manager, Timbuktu
Michael P. Trupiano..... 43 Senior Vice President and General Manager, Internet Equipment
Reese M. Jones.......... 41 Chairman of the Board of Directors
David F. Marquardt
(2)(3)................. 50 Director
James R. Swartz (3)..... 57 Director
</TABLE>
(1) Member of the Stock Option Committee
(2) Member of the Audit Committee
(3) Member of the Compensation Committee

Mr. Lefkof. Alan B. Lefkof joined Netopia as President in August 1991 and
has been Chief Executive Officer since November 1994. Prior to joining Netopia,
Mr. Lefkof spent over nine years at GRiD Systems, a manufacturer of laptop
computers, where he served as President from October 1989 to August 1991, Chief
Financial Officer from March 1987 to September 1989, and Vice President of
Marketing from August 1983 to February 1987. Before joining GRiD Systems, Mr.
Lefkof served as a Management Consultant at McKinsey & Company from July 1977
to January 1982. Mr. Lefkof received a B.S. in computer science from the
Massachusetts Institute of Technology in 1975 and an M.B.A. from Harvard
Business School in 1977.

Mr. Clark. James A. Clark, Vice President and Chief Financial Officer,
joined Netopia in November 1994. Prior to joining Netopia, Mr. Clark was Vice
President and Chief Financial Officer at Integral Systems, a developer of large
scale, client/server business application software, from November 1985 to
November 1994. Before joining Integral Systems, Mr. Clark was Manager of
Reporting and International Accounting at MicroPro from April 1984 to November
1985. Mr. Clark received a B.A. in business administration/accounting from
California State University at Chico in 1978 and is a Certified Public
Accountant.

Mr. Cop. Didier Cop, Vice President International and Marketing, Internet
Equipment, joined Netopia in June 1991. Prior to joining Netopia, Mr. Cop was
Sales and Marketing Manager for Mood Media, a multimedia and advertising system
company, from August 1990 to May 1991. Before joining Mood Media, Mr. Cop was
General Manager for Southern Europe Sales with General Parametrics. Mr. Cop
received a degree in business administration from E.S.S.E.C. in France, in
1976.

Mr. Kadish. David A. Kadish, Vice President and General Counsel, joined
Netopia in June 1999. Prior to joining Netopia, Mr. Kadish provided legal
consulting services to Netopia from September 1997 to June 1999. Mr. Kadish
operated an independent legal consulting practice from May 1996 to June 1999.
He served as Senior International Counsel and Manager, Intellectual Property
Law for the Electric Power Research Institute, Inc., from December 1997 to June
1999. He was Vice President, General Counsel and Secretary of Integral Systems,
a developer of large scale, client/server business application software, from
September 1987 to April

64
<PAGE>

1996. Mr. Kadish received a B.A. in American history from University of
California at Santa Cruz in 1973, an M.A. in American history from Brandeis
University in 1974, and a J.D. from Yale University in 1979.

Mr. Skoulis. Thomas A. Skoulis, Senior Vice President and General Manager,
Timbuktu, joined Netopia in September 1991. Prior to joining Netopia, Mr.
Skoulis held various sales management positions with 3Com from March 1988 to
September 1991. Before joining 3Com, Mr. Skoulis also held the position of
Senior Sales Representative at Digital Equipment from June 1980 to March 1988.
Mr. Skoulis received a B.A. in business administration from Miami University in
Oxford, Ohio, in 1980.

Mr. Trupiano. Michael P. Trupiano, Senior Vice President and General
Manager, Internet Equipment, joined Netopia in May 1992. Prior to joining
Netopia, Mr. Trupiano was Director of R&D/Product Marketing at Verifone, a
transaction processing products company, from January 1989 to May 1992. Before
joining Verifone, Mr. Trupiano was Vice President of Engineering at Isix from
June 1987 to December 1989, and was Director of Engineering at Amtel Systems
from January 1984 to June 1987. Mr. Trupiano received a B.S. in electrical
engineering and computer science from Santa Clara University in 1978.

Mr. Jones. Reese M. Jones, founder of Netopia, has served as Chairman of the
Board of Directors of Netopia since inception. Mr. Jones served as Chief
Executive Officer of Netopia until Mr. Lefkof was appointed Chief Executive
Officer in November 1994. Mr. Jones currently serves on the Board of Directors
of a number of privately held companies. Mr. Jones received a B.A. in
biophysics from the University of California at Berkeley in 1982.

Mr. Marquardt. David F. Marquardt has been a director of Netopia since 1990.
Mr. Marquardt is a founding General Partner of August Capital, formed in 1995,
and has been a General Partner of various Technology Venture Investors (TVI)
entities since August 1980. August Capital and the TVI entities are all private
venture capital partnerships. Mr. Marquardt currently serves on the Board of
Directors of Microsoft, Tumbleweed Communications and a number of privately
held companies. Mr. Marquardt received a B.S. in mechanical engineering from
Columbia University in 1973 and an M.B.A. from Stanford University in 1979.

Mr. Swartz. James R. Swartz has been a director of Netopia since 1992. Mr.
Swartz is a Founding General Partner of Accel Partners, a venture capital firm,
which he co-founded in September 1983. Mr. Swartz currently serves on the Board
of Directors of Remedy, Polycom, FVC.COM and a number of privately held
companies. Mr. Swartz received a B.A. from Harvard College with a concentration
in engineering sciences and applied physics and received an M.S. in Industrial
Administration from Carnegie Mellon University.

ITEM 11. EXECUTIVE COMPENSATION

The information required by item 11 of Form 10-K is incorporated by
reference from the information contained in the section captioned "Executive
Compensation and Other Matters" in the Proxy Statement.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required by item 12 is incorporated by reference from the
information contained in the section captioned "Security Ownership of Certain
Beneficial Owners and Management" in the Proxy Statement to be filed with the
Commission within 120 days after the end of the fiscal year ended September 30,
1999.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by item 13 is incorporated by reference from the
information contained in the section captioned "Compensation Committee and
Insider Participation" in the Proxy Statement to be filed with the Commission
within 120 days after the end of the fiscal year ended September 30, 1999.

65
<PAGE>

PART IV.

ITEM 14. EXHIBITS, FINANCIAL SCHEDULES AND REPORTS ON FORM 8-K

(A) See Item 8 for an index to the consolidated financial statements and
supplementary financial information.

(B) There were no filings on Form 8-K for the three months ended September 30,
1999.

66
<PAGE>

(c) Exhibits have been filed separately with the United States Securities
and Exchange Commission in connection with the Annual Report on Form 10-K or
have been incorporated into the report by reference. Copies of such exhibits
may be obtained from the Company upon request.

<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
3.1(a) Restated and Amended Certificate of Incorporation
3.2(a) Restated and Amended Bylaws of the Registrant
3.3(b) Certificate of Ownership and Merger (Corporate Name Change)
4.1 Reference is made to Exhibits 3.1, 3.2 and 3.3
4.2(a) Amended and Restated Investor Rights Agreement, dated March 27, 1992,
among the Registrant and the Investors and Founders named therein, as
amended
10.1(a) Form of Indemnification Agreement entered into between the Registrant
and it Directors and Officers
10.2(a) 1996 Stock Option Plan and forms of agreements thereunder
10.3(a) Employee Stock Purchase Plan
10.4(b) Office Lease Agreement between the Company and WHLW Real Estate
Limited Partnership, dated May 1, 1997
10.5(b) Real Property Lease Extension Agreement between the Company and
Bobwhite Meadow, L.P., dated March 1,1996
10.6(c) Agreement of Purchase and Sale of Assets, dated August 5, 1998, by and
between Netopia, Inc., a Delaware corporation, and Farallon Networking
Corporation, a Delaware corporation
10.7(d) Serus Asset Purchase Agreement by and among Netopia, Inc., Serus LLC,
Serus Acquisition Corporation and the Members of Serus LLC dated as of
December 16, 1998 (including exhibits thereto)
10.8(e) Agreement and Plan of Reorganization dated September 28, 1999 by and
between Netopia, Inc., a Delaware corporation, SN Merger Corporation,
a Delaware corporation that is a wholly-owned subsidiary of Netopia,
and StarNet Technologies, Inc. a California corporation
11.1 Reference is made to Note 1 of Notes to Consolidated Financial
Statements
21.1(f) Subsidiaries of the Registrant
23.1 Consent of Independent Auditors
24.1 Power of Attorney (see Signature page)
27.1 Financial Data Schedule
</TABLE>
- --------
(a) Incorporated by reference to our Registration Statement on Form S-1 (No.
333-3868).
(b) Incorporated by reference to our Form 10-K for the fiscal year ended
September 30, 1997.
(c) Incorporated by reference to our Form 8-K as filed on August 20, 1998.
(d) Incorporated by reference to our form 10-K for the fiscal year ended
September 30, 1998.
(e) Incorporated by reference to our Form 8-K as filed on October 28, 1999.
(f) Incorporated by reference to our Registration Statement on Form S-1 (No.
333-3868) for our Subsidiary in France.

67
<PAGE>

SIGNATURES

Pursuant to the requirements of Sections 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on behalf by the undersigned, thereunto duly authorized, in the City of
Alameda, State of California on this 29th day of December, 1999.

Netopia, Inc.

/s/ Alan B. Lefkof
By:__________________________________
Alan B. Lefkof
President and Chief Executive
Officer

Dated: December 29, 1999

POWER OF ATTORNEY

By signing this form 10-K below, I hereby appoint each of Alan B. Lefkof and
David A. Kadish, as my attorney-in-fact to sign all amendments to this Form 10-
K on my behalf, and to file this Form 10-K (including all exhibits and other
documents related to the form 10-K) with the Securities and Exchange
Commission. I authorize each of my attorneys-in-fact to (1) appoint a
substitute attorney-in-fact for himself and (2) perform any actions that he
believes are necessary or appropriate to carry out the intention and purpose of
this Power of Attorney. I ratify and confirm all lawful actions taken directly
or indirectly by my attorneys-in-fact and by any properly appointed substitute
attorneys-in-fact.

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.

<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Alan B. Lefkof President, Chief Executive December 29, 1999
______________________________________ Officer and Director
Alan B. Lefkof (Principal Executive
Officer)
/s/ James A. Clark Vice President and Chief December 29, 1999
______________________________________ Financial Officer
James A. Clark (Principal Financial and
Accounting Officer)
/s/ Reese M. Jones Chairman of the Board of December 29, 1999
______________________________________ Directors
Reese M. Jones
/s/ David F. Marquardt Director December 29, 1999
______________________________________
David F. Marquardt
/s/ James R. Swartz Director December 29, 1999
______________________________________
James R. Swartz
</TABLE>

<PAGE>

Exhibit 23.1

CONSENT OF INDEPENDENT AUDITORS

The Board of Directors
Netopia, Inc. and subsidiary:

We consent to incorporation by reference in the registration statement (No.
333-74943) on Form S-8 of Netopia, Inc. and subsidiaries of our report dated
October 29, 1999 relating to the consolidated balance sheets of Netopia, Inc.
and subsidiaries as of September 30, 1999 and 1998, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the years in the three-year period ended September 30, 1999, annual
report on Form 10-K of Netopia, Inc. and to the reference to our firm under the
heading "Selected Financial Data" in the annual report on Form 10-K.

/s/ KPMG LLP

San Francisco, California
December 29, 1999

<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> SEP-30-1999
<CASH> 61,381
<SECURITIES> 8,102
<RECEIVABLES> 10,229
<ALLOWANCES> 796
<INVENTORY> 3,681
<CURRENT-ASSETS> 85,740
<PP&E> 2,403
<DEPRECIATION> 11,162
<TOTAL-ASSETS> 95,969
<CURRENT-LIABILITIES> 10,346
<BONDS> 0
15
0
<COMMON> 0
<OTHER-SE> 85,064
<TOTAL-LIABILITY-AND-EQUITY> 95,969
<SALES> 44,151
<TOTAL-REVENUES> 44,151
<CGS> 16,243
<TOTAL-COSTS> 16,243
<OTHER-EXPENSES> 37,834
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (2,066)
<INCOME-PRETAX> (7,860)
<INCOME-TAX> 0
<INCOME-CONTINUING> (7,860)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,860)
<EPS-BASIC> (0.60)
<EPS-DILUTED> (0.60)

</TABLE>