NETOPIA INC, 424B4, 1999-08-05

NETOPIA INC
424B4, 1999-08-05
COMPUTER INTEGRATED SYSTEMS DESIGN

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Filed Pursuant to Rule 424(b)(4)
Registration No. 333-82255

PROSPECTUS Issued August 5, 1999
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2,200,000 Shares

Common Stock

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Netopia, Inc. is offering 2,000,000 shares of common stock and the stockholders
identified in this prospectus are offering 200,000 shares of our common stock.
We will not receive any of the proceeds from the sale of shares of our common
stock by the selling stockholders.

Our common stock is listed on the Nasdaq National Market under the symbol
"NTPA." The last reported sale price of the common stock on the Nasdaq National
Market on August 4, 1999 was $19.69 per share.

Investing in our common stock involves risks. See "Risk Factors" beginning on
page 4.

Neither the Securities and Exchange Commission nor state securities regulators
has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.

<TABLE>
<CAPTION>
Per Share Total
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<S> <C> <C>
Public offering price $19.00 $41,800,000
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Underwriting discounts and commissions $ 0.99 $ 2,178,000
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Proceeds to Netopia $18.01 $36,020,000
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Proceeds to the selling stockholders $18.01 $ 3,602,000
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</TABLE>

We have granted the underwriters a 30-day option to purchase up to an
additional 330,000 shares of common stock to cover over-allotments. Warburg
Dillon Read LLC expects to deliver the shares of common stock to purchasers on
August 9, 1999.

Warburg Dillon Read LLC BancBoston Robertson Stephens

Volpe Brown Whelan & Company

DLJdirect Inc.
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[Diagram containing three tables:

. Table depicting our Internet connectivity and Web platform products;

. Table depicting the channels through which we distribute our products;
and

. Table depicting the end user that we target for our products.]
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Prospectus Summary
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You should read the following summary together with the more detailed
information regarding our company and the common stock being sold in this
offering and our consolidated financial statements and notes to those
statements appearing elsewhere in this prospectus.

Netopia, Inc.

Netopia 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. 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.

Small and medium size businesses typically do not have the internal resources
necessary to establish 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. 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. As a result, there is considerable
demand for affordable, easy-to-use, high-speed Internet access, as well as for
platforms which enable the construction of Web sites and provide other means of
conducting business on the Web.

Our objective is to be the 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. The
following are key elements of our business strategy:

. Target the small and medium size business market;

. Leverage strategic relationships with Internet service providers (ISPs),
Internet portals and other distribution channels;

. Provide complete, plug-and-play customer premise digital subscriber line,
or DSL, Internet connectivity products;

. Enable small and medium size businesses to leverage the Internet;

. Maintain and extend technology leadership; and

. Leverage brand recognition and customer support infrastructure.

Our Internet connectivity products enable small and medium size businesses to
take advantage of high-speed Internet access technologies and, in particular,
DSL. Our DSL Internet connectivity products, including routers, digital service
units, filtering bridges 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

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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.

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 solutions that are reliable, cost-effective and easy to use. Our
largest relationships include Internet service providers such as Concentric
Network and PSINet, Internet portals such as GeoCities and Netscape Netcenter,
and competitive local exchange carriers such as NorthPoint Communications and
Rhythms NetConnections. In addition, we have established relationships with
telecommunications equipment suppliers, such as our relationships with Carrier
Access Corporation and Copper Mountain, and our development relationships with
next-generation technology providers CopperCom, Jetstream Communications and
TollBridge Technologies.

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.

Netopia, Timbuktu Pro, netOctopus, Up & Running, Guaranteed! and Customer
Care, Guaranteed! are trademarks of Netopia, Inc. This prospectus also includes
trademarks of other companies.

Recent Developments

On July 15, 1999, we announced our results for the three and nine months
ended June 30, 1999. In the three months ended June 30, 1999, our revenues
increased 80.6% to $12.2 million from $6.8 million in the three months ended
June 30, 1998. In the nine months ended June 30, 1999, our revenues increased
66.0% to $30.7 million from $18.5 million in the nine months ended June 30,
1998. Our revenues increased primarily due to the introduction of our DSL
Internet connectivity products which were introduced in our fourth fiscal
quarter of 1998, and increased sales of our Web platform products. Our loss
from continuing operations in the three months ended June 30, 1999 was $526,000
or $0.04 per share, compared to our loss from continuing operations of $330,000
or $0.03 per share in the three months ended June 30, 1998. Our loss from
continuing operations in the nine months ended June 30, 1999 was $7.5 million
or $0.60 per share, compared to our loss from continuing operations of
$2.0 million or $0.17 per share in the nine months ended June 30, 1998.
Included in the loss from continuing operations in the nine months ended June
30, 1999 is $4.2 million of in-process research and development related to our
acquisitions of Serus and netOctopus in December 1998. Excluding the impact of
in-process research and development, our loss from continuing operations in the
nine months ended June 30, 1999 was $3.3 million or $0.26 per share.

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The Offering

<TABLE>
<S> <C>
Common stock offered by Netopia............ 2,000,000 shares

Common stock offered by the selling
stockholders.............................. 200,000 shares

Common stock to be outstanding after the
offering (1).............................. 14,986,133 shares

Use of proceeds............................ For general corporate purposes,
including working capital, and
business acquisitions. See "Use of
Proceeds."

Nasdaq National Market symbol.............. NTPA
</TABLE>

Summary Consolidated Financial Data
(in thousands, except for per share amounts)

<TABLE>
<CAPTION>
March 31, 1999
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Actual As Adjusted(4)
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(unaudited)
<S> <C> <C>
Balance sheet data:
Cash, cash equivalents and short-term investments....... $31,952 $67,297
Working capital......................................... 32,933 68,278
Total assets............................................ 52,501 87,846
Total liabilities....................................... 10,481 10,481
Stockholders' equity.................................... $42,020 $77,365
</TABLE>
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(1) Assumes no exercise of the underwriters' over-allotment option and
excludes, as of June 30, 1999, (i) 4,020,851 shares of common stock
issuable upon exercise of outstanding options and warrants at a weighted
average exercise price of $6.3842 per share and (ii) an aggregate of
309,662 shares available for future issuance under our 1996 Stock Option
Plan and 322,181 shares available for future issuance under our Employee
Stock Purchase Plan. New investors will be further diluted if any shares of
common stock are issued upon exercise of currently outstanding options or
other rights, are granted in the future or are reserved for future issuance
under our stock plans. See "Capitalization," "Description of Capital
Stock," "Dilution" and Note 6 of Notes to Consolidated Financial
Statements.

(2) Includes $4.2 million allocated to in-process research and development
related to our acquisitions of Serus and netOctopus in December 1998.

(3) See Note 1 of Notes to Consolidated Financial Statements for the
determination of shares used in computing basic and diluted net loss per
share.

(4) Adjusted to reflect our sale of 2,000,000 shares of common stock at an
offering price of $19.00 per share (after deducting the underwriting
discounts and commissions and estimated offering expenses payable by us)
and the application of the estimated net proceeds therefrom, as described
under "Use of Proceeds."

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

Except as otherwise indicated herein, all information in this prospectus
assumes that the underwriters' over-allotment option is not exercised. See
"Principal Stockholders" and "Underwriting."

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Risk Factors
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An investment in the shares of our common stock offered by this prospectus
involves a high degree of risk. You should carefully review the following risk
factors as well as the other information set forth in this prospectus before
making an investment.

Some of the information in this prospectus 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 section, as well as any cautionary language in
this prospectus, 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. Before you invest in our common
stock, you should be aware that the occurrence of any of the events described
in these risk factors and elsewhere in this prospectus could seriously harm our
business and that upon the occurrence of any of these events, the trading price
of our common stock could decline and you could lose all or part of your
investment.

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 $7.0 million in the
six months ended March 31, 1999 and $8.0 million, $3.6 million and $1.3 million
in the fiscal years ended September 30, 1998, 1997 and 1996, 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 peri-
od-to-period comparisons of our operating results are not necessarily meaning-
ful. 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;

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. 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;

. 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, in-
cluding:

. 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.

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We may not be able to compete successfully against current and future
competitors.

We sell products and services in markets that are highly competitive. We ex-
pect 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 mar-
ket share, any one of which could seriously harm our business. Competitors vary
in size, scope and breadth of the products and services offered.

In the DSL router market, we primarily encounter competition from 3Com,
Ascend Communications (Lucent Technologies), Cayman Systems, Cisco Systems ,
FlowPoint (Cabletron Systems), 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 encounter
competition primarily from America Online, Homestead Technologies, IBM, Inc.
Online, Site Architects, Sitematic, Yahoo! and several other companies. In the
market for our remote control and enterprise software, we primarily encounter
competition from Computer Associates, Contigo Software, Lotus, Microcom
(Compaq), Microsoft, PlaceWare, Stac Software, Symantec, Tivoli Systems (IBM)
and several other companies. We anticipate intense competition from some of
these companies because some of these competitors provide their products to
consumers at no cost. For example, Microsoft has available at no cost a
communications and collaboration software product that could limit the market
for Timbuktu Pro.

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

We compete in markets characterized by continuing technological advancement,
changes in customer requirements and evolving industry standards. To compete
successfully, we must design, develop, manufacture and sell new or enhanced
products that provide increasingly higher levels of performance and
reliability. 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. However, we may not be able to successfully
develop, introduce 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.

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

In the past, we have engaged in both acquisitions and divestitures. For
example, in August 1998, we sold our LAN Division, which developed and sold
local area network (LAN) products. We may

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continue to acquire companies, technologies or products or to sell or
discontinue some of our technologies or products in future periods. 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. 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.

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

We expect that sales of our Internet connectivity products may account for a
larger percentage of our total revenues in future periods. Because these prod-
ucts are generally sold at lower gross margins than our Web platform products,
this will likely result in a decrease in our overall gross margins. 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 fu-
ture. As the average selling price of our routers declines, our gross margins
related to such products, and in general, are likely to decline.

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

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 cus-
tomers reduce or delay purchases of our products. In the six months ended
March 31, 1999, our top three customers and distributors who each individually
represented at least 5% of our total revenues accounted for approximately 23%
of our total revenues as a group. In this period, sales to Ingram Micro repre-
sented approximately 10% of our total revenues. In the years ended September
30, 1998, 1997 and 1996, our distributors and customers who each individually
represented at least 5% of our total revenues accounted for approximately 16%,
20% and 25% of our total revenues, respectively. We do not have purchase con-
tracts 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.

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.

Our revenues will not grow and our losses will increase if we cannot continue
to successfully introduce, market and sell our DSL Internet connectivity
products.

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.

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Accordingly, our revenues will not grow if we are unable to continue to
introduce, market and sell our DSL Internet connectivity products.

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

We are dependent on the selection of Copper Mountain DSL equipment by tele-
communications service providers that are deploying DSL services. Substantially
all of our sales of DSL routers have been for use with DSL equipment manufac-
tured by Copper Mountain Networks. If Copper Mountain DSL equipment is not
widely used in DSL deployments, our business will be seriously harmed.

For some DSL deployments, our products require an add-on device, which makes
them less desirable for these deployments than the products of some of our
competitors.

For some DSL deployments, our products require an add-on device, which makes
them less desirable for these deployments than the products of some of our
competitors. A substantial majority of our revenue from sales of DSL Internet
connectivity products has been for use with DSL equipment supplied by Copper
Mountain. When used with this equipment, our DSL Internet connectivity products
do not require an add-on device. Not all DSL deployments use DSL equipment
supplied by Copper Mountain, and in order to remain competitive, we will need
to develop products that do not require an add-on device when used with DSL
equipment supplied by other vendors.

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;

. 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 serv-
ices 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

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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 depend upon the ability of emerging competitive telecommunications service
providers to compete effectively with traditional telephone companies in
providing DSL services.

The purchasers of our DSL Internet connectivity products are primarily
emerging competitive telecommunications service providers such as NorthPoint
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.

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 Sys-
tems. 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 ex-
pense 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

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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.

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.

The number of portals distributing our Web platform is decreasing due to
industry consolidation.

The Internet industry is experiencing consolidation. This consolidation is
decreasing the number of distributors and potential distributors of our Web
platform. For example, GeoCities has been acquired by Yahoo! and Netscape
Communications has been acquired by America Online. There is a risk that our
sales to, or strategic relationships with, these companies may be negatively
affected by these acquisitions or continuing industry consolidation.

The market for our Web platform may be limited by products and services that
are available at no cost.

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 will be limited.

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 recur-
ring 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 or-
ganization and customer support organization to increase the number of
licensees of our Web platform. We currently have seven internal sales person-
nel and eight customer support personnel for 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.

Our Web platform is based on a proprietary architecture, and if customers find
the architecture inflexible, then our Web platform may not be successful.

Many Web presence products are based on a programming language called
hypertext markup language (HTML). Because this language is widely accepted as
an industry standard, Web sites that are created with it may be easier to
modify than Web sites that are created with proprietary languages. Our Web
platform is based on a proprietary version of hypertext markup language. Our

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<PAGE>

products may not be successful if customers prefer Web sites created with
industry standard hypertext markup language to Web sites created with our
proprietary hypertext markup language.

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

We depend on our servers, networking hardware and software infrastructure,
and third-party service and maintenance of these items to provide reliable,
high-performance 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 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 would decrease. If such
circumstances do arise in some future period, in order to retain current
customers and attract new customers, we may have to provide our 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.

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.

A substantial portion of our revenues come from sales to international
customers.

A substantial portion of our revenues come from sales to international cus-
tomers. We expect sales to international customers to continue to comprise a
significant portion of our revenues. While our international sales are typi-
cally denominated in United States dollars, fluctuations in currency exchange
rates could cause our products and services to become relatively more expensive
to our foreign customers. This could lead to decreased profitability of our
products and services.

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.

Changes in computer platform preferences of end users may cause a loss of
revenues.

We believe through the six months ended March 31, 1999, that approximately
20% of Web platform revenue, and approximately 10-20% of our total revenue, was
derived from sales to users of

11
<PAGE>

the Apple Mac OS family of products. Accordingly, a decrease in the sales or
market acceptance of Mac OS may cause a loss of revenue and harm our business.

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 reve-
nues 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.

When we sold the LAN Division, we also made customary representations and
warranties to the buyer which we believe to be accurate. Our liability under
such representations and warranties, which is limited to $2.0 million, will
terminate on October 31, 1999. If we are unable to collect on the promissory
note or we are required to pay claims for any breach of the representations and
warranties, our financial position and results of operations may be seriously
damaged.

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

Our future performance depends on the continued service of our senior
management, product development and sales personnel, particularly Alan Lefkof,
our President and Chief Executive Officer. None of 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.

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

We depend on our ability to develop and maintain the proprietary aspects of
our technology. To protect our proprietary technology, we rely primarily on a
combination of contractual provisions, confidentiality procedures, trade se-
crets, and patent, copyright and trademark law.

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.

12
<PAGE>

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

We provide end users of our products with a 90-day limited warranty on our
Timbuktu Pro software and a one-year limited warranty on our Internet
connectivity products. In addition, we provide end users of our Web sites a
free 30-day trial period after which time end users can cancel at no cost. We
permit end users to return our Internet connectivity equipment, Timbuktu Pro
software and Web sites for replacement or refund of the full purchase price if
the products do not perform as warranted. If a substantial portion of our
customers return our products for replacement or refund, we will lose revenue
and our business could be seriously damaged.

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 are in the process of developing our contingency plans and
plan to have these plans in place by September 1999. We expect our contingency
plans to 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 our Year 2000 compliance program will be completed on a timely
basis. In addition, 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 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 are in the process of identifying and
prioritizing 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

13
<PAGE>

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. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Year 2000 Readiness
Disclosure."

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

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

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

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

Our California facilities are located near major earthquake fault lines.

Our California facilities are located near major earthquake fault lines. If
there is a major earthquake in the region, our business could be seriously
harmed.

We have broad discretion to use the offering proceeds, and how we invest those
proceeds may not yield a favorable return.

The majority of the net proceeds of this offering are not allocated for
specific uses. Our management will retain broad discretion to allocate a
substantial portion of the net proceeds from this offering to uses that the
stockholders may not deem as desirable. We cannot assure you that these
proceeds can or will yield a significant return.

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

We may require substantial capital to finance our future growth and fund our
ongoing research and development activities beyond 1999. 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;

14
<PAGE>

. The costs associated with our expansion; and

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

To the extent that the proceeds of this offering, our existing sources of
cash and cash flow from operations, if any, are insufficient to fund our
activities, we may need to raise additional funds. If we issue additional stock
to raise capital, your percentage ownership in Netopia 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. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources."

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

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

. Variations in our quarterly operating results;

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

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

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

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

Provisions of our Amended and Restated Certificate of Incorporation, our By-
laws and Delaware law could make it difficult for a third party to acquire us,
even if doing so would be beneficial to our stockholders. See "Description of
Capital Stock."

15
<PAGE>

Use of Proceeds
- --------------------------------------------------------------------------------

The net proceeds we expect to receive from the sale of 2,000,000 shares of
our common stock in this offering are estimated to be $35.3 million ($41.3
million if the underwriters exercise their over-allotment option in full), at
an offering price of $19.00 per share and after deducting estimated offering
expenses of $675,000 and underwriting discounts and commissions payable by us.
We will not receive any of the proceeds from the sale of shares of our common
stock by the selling stockholders.

We expect to use the net proceeds of this offering for general corporate
purposes, including working capital. We may use a portion of the net proceeds
to acquire businesses, products and technologies that are complementary to
ours. We have no agreements or commitments with respect to any such
acquisition. See Risk Factors -- "We may engage in acquisitions or divestitures
that involve numerous risks, including the use of cash and the diversion of
management attention." Pending such uses, the net proceeds of this offering
will be invested in short term, investment grade, interest-bearing securities.

Price Range of Common Stock
- --------------------------------------------------------------------------------

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 since the initial public offering.

<TABLE>
<CAPTION>
1999 1998 1997
-------------- -------------- --------------
High Low High Low High Low
------- ------ ------- ------ ------- ------
<S> <C> <C> <C> <C> <C> <C>
Fourth fiscal quarter ended
September 30........................... -- -- $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 August 4, 1999, the closing price of our common stock as reported on the
Nasdaq National Market was $19.69 per share. As of June 30, 1999 there were
approximately 144 holders of record of our 12,986,133 shares of outstanding
common stock.

Dividend Policy
- --------------------------------------------------------------------------------

We have never declared or paid any cash dividends on our common stock. We
currently anticipate that we will retain all future earnings for use in our
business and do not anticipate paying cash dividends in the foreseeable future.

16
<PAGE>

Dilution
- --------------------------------------------------------------------------------

If you invest in our common stock, your interest will be diluted to the
extent of the difference between the public offering price per share you pay in
this offering, and the net tangible book value per share of our common stock
immediately after this offering. Our net tangible book value as of March 31,
1999 was $39.3 million or approximately $3.11 per share of common stock. Net
tangible book value per share represents the amount of our total tangible
assets less total liabilities, divided by the number of shares of common stock
outstanding. After giving effect to the sale of the 2,000,000 shares of common
stock offered by us in this offering at a public offering price of $19.00 per
share, and after deducting the underwriting discounts and commissions and
estimated offering expenses payable by us, our net tangible book value as of
March 31, 1999 would have been $74.6 million or approximately $5.10 per share.
This represents an immediate increase in net tangible book value of $1.99 per
share to existing stockholders and an immediate dilution in net tangible book
value of $13.90 per share to new investors of common stock in this offering.
The following table illustrates this dilution on a per share basis:

<TABLE>
<S> <C> <C>
Public offering price per share................................ $19.00
Net tangible book value per share as of March 31, 1999....... $ 3.11
Increase per share attributable to new investors............. 1.99
------
Net tangible book value per share after the offering........... 5.10
------

Dilution per share to new investors............................ $13.90
======
</TABLE>

The foregoing discussion and table excludes all options and warrants that
were outstanding as of March 31, 1999. To the extent any of these options are
exercised, there will be further dilution to investors.

17
<PAGE>

Capitalization
- --------------------------------------------------------------------------------

The following table sets forth our capitalization as of March 31, 1999:

. On an actual basis; and

. On an as adjusted basis to reflect the sale of 2,000,000 shares of our
common stock, offered hereby at an offering price of $19.00 per share,
and the receipt of the net proceeds therefrom, after deducting the
estimated expenses, commissions and underwriting discounts payable by us
as described in "Use of Proceeds" and "Dilution."

When you read this capitalization table, it is important that you read it in
conjunction with our financial statements and the related notes and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," appearing elsewhere in this prospectus.

<TABLE>
<CAPTION>
March 31, 1999
---------------------
Actual As Adjusted
-------- -----------
(in thousands)
<S> <C> <C>
Long-term liabilities.................................... $ 371 $ 371
Stockholders' equity:
Preferred stock: $0.001 par value; 5,000,000 shares
authorized; none issued or outstanding actual or as
adjusted............................................... -- --
Common stock: $0.001 par value; 25,000,000 shares
authorized; 12,641,439 shares issued and outstanding at
March 31, 1999; 14,641,439 shares issued and
outstanding as adjusted (1)............................ 13 15
Additional paid-in capital............................... 56,068 91,411
Accumulated deficit...................................... (14,061) (14,061)
-------- --------
Total stockholders' equity........................... 42,020 77,365
-------- --------
Total capitalization................................. $ 42,391 $ 77,736
======== ========
</TABLE>
- -----------------
(1) Assumes no exercise of the underwriters' over-allotment option and
excludes, as of June 30, 1999, (i) 4,020,851 shares of common stock
issuable upon exercise of outstanding options and warrants at a weighted
average exercise price of $6.3842 per share and (ii) an aggregate of
309,662 shares available for future issuance under our 1996 Stock Option
Plan and 322,181 shares available for future issuance under our Employee
Stock Purchase Plan. New investors will be further diluted if any shares of
common stock are issued upon exercise of currently outstanding options or
other rights, are granted in the future or are reserved for future issuance
under our stock plans. See "Capitalization," "Description of Capital
Stock," "Dilution" and Note 6 of Notes to Consolidated Financial
Statements.

18
<PAGE>

Selected Consolidated Financial Data
- --------------------------------------------------------------------------------

In the tables below, we provide you with our selected consolidated financial
data. We have prepared this information using our consolidated financial
statements for the six month periods ended March 31, 1999 and 1998, and the
fiscal years ended September 30, 1998, 1997, 1996, 1995 and 1994. The
consolidated financial statements for the fiscal years ended September 30,
1998, 1997, 1996, 1995 and 1994 have been audited by KPMG LLP, our independent
auditors. The condensed consolidated financial statements for the six month
periods ended March 31, 1999 and 1998 have not been audited. In our opinion,
our unaudited condensed consolidated financial statements include all
adjustments (consisting only of normal recurring adjustments) necessary for a
fair presentation of such information.

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>
Six months ended
March 31, Fiscal years ended September 30,
------------------ --------------------------------------------
1999 1998 1998 1997 1996 1995 1994
-------- -------- -------- ------- ------- ------- -------
(unaudited)
(in thousands, except for per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues................ $ 18,458 $ 11,715 $ 24,836 $20,170 $16,718 $ 6,569 $ 5,310
Cost of revenues........ 6,450 3,579 7,955 6,396 3,811 674 447
-------- -------- -------- ------- ------- ------- -------
Gross profit........... 12,008 8,136 16,881 13,774 12,907 5,895 4,863
Operating expenses:
Research and
development........... 4,331 3,602 7,201 7,177 7,603 5,905 2,787
Selling and marketing.. 9,589 6,639 14,404 11,288 9,410 4,463 2,841
General and
administrative........ 1,681 1,596 3,380 2,945 2,835 2,364 2,736
Acquired in-process
research and
development (1)....... 4,205 -- -- -- -- -- --
Amortization of
goodwill (2).......... 181 -- -- -- -- -- --
-------- -------- -------- ------- ------- ------- -------
Total operating
expenses............. 19,987 11,837 24,985 21,410 19,848 12,732 8,364
-------- -------- -------- ------- ------- ------- -------
Operating loss......... (7,979) (3,701) (8,104) (7,636) (6,941) (6,837) (3,501)
Other income, net....... 1,000 1,137 2,222 1,869 1,040 815 291
-------- -------- -------- ------- ------- ------- -------
Loss from continuing
operations before
income taxes.......... (6,979) (2,564) (5,882) (5,767) (5,901) (6,022) (3,210)
Income tax provision
(benefit) (3).......... -- (915) 2,155 (2,217) (4,619) (2,732) (1,856)
-------- -------- -------- ------- ------- ------- -------
Loss from continuing
operations............ (6,979) (1,649) (8,037) (3,550) (1,282) (3,290) (1,354)
Discontinued operations,
net of taxes (4)....... -- 251 (2,496) 3,021 4,983 5,796 3,541
-------- -------- -------- ------- ------- ------- -------
Net income (loss)...... $ (6,979) $ (1,398) $(10,533) $ (529) $ 3,701 $ 2,506 $ 2,187
======== ======== ======== ======= ======= ======= =======
Per share data,
continuing operations:
Basic and diluted loss
per share............. $ (0.56) $ (0.14) $ (0.69) $ (0.31) $ (0.13) $ (0.36) $ --
======== ======== ======== ======= ======= ======= =======
Shares used in the per
share calculations.... 12,386 11,567 11,687 11,335 9,890 9,148 --
======== ======== ======== ======= ======= ======= =======
Per share data,
discontinued
operations:
Basic income (loss) per
share................. $ -- $ 0.02 $ (0.21) $ 0.27 $ 0.50 $ 0.63 $ --
======== ======== ======== ======= ======= ======= =======
Diluted income (loss)
per share............. $ -- $ 0.02 $ (0.21) $ 0.24 $ 0.46 $ 0.61 $ --
======== ======== ======== ======= ======= ======= =======
Common shares used in
the calculations of
basic income per
share................. -- 11,567 11,687 11,335 9,890 9,148 --
======== ======== ======== ======= ======= ======= =======
Common and common
equivalent shares used
in the calculations of
diluted income per
share................. -- 12,619 11,687 12,350 10,887 9,522 --
======== ======== ======== ======= ======= ======= =======
Per share data, net
income (loss):
Basic net income (loss)
per share............. $ (0.56) $ (0.12) $ (0.90) $ (0.05) $ 0.37 $ 0.27 $ --
======== ======== ======== ======= ======= ======= =======
Diluted net income
(loss) per share...... $ (0.56) $ (0.12) $ (0.90) $ (0.05) $ 0.34 $ 0.26 $ --
======== ======== ======== ======= ======= ======= =======
Common shares used in
the calculations of
basic net income
(loss) per share...... 12,386 11,567 11,687 11,335 9,890 9,148 --
======== ======== ======== ======= ======= ======= =======
Common and common
equivalent shares used
in the calculations of
diluted net income
(loss) per share...... 12,386 11,567 11,687 11,335 10,887 9,522 --
======== ======== ======== ======= ======= ======= =======
</TABLE>

19
<PAGE>

<TABLE>
<CAPTION>
September 30,
March 31, ---------------------------------------
1999 1998 1997 1996 1995 1994
----------- ------- ------- ------- ------- -------
(unaudited)
Balance Sheet Data: (in thousands)
<S> <C> <C> <C> <C> <C> <C>
Cash, cash equivalents and
short-term investments... $31,952 $42,095 $41,636 $37,145 $17,643 $14,611
Working capital........... 32,933 38,152 49,979 49,469 21,755 19,569
Total assets.............. 52,501 56,292 61,001 61,618 33,872 29,289
Long-term liabilities..... 371 260 361 46 218 689
Total stockholders'
equity................... $42,020 $44,801 $53,977 $53,143 $24,279 $21,644
</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 5 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 2 of Notes to Consolidated Financial
Statements.

20
<PAGE>

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 prospectus. 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 "Risk Factors" and elsewhere in this
prospectus.

Overview

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.

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.

During the six months ended March 31, 1999 and 1998:

. Revenues from two-tier distributors accounted for 43% and 46% of our
total revenues, respectively;

. Our three largest distributors, in total, accounted for 23% and 22% of
our total revenues, respectively; and

. Ingram Micro, a worldwide distributor of computer technology products and
services, accounted for 10% and 12% of our total revenues, respectively.
No other customers during the six months ended March 31, 1999 and 1998
accounted for 10% or more of our total revenues.

During the fiscal years ended September 30, 1998, 1997 and 1996:

. Revenues from two-tier distributors accounted for 45%, 43% and 37% of our
total revenues, respectively;

. Our three largest distributors, in total, accounted for 21%, 24% and 23%
of our total revenues, respectively; and

. Ingram Micro accounted for 12%, 14% and 12% of our total revenues,
respectively. No other customers during the fiscal years ended September
30, 1998, 1997 and 1996 accounted for 10% or more of our total revenues.

Historically, a significant portion of our revenues has been derived from
customers outside of the United States, and we expect this trend to continue.
International revenues accounted for:

. 32% and 34% of our revenues for the six months ended March 31, 1999 and
1998, respectively; and

. 33%, 27% and 20% of our revenues for the fiscal years ended September 30,
1998, 1997 and 1996, respectively.

21
<PAGE>

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 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.

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, 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). Serus is developing Java-based Web site editing
software products that will 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, we intend to market 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.
Upon completion of the development of the Windows versions of the netOctopus
software products, we intend to market the products both independently and
along with our Timbuktu Pro 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.

We were founded in 1985 and initially focused on developing computer
networking products for local area networks (LANs). In 1993, we re-focused our
business strategy to concentrate on the Internet and Intranet markets through
the utilization of our transmission control protocol/Internet protocol
(TCP/IP), and routing expertise. In 1998, we sold the division of our company
that continued to develop computer networking products for LANs. We refer to
this division as the LAN

22
<PAGE>

Division. In the financial statements and discussion to follow, the results of
the LAN Division are presented in the sections titled "Discontinued
Operations."

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.

Recent Developments

23
<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>
Six months ended Fiscal years ended
March 31, September 30,
------------------- ----------------------------
1999 1998 1998 1997 1996
-------- -------- -------- ------- -------
(unaudited)
(in thousands, and as a percentage of
revenues)
<S> <C> <C> <C> <C> <C>
Statement of operations
data:
Revenues................... $ 18,458 $ 11,715 $ 24,836 $20,170 $16,718
Cost of revenues........... 6,450 3,579 7,955 6,396 3,811
-------- -------- -------- ------- -------
Gross profit.............. 12,008 8,136 16,881 13,774 12,907
Operating expenses:
Research and development.. 4,331 3,602 7,201 7,177 7,603
Selling and marketing..... 9,589 6,639 14,404 11,288 9,410
General and
administrative........... 1,681 1,596 3,380 2,945 2,835
Acquired in-process
research and
development.............. 4,205 -- -- -- --
Amortization of goodwill.. 181 -- -- -- --
-------- -------- -------- ------- -------
Total operating
expenses................ 19,987 11,837 24,985 21,410 19,848
-------- -------- -------- ------- -------
Operating loss........... (7,979) (3,701) (8,104) (7,636) (6,941)
Other income, net.......... 1,000 1,137 2,222 1,869 1,040
-------- -------- -------- ------- -------
Loss from continuing
operations before income
taxes.................... (6,979) (2,564) (5,882) (5,767) (5,901)
Income tax provision
(benefit)................. -- (915) 2,155 (2,217) (4,619)
-------- -------- -------- ------- -------
Loss from continuing
operations............... (6,979) (1,649) (8,037) (3,550) (1,282)
Discontinued operations:
Income from discontinued
operations, net of
taxes.................... -- 251 602 3,021 4,983
Loss on sale of
discontinued operations,
net of taxes............. -- -- (3,098) -- --
-------- -------- -------- ------- -------
Net income (loss)........ $ (6,979) $ (1,398) $(10,533) $ (529) $ 3,701
======== ======== ======== ======= =======
As a percentage of
revenues:
Revenues................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues........... 34.9 30.6 32.0 31.7 22.8
-------- -------- -------- ------- -------
Gross profit.............. 65.1 69.4 68.0 68.3 77.2
Operating expenses:
Research and development.. 23.5 30.7 29.0 35.6 45.5
Selling and marketing..... 52.0 56.7 58.0 56.0 56.3
General and
administrative........... 9.1 13.6 13.6 14.6 16.9
Acquired in-process
research and
development.............. 22.7 -- -- -- --
Amortization of goodwill.. 1.0 -- -- -- --
-------- -------- -------- ------- -------
Total operating expenses.. 108.3 101.0 100.6 106.2 118.7
-------- -------- -------- ------- -------
Operating loss........... (43.2) (31.6) (32.6) (37.9) (41.5)
Other income, net.......... 5.4 9.7 8.9 9.3 6.2
-------- -------- -------- ------- -------
Loss from continuing
operations before income
taxes.................... (37.8) (21.9) (23.7) (28.6) (35.3)
Income tax provision
(benefit)................. -- (7.8) 8.7 (11.0) (27.6)
-------- -------- -------- ------- -------
Loss from continuing
operations............... (37.8) (14.1) (32.4) (17.6) (7.7)
Discontinued operations:
Income from discontinued
operations, net of
taxes.................... -- 2.2 2.4 15.0 29.8
Loss on sale of
discontinued operations,
net of taxes............. -- -- (12.4) -- --
-------- -------- -------- ------- -------
Net income (loss)........ (37.8)% (11.9)% (42.4)% (2.6)% 22.1%
======== ======== ======== ======= =======
</TABLE>

24
<PAGE>

Six Months Ended March 31, 1999 and 1998

Revenue. Our revenues increased 57.6% to $18.5 million in the six months
ended March 31, 1999 from $11.7 million in the six months ended March 31, 1998.
The increase was primarily due to increased sales of our Internet connectivity
products, Web site and site server products and Timbuktu Pro software.

. Revenue from our Internet connectivity products increased both
domestically and internationally. Internet connectivity products revenue
increased domestically primarily due to sales of our DSL Internet
connectivity products, which were not available during the six months
ended March 31, 1998. Internet connectivity products revenue increased
internationally primarily due to increased sales of our integrated
services digital network (ISDN) Internet router primarily as a result of
our relationship with France Telecom's Internet service (Wanadoo), and
Telecom Italia's Internet service (TIN). These increases were partially
offset by continued price competition. We expect that our Internet
connectivity products may experience increasing price competition from
both domestic and foreign manufacturers of similar products as well as
competition from alternative technologies. Increased price or technology
competition could seriously harm our business.

. Revenue from our Web site and site server products increased primarily
due to licensing of the site server. 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.

. Revenue from our Timbuktu Pro software increased primarily due to
increased volume license sales of the Windows version of Timbuktu Pro and
volume license sales of netOctopus software which we acquired from
Network Associates in December 1998. This increase was partially offset
by decreased sales of the Mac OS version of Timbuktu Pro software. We
expect revenue from the Mac OS version of Timbuktu Pro to continue to
decline in absolute dollars and as a percent of revenue.

International revenues accounted for 32% and 34% of our total revenues for
the six months ended March 31, 1999 and 1998, respectively. International
revenues declined as a percentage of total revenues 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>
Six months ended
March 31,
----------------
1999 1998
-------- --------
<S> <C> <C>
Europe................................................. 26% 25%
Pacific Rim............................................ 3 6
Other.................................................. 3 3
-------- --------
Subtotal international revenues....................... 32 34
United States.......................................... 68 66
-------- --------
Total revenues....................................... 100% 100%
======== ========
</TABLE>

25
<PAGE>

Although our international revenues decreased as a percent of total revenues,
international revenue increased 50.9% to $5.9 million in the six months ended
March 31, 1999 from $3.9 million in the six months ended March 31, 1998.
International revenue increased primarily due to increased sales of our
integrated services digital network Internet router as a result of our
relationships with Wanadoo and TIN, and was partially offset by decreased sales
of the Mac OS version of Timbuktu Pro software.

Gross Margin. Our total gross margin decreased to 65.1% in the six months
ended March 31, 1999 from 69.4% in the six months ended March 31, 1998. The
decrease is 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. 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;

. New versions of existing products; and

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

Our Web platform products have a 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.

Research and Development. Our research and development expenses increased
20.2% to $4.3 million for the six months ended March 31, 1999 from $3.6 million
for the six months ended March 31, 1998. Research and development expenses
increased 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 Internet connectivity
products.

These increases were partially offset by reduced software localization
expenses. Research and development expenses represented 23.5% and 30.7% of
total revenues for the six months ended March 31, 1999 and 1998, respectively.
We expect to continue to devote substantial resources to product and
technological development and therefore, research and development costs may
increase in absolute dollars in fiscal 1999 compared to fiscal 1998.
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, during the six months ended March 31, 1999, we
capitalized $288,000 of product development costs incurred subsequent to the
delivery of a working model, under a development agreement with third parties.

26
<PAGE>

Selling and Marketing. Our selling and marketing expenses increased 44.4% to
$9.6 million for the six months ended March 31, 1999 from $6.6 million for the
six months ended March 31, 1998. Selling and marketing expenses increased
primarily due to:

. Increased advertising, promotional and distribution channel development
expenses; and

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

Selling and marketing expenses represented 52.0% and 56.7% of our total
revenues for the six months ended March 31, 1999 and 1998, respectively. We
believe that our selling and marketing expenses may increase in absolute
dollars in fiscal 1999 as a result of increased advertising and promotion
campaigns related to the launch of our electronic commerce enabled version of
our Web site platform and the first commercial launch of the product acquired
from Serus as well as expansion of our Timbuktu Pro and Web site telesales
staff.

General and Administrative. Our general and administrative expenses increased
5.3% to $1.7 million for the six months ended March 31, 1999 from $1.6 million
for the six months ended March 31, 1998. General and administrative expenses
increased primarily due to increased employee related expenses. General and
administrative expenses represented 9.1% and 13.6% of total revenues for the
six months ended March 31, 1999 and 1998, respectively.

Acquired In-Process Research and Development. On December 17, 1998, we closed
a transaction to purchase substantially all of the assets and assume certain
liabilities and the existing operations of 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).
Upon completion of the development of such products, we intend to market 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. The maximum
aggregate purchase price of the Serus transaction is approximately $7.0 million
including:

. $3.0 million of cash paid on the closing date of the transaction;

. 409,556 shares of our common stock issued on the closing date; and

. A $1.0 million earnout opportunity based upon certain criteria as set
forth in the Serus asset purchase agreement.

The excess purchase price over the net book value acquired was $6.0 million,
of which, based upon estimates we 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 income approach was used to appraise
the value of the business and projects acquired. This 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 occur during the calendar year
2001. These cash flows were discounted using a discount rate of 44.0%. Based
upon the expenses incurred, the development time invested in the product prior
to the acquisition, and the estimated expenses and development time to complete
the product, we determined the product to be approximately 85% complete at the
time of

27
<PAGE>

acquisition. We expect to complete development of the product in the summer of
1999 and to incur approximately $400,000 of development expenses from the date
of acquisition to completion of development. The $1.0 million earnout
opportunity described above shall be accounted for when we believe that it is
probable that the earnout will be earned. We are amortizing the goodwill
related to the Serus transaction over the next four years. During the six
months ended March 31, 1999, goodwill amortization related to the Serus
transaction was $133,000. Any significant delay in the completion of the
development of the product would cause us to incur additional unplanned
development expenses as well as the loss of, or deferral of, customer purchases
either of which could seriously harm our business.

On December 31, 1998, we closed a transaction to purchase from Network
Associates substantially all of the assets and assume 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.
Upon completion of the development of the Windows versions of the netOctopus
software products, we intend to market the 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. 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 estimates we prepared in conjunction
with a third party valuation consultant, $400,000 was allocated to acquired in-
process research and development and $700,000 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
income approach was used to appraise the value of the business and projects
acquired. This 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
occur during the calendar year 2000. These cash flows were discounted using a
discount rate of 25.0%. Based upon the expenses incurred, the development time
invested in the product prior to the acquisition, and the estimated expenses
and development time to complete the product, we determined the product to be
approximately 70% complete at the time of acquisition. We expect to complete
development of the product during our fourth fiscal quarter and to incur
approximately $175,000 of development expenses from the date of acquisition to
completion of development. The $300,000 earnout opportunity above shall be
accounted for when we believe it is probable that the earnout will be earned.
We are amortizing the goodwill related to the netOctopus transaction over the
next four years. During the six months ended March 31, 1999, goodwill
amortization related to the netOctopus transaction was $48,000. Any significant
delay in the completion of the development of the product would cause us to
incur additional unplanned development expenses as well as the loss of or
deferral of customer purchases, either of which could seriously harm our
business.

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.

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

28
<PAGE>

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.

Other Income, Net. Other income, net, primarily represents interest we earn
on our cash, cash equivalents and short-term investments. Other income, net,
decreased 12.0% to $1.0 million for the six months ended March 31, 1999 from
$1.1 million for the six months ended March 31, 1998. The decrease is primarily
due to the cash used for the acquisitions of Serus and netOctopus and for
operating activities. We expect interest income to decrease in absolute dollars
and as a percentage of revenues primarily due to the cash used for operating
activities.

Income Tax Benefit. We did not record an income tax benefit during the six
months ended March 31, 1999 primarily due to continued substantial uncertainty
regarding our ability to realize our tax assets. The tax benefit recorded in
the six months ended March 31, 1998 was primarily related to our net operating
loss in such period. The effective tax rate was 36% for the six months ended
March 31, 1998. This rate differed from the statutory rate primarily due to
state income taxes, investment income from tax advantaged investments, and the
utilization of research and experimentation tax credits.

Discontinued Operations. In the fourth quarter of fiscal 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. Income from
discontinued operations of $251,000 during the six months ended March 31, 1998
represents the operating income, net of taxes of the discontinued operations.

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, or Farallon, an affiliate of Gores Technology Group, or Gores.
Farallon also assumed certain accounts payable and other liabilities of the LAN
Division. In connection with the sale, we received consideration aggregating
$4.9 million, including:

. $2.0 million of cash;

. Royalties on Farallon's revenues for a period of five years to the extent
that Farallon achieves revenues from the sale of its LAN products of at
least $15.0 million per year;

. A two year $1.0 million promissory note from Farallon, guaranteed by
Gores; and

. A warrant to purchase up to 5% of the equity of Farallon.

There can be no assurance that the business of Farallon will be sufficiently
successful to allow us to realize the value of the receivables, note and
warrant described above. See "Risk Factors -- The proceeds we expect to receive
for the sale of our LAN Division could be affected by its future performance
under the new owner."

Fiscal Years Ended September 30, 1998, 1997 and 1996

Revenues. Our revenues increased 23.1% to $24.8 million in fiscal 1998 from
$20.2 million in fiscal 1997, which increased 20.6% from $16.7 million in
fiscal 1996.

29
<PAGE>

The increase in fiscal 1998 was primarily due to:

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

. 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.

The increase in fiscal 1997 was primarily due to:

. Increased sales of our integrated services digital network Internet
router internationally, which was introduced in the fourth quarter of
fiscal 1996;

. The fiscal 1997 first quarter introduction of our plain old telephone
system (POTS) enabled integrated services digital network Internet router
in North America;

. A greater number of regional Internet service providers selling our
Internet connectivity products; and

. Increased sales of the Windows version of Timbuktu Pro software.

These increases were partially offset by decreased sales of the Mac OS
version of Timbuktu Pro software, decreased revenue from patent licenses and
price competition related to integrated services digital network Internet
routers in North America.

During fiscal years 1998 and 1997, revenues from the Mac OS version of
Timbuktu Pro software were adversely affected by declining sales of Mac OS
computers, Apple's loss of market share and the reduction in sales of Macintosh
clone computers due to the elimination of a number of cloning licenses issued
by Apple. Also during fiscal years 1998 and 1997, our Internet connectivity
products, particularly our integrated services digital network Internet router,
had experienced increasing price competition from both domestic and foreign
manufacturers of similar products as well as competition from newer
technologies such as DSL and cable Internet connectivity products. During
fiscal 1999, 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.

International revenues increased 47.6% to $8.2 million in fiscal 1998 from
$5.5 million in fiscal 1997, which increased 67.4% from $3.3 million in fiscal
1996. The increase in fiscal 1998 is primarily due to increased sales of our
Internet connectivity products, particularly our integrated services digital
network Internet router as a result of the Wanadoo service. The increase in
fiscal 1997 was primarily due to increased sales of our integrated services
digital network Internet router, which was introduced internationally in the
fourth quarter of fiscal 1996. 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,
----------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Europe..................................................... 25% 19% 11%
Pacific Rim................................................ 5 5 7
Other...................................................... 3 3 2
--- --- ---
Subtotal international revenues.......................... 33 27 20
United States.............................................. 67 73 80
--- --- ---
Total revenues........................................... 100% 100% 100%
=== === ===
</TABLE>

30
<PAGE>

Gross Margin. Our total gross margin decreased to 68.0% in fiscal 1998 from
68.3% in fiscal 1997, which decreased from 77.2% in fiscal 1996.

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 is a result of the shift in our
strategic focus to provide multi-user Internet connectivity products rather
than single-user Internet connectivity products.

The decrease in fiscal 1997 was primarily due to increased sales of our
Internet connectivity products which have a lower gross margin than our
software products and decreased revenue from the licensing of our patent
covering cross-platform screen sharing.

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;

. New versions of existing products; and

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

Our Web platform products have a higher average gross margin than our
Internet connectivity products. Accordingly, to the extent we sell more
Internet connectivity products than our Web platform products, our gross
margins will be lower.

Research and Development. Our research and development expenses were $7.2
million for fiscal 1998 and fiscal 1997, which decreased 5.6% from $7.6 million
in fiscal 1996. Although our research and development expenses remained
unchanged between fiscal 1998 and fiscal 1997, third party contractor expenses
increased but were offset by reduced product localization expenses.

The decrease in fiscal 1997 was primarily due to:

. Decreased product design, prototyping and regulatory compliance related
expenses; and

. Reduced incentives, recruiting, travel and contractor expenses.

These decreases were partially offset by increased product localization
expenses. Research and development expenses represented 29.0%, 35.6% and 45.5%
of total revenues for the fiscal years ended September 30, 1998, 1997 and 1996,
respectively. We expect to continue to devote substantial resources to product
and technological development, and research and development costs may increase
in absolute dollars in fiscal 1999 compared to fiscal 1998. During the fiscal
year ended September 30, 1998, we capitalized $237,000 of product 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 27.6% to
$14.4 million in fiscal 1998 from $11.3 million in fiscal 1997, which increased
20.0% from $9.4 million in fiscal 1996. The increase in fiscal 1998 was
primarily due to increased headcount and increased advertising, promotional and
distribution channel development expenses related to the introduction of new
products. The increase in fiscal 1997 was primarily due to increased headcount
and related expenses.

31
<PAGE>

Selling and marketing expenses represented 58.0%, 56.0% and 56.3% of total
revenues for the fiscal years ended September 30, 1998, 1997 and 1996,
respectively. We believe that our selling and marketing expenses may increase
in absolute dollars in fiscal 1999 compared to fiscal 1998 as a result of
increased advertising and promotion campaigns related to the launch of our
electronic commerce enabled version of our Web site platform and the first
commercial launch of the product acquired from Serus as well as expansion of
our Timbuktu Pro and Web site telesales staff.

General and Administrative. Our general and administrative expenses increased
14.8% to $3.4 million in fiscal 1998 from $2.9 million in fiscal 1997, which
increased 0.4% from $2.8 million in fiscal 1996. 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. The increase in fiscal 1997 was primarily due to increased legal,
accounting and insurance fees related to being a public company, partially
offset by reduced consulting and employee-related expenses. General and
administrative expenses represented 13.6%, 14.6% and 16.9% of total revenues
for the fiscal years ended September 30, 1998, 1997 and 1996, respectively.

Other Income, Net. Other income, net, primarily represents interest we earn
on our cash, cash equivalents and short-term investments. Other income, net,
increased 18.9% to $2.2 million in fiscal 1998 from $1.9 million in fiscal
1997, which increased 79.7% from $1.0 million in fiscal 1996. Other income,
net, increased in fiscal 1998 primarily due to moving our short-term
investments to non-tax advantaged investments from tax advantaged investments.
The increase in fiscal 1997 was primarily due to the interest earned on the
cash raised from our initial public offering in June 1996, which was invested
during the entire fiscal year of 1997.

Provision for Income Taxes. Income tax expense related to our continuing
operations was $2.2 million in fiscal 1998 compared to income tax benefits of
$2.2 million and $4.6 million in fiscal years 1997 and 1996, respectively. Tax
expense in fiscal 1998 was primarily related to the establishment of a
valuation allowance against $2.9 million of deferred tax assets as of the
beginning of the year and an additional valuation allowance of $2.6 million
primarily against net operating losses generated in the current year. The tax
benefit recorded in fiscal 1997 was primarily related to our net operating loss
in such year and the tax benefit in fiscal 1996 was primarily related to our
net operating loss in such year and the reversal of a previously recognized
valuation allowance. Excluding the impact of changes in the valuation allowance
against deferred tax assets, our effective tax rate differs from the statutory
rate primarily due to research tax credits and tax exempt interest income. See
Note 5 of Notes to Consolidated Financial Statements.

At September 30, 1998, we believed that based upon available objective
evidence, there was sufficient uncertainty regarding our ability to realize our
tax assets to warrant a full valuation allowance. The factors considered
included:

. The relatively shorter life cycles in the high technology industry;

. The uncertainty of longer-term taxable income estimates related thereto;
and

. The sale of the historically profitable LAN Division.

At September 30, 1997, we believed that based upon the then available
objective evidence, there was sufficient uncertainty regarding our ability to
realize certain of our tax assets to warrant a partial valuation allowance,
primarily related to our expected ability to realize research credit
carryforwards. The factors we considered included:

. The relatively shorter product life cycles in the high technology
industry;

. The uncertainty of longer-term taxable income estimates related thereto;
and

. The limits on the carryback potential for realizing deferred tax assets.

32
<PAGE>

During fiscal 1996, we believed that, due to the demonstrated market
acceptance of our new products, the uncertainty regarding our ability to
realize our deferred tax assets had diminished to the point where it was more
likely than not that the deferred tax assets would be realized.

Discontinued Operations. In the fourth quarter of fiscal 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. Income from
discontinued operations of $602,000, $3.0 million and $5.0 million in fiscal
years ended September 30, 1998, 1997 and 1996, respectively, represents the
operating income, net of taxes, of the discontinued operations.

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

33
<PAGE>

Quarterly Results

The following table sets forth certain unaudited selected quarterly results
of operations data for the six quarters ended March 31, 1999 as well as such
data expressed as a percentage of our revenues. This data has been derived from
our unaudited condensed consolidated financial statements that, in our opinion,
include all adjustments (consisting only of normal recurring adjustments)
necessary for a fair presentation of such information. It is important that
when you read this information you also read our annual audited consolidated
financial statements and related notes thereto appearing elsewhere in this
prospectus.

<TABLE>
<CAPTION>
Three months ended
--------------------------------------------------------------
Mar. 31, Dec. 31, Sep. 30, Jun. 30, Mar. 31, Dec. 31,
1999 1998 1998 1998 1998 1997
-------- -------- -------- -------- -------- --------
(in thousands, and as a percentage of revenues)
<S> <C> <C> <C> <C> <C> <C>
Statement of operations:
Revenues................ $10,535 $ 7,923 $ 6,355 $ 6,766 $ 6,252 $ 5,463
Cost of revenues........ 3,644 2,806 2,392 1,984 1,858 1,721
------- ------- ------- ------- ------- -------
Gross profit........... 6,891 5,117 3,963 4,782 4,394 3,742
Operating expenses
Research and
development........... 2,346 1,985 1,940 1,659 1,711 1,891
Selling and marketing.. 4,828 4,761 4,397 3,368 3,113 3,526
General and
administrative........ 899 782 961 823 805 791
Acquired in-process
research and
development........... -- 4,205 -- -- -- --
Amortization of
goodwill.............. 181 -- -- -- -- --
------- ------- ------- ------- ------- -------
Total operating
expenses............. 8,254 11,733 7,298 5,850 5,629 6,208
------- ------- ------- ------- ------- -------
Operating loss........ (1,363) (6,616) (3,335) (1,068) (1,235) (2,466)
Other income, net....... 430 570 559 526 564 573
------- ------- ------- ------- ------- -------
Loss from continuing
operations before
income taxes, net..... (933) (6,046) (2,776) (542) (671) (1,893)
Income tax expense
(benefit).............. -- -- 3,282 (212) (241) (674)
------- ------- ------- ------- ------- -------
Loss from continuing
operations............ (933) (6,046) (6,058) (330) (430) (1,219)
Discontinued operations,
net of taxes........... -- -- (3,081) 334 87 164
------- ------- ------- ------- ------- -------
Net income (loss)...... $ (933) $(6,046) $(9,139) $ 4 $ (343) $(1,055)
======= ======= ======= ======= ======= =======
As a percentage of
revenues:
Revenues................ 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues........ 34.6 35.4 37.6 29.3 29.7 31.5
------- ------- ------- ------- ------- -------
Gross profit........... 65.4 64.6 62.4 70.7 70.3 68.5
Operating expenses
Research and
development........... 22.3 25.0 30.6 24.5 27.4 34.6
Selling and marketing.. 45.8 60.1 69.2 49.8 49.8 64.5
General and
administrative........ 8.5 9.9 15.1 12.2 12.9 14.5
Acquired in-process
research and
development........... -- 53.1 -- -- -- --
Amortization of
goodwill.............. 1.7 -- -- -- -- --
------- ------- ------- ------- ------- -------
Total operating
expenses............. 78.3 148.1 114.9 86.5 90.1 113.6
------- ------- ------- ------- ------- -------
Operating loss........ (12.9) (83.5) (52.5) (15.8) (19.8) (45.1)
Other income, net....... 4.0 7.2 8.8 7.8 9.0 10.4
------- ------- ------- ------- ------- -------
Loss from continuing
operations before
income taxes, net..... (8.9) (76.3) (43.7) (8.0) (10.8) (34.7)
Income tax expense
(benefit).............. -- -- 51.6 (3.1) (3.9) (12.4)
------- ------- ------- ------- ------- -------
Loss from continuing
operations............ (8.9) (76.3) (95.3) (4.9) (6.9) (22.3)
Discontinued operations,
net of taxes........... -- -- (48.5) (4.9) 1.4 3.0
------- ------- ------- ------- ------- -------
Net income (loss)...... (8.9)% (76.3)% (143.8)% 0.0% (5.5)% (19.3)%
======= ======= ======= ======= ======= =======
</TABLE>

34
<PAGE>

Our operating results for any given quarter or series of quarters are not
necessarily indicative of our results for any future period. The following is a
summary of significant factors which have occurred in our recent quarterly
results.

In the three months ended March 31, 1999:

. Our revenues increased from the prior quarter primarily due to increased
sales of our Internet connectivity products, particularly our DSL
Internet connectivity products, as well as increased sales of our Windows
version of Timbuktu Pro software;

. We began amortizing the intangible assets related to our acquisitions of
Serus and netOctopus; and

. Our research and development and sales and marketing expenses increased
from the prior quarter primarily due to the addition of the Serus and
netOctopus employees and related operating activities we acquired in
December 1998.

In the three months ended December 31, 1998:

. Our revenues increased from the prior quarter primarily due to increased
sales of our Internet connectivity products, particularly our DSL
Internet connectivity products which were not available until the latter
half of the three months ended September 30, 1998 as well as increased
sales of our Web platform;

. Our gross margins increased from the prior quarter primarily due to a
special charge taken in the prior quarter related to our single user
modem products; and

. Our operating expenses increased from the prior quarter primarily due to
the amounts we allocated to in-process research and development related
to our acquisitions of Serus and netOctopus.

In the three months ended September 30, 1998:

. Our gross margins decreased from the prior quarter primarily due to a
special charge taken related to our single-user modem products and a
greater proportion of our revenue coming from sales of lower margin
Internet connectivity products;

. Our income tax expense increased from the prior quarter primarily due to
the establishment of a valuation allowance against deferred tax assets as
of the beginning of fiscal 1998 and an additional valuation allowance
related primarily to net operating losses generated in the prior three
quarters of fiscal 1998;

. Our operating expenses increased from the prior quarter primarily due to
expenses related to our new positioning as an Internet-focused company as
well as increased advertising and promotional expenses related to our Web
site platform and DSL Internet connectivity products; and

. We sold the LAN Division and accounted for the sale as a discontinued
operation. The loss on the sale of discontinued operations primarily
represents costs and transaction expenses incurred and accrued as a
result of the sale of the LAN Division.

In the three months ended June 30, 1998:

. Our revenues increased from the prior quarter primarily due to increased
license sales of our Web site and site server platform; and

. Our selling and marketing expenses increased from the prior quarter
primarily due to increased sales headcount and related expenses.

35
<PAGE>

In the three months ended March 31, 1998:

. Our gross margins increased from the prior quarter primarily due to a
greater proportion of revenue from higher margin Timbuktu Pro software.

Liquidity and Capital Resources

We have funded our operations to date primarily through the private sale of
preferred stock and the initial public offering of our common stock. Since
inception, we have raised $19.4 million from the private sale of equity
securities prior to our initial public offering and approximately
$24.8 million, net of offering expenses, from the sale of common stock in our
initial public offering completed in June 1996. As of March 31, 1999, we had
cash, cash equivalents and short-term investments representing 61% of total
assets.

Our operating activities used cash of $6.2 million and $966,000 for the six
months ended March 31, 1999 and 1998, respectively. The cash used to support
our operations in the six months ended March 31, 1999 was primarily due to
supporting our operating activities as well as the increase in accounts
receivable 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 six months ended March 31, 1998 was primarily due to the net
loss of $1.4 million and a decrease of $1.3 million in accounts payable and
accrued liabilities, partially offset by the reduction of accounts receivable
of $1.1 million. Our operating activities used $926,000 of cash in fiscal 1998,
generated $4.9 million of cash in fiscal 1997 and used $3.3 million of cash in
fiscal 1996. The cash used in operations in fiscal 1998 was primarily due to
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. The cash used in operations in
fiscal 1996 was primarily due to increases in accounts receivable related to
volume license sales of our Timbuktu Pro software, that occurred in the last
weeks of the fourth quarter ended September 30, 1996, increases in operating
expenses related to the introduction of our Internet connectivity products,
reduction in accounts payable and increases in inventory related to our
Internet connectivity products and the LAN Division's Fast Ethernet products.

Cash provided by investing activities in the six months ended March 31, 1999
was primarily due to proceeds from the sale and maturity of short-term
investments partially offset by the purchases of such investments as well as
the acquisitions of Serus and netOctopus and purchases of capital equipment.
The cash provided by investing activities in the six months ended March 31,
1998 was primarily related to the sale and maturity of short-term investments
partially offset by the purchase of such investments and purchases of capital
equipment. Expenditures for capital equipment were $736,000 and $489,000 for
the six months ended March 31, 1999 and 1998, respectively. We expect that our
capital expenditures will increase in future periods to support new product
development and production. Our financing activities in the six months ended
March 31, 1999 and 1998 were primarily related to the exercise of stock options
and activities related to our Employee Stock Purchase Plan. The cash provided
by investing activities during fiscal 1998 was primarily from proceeds from the
sale of short-term investments partially offset by purchases of such
investments, proceeds from the sale of the LAN Division, less the acquisition
of a trademark license related to the Netscape Internet portal for our Web site
platform, which we expect to amortize over a period not to exceed 2 years, and
expenditures for capital equipment, representing acquisitions of computer
equipment used predominantly in product development. The cash used in investing
activities in fiscal years 1997 and 1996 was primarily related to the purchase
of short-term investments and capital equipment. Our financing activities in
fiscal 1998, 1997 and 1996 represent the exercise of stock options, activities
related to our Employee Stock Purchase Plan and the initial public offering.
Our principal commitments consist primarily of leases on our headquarters
facilities and certain operating equipment. See Note 7 of Notes to Consolidated
Financial Statements.

36
<PAGE>

Although we believe that our existing cash balance will decrease moderately
during the remainder of fiscal 1999 as a result of operating activities, 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. If cash generated from operations is insufficient to satisfy our
liquidity requirements, we may seek to sell additional equity or convertible
debt securities or obtain additional credit facilities. We cannot assure you
that such additional equity or convertible debt financing or additional credit
facilities will be available on acceptable terms, if at all. The sale of
additional equity or convertible debt securities could result in additional
dilution to our stockholders. From time to time, in the ordinary course of
business, we evaluate 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 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
June 30, 1999, the market value of these shares was approximately $2,027,757.

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 March 31, 1999. All of our investments mature in twelve months or
less.

<TABLE>
<CAPTION>
Carrying Average
Principal (notional) amounts in United States Amount Interest Rate
dollars: -------------- -------------
(in thousands)
<S> <C> <C>
Cash equivalents -- fixed rate............... $13,946 4.62%
Short-term investments -- fixed rate......... 14,985 5.66%
-------
$28,931
=======
</TABLE>

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

37
<PAGE>

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. 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.

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 ending September 30, 1999, is not
expected to 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

38
<PAGE>

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), and our Windows, Mac OS and
Enterprise versions of Timbuktu Pro (versions 1.5 and later), are Year 2000
compliant. Upon completion of the development of the products acquired as a
result of our Serus and netOctopus acquisitions, we expect these products will
meet Year 2000 readiness requirements. 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 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 initiated a
comprehensive inventory and evaluation of all desktop systems and expect to
complete this process and upgrade such non-compliant desktop systems to Year
2000 compliant systems by September 1999. The additional costs of remediation
are not expected to be material. However, if implementation of replacement
systems is delayed or if significant new non-compliance issues are identified,
our business could be seriously harmed.

We are in the process of identifying and prioritizing 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.

39
<PAGE>

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
have currently identified certain facilities related items that we estimate
will cost approximately $60,000 to upgrade to Year 2000 compliance. While we
have dedicated and will continue to dedicate a substantial amount of time and
internal resources towards attaining Year 2000 compliance, we cannot assure you
that our Year 2000 compliance program will be completed on a timely basis. In
addition, 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 avoid such limitations. Any failure to effectively
monitor, implement or improve 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 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. We are in the process of developing
our contingency planning and plan to have these plans in place by September
1999. We expect our contingency plans to include, among other things, manual
"work-arounds" for software and hardware failures, as well as substitution of
systems, if necessary.

40
<PAGE>

Business
- --------------------------------------------------------------------------------

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. According to
International Data Corporation, the value of goods and services sold worldwide
via the Internet increasing from $12 billion in 1997 to over $425 billion by
2002, and spending on Internet services is projected to grow from approximately
$7.8 billion in 1998 to $79 billion by 2003.

Changes in telecommunications regulation in the United States and globally
have enabled new entrants, such as competitive local exchange carriers,
Internet service providers 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, or 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.
IDC estimates that the percentage of small businesses with access to the
Internet will grow to approximately 64% by 2002 and, according to AMI, spending
on Web site hosting and maintenance is expected to exceed $12.7 billion by
2002. AMI also estimates that the number of Web sites for small businesses in
the United States will increase from 2 million in 1998 to 5 million in 2002.
Many of these businesses are also implementing complex Web strategies,
including business-to-consumer and business-to-business electronic commerce.
According to AMI, small business electronic commerce revenues are expected to
grow from $9.5 billion in 1998 to approximately $50 billion in 2002.

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 businesses are discovering that
installing, configuring and developing Web sites and

41
<PAGE>

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. IDC estimates that in the
United States, 91% of small businesses do not yet sell products or services
over the Internet. Thus, there is considerable demand for platforms which
enable the construction of Web sites and provide other means of conducting
business on the Web, as well as for affordable, easy-to-use, high-speed
Internet connectivity.

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

Our Internet connectivity products enable small and medium size businesses to
cost-effectively take advantage of high-speed Internet access technologies, and
in particular DSL. Our customer premise DSL Internet connectivity products,
including routers, digital service units, filtering bridges 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 largest relationships (in terms of revenue)
include Internet service providers (ISPs) such as Concentric Network and
PSINet, Internet portals such as GeoCities and Netscape Netcenter, and
competitive local exchange carriers such as NorthPoint Communications and
Rhythms NetConnections. In addition, we have established relationships with
telecommunications equipment suppliers, such as our longest-standing
relationships with Carrier Access and Copper Mountain, and our three recently-
established development relationships with next generation technology providers
CopperCom, Jetstream Communications and TollBridge Technologies.

42
<PAGE>

Strategy

Our objective is to be the 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 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 partnerships include Internet service providers
such as Concentric Network and PSINet, Internet portals such as GeoCities
and Netscape Netcenter, and competitive local exchange carriers such as
NorthPoint Communications and Rhythms NetConnections. 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 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 will 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, 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 a key 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

43
<PAGE>

products and services is necessary for our success. We therefore have
developed close working relationships with leading central office
equipment providers. For example, through our relationship with Copper
Mountain, we have fully integrated our DSL equipment into their 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, 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.

44
<PAGE>

Products and Services

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 Routers* Provide a shared and $450-$700
Subscriber Line permanent connection to
(DSL) 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 Access Provide a high performance $100-$150
Device Modules DSL module to 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 Service Provide a cost-effective $650-$700
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 Bridges* Provide a shared, $650-$700
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.
----------------------------------------------------------------
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.
- -------------------------------------------------------------------------------
Cable Routers Provide a shared $500-$600
connection to the Internet
through the Ethernet port
on a cable modem.
- -------------------------------------------------------------------------------
T1 and Frame Routers Provide a dedicated, high- $800-$1,300
Relay speed, shared connection
to the Internet through a
traditional T1 leased line
service.
- -------------------------------------------------------------------------------
Integrated Routers Provide shared Internet $450-$1,100
Services Digital access at speeds up to 128
Network (ISDN) Kbps over an integrated
services digital network
phone line.
- -------------------------------------------------------------------------------
56K Digital Routers Provide a shared, $800-$1,050
Dataphone dedicated connection to
Service 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>

45
<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 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 that networks operating 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

46
<PAGE>

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.

Web Platforms

Our Web platforms enable small and medium size businesses and other
organizations to fully 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
Our Products U.S. Street
Supported Platforms and Services Functions and Features Price
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Netscape Navigator or Web sites Provide an easy-to-use and cost-effective way to set up a Web $20
Microsoft Internet site on the Internet without requiring any knowledge of hypertext per month
Explorer versions 3.02 markup language (HTML), programming skills or a technical staff
and higher to maintain 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 $60-$100
Microsoft Internet product or service over the Internet without requiring any per month
Explorer versions 3.02 knowledge of hypertext markup language (HTML), programming skills
and higher or a technical 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 Enables Internet service providers, competitive local exchange Individual
higher and Netscape server carriers, Internet portals, associations and others to offer pricing
Enterprise Server 3.5.1 their members or customers hosted Web sites and electronic
or higher commerce stores using our entire Web platform.
- ---------------------------------------------------------------------------------------------------------------------
Windows 3.X Timbuktu Enables users to communicate and collaborate in real time over $20-$90
Windows 95 Pro the Internet and within Intranets with other Timbuktu Pro users. per seat
Windows 98 Our Timbuktu Pro product family also includes Timbuktu Web
Windows NT Seminar for Internet conferencing and netOctopus network systems
Mac OS management tools.
</TABLE>

47
<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
- ------------------------------------------------------------------------------------------------
<C> <S> <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
UUNET Technologies X
Verio X
(and over 270 additional
Internet service
providers)
- ------------------------------------------------------------------------------------------------
Competitive Local Exchange Carriers (CLECs) Birch Telecom X X
ICG Communications X
Jato Communications X
MCIWorldCom X
NorthPoint
Communications X
Rhythms NetConnections X
- ------------------------------------------------------------------------------------------------
Internet Portals and Industry Associations American Dental
Association (ADA
Electronic Commerce
Company) X
GeoCities X
Intuit quicken.com X
National Home Office
Association X
Netscape Netcenter X
OfficeMax X
theseniornetwork.com X
- ------------------------------------------------------------------------------------------------
Two-Tier Distributors Ingram Micro X X
Merisel X X
Softway International X X
Tech Data X X
</TABLE>

48
<PAGE>

Strategic Product Development Relationships

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

<TABLE>
<CAPTION>
Product Development Company Product
- --------------------------------------------------------------------------------
<S> <C> <C>
Digital Subscriber Line Alcatel DSL Internet
Carrier Access Corporation connectivity products
Copper Mountain
Nokia
Virata
- --------------------------------------------------------------------------------
Voice over Digital CopperCom DSL Internet
Subscriber Line Jetstream Communications connectivity products
TollBridge Technologies
- --------------------------------------------------------------------------------
Electronic Commerce Concentric Network E-store
CyberCash
CyberSource
Intershop Communications
WebOrder
- --------------------------------------------------------------------------------
Internet/Intranet Allen Systems Group Timbuktu Pro
Communications 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
48 distributors in 33 countries. In Europe, distributors sell primarily in
France, the United Kingdom, and Italy, 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 1,150 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.
During the six months ended March 31, 1999, Ingram Micro accounted for 10% of
our total revenues, and in the six months ended March 31, 1998, Ingram Micro
accounted for 12% of our total revenues. No other customers

49
<PAGE>

during the six months ended March 31, 1999 and 1998 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.

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 280 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
and Jato Communications, who sought introductions to Internet service providers
because their DSL lines are often provisioned in combination with an Internet
service provider's Internet service.

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 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.

Other Marketing. We utilize several other marketing programs, such as our
online Web store, 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

50
<PAGE>

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 enhance our routing and security
functionality, including virtual private networks. We also plan 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 $4.3 million
for the six months ended March 31, 1999, $7.2 million for each of the fiscal
years ended September 30, 1998 and 1997 and $7.6 million for the fiscal year
ended September 30, 1996. 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
product introductions. A number of companies offer products that compete with
one or more of our products. 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, Ascend

51
<PAGE>

Communications (Lucent Technologies), Cayman Systems, Cisco Systems, FlowPoint
(Cabletron Systems), Ramp Networks and several other companies. In the Web site
and electronic commerce platform market, we compete with America Online,
Homestead Technologies, IBM, Inc. Online, Site Architects, Sitematic, Yahoo!
and several other companies. In the remote control and collaboration software
markets, we compete primarily with Computer Associates, Contigo Software,
Lotus, Microcom (Compaq), Microsoft, PlaceWare, Stac Software, Symantec, Tivoli
Systems (IBM) and several other companies. We have experienced and expect to
continue to experience increased competition from current and potential
competitors, many of whom have substantially greater financial, technical,
sales, marketing and other resources, as well as greater name recognition and a
larger customer base than we do.

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. See "Risk Factors -- We may not be able to compete successfully
against current and future competitors."

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.

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
assure you 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,

52
<PAGE>

identified, licensed and integrated which would seriously harm our business.
See "Risk Factors --Our intellectual property may not be adequately protected,
and our products may infringe upon the intellectual property rights of third
parties."

Employees

As of June 30, 1999, we employed 228 persons, including 71 in sales and
marketing, 69 in research and development, 32 in customer service and support,
25 in manufacturing operations, and 31 in general and administrative functions.
We also contract with consultants who provide us short and long-term services
in various areas of our business.

Facilities

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 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. As a result of the sale of
the LAN Division, we have provided a reserve against the remaining term
of this lease related to the space that the LAN Division occupied.

. A portion (currently approximately 12,000 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, an
affiliate of Gores, 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.

. 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 office space in Orem, Utah for a research and
product development group. 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.

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.

53
<PAGE>

Management
- --------------------------------------------------------------------------------

Officers and Directors

Our executive officers and directors, and their ages as of June 30, 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................. 42 Vice President and Chief Financial Officer
Didier Cop..................... 44 Vice President Marketing and International,
Internet Equipment
Mary Felice Crowe.............. 51 Vice President Engineering, Web Site
Services
David A. Kadish................ 46 Vice President and General Counsel
Thomas A. Skoulis.............. 43 Senior Vice President and General Manager,
Timbuktu Products
Michael P. Trupiano............ 43 Senior Vice President and General Manager,
Internet Equipment
Vickie L. Welch................ 44 Vice President Marketing, Web Site Services
Reese M. Jones................. 40 Chairman of the Board of Directors
David F. Marquardt (2)(3)...... 50 Director
James R. Swartz (3)............ 56 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 Marketing and International, 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.

Ms. Crowe. Mary Felice Crowe, Vice President Engineering, Web Site Services,
joined Netopia in July 1994. Prior to joining Netopia, Ms. Crowe spent six
years from 1988 to 1994 at Orion Network Systems as a Software Engineering
Manager for SNA connectivity products. Before joining Orion, Ms. Crowe was a
software engineer at DCA, SoftSwitch, and Intel. Ms. Crowe

54
<PAGE>

received a B.S. in mathematics from Mississippi University for Women in 1969
and an M.A. in mathematics from Vanderbilt University in 1971.

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 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 Products, 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.

Ms. Welch. Vickie L. Welch, Vice President Marketing, Web Site Services,
joined Netopia in June 1999. Prior to joining Netopia, Ms. Welch held the
position of Associate Publisher/Marketing for Network Computing Magazine, CMP
Media. Prior to joining CMP Media, Ms. Welch was Vice President, Marketing for
MacPublishing LLC, a joint venture between Ziff-Davis Publishing Company and
International Data Group. From 1984 to 1996, Ms. Welch worked directly for
Ziff-Davis, serving as Marketing Director for PC WEEK, MacUser, Corporate
Computing and MacWEEK and Group Marketing Director for the Mac Publications
Group and Consumer Media Group. Ms. Welch received a B.S. in journalism and
communication studies from the University of Iowa in 1977.

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, ScanSoft 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.

55
<PAGE>

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.

56
<PAGE>

Principal Stockholders
- --------------------------------------------------------------------------------

The following table sets forth information known to us regarding beneficial
ownership of our common stock as of June 30, 1999, and as adjusted to reflect
the sale of shares offered hereby by:

. Each person who we know to own beneficially more than five percent of our
common stock;

. Each of the named officers;

. Each of our directors; and

. All current directors and executive officers as a group.

<TABLE>
<CAPTION>
5% Stockholders, Named Shares Shares Percent Beneficially
Officers, Directors, Beneficially Beneficially Owned(1)(2)(3)
and Directors and Owned Prior Owned After ------------------------
Executive Officers as a to the the Before After
Group Offering(1)(2) Offering(1)(2) Offering Offering
----------------------- -------------- -------------- -------- ----------
<S> <C> <C> <C> <C>
Alan B. Lefkof (4)...... 395,625 395,625 3.0% 2.6%
James A. Clark (5)...... 118,189 118,189 * *
Didier Cop (6).......... 92,443 92,443 * *
Mary Felice Crowe (7)... 40,280 40,280 * *
David A. Kadish (8)..... 18,500 18,500 * *
Thomas A. Skoulis (9)... 92,377 92,377 * *
Michael P. Trupiano
(10)................... 134,264 134,264 1.0% *
Reese M. Jones (11)..... 2,328,343 2,213,343 17.9% 14.8%
David F. Marquardt
(12)................... 119,486 119,486 * *
James R. Swartz (13).... 76,779 76,779 * *
All directors and
executive officers as a
group,
10 persons (14)........ 3,416,286 3,301,286 24.6% 20.8%
</TABLE>
- -----------------
* Less than 1%.
(1) Except as indicated in the footnotes to this table and pursuant to
applicable community property laws, the persons named in the table have
sole voting and investment power with respect to all shares of common
stock.
(2) The number of shares of common stock deemed outstanding prior to this
offering includes the shares issuable pursuant to stock options and
warrants that may be exercised within 60 days after June 30, 1999. The
number of shares of common stock outstanding after this offering includes
the 2,000,000 shares of common stock we are offering in this offering.
(3) Assumes no exercise of the underwriters' over-allotment option.
(4) Includes options exercisable into 383,625 shares of common stock under the
1996 Stock Option Plan (Option Plan) and 12,000 shares held by the Lefkof
Family Trust over which Alan B. Lefkof has shared voting and investment
authority.
(5) Includes options exercisable into 118,189 shares of common stock under the
Option Plan.
(6) Includes options exercisable into 66,055 shares of common stock under the
Option Plan.
(7) Includes options exercisable into 31,517 shares of common stock under the
Option Plan.
(8) Includes options exercisable into 16,500 shares of common stock under the
Option Plan.
(9) Includes options exercisable into 88,377 shares of common stock under the
Option Plan.
(10) Includes options exercisable into 134,264 shares of common stock under the
Option Plan.
(11) Includes options exercisable into 17,188 shares of common stock under the
Option Plan.
(12) Includes options exercisable into 25,000 shares of common stock under the
Option Plan.
(13) Includes 20,000 shares beneficially owned by Accel Japan L.P. and 4,207
shares beneficially owned by Swartz Family Partnership L.P. Mr. Swartz is
the general partner of both partnerships and disclaims beneficial
ownership except to the extent of his pecuniary interest therein arising
from his partnership interests. Includes options exercisable into 25,000
shares of common stock under the Option Plan.
(14) Includes options exercisable into 905,715 shares of common stock under the
Option Plan.

57
<PAGE>

Selling Stockholders
- --------------------------------------------------------------------------------

The following table sets forth information known to us with respect to the
beneficial ownership of its common stock held by each selling stockholder as of
June 30, 1999, and as adjusted to reflect the sale of common stock offered
hereby by such stockholder. As of June 30, 1999, there were 12,986,133 shares
of common stock outstanding.

<TABLE>
<CAPTION>
Percent Beneficially
Owned(1)(2)
------------------------
Number of Before After
Name and Address Shares Offered(2) Offering Offering
- ---------------- ----------------- ---------- ----------
<S> <C> <C> <C>
Reese M. Jones(3)................. 115,000 17.9% 14.8%
c/o Netopia, Inc.
2470 Mariner Square Loop,
Alameda, California 94501
Serus LLC......................... 85,000 3.2% 2.2%
c/o Christian Hendricks
550 North Brand Boulevard
Suite 1960
Glendale, California 91203
</TABLE>
- -----------------
(1) Based upon outstanding shares of our common stock as of June 30, 1999.
(2) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. The number of shares beneficially owned
by a person includes shares of common stock subject to options held by that
person that are currently exercisable or exercisable within 60 days of June
30, 1999. Such shares issuable pursuant to such options are deemed
outstanding for computing the percentage ownership of the person holding
such options but are not deemed outstanding for the purposes of computing
the percentage ownership of each other person.
(3) Includes options exercisable into 17,188 shares of our common stock under
the Option Plan.

58
<PAGE>

Description of Capital Stock
- --------------------------------------------------------------------------------

General

We are authorized to issue 25,000,000 shares of common stock, $0.001 par
value, and 5,000,000 shares of undesignated preferred stock, $0.001 par value.
The following description of our capital stock does not purport to be complete
and is subject to and qualified in its entirety by our Amended and Restated
Certificate of Incorporation and Bylaws, and by the provisions of applicable
Delaware law.

Common Stock

As of June 30, 1999, there were 12,986,133 shares of common stock outstanding
which were held of record by approximately 144 stockholders.

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 for that
purpose. See "Dividend Policy." In the event of a liquidation, dissolution or
winding up of Netopia, 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.
There are no redemption or sinking fund provisions applicable to the common
stock. All outstanding shares of common stock are fully paid and nonassessable,
and the shares of common stock to be issued upon the closing of this offering
will be fully paid and nonassessable.

Preferred Stock

The Board of Directors has the authority, without action by the stockholders,
to designate and issue preferred stock in one or more series and to designate
the rights, preferences and privileges of each series, any or all of which may
be greater than the rights of the common stock. It is not possible to state the
actual effect of the issuance of any shares of preferred stock upon the rights
of holders of the common stock until our Board of Directors determines the
specific rights of the holders of such preferred stock. However, the effects
might include, among other things, restricting dividends on the common stock,
diluting the voting power of the common stock, impairing the liquidation rights
of the common stock and delaying or preventing a change in control of Netopia
without further action by the stockholders. We have no present plans to issue
any shares of preferred stock.

Warrant

As of June 30, 1999, there was one warrant outstanding to purchase a total of
60,000 shares of common stock. The warrant is held by UBS AG, the corporate
parent of Warburg Dillon Read LLC, and is currently exercisable.

Anti-takeover Effects of Provisions of our Certificate of Incorporation and
Delaware Law

As described above, under our Amended and Restated Certificate of
Incorporation, our Board of Directors has the power to authorize the issuance
of up to 5,000,000 shares of preferred stock and to determine the price,
rights, preferences, privileges and restrictions, including voting rights, of
those shares without further vote or action by the stockholders. The issuance
of preferred stock, while providing desirable flexibility in connection with
possible acquisitions and other corporate purposes,

59
<PAGE>

may have the effect of delaying, deferring or preventing a change in control of
Netopia, may discourage bids for our common stock at a premium over the market
price of our common stock and may adversely affect the market price of and the
voting and other rights of the holders of the common stock. In addition, our
Amended and Restated Certificate of Incorporation provides that all stockholder
actions must be effected at a duly called meeting and not by a consent in
writing. These provisions of our Amended and Restated Certificate of
Incorporation could discourage potential acquisition proposals and could delay
or prevent a change in control of Netopia. These provisions are intended to
enhance the likelihood of continuity and stability in the composition of our
Board of Directors and in the policies formulated by them. Such provisions are
also designed to discourage certain types of transactions that may involve an
actual or threatened change of control of Netopia. These provisions are
designed to reduce our vulnerability to an unsolicited acquisition proposal and
to discourage certain tactics that may be used in proxy fights. Such
provisions, however, could have the effect of discouraging others from making
tender offers for our shares and, as a consequence, they also may inhibit
fluctuations in the market price of our shares that could result from actual or
rumored takeover attempts. Such provisions also may have the effect of
preventing changes in the management of Netopia. See "Risk Factors -- It may be
difficult for a third party to acquire us, even if doing so would be beneficial
to our stockholders."

We are subject to Section 203 of the Delaware General Corporation Law, an
anti-takeover law. In general, Section 203 prohibits a publicly held Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" for a period of three years following the date the person became
an interested stockholder, unless (with certain exceptions) the "business
combination" or the transaction in which the person became an interested
stockholder is approved in a prescribed manner. Generally, a "business
combination" includes a merger, asset or stock sale, or other transaction
resulting in a financial benefit to the interested stockholder. Generally, an
"interested stockholder" is a person who, together with affiliates and
associates, owns (or within three years prior to the determination of
interested stockholder status, did own) 15% or more of a corporation's voting
stock. Existence of this provision would be expected to have an anti-takeover
effect with respect to transactions not approved in advance by the Board of
Directors, including discouraging attempts that might result in a premium over
the market price for the shares of common stock held by stockholders.

Transfer Agent and Registrar

The transfer agent and registrar for the common stock is ChaseMellon
Shareholder Services, San Francisco, California.

60
<PAGE>

Underwriters
- --------------------------------------------------------------------------------

Netopia, the selling stockholders and the underwriters for the offering named
below, for whom Warburg Dillon Read LLC, BancBoston Robertson Stephens Inc.,
Volpe Brown Whelan & Company, LLC and DLJdirect Inc. are acting as
representatives, have entered into an underwriting agreement with respect to
the shares being offered. Subject to certain conditions, each underwriter has
severally agreed to purchase the number of shares indicated in the following
table.

<TABLE>
<CAPTION>
Underwriters Number of Shares
------------ ----------------
<S> <C>
Warburg Dillon Read LLC..................................... 778,000
BancBoston Robertson Stephens Inc. ......................... 778,000
Volpe Brown Whelan & Company, LLC........................... 389,000
DLJdirect Inc............................................... 105,000
Hoefer & Arnett, Inc........................................ 50,000
Pacific Crest Securities.................................... 50,000
Raymond James & Associates, Inc............................. 50,000
---------
Total...................................................... 2,200,000
=========
</TABLE>

If the underwriters sell more than the total number of shares set forth in
the table above, the underwriters have an option to buy up to an additional
330,000 shares from Netopia to cover such sales. They may exercise that option
for 30 days. If any shares are purchased pursuant to this option, the
underwriters will severally purchase shares in approximately the same
proportion as set forth in the table above.

The following table shows the per share and total underwriting discounts and
commissions to be paid to the underwriters by Netopia and the selling
stockholders. Such amounts are shown assuming both no exercise and full
exercise of the underwriters' option to purchase additional shares.

<TABLE>
<CAPTION>
Amount Paid
-----------------------------------
Per Share No Exercise Full Exercise
--------- ----------- -------------
<S> <C> <C> <C>
Netopia.................................. $0.99 $1,980,000 $2,306,700
Selling stockholders..................... 0.99 198,000 198,000
---------- ----------
Total................................... $0.99 $2,178,000 $2,504,700
========== ==========
</TABLE>

Shares sold by the underwriters to the public will initially be offered at
the public offering price set forth on the cover of this prospectus. Any shares
sold by the underwriters to securities dealers may be sold at a discount of up
to $.59 per share from the public offering price. Any such securities dealers
may resell any shares purchased from the underwriters to certain other brokers
or dealers at a discount of up to $.10 per share from the public offering
price. If all the shares are not sold at the offering price, the underwriters
may change the offering price and the other selling terms.

Netopia and its directors and executive officers have agreed with the
underwriters not to dispose of or hedge any of their common stock or securities
convertible into or exchangeable for shares of common stock during the period
from the date of this prospectus continuing through the date 90 days after the
date of this prospectus, except with the prior written consent of Warburg
Dillon Read LLC. This agreement does not apply to issuances or sales by us
pursuant to any existing employee benefit plans or upon conversion or exchange
of any currently outstanding convertible or exchangeable securities.

In connection with the offering, the underwriters may purchase and sell
shares of common stock in the open market. These transactions may include short
sales, stabilizing transactions and purchases to cover positions created by
short sales. Short sales involve the sale by the underwriters of a greater

61
<PAGE>

number of shares than they are required to purchase in the offering.
Stabilizing transactions consist of certain bids or purchases made for the
purpose of preventing or retarding a decline in the market price of the common
stock while the offering is in progress.

The underwriters may also impose a penalty bid. This occurs when a particular
underwriter repays to the underwriters a portion of the underwriting discount
received by it because the representatives have repurchased shares sold by or
for the account of such underwriter in stabilizing or short covering
transactions.

These activities by the underwriters may stabilize, maintain or otherwise
affect the market price of the common stock. As a result, the price of the
common stock may be higher than the price that otherwise might exist in the
open market. If these activities are commenced, they may be discontinued by the
underwriters at any time. These transactions may be effected on the Nasdaq
National Market, in the over-the-counter market or otherwise.

In connection with this offering, certain underwriters and selling group
members (if any) who are qualified market makers on the Nasdaq National Market
may engage in passive market making transactions in the common stock on the
Nasdaq National Market in accordance with Rule 103 of Regulation M under the
Securities Exchange Act of 1934, as amended, during the business day prior to
the pricing of the offering before the commencement of offers or sales of the
common stock. Passive market makers must comply with applicable volume and
price limitations and must be identified as such. In general, a passive market
maker must display its bid at a price not in excess of the highest independent
bid of such security; if all independent bids are lowered below the passive
market makers' bid, however, such bid must then be lowered when certain
purchase limits are exceeded.

UBS AG, the corporate parent of Warburg Dillon Read LLC, holds a currently
exercisable warrant to purchase 60,000 shares of common stock.

We estimate that our share of the total expenses of the offering, excluding
underwriting discounts and commissions, will be approximately $675,000.

We have agreed to indemnify the several underwriters against certain
liabilities, including liabilities under the Securities Act of 1933.

62
<PAGE>

Legal Matters
- --------------------------------------------------------------------------------

The validity of the issuance of the common stock offered hereby will be
passed upon for us by Gunderson Dettmer Stough Villeneuve Franklin & Hachigian,
LLP, Menlo Park, California. Legal matters in connection with this offering
will be passed upon for the underwriters by Brobeck, Phleger & Harrison LLP,
Palo Alto, California.

Experts
- --------------------------------------------------------------------------------

The consolidated financial statements and schedule as of September 30, 1998
and 1997 and for each of the years in the three-year period ended September 30,
1998, included or incorporated by reference in this prospectus, have been so
included or incorporated by reference in reliance upon the reports of KPMG LLP,
independent certified public accountants, included or incorporated by reference
herein, and upon the authority of said firm as experts in accounting and
auditing.

63
<PAGE>

Where You Can Find More Information
- --------------------------------------------------------------------------------

This prospectus constitutes a part of a registration statement on Form S-3
filed by us with the Securities and Exchange Commission, or the SEC, under the
Securities Act of 1933. This prospectus does not contain all of the information
set forth in the Registration Statement, as we have omitted some parts in
accordance with the SEC's rules and regulations. For further information about
us and the shares being sold in this offering, please refer to the registration
statement. Statements contained in this prospectus concerning the contents of
any contract or any other document referred to are not necessarily a complete
description of the provisions of the contract. Copies of the registration
statement may be inspected, without charge, at the offices of the SEC, or
obtained at prescribed rates from the Public Reference Section of the SEC at
the address set forth below.

We file annual, quarterly and special reports, proxy statements and other
information with the SEC. You may read and copy any document we file at the
public reference facilities of the SEC located at 450 Fifth Street N.W.,
Washington D.C. 20549. You may obtain information on the operation of the SEC's
public reference facilities by calling the SEC at 1-800-SEC-0330. You can also
access copies of such material electronically on the SEC's home page on the Web
at www.sec.gov. Information concerning Netopia, Inc. is also available for
inspection at the offices of the Nasdaq National Market, Reports Section, 1735
K Street, N.W., Washington, D.C. 20006.

The SEC permits us to "incorporate by reference" the information we file with
them, which means that we can disclose important information to you by
referring you to those documents. The information incorporated by reference is
considered to be part of this prospectus, and information we file with the SEC
after the date of this prospectus will automatically update and supersede this
information. We incorporate by reference the following documents filed by us
with the SEC. We also incorporate by reference any future filings made with the
SEC under Sections 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of
1934, as amended, after the date of this prospectus until the termination of
this offering.

1. Our Annual Report on Form 10-K for the fiscal year ended September 30,
1998.

2. Our Proxy Statement for our 1999 Annual Meeting.

3. Our Quarterly Reports on Form 10-Q for the quarterly periods ended
December 31, 1998 and March 31, 1999.

4. Our Form 8-A filed with the SEC in May 1996.

If you request a copy of any or all of the documents incorporated by
reference, then we will send to you the copies you requested at no charge.
However, we will not send exhibits to such documents, unless such exhibits are
specifically incorporated by reference in such documents. You should direct
requests for such copies to Investor Relations, 2470 Mariner Square Loop,
Alameda, CA 94501. Our phone number is (510) 814-5100.

You should rely only on the information contained in this prospectus and
incorporated by reference into this prospectus. We have not authorized anyone
to provide you with information different from that contained in this
prospectus. We are offering to sell, and seeking offers to buy, shares of our
common stock only in jurisdictions where offers and sales are permitted. The
information contained in this prospectus is accurate only as of the date of
this prospectus, regardless of the time of delivery of this prospectus or of
any sale of the shares.

64
<PAGE>

Netopia, Inc.

Index to Financial Statements

<TABLE>
<S> <C>
Report of KPMG LLP, Independent Auditors................................. F-2

Consolidated Balance Sheets as of September 30, 1998 and 1997............ F-3

Consolidated Statements of Operations for the Years Ended September 30,
1998, 1997, and 1996.................................................... F-4

Consolidated Statements of Stockholders' Equity for the Years Ended
September 30, 1998, 1997, and 1996...................................... F-5

Consolidated Statements of Cash Flows for the Years Ended September 30,
1998, 1997, and 1996.................................................... F-6

Notes to Consolidated Financial Statements............................... F-7

Condensed Consolidated Balance Sheet at March 31, 1999................... F-21

Condensed Consolidated Statements of Operations for the Six Months Ended
March 31, 1999 and 1998................................................. F-22

Condensed Consolidated Statements of Cash Flows for the Six Months Ended
March 31, 1999 and 1998................................................. F-23

Notes to Condensed Consolidated Financial Statements..................... F-24
</TABLE>

F-1
<PAGE>

Independent Auditors' Report

The Board of Directors
Netopia, Inc. and subsidiary:

We have audited the accompanying consolidated balance sheets of Netopia,
Inc. and subsidiary as of September 30, 1998 and 1997 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, 1998. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements 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 subsidiary as of September 30, 1998 and 1997 and the results of their
operations and their cash flows for each of the years in the three-year period
ended September 30, 1998 in conformity with generally accepted accounting
principles.

KPMG LLP

San Francisco, California
November 4, 1998, except as to Note
9, which is as of December 17, 1998

F-2
<PAGE>

Netopia, Inc. and Subsidiary

Consolidated Balance Sheets

<TABLE>
<CAPTION>
September 30,
--------------------
1998 1997
--------- ---------
(in thousands,
except for share
and
per share amounts)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents............................... $ 19,244 $ 14,444
Short-term investments.................................. 22,851 27,192
Trade accounts receivable less allowance for doubtful
accounts and returns of $617 and $1,127, respectively.. 4,358 8,332
Royalties receivable.................................... 410 --
Inventories, net........................................ 1,591 4,421
Deferred tax assets..................................... -- 1,463
Prepaid expenses and other current assets............... 929 790
--------- ---------
Total current assets................................... 49,383 56,642
Note receivable.......................................... 900 --
Royalties receivable..................................... 1,372 --
Furniture, fixtures and equipment, net................... 2,068 2,321
Deferred tax assets...................................... -- 1,406
Deposits and other assets................................ 2,569 632
--------- ---------
$ 56,292 $ 61,001
========= =========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable........................................ $ 5,440 $ 4,302
Accrued compensation.................................... 1,217 1,237
Accrued liabilities..................................... 3,468 195
Deferred revenue........................................ 807 874
Other current liabilities............................... 299 55
--------- ---------
Total current liabilities.............................. 11,231 6,663
Long-term liabilities.................................... 260 361
--------- ---------
Total liabilities...................................... 11,491 7,024
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;
11,953,908 and 11,492,732 shares issued and outstanding
at September 30, 1998 and 1997, respectively........... 12 12
Additional paid-in capital.............................. 51,871 50,568
Deferred compensation................................... -- (54)
Retained earnings (deficit)............................. (7,082) 3,451
--------- ---------
Total stockholders' equity............................. 44,801 53,977
--------- ---------
$ 56,292 $ 61,001
========= =========
</TABLE>

See accompanying notes to consolidated financial statements.

F-3
<PAGE>

Netopia, Inc. and Subsidiary

Consolidated Statements of Operations

<TABLE>
<CAPTION>
Fiscal years ended September 30,
----------------------------------
1998 1997 1996
---------- ---------- ----------
(in thousands, except for
per share amounts)
<S> <C> <C> <C>
Revenues................................... $ 24,836 $ 20,170 $ 16,718
Cost of revenues........................... 7,955 6,396 3,811
---------- ---------- ----------
Gross profit............................... 16,881 13,774 12,907
Operating expenses:
Research and development.................. 7,201 7,177 7,603
Selling and marketing..................... 14,404 11,288 9,410
General and administrative................ 3,380 2,945 2,835
---------- ---------- ----------
Total operating expenses.................. 24,985 21,410 19,848
---------- ---------- ----------
Operating loss........................... (8,104) (7,636) (6,941)
Other income, net.......................... 2,222 1,869 1,040
---------- ---------- ----------
Loss from continuing operations before
income taxes............................. (5,882) (5,767) (5,901)
Income tax provision (benefit)............. 2,155 (2,217) (4,619)
---------- ---------- ----------
Loss from continuing operations.......... (8,037) (3,550) (1,282)
Discontinued operations:
Income from discontinued operations, net
of taxes................................. 602 3,021 4,983
Loss on sale of discontinued operations,
net of taxes............................. (3,098) -- --
---------- ---------- ----------
Net income (loss)........................ $ (10,533) $ (529) $ 3,701
========== ========== ==========
Per share data, continuing operations:
Basic and diluted loss per share.......... $ (0.69) $ (0.31) $ (0.13)
========== ========== ==========
Shares used in the per share
calculations............................. 11,687 11,335 9,890
========== ========== ==========
Per share data, discontinued operations:
Basic income per share.................... $ 0.05 $ 0.27 $ 0.50
========== ========== ==========
Diluted income per share.................. $ 0.05 $ 0.24 $ 0.46
========== ========== ==========
Common shares used in the calculations of
basic income per share................... 11,687 11,335 9,890
========== ========== ==========
Common and common equivalent shares used
in the calculations of diluted income per
share.................................... 12,830 12,350 10,887
========== ========== ==========
Basic and diluted per share loss on sale.. $ (0.27) $ -- $ --
========== ========== ==========
Shares used in the per share calculation.. 11,687 -- --
========== ========== ==========
Per share data, net income (loss):
Basic net income (loss) per share......... $ (0.90) $ (0.05) $ 0.37
========== ========== ==========
Diluted net income (loss) per share....... $ (0.90) $ (0.05) $ 0.34
========== ========== ==========
Common shares used in the calculations of
basic net income (loss) per share........ 11,687 11,335 9,890
========== ========== ==========
Common and common equivalent shares used
in the calculations of diluted net income
(loss) per share......................... 11,687 11,335 10,887
========== ========== ==========
</TABLE>

See accompanying notes to consolidated financial statements.

F-4
<PAGE>

Netopia, Inc. and Subsidiary

Consolidated Statements of Stockholders' Equity

<TABLE>
<CAPTION>
Preferred Stock Common Stock Additional Deferred Retained Total
------------------ ----------------- paid-in compen- earnings stockholders'
Shares Amount Shares Amount capital sation (deficit) equity
---------- ------ ---------- ------ ---------- -------- --------- -------------
(in thousands, except for share amounts)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances, September 30,
1995................... 5,591,207 $ 6 3,624,231 $ 4 $ 23,990 $ -- $ 279 $ 24,279
Exercise of stock
options................ -- -- 135,238 -- 148 -- -- 148
Issuance of common stock
net of issuance costs
of $1,222.............. -- -- 1,750,000 2 24,812 -- -- 24,814
Conversion of preferred
stock to common stock.. (5,591,207) (6) 5,591,207 6 -- -- -- --
Issuance of common stock
for consulting
services............... -- -- 5,000 -- 30 -- -- 30
Issuance of common stock
for rights and
services............... -- -- 14,285 -- 162 -- -- 162
Deferred compensation
related to grant of
stock options.......... -- -- -- -- 90 (90) -- --
Amortization of deferred
compensation........... -- -- -- -- -- 9 -- 9
Net income.............. -- -- -- -- -- -- 3,701 3,701
---------- ---- ---------- --- -------- ---- -------- --------
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
========== ==== ========== === ======== ==== ======== ========
</TABLE>

See accompanying notes to consolidated financial statements.

F-5
<PAGE>

Netopia, Inc. and Subsidiary

Consolidated Statements of Cash Flows

<TABLE>
<CAPTION>
Fiscal years ended September 30,
-----------------------------------
1998 1997 1996
---------- ---------- -----------
(in thousands)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)........................ $ (10,533) $ (529) $ 3,701
Adjustments to reconcile net income
(loss) to net cash provided by (used in)
operating activities:
Depreciation and amortization........... 995 1,812 1,757
Deferred income taxes................... 2,869 (673) (2,197)
Amortization of deferred compensation... 24 27 9
Noncash compensation for services....... -- 60 192
Changes in allowance for doubtful
accounts and returns on accounts
receivable............................. (40) (201) 74
Changes in operating assets and
liabilities:
Trade accounts receivable............... 1,549 3,041 (3,522)
Inventories............................. (618) 1,874 (1,537)
Prepaid expenses and other current
assets................................. (443) 667 (453)
Deposits and other assets............... (127) 49 (186)
Accounts payable and accrued
liabilities............................ 5,310 (1,508) (1,563)
Deferred revenue........................ (67) 87 619
Other liabilities....................... 155 185 (173)
---------- ---------- -----------
Net cash provided by (used in)
operating activities.................. (926) 4,891 (3,279)
---------- ---------- -----------
Cash flows from investing activities:
Purchase of furniture, fixtures and
equipment............................... (711) (1,111) (2,182)
Acquisition of trademark license......... (1,000) -- --
Capitalization of software development
costs................................... (237) (350) --
Proceeds from sale of discontinued
operations.............................. 2,000 -- --
Purchase of short-term investments....... (47,706) (35,900) (124,337)
Proceeds from the sale of short-term
investments............................. 52,047 25,943 110,783
---------- ---------- -----------
Net cash provided by (used in)
investing activities.................. 4,393 (11,418) (15,736)
---------- ---------- -----------
Cash flows from financing activities:
Proceeds from the issuance of common
stock, net.............................. 1,333 1,061 24,962
---------- ---------- -----------
Net cash provided by financing
activities............................ 1,333 1,061 24,962
---------- ---------- -----------
Net increase (decrease) in cash and cash
equivalents.............................. 4,800 (5,466) 5,947
Cash and cash equivalents, beginning of
year..................................... 14,444 19,910 13,963
---------- ---------- -----------
Cash and cash equivalents, end of year.... $ 19,244 $ 14,444 $ 19,910
========== ========== ===========
Supplemental disclosures of cash flow
activities:
Income taxes paid........................ $ 193 $ 289 $ 1,050
========== ========== ===========
Supplemental disclosures of noncash
investing and financing activities:
Accrual of stock option deferred
compensation............................ $ -- $ -- $ 90
========== ========== ===========
Issuance of warrants for consulting
services................................ $ -- $ 60 $ --
========== ========== ===========
Issuance of common stock for consulting
services................................ $ -- $ -- $ 30
========== ========== ===========
Issuance of common stock and redeemable
common stock for rights and services.... $ -- $ -- $ 162
========== ========== ===========
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 $ -- $ --
========== ========== ===========
</TABLE>

See accompanying notes to consolidated financial statements.

F-6
<PAGE>

Netopia, Inc. and Subsidiary

Notes to Consolidated Financial Statements

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

Nature of Business

Netopia, Inc. (the Company) develops, markets, and supports high-speed,
multi-user Internet connectivity products, Web site software and services, and
collaboration software.

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiary located in France. 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 are 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, 1998 and 1997, consisted of the following (in thousands):

<TABLE>
<CAPTION>
September 30,
---------------
1998 1997
------- -------
<S> <C> <C>
U.S. Treasury Securities and obligations of
U.S. Government agencies................................... $10,554 $ 8,193
Corporate debt.............................................. 3,997 22,526
Commercial paper............................................ 21,567 7,102
------- -------
$36,118 $37,821
======= =======
</TABLE>

The available-for-sale securities as of September 30, 1998 were all due in
one year or less.

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 received, the
software and related documentation have been shipped,

F-7
<PAGE>

Netopia, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Continued)

collection of the resulting receivable is deemed probable, and no other
significant vendor obligations exist. Patent revenue is recognized upon the
licensing of the rights to the patent. 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. Revenues and Cost of Revenues are broken down
as follows (in thousands):

<TABLE>
<CAPTION>
September 30,
-----------------------
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Revenues:
Hardware products................................... $10,884 $ 8,134 $ 3,741
Software products................................... 13,952 12,036 12,977
------- ------- -------
$24,836 $20,170 $16,718
======= ======= =======
Cost of revenues:
Hardware products................................... $ 7,064 $ 5,258 $ 2,584
Software products................................... 891 1,138 1,227
------- ------- -------
$ 7,955 $ 6,396 $ 3,811
======= ======= =======
</TABLE>

In October 1997, the American Institute of Certified Public Accountants
issued Statement of Position (SOP) No. 97-2, Software Revenue Recognition (SOP
97-2). 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 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. SOP 97-2 will be adopted by the Company effective October 1, 1998.
We do not expect the adoption of SOP 97-2 will have a material impact on our
consolidated results of operations.

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 other large
scale 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.

F-8
<PAGE>

Netopia, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Continued)

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. Depreciation is
calculated using the straight-line method over the shorter of estimated useful
lives or related lease terms ranging from one to seven years.

Impairment of Long-Lived Assets

The Company adopted the provisions of SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, in
fiscal 1997. SFAS No. 121 requires that long-lived assets and certain
identifiable intangibles be reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by
comparison of the carrying amount of an asset to future net undiscounted 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 of the assets exceed the fair value of the assets. Assets
to be disposed of are reported at the lower of the carrying value amount or the
fair value less costs to sell. The adoption of SFAS No. 121 did not have a
material impact on the Company's financial position, results of operations, or
liquidity.

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 is computed on a straight-line basis over the estimated
economic life of the product, which is generally 1-2 years. All other research
and development expenditures are charged to research and development expense in
the period incurred. During fiscal 1998, 1997 and 1996, $237,000, $350,000 and
$0, 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
$1.3 million, $1.0 million and $845,000 for fiscal 1998, 1997 and 1996,
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

F-9
<PAGE>

Netopia, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Continued)

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
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

In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, Earnings Per Share. SFAS No. 128 established standards for the
computation, presentation and disclosure of earnings per share (EPS) and also
requires dual presentation of basic EPS and diluted EPS for entities with
complex capital structures. SFAS No. 128 became effective for the Company's
consolidated financial statements for quarterly and annual periods beginning
October 1, 1997, and requires restatement of EPS for periods prior to the
effective date.

Basic net income (loss) per share is based on the weighted average number of
shares of common stock outstanding during the period. Diluted net income (loss)
per share is based on the weighted average number of shares of common stock
outstanding during the period 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 stock options and stock warrants.

In conjunction with the Company's adoption of SFAS No. 128, the Company also
adopted the provisions of Staff Accounting Bulletin (SAB) No. 98, issued in
February 1998. Accordingly, shares previously included pursuant to SAB No. 83
have been omitted from both basic and diluted net income per share amounts.
Prior periods have been restated to conform to SFAS No. 128.

Potential common shares have been excluded from the computation of diluted
EPS for fiscal 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. Potential
common shares which were excluded from the computation of diluted EPS consisted
of options to purchase common stock totaled 3,520,899 shares in fiscal 1998 and
2,867,200 shares in fiscal 1997.

F-10
<PAGE>

Netopia, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Continued)

<TABLE>
<CAPTION>
Years ended September 30,
---------------------------
1998 1997 1996
-------- -------- -------
(in thousands, except for
per share amounts)
<S> <C> <C> <C>
Computation of basic net income (loss) per share:
Net income (loss)................................. $(10,533) $ (529) $ 3,701
======== ======== =======
Weighted average number of common shares
outstanding...................................... 11,687 11,335 9,890
======== ======== =======
Basic net income (loss) per share................. $ (0.90) $ (0.05) $ 0.37
======== ======== =======
Computation of diluted net income (loss) per share:
Net income (loss)................................. $(10,533) $ (529) $ 3,701
======== ======== =======
Weighted average number of common shares
outstanding...................................... 11,687 11,335 9,890
Number of dilutive common stock equivalents --
stock options................................... -- -- 997
-------- -------- -------
Shares used in per share calculation.............. 11,687 11,335 10,887
======== ======== =======
Diluted net income (loss) per share............... $ (0.90) $ (0.05) $ 0.34
======== ======== =======
</TABLE>

Recent Accounting Pronouncements

In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
Reporting Comprehensive Income and SFAS No. 131, Disclosures about Segments of
an Enterprise and Related Information which are effective for the Company
beginning with the fiscal year ended September 30, 1999. 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. 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 these standards is
not expected to have a material effect on the Company's consolidated financial
position or results of operations.

In June 1998, the Financial Accounting Standards Board 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. The Company does not expect the adoption of SFAS No. 133 will
have a material effect on the financial position of the Company.

In March 1998, the American Institute of Certified Public Accountants issued
SOP 98-1, Accounting for the Costs of Computer Software Developed or Obtained
for Internal Use. SOP 98-1

F-11
<PAGE>

Netopia, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Continued)

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.

(2) 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
Total Farallon
If 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, have not been recorded
to the extent that total consideration on the transaction exceeds 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 to reflect the LAN
Division's operations as a discontinued operation. Revenue from discontinued
operations was $15.1 million, $32.0 million, and $44.9 million, respectively,
in fiscal 1998, 1997, and 1996. The income from discontinued operations of
$602,000, $3.0 million, and

F-12
<PAGE>

Netopia, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Continued)

$5.0 million in fiscal 1998, 1997, and 1996, 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, $2.5
million is included in accrued liabilities at September 30, 1998. Such accrual
consists of $1.7 million of facility costs, approximately $300,000 in employee-
related costs and other costs consisting primarily of services fees of
approximately $500,000. As of September 30, 1998, the Company has recorded a
payable to Farallon for $736,000 related to LAN Division receivables collected
subsequent to the sale of the LAN Division. The following approximates assets
and liabilities of the LAN Division which are included in the consolidated
balance sheet as of September 30, 1997 (in thousands):

<TABLE>
<CAPTION>
1997
-------
<S> <C>
Accounts receivable, net.......................................... $ 4,832
Inventory......................................................... 3,247
Prepaid expenses and other current assets......................... 209
Property and equipment............................................ 359
Deposits and other assets......................................... 54
-------
Total........................................................... 8,701
Other liabilities................................................. (1,970)
-------
Net assets...................................................... $ 6,731
=======
</TABLE>

(3) Inventories

Inventories consisted of the following (in thousands):

<TABLE>
<CAPTION>
September 30,
-------------
1998 1997
------ ------
<S> <C> <C>
Raw materials and work in process........................... $1,080 $1,966
Finished goods.............................................. 511 2,455
------ ------
$1,591 $4,421
====== ======
</TABLE>

(4) Furniture, Fixtures, and Equipment

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

<TABLE>
<CAPTION>
September 30,
-----------------
1998 1997
------- --------
<S> <C> <C>
Office equipment........................................ $ 2,457 $ 3,263
Furniture and fixtures.................................. 1,186 1,367
Computers............................................... 7,757 7,954
Leasehold improvements.................................. 540 521
------- --------
11,940 13,105
Accumulated depreciation and amortization............... (9,872) (10,784)
------- --------
$ 2,068 $ 2,321
======= ========
</TABLE>

F-13
<PAGE>

Netopia, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Continued)

(5) Income Taxes

Total income tax expense for the years ended September 30, 1998, 1997 and
1996 are allocated as follows (in thousands):

<TABLE>
<CAPTION>
September 30,
-----------------------
1998 1997 1996
------ ------- -------
<S> <C> <C> <C>
Continuing operations............................ $2,155 $(2,217) $(4,619)
Discontinued operations.......................... 385 1,932 3,186
------ ------- -------
$2,540 $ (285) $(1,433)
====== ======= =======
</TABLE>

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

<TABLE>
<CAPTION>
September 30,
------------------------
1998 1997 1996
------ ------- -------
<S> <C> <C> <C>
Current:
Federal....................................... $ (596) $(1,753) $(2,714)
State......................................... (118) (6) 244
Foreign....................................... -- -- 48
------ ------- -------
(714) (1,759) (2,422)
------ ------- -------
Deferred:
Federal....................................... 2,191 (378) (1,814)
State......................................... 678 (295) (383)
------ ------- -------
2,869 (673) (2,197)
Charge in lieu of taxes attributable to
employer stock option plans................... -- 215 --
------ ------- -------
Total...................................... $2,155 $(2,217) $(4,619)
====== ======= =======
</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
income as a result of the following (in thousands):

<TABLE>
<CAPTION>
September 30,
-------------------------
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Computed "expected" tax (benefit) of 34%...... $(2,000) $(1,960) $(2,006)
Change in valuation allowance for deferred tax
assets....................................... 5,459 512 (2,295)
Tax exempt interest income.................... -- (163) --
Research credits.............................. (770) (172) (72)
State tax and other, net...................... (534) (434) (246)
------- ------- -------
$ 2,155 $(2,217) $(4,619)
======= ======= =======
</TABLE>

F-14
<PAGE>

Netopia, Inc. and Subsidiary

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,
---------------
1998 1997
------- ------
<S> <C> <C>
Deferred tax asset:
Reserves and accruals not currently deductible............. $ 1,010 $1,541
Deferred rent.............................................. 119 16
Research and other credits................................. 1,782 1,012
Alternative minimum tax credit carryforward................ -- 183
Tangible and intangible assets............................. 349 462
Net operating losses....................................... 2,377 --
State tax and other, net................................... 957 167
------- ------
Total gross deferred assets............................. 6,594 3,381
Less valuation allowance.................................... (6,594) (512)
------- ------
Net deferred tax assets................................. $ -- $2,869
======= ======
</TABLE>

The net change in the total valuation allowance for the years ended September
30, 1998 and 1997 was increases of $6,082,000 and $512,000, respectively.

At September 30, 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, 1996, the Company believed that due to the demonstrated
market acceptance of its products over the previous year, the uncertainty
regarding the realizability of its deferred tax assets had diminished to the
point where it was more likely than not that the deferred tax asset at such
date would be realized, and, as such, the previously established valuation
allowance was reversed in fiscal 1996.

At September 30, 1998, the Company had net operating loss carryforwards of
approximately $6.0 million for federal tax purposes and $4.5 million for state
tax purposes. If not earlier utilized, the federal net operating loss
carryforwards will expire in 2018 and the state net operating loss
carryforwards will expire in 2003. At September 30, 1998, the Company had
research credit carryforwards of approximately $1.4 million for federal tax
purposes and $280,000 for state tax purposes. If not earlier utilized, the
federal research credit carryforwards will expire in years 2009 through 2018.
Also, the Company had alternative minimum tax credit carryforwards of
approximately $92,000. 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.

F-15
<PAGE>

Netopia, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Continued)

(6) 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.

Common Stock

In June 1996, the Company completed the sale of 1,750,000 shares of common
stock, which generated net proceeds of approximately $24.8 million.

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
therefore. 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 issuance of these warrants.

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.

The 1996 Plan succeeds the previous equity incentive program and 4,243,141
shares of the Company's common stock have been authorized under the 1996 Plan.
This share reserve is comprised of (i) 294,945 shares available for issuance
under the predecessor plan and 1,372,050 shares subject to outstanding options
thereunder at March 31, 1996; and (ii) an additional increase of 2,576,146
shares. As of September 30, 1998 the 1996 Plan share reserve of 3,673,640
shares is comprised of (i) 3,520,899 shares subject to outstanding options and
(ii) 152,741 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.

F-16
<PAGE>

Netopia, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Continued)

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 IPO at the initial offering price. These
shares have been granted to three non-employee Board of Director members.
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 are exercisable
immediately subject to the Company's right of repurchase. The Company's right
to repurchase will lapse ratably over five years or upon the Director's
departure from the Board.

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.

The Company has recorded deferred compensation of $90,000 for the difference
between the grant price and the deemed fair value of the common stock
underlying options granted in October and December of 1995. This amount is
being amortized over the vesting period of the individual options, generally
five years. Amortization of deferred compensation is being charged to operating
expense. The balance has been fully amortized as of September 30, 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. The options relating to these units are included
in the table below. 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
Number of Average
Options Price Range Exercise Price
--------- ------------- --------------
<S> <C> <C> <C>
Outstanding as of September 30, 1995... 1,350,539 $1.00 - 1.60 $1.19
Options granted........................ 518,975 1.60 - 16.00 9.07
Options exercised...................... (135,238) 1.00 - 1.60 1.10
Options cancelled...................... (132,971) 1.00 - 12.50 2.58
---------
Outstanding as of September 30, 1996... 1,601,305 1.00 - 16.00 3.64
Options granted........................ 1,787,365 4.00 - 13.25 5.36
Options exercised...................... (194,535) 1.00 - 11.25 1.17
Options cancelled...................... (326,935) 1.00 - 15.00 8.53
---------
Outstanding as of September 30, 1997... 2,867,200 1.00 - 16.00 4.32
Options granted........................ 1,409,425 4.38 - 8.19 5.51
Options exercised...................... (312,090) 1.00 - 11.25 2.40
Options cancelled...................... (443,636) 1.20 - 10.50 4.80
---------
Outstanding as of September 30, 1998... 3,520,899 $1.00 - 16.00 4.90
=========
Exercisable............................ 1,338,228 $3.88
=========
</TABLE>

F-17
<PAGE>

Netopia, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Continued)

The following table summarizes information about stock options outstanding at
September 30, 1998:

<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------ -----------------------
Number of Weighted- Number
outstanding average Weighted- exercisable Weighted-
shares as of remaining average as of average
Range of exercise September 30, contractual exercise September 30, exercise
prices 1998 life (years) price 1998 price
----------------- ------------- ------------ --------- ------------- ---------
<S> <C> <C> <C> <C> <C>
$1.00................... 251,577 2.86 $ 1.00 251,577 $ 1.00
1.20................... 270,746 5.48 1.20 219,651 1.20
1.60 - 4.00............ 300,641 7.51 2.96 165,889 2.71
4.25 - 4.50............ 418,437 8.89 4.39 120,737 4.38
4.63 - 5.19............ 347,406 9.62 4.72 69,708 4.63
5.25 - 5.63............ 608,056 8.73 5.35 207,309 5.37
5.69................... 620,500 9.53 5.69 69,131 5.69
5.75 - 6.75............ 393,761 8.30 6.37 172,689 6.37
7.13 - 11.25........... 234,775 9.42 7.81 31,537 9.02
16.00.................. 75,000 7.70 16.00 30,000 16.00
--------- ---- ------ --------- ------
$1.00 - 16.00........... 3,520,899 8.18 $ 4.90 1,338,228 $ 3.88
========= ==== ====== ========= ======
</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 300,000 shares have been
approved for issuance under the Purchase Plan. As of September 30, 1998,
331,393 shares have been issued under the Purchase 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,
-------------------------
1998 1997 1996
-------- ------- ------
<S> <C> <C> <C>
Net income (loss) -- as reported................. $(10,533) $ (529) $3,701
Net income (loss) -- pro forma................... (13,384) (1,109) 3,492
Basic net income (loss) per share -- as
reported........................................ $ (0.90) $ (0.05) $ 0.37
Basic net income (loss) per share -- pro forma... (1.15) (0.10) 0.35
Diluted net income (loss) per share -- as
reported........................................ $ (0.90) $ (0.05) $ 0.34
Diluted net income (loss) per share -- pro
forma........................................... (1.15) (0.10) 0.32
</TABLE>

F-18
<PAGE>

Netopia, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Continued)

The effect on net income (loss) and net income (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 income (loss) for the future
years because pro forma net income (loss) reflects compensation costs only for
stock options granted in fiscal 1998, 1997 and 1996. The fair value of options
granted during fiscal 1998 under SFAS No. 123 was $4,906,099.

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,
--------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Expected volatility............................. 84% 70% 70%
Risk-free interest rate......................... 4.25% 5.60% 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.

(7) Commitments and Contingencies

Leases

The Company conducts its operations in leased facilities and with equipment
under operating lease agreements expiring at various dates through 2002.

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>
1999............................................................. $1,210
2000............................................................. 1,114
2001............................................................. 1,116
2002............................................................. 1,111
2003............................................................. 55
thereafter....................................................... 42
------
Total minimum lease payments................................... $4,648
======
</TABLE>

Total rental expense for all operating leases amounted to approximately
$1,244,000, $1,157,000 and $1,117,000 for the years ended September 30, 1998,
1997 and 1996, respectively.

F-19
<PAGE>

Netopia, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Continued)

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.

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.

(8) Significant Customers and Revenue by Geographic Region

During the years ended September 30, 1998, 1997 and 1996, one customer
accounted for approximately 12%, 14% and 12%, respectively, of total net
revenues. No other customers have accounted for 10% or more of the Company's
total revenue for the last three fiscal years.

Revenues outside of the United States are primarily export sales denominated
in United States dollars. Revenue by geographic region is as follows (in
thousands):

<TABLE>
<CAPTION>
Years ended September 30,
--------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
United States..................................... $ 16,670 $ 14,637 $ 13,412
Europe............................................ 6,215 3,929 1,769
Asia/Pacific...................................... 1,175 1,018 1,219
Canada............................................ 706 542 308
Latin America..................................... 70 44 10
-------- -------- --------
Total revenues.................................. $ 24,836 $ 20,170 $ 16,718
======== ======== ========
</TABLE>

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

(9) Subsequent Event

On December 17, 1998, the Company signed a definitive agreement and closed a
transaction to purchase Serus LLC (Serus), a Utah limited liability company.
Serus is a developer of Java-based Web site editing software products. Upon
completion of the development of such products, Netopia intends to market the
products both independently and along with its Web site and site server
products. As per the Serus Asset Purchase Agreement by and among Netopia, Inc.
and Serus LLC (the Purchase Agreement), Netopia will acquire substantially all
of the assets and assume certain liabilities of Serus and existing operations
which include 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, (ii) 409,556 shares of the Company's common stock,
and (iii) a $1.0 million earnout opportunity based upon certain criteria as set
forth in the Purchase Agreement.

F-20
<PAGE>

Netopia, Inc. and Subsidiary

Condensed Consolidated Balance Sheet

<TABLE>
<CAPTION>
March 31,
1999
-----------------
(unaudited)
(in thousands,
except for share
and per share
amounts)
Assets
<S> <C>
Current assets:
Cash and cash equivalents................................... $ 16,706
Short-term investments...................................... 15,246
Trade accounts receivable less allowance for doubtful
accounts and returns of $629............................... 8,253
Royalties receivable........................................ 410
Inventories, net............................................ 1,527
Prepaid expenses and other current assets................... 901
--------
Total current assets....................................... 43,043
Note receivable.............................................. 978
Royalties receivable......................................... 1,372
Furniture, fixtures and equipment, net....................... 2,163
Intangible assets............................................ 2,725
Deposits and other assets.................................... 2,220
--------
$ 52,501
========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable............................................ $ 5,080
Accrued compensation........................................ 1,730
Accrued liabilities......................................... 2,013
Deferred revenue............................................ 1,183
Other current liabilities................................... 104
--------
Total current liabilities.................................. 10,110
Long-term liabilities........................................ 371
--------
Total liabilities.......................................... 10,481
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; 12,641,439
shares issued and outstanding at March 31, 1999............ 13
Additional paid-in capital.................................. 56,068
Retained deficit............................................ (14,061)
--------
Total stockholders' equity................................. 42,020
--------
$ 52,501
========
</TABLE>

See accompanying notes to unaudited condensed consolidated financial
statements.

F-21
<PAGE>

Netopia, Inc. and Subsidiary

Condensed Consolidated Statements of Operations

<TABLE>
<CAPTION>
Six months ended
March 31,
------------------------
1999 1998
----------- -----------
(unaudited)
(in thousands, except
for per share amounts)

<S> <C> <C>
Revenues............................................. $ 18,458 $ 11,715
Cost of revenues..................................... 6,450 3,579
----------- -----------
Gross profit........................................ 12,008 8,136
Operating expenses:
Research and development............................ 4,331 3,602
Selling and marketing............................... 9,589 6,639
General and administrative.......................... 1,681 1,596
Acquired in-process research and development........ 4,205 --
Amortization of goodwill............................ 181 --
----------- -----------
Total operating expenses........................... 19,987 11,837
----------- -----------
Operating loss..................................... (7,979) (3,701)
Other income, net.................................... 1,000 1,137
----------- -----------
Loss from continuing operations before income
taxes.............................................. (6,979) (2,564)
Income tax benefit................................... -- (915)
----------- -----------
Loss from continuing operations..................... (6,979) (1,649)
Discontinued operations, net of taxes................ -- 251
----------- -----------
Net loss........................................... $ (6,979) $ (1,398)
=========== ===========
Per share data, continuing operations:
Basic and diluted loss per share.................... $ (0.56) $ (0.14)
=========== ===========
Shares used in the per share calculations........... 12,386 11,567
=========== ===========
Per share data, discontinued operations:
Basic income per share.............................. $ -- $ 0.02
=========== ===========
Diluted income per share............................ $ -- $ 0.02
=========== ===========
Common shares used in the calculations of basic
income per share................................... -- 11,567
=========== ===========
Common and common equivalent shares used in the
calculations of diluted income per share........... -- 12,619
=========== ===========
Per share data, net loss:
Basic and diluted net loss per share................ $ (0.56) $ (0.12)
=========== ===========
Shares used in the per share calculations........... 12,386 11,567
=========== ===========
</TABLE>

See accompanying notes to unaudited condensed consolidated financial
statements.

F-22
<PAGE>

Netopia, Inc. and Subsidiary

Condensed Consolidated Statements of Cash Flows

<TABLE>
<CAPTION>
Six months ended March 31,
----------------------------
1999 1998
------------- -------------
(unaudited)
(in thousands)
<S> <C> <C>
Cash flows from operating activities:
Net loss........................................ $ (6,979) $ (1,398)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization.................. 1,393 736
Amortization of deferred compensation.......... -- 9
Charge for acquired in-process research and
development................................... 4,205 --
Changes in operating assets and liabilities:
Trade accounts receivable..................... (3,895) 1,079
Inventories................................... 64 (334)
Prepaid expenses, deposits and other current
assets....................................... 16 (27)
Accounts payable and accrued liabilities...... (1,302) (1,324)
Deferred revenue.............................. 346 (68)
Other liabilities............................. (54) 361
------------- -------------
Net cash used in operating activities........ (6,206) (966)
------------- -------------
Cash flows from investing activities:
Purchase of furniture, fixtures and equipment.. (736) (489)
Acquisition of technology...................... (4,299) --
Capitalization of software development costs... (288) (241)
Purchase of short-term investments............. (12,666) (24,262)
Proceeds from the sale and maturity of short-
term investments.............................. 20,271 27,004
------------- -------------
Net cash provided by investing activities.... 2,282 2,012
------------- -------------
Cash flows from financing activities:
Proceeds from the issuance of common stock..... 1,386 380
------------- -------------
Net cash provided by financing activities.... 1,386 380
------------- -------------
Net increase (decrease) in cash and cash
equivalents.................................... (2,538) 1,426
Cash and cash equivalents, beginning of period.. 19,244 14,444
------------- -------------
Cash and cash equivalents, end of period........ $ 16,706 $ 15,870
============= =============
Supplemental disclosures of noncash investing
and financing activities:
Issuance of common stock for acquisition of
intangible assets............................. $ 2,811 $ --
============= =============
Issuance of common stock for consulting
services...................................... $ 92 $ --
============= =============
</TABLE>

See accompanying notes to unaudited condensed consolidated financial
statements.

F-23
<PAGE>

Netopia, Inc. and Subsidiary

Notes to Condensed Consolidated Financial Statements

(1) Basis of Presentation

The unaudited condensed consolidated financial statements included herein
reflect all adjustments, consisting only of normal recurring adjustments which
in the opinion of management are necessary to fairly present the Company's
consolidated financial position, results of operations, and cash flows for the
periods presented. These unaudited condensed consolidated financial statements
should be read in conjunction with the Company's annual consolidated financial
statements included elsewhere in this prospectus. The consolidated results of
operations for the period ended March 31, 1999 are not necessarily indicative
of the results to be expected for any subsequent quarter or for the entire
fiscal year ending September 30, 1999.

(2) Supplier Concentration

The Company currently buys all of its chip sets for its DSL Internet
connectivity products from one supplier. Additionally, all of the Company's
circuit boards for its Internet connectivity products are purchased from one
supplier. Although there are a limited number of manufacturers of similar chip
sets and circuit board, management believes that other suppliers could provide
similar components on comparable terms. A change in suppliers, however, could
cause a delay in manufacturing and a possible loss of sales, which would affect
operating results adversely.

(3) Recent Accounting Pronouncements

During the first quarter of fiscal 1999, the Company 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 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. The adoption of SOP 97-2 did not have a material impact on the
Company's consolidated results of operations.

F-24
<PAGE>

Netopia, Inc. and Subsidiary

Notes to Condensed Consolidated Financial Statements (Continued)

recognized as revenue related to the delivered elements. SOP 98-9 was adopted
by the Company effective January 1, 1999. The adoption of SOP 98-9 did not have
a material impact on the Company's consolidated results of operations.

Effective October 1, 1998, the Company 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 were no material differences between net loss and
comprehensive income (loss) during the three and six months ended March 31,
1999 and 1998.

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 is not expected to have a
material effect on the Company's consolidated 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. The Company does not expect the
adoption of SOP 98-1 will have a material impact on its results of operations.

(4) Inventories

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

<TABLE>
<CAPTION>
March 31,
1999
---------
<S> <C>
Raw materials and work in process................................ $ 674
Finished goods................................................... 853
------
$1,527
======
</TABLE>

F-25
<PAGE>

Netopia, Inc. and Subsidiary

Notes to Condensed Consolidated Financial Statements (Continued)

(5) Furniture, Fixtures and Equipment, net (in thousands):

<TABLE>
<CAPTION>
March 31,
1999
---------
<S> <C>
Furniture, fixtures and equipment................................. $ 12,676
Accumulated depreciation and amortization......................... (10,513)
--------
$ 2,163
========
</TABLE>

(6) Earnings Per Share

SFAS No. 128, Earnings Per Share, established standards for the computation,
presentation and disclosure of earnings per share (EPS) and also requires dual
presentation of basic EPS and diluted EPS for entities with complex capital
structures. Basic earnings per share is based on the weighted average number of
shares of common stock outstanding during the period. Diluted earnings 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 antidilutive. Dilutive common
equivalent shares consist of stock options and stock warrants.

Potential common shares have been excluded from the net loss computation of
diluted EPS for the six months ended March 31, 1999 and 1998 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. Potential common shares excluded from the computations of
diluted EPS consist of options to purchase common stock which totaled 4,010,813
shares and 3,007,306 shares for the six months ended March 31, 1999 and 1998,
respectively.

<TABLE>
<CAPTION>
Six months ended
March 31,
----------------------
1999 1998
---------- ----------
(in thousands, except
per share amounts)
<S> <C> <C>
Computation of basic net loss per share:
Net loss............................................... $ (6,979) $ (1,398)
========== ==========
Weighted average number of common shares outstanding... 12,386 11,567
========== ==========
Basic net loss per share.............................. $ (0.56) $ (0.12)
========== ==========
Computation of diluted net loss per share:
Net loss............................................... $ (6,979) $ (1,398)
========== ==========
Weighted average number of common shares outstanding... 12,386 11,567
Number of dilutive common stock equivalents............ -- --
========== ==========
Shares used in per share calculation................... 12,386 11,567
========== ==========
Diluted net loss per share............................ $ (0.56) $ (0.12)
========== ==========
</TABLE>

F-26
<PAGE>

Netopia, Inc. and Subsidiary

Notes to Condensed Consolidated Financial Statements (Continued)

(7) 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. The Company
is 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). Upon completion of the development of such products,
Netopia intends to market the products both independently and along with its
Web site and site server products 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
occur during 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. The
Company expects to complete development of the product in the summer of 1999
and to incur approximately $400,000 of development expenses from the date of
acquisition to completion of development. The $1.0 million earnout opportunity
in (iii) above shall be accounted for when it is deemed probable that the
earnout will be earned. The Company is amortizing the goodwill related to the
Serus transaction over the next four (4) years. During the six months ended
March 31, 1999, goodwill amortization related to the Serus transaction was
$133,000. Any delay in the completion of the development of the product would
cause the Company to incur additional unplanned development expenses as well as
the loss of or deferral of customer purchases either of which would have a
material adverse effect on the Company's business, operating results and
financial condition.

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 Mac OS
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

F-27
<PAGE>

Netopia, Inc. and Subsidiary

Notes to Condensed Consolidated Financial Statements (Continued)

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
$700,000 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 occur during 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. The Company expects to complete
development of the product during the Company's fourth fiscal quarter of fiscal
1999 and to incur approximately $175,000 of development expenses from the date
of acquisition to completion of development. The $300,000 earnout opportunity
above shall be accounted for when it is deemed probable that the earnout will
be earned. The Company is amortizing the goodwill related to the netOctopus
transaction over the next four (4) years. During the six months ended March 31,
1999, goodwill amortization related to the netOctopus transaction was $48,000.
Any delay in the completion of the development of the product would cause the
Company to incur additional unplanned development expenses as well as the loss
of or deferral of customer purchases either of which would have a material
adverse effect on the Company's business, operating results and financial
condition.

(8) Discontinued Operations

The disposition of the LAN Division has been accounted for as a discontinued
operation in accordance with Accounting Principles Board (APB) Opinion No. 30,
and prior period consolidated financial statements have been restated to
reflect the LAN Division's operations as a discontinued operation. Revenue from
discontinued operations was $10.1 million for the six months ended March 31,
1998, repectively. The income from discontinued operations of $251,000 for the
six months ended March 31, 1998, represents operating income, net of taxes, of
the discontinued operation. At September 30, 1998, the Company had $2.5 million
in accrued liabilities which represented 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. Such accrual consisted of
$1.7 million of facility costs, approximately $300,000 in employee-related
costs and other costs consisting primarily of services fees of approximately
$500,000. At March 31, 1999, the balance in accrued liabilities related to the
sale of the LAN Division was $1.7 million consisting of $1.4 million of
facility costs and approximately $300,000 related to purchase price
adjustments. Pursuant to the Agreement of Purchase and Sale of Assets by and
between Netopia, Inc. and Farallon, the purchase price of the LAN Division

F-28
<PAGE>

Netopia, Inc. and Subsidiary

Notes to Condensed Consolidated Financial Statements (Continued)

is subject to a purchase price adjustment. Such adjustment is based upon the
difference between the unaudited balance sheet of the LAN Division as of the
effective date of the sale and the estimated book value of the LAN Division at
March 31, 1998.

(9) Subsequent Events

In April 1999, the Company 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 occured on May 5, 1999, the Company's
Series D-1 preferred stock converted into 55,555 shares of Class B common
stock. As a Series D-1 purchaser, the Company has agreed not to transfer any
Series D-1 preferred stock or Class B common stock to any non-affiliated third
party until March 2000. The Company has 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, the Company has agreed to vote any voting securities it holds as
recommended by NorthPoint Communications' board of directors, except with
respect to votes pursuant to the protective provisions in NorthPoint
Communications' certificate of incorporation.

F-29
<PAGE>

You should rely only on the information contained in this prospectus. We have
not authorized anyone to provide you with information different from that con-
tained in this prospectus. Information contained on Netopia's Web site does not
constitute part of this prospectus. We are offering to sell, and seeking offers
to buy, shares of common stock only in jurisdictions where offers and sales are
permitted. The information contained in this prospectus is accurate only as of
the date of this prospectus, regardless of the time of delivery of this pro-
spectus or of any sale of the common stock.

TABLE OF CONTENTS

<TABLE>
<S> <C>
Prospectus Summary........................................................ 1

The Offering.............................................................. 3

Risk Factors.............................................................. 4

Use of Proceeds........................................................... 16

Price Range of Common Stock............................................... 16

Dividend Policy........................................................... 16

Dilution.................................................................. 17

Capitalization............................................................ 18

Selected Consolidated Financial Data...................................... 19

Management's Discussion and Analysis of Financial Condition and Results of
Operations................................................................ 21

Business.................................................................. 41
</TABLE>

PROSPECTUS AUGUST 5, 1999

2,200,000 Shares

Common Stock

<TABLE>
<S> <C>
Management.................................................................. 54

Principal Stockholders...................................................... 57

Selling Stockholders........................................................ 58

Description of Capital Stock................................................ 59

Underwriters................................................................ 61

Legal Matters............................................................... 63

Experts..................................................................... 63

Where You Can Find More Information......................................... 64

Index to Financial Statements............................................... F-1
</TABLE>

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