NETOPIA INC, 10-K405, 2000-12-21

NETOPIA INC
10-K405, 2000-12-21
COMPUTER INTEGRATED SYSTEMS DESIGN

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

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

FORM 10-K

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934

For the fiscal year ended September 30, 2000

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

For the transition period from to

Commission file number 0-28450

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

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

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

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

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

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

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

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

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

As of December 1, 2000 there were 17,607,608 shares of the Registrant's
Common Stock outstanding. The aggregate market value of the Common Stock held
by non-affiliates of the registrant, based on the closing price of the Common
Stock as reported on The Nasdaq National Market on December 1, 2000 was
approximately $68,500,178.

DOCUMENTS INCORPORATED BY REFERENCE

The Registrant's definitive Proxy Statement for its Annual Stockholders
Meeting to be held on January 29, 2001 is incorporated by reference in Part III
of this Form 10-K.

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<PAGE>

NETOPIA, INC.
FORM 10-K

TABLE OF CONTENTS

<TABLE>
<CAPTION>
Page
----

<C> <S> <C>
PART I.

Item 1. Description of Business..................................... 3

Item 2. Properties.................................................. 18

Item 3. Legal Proceedings........................................... 18

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

PART II.

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

Item 6. Selected Financial Data..................................... 20

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

Item 7(a). Quantitative and Qualitative Disclosures About Market Risk.. 44

Item 8. Financial Statements and Supplementary Data................. 46

Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure................................... 73

PART III.

Item 10. Directors and Executive Officers of the Registrant.......... 73

Item 11. Executive Compensation...................................... 74

Security Ownership of Certain Beneficial Owners and
Item 12. Management................................................. 74

Item 13. Certain Relationships and Related Transactions.............. 75

PART IV.

Item 14. Exhibits, Financial Schedules and Reports on Form 8-K....... 76

Index to Exhibits....................................................... 76

Signatures.............................................................. 78
</TABLE>

2
<PAGE>

PART I.

Item 1. Description of Business

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

Company Background

We develop, market and support broadband Internet equipment and e-commerce
Web platforms for small and medium size businesses. Our platforms are designed
to enable carriers and service providers to create and offer value-added,
bundled service offerings for their small and medium size business customers.
These bundled service offerings often include digital subscriber line (DSL)
service bundled with back-up, bonding, virtual private networking (VPN), and
Web site and e-store hosting.

Our broadband Internet equipment enables small and medium size businesses to
take advantage of high-speed Internet access technologies and, in particular,
DSL technologies. Our DSL broadband Internet equipment, 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 equipment technologies, our Internet equipment is designed to
be plug-and-play and incorporate many value-added features such as back-up,
bonding, VPN and firewall protection.

Our Web platform includes the Netopia Site Server (NSS) and the Netopia
Commerce Server (NCS). The NSS delivers Web sites, and the NCS provides those
Web sites full electronic commerce capabilities. The NSS offers customers a
wide array of industry specific content packages that are pre-configured
templates. Customers can choose content packages to create sites that contain
the pages, tools, and information they want. NCS works together with NSS to
integrate an end-to-end e-commerce solution with a Web site. NCS provides
shopping cart and secure checkout capabilities, giving an e-store owner full
control over store administration. Our Web platform offers a "no assembly
required" set-up and hosting service which is optimized for partner
integration.

Our DSL routers are interoperable with major central office equipment
suppliers, including Alcatel, Cisco, Copper Mountain, Ericsson, Lucent, Nokia,
Orckit, Paradyne, and Siemens. We have established strategic distribution
relationships with leading carriers and service providers including
Bloomberg.com, Citigroup's bizzed.com, Covad Communications, Earthlink Network,
Everdream, France Telecom, MegaPath Networks, NorthPoint Communications,
PSINet, Rhythms NetConnections, Telecom Italia, UUNet, Verio, Verizon, and XO
Communications.

Our Web platform also includes our Timbuktu Pro software and our newly
introduced iConcierge product. Timbuktu Pro enables users to communicate and
collaborate in real time over the Internet and within Intranets with other
Timbuktu Pro users. iConcierge is an Internet service platform for improving
"Help Desk" and customer support services. The iConcierge platform provides
support staff and their users and customers a common platform to resolve
difficulties and interact in real-time over the Internet.

3
<PAGE>

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.

Acquisitions

WebOrder

In March 2000, we acquired WebOrder, a developer of e-commerce
infrastructure for small and medium size businesses. WebOrder's Smart Commerce
System offers e-commerce solutions to on-line businesses including the ability
to manage order processing, and the ability to maintain records of customer
transactions flowing through a merchant's e-store. We have fully integrated
WebOrder's technology into our NCS product development.

StarNet

In October 1999, we acquired StarNet Technologies, Inc. (StarNet), a
developer of voice channel technology architecture that allows the simultaneous
transmission of voice and standard data packets over a digital subscriber line.
We intend to fully integrate StarNet's technology into our Internet equipment
development and begin offering voice and data integrated access devices (IADs).

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

Industry Background

The Internet continues to be 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 e-commerce, are compelling
businesses and other organizations to establish a Web presence. In addition,
the possibility of losing a competitive edge to companies that maximize the
benefits of the Internet is also a significant motivating factor for many such
companies to utilize the Internet in their everyday business. These factors
have compelled businesses to adopt complex network communications and computing
systems in order to access the Internet.

Changes in telecommunications regulation in the United States and globally
have enabled new entrants, such as competitive local exchange carriers (CLECs),
Internet service providers (ISPs) and cable companies to challenge traditional
telephone companies in providing telecommunications services. Simultaneously,
the demand for high-speed Internet access has grown substantially due to the
increasing use of data-intensive multimedia in Web sites and the development of
e-commerce. As a result, service providers have deployed new technologies that
allow them to quickly and cost-effectively provide a full range of voice, data
and video services. One such technology is 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.

4
<PAGE>

Small and medium size businesses 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. Many 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 networking systems,
obtaining high-speed digital services, such as DSL and arranging for an
Internet connection from an ISP can be costly and burdensome, even for
companies with sophisticated technical support. We believe traditional vendors
of Internet networking products and services historically have not offered
solutions specifically designed for users who may not have access to
sophisticated technical support.

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

Strategy

Our objective is to be a leading developer and provider of broadband
Internet equipment and Web platforms for small and medium size businesses. 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 equipment, Web site
creation and hosting, and e-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 that 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 Carriers, ISPs, Application Service
Providers and Other Distribution Channels. We believe that the
distribution channels for high-speed Internet access and broadband
Internet applications are converging. Our combined Internet equipment and
Web platform products provide competitive differentiation and have
enabled us to establish strong distribution relationships and recruit new
strategic partners. Our platforms are designed to enable carriers and
service providers to create and offer value-added, bundled service
offerings for their small and medium size business customers. These
bundled service offerings often include digital subscriber line (DSL)
service bundled with back-up, bonding, virtual private networking (VPN),
voice over DSL, and Web site and e-store hosting.

. Provide Complete, Plug-and-Play Customer Premise DSL Internet
Connectivity Products. We provide a comprehensive suite of customer
premise DSL Internet equipment. Our products include routers, modems,
bridges, and digital service units. We also provide proprietary
applications that increase the functionality of our Internet equipment,
including encryption, virtual private network and firewall protection. We
intend to continue to develop new generations of our equipment for
emerging DSL and other broadband standards. We also intend to continue to
add functionality that 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 Web platforms for easily creating, enhancing and hosting Web
sites, and providing e-commerce capability. Our platforms provide
customizable Web site content packages, complete e-stores, and full
administrative control. Merchants can use our platform's editing
interface to ensure their sites perform to high standards. Our Web
platforms also provide real-time Internet communication and collaboration
capabilities and Web based customer service and support 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 and enhance e-store functionality
with minimal technical expertise.

5
<PAGE>

. Maintain and Extend Technology Leadership. We believe an important
competitive advantage is the ability to fully integrate our products into
those of other telecommunications equipment providers. We also believe
that timely introduction of our products and services is imperative for
our success. We therefore have developed close working relationships with
leading central office equipment providers such as Alcatel, Cisco, Copper
Mountain, Ericsson, Lucent, Nokia, Orckit, Paradyne, and Siemens. 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 brand name with companies seeking
high-speed broadband Internet equipment and Web platform products and
services. 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.

6
<PAGE>

Products and Services

Internet Equipment

Our Internet equipment provides cost-effective, high-speed, multi-user,
plug-and-play solutions for Internet access with advanced value added features
including automated backup, DSL bonding, and virtual private network and
firewall protection. Our customer premise Internet equipment offers small and
medium size businesses the flexibility to use the communication technology
which best meets their needs for economy and performance. Our Internet
equipment is summarized in the following table.

<TABLE>
<CAPTION>
Internet
Access Estimated U.S.
Technology Our Products Functions and Features Street Price
----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Digital Data Routers Provide a shared and permanent connection $415-$1,000
Subscriber to the Internet at speeds up to 2.3 Mbps
Line (DSL) and offer a cost-effective solution for
including customers that require an "always on"
SDSL, IDSL, Internet presence for applications such as
and ADSL hosting a Web server or conducting e-
commerce through an online e-store.
----------------------------------------------------------------------------------------
Digital Provide a cost-effective method to migrate $650-$700
Service Internet access from a T1 or 56K digital
Units dataphone service connection to DSL without
having to replace or disrupt current
network hardware or infrastructure.
----------------------------------------------------------------------------------------
Filtering Provide a shared, permanent connection to $650-$700
Bridges the Internet using the simplicity of a
bridged connection with the added security
of packet filtering and Internet protocol
(IP) based remote management.
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Modems Provide single users and small local area $200-$300
networks a dedicated connection to the
Internet with upload and download speeds up
to 1.04 Mbps.
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Cable Routers Provide a shared connection to the Internet $300-$400
through the Ethernet port on a cable modem.
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T1 and Frame Routers Provide a dedicated, high-speed, shared $1,025-
Relay connection to the Internet through a $1,220
traditional T1 leased line service.
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ISDN Routers Provide shared Internet access at speeds up $470-$650
to 128 Kbps over An ISDN phone line.
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56K Digital Routers Provide a shared, dedicated connection to $800-$1,050
Dataphone the Internet at 56 Kbps or 64 Kbps speeds
Service through a traditional digital dataphone
leased line service.
----------------------------------------------------------------------------------------
Dual Analog Routers Provide an entry-level solution for $500-$600
Internet connections that Will work over
standard analog phone lines. By aggregating
as many as three analog telephone lines,
our dual analog routers provide shared
Internet access at speeds up to 168 Kbps.
</TABLE>

7
<PAGE>

Internet Equipment Value-Added Features

In addition to supporting various Internet equipment technologies, our
Internet equipment is 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 equipment from those of our competitors. Some of
these features include:

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

[Depiction of expanded view of Internet router]

. Integrated V.90 analog or ISDN dial backup, which ensures redundancy for
mission-critical Internet connectivity;

. DSL bonding, which allows customers to join up four IDSL or up to two
SDSL circuits into a single "virtual pipe" for connection speeds of over
3 Mbps;

. Internet Protocol Security (IPSec) to enable businesses to securely
connect to branch offices, telecommuters and partners;

. 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;

. Business-class diagnostic and management utilities including Ping, Trace
Route, Syslog and Telnet client;

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

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

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

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

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

8
<PAGE>

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

We compete in markets characterized by continuing technological advancement,
changes in customer requirements and evolving industry standards. To compete
successfully, we must design, develop, manufacture and sell new or enhanced
products that provide increasingly higher levels of performance, reliability
and compatibility. For example, we anticipate that voice over DSL technology
will become an important feature of future DSL router products. As a result, we
believe we will need to successfully develop, introduce and market IADs that
will combine voice over DSL and data routing functionality in our products.
Additionally, we will need to continue to integrate our DSL router technology
with the architectures of leading central office equipment providers in order
to enhance the reliability, ease-of-use and management functions of each of our
DSL products. However, we may not be able to successfully develop, introduce,
enhance or market these or other products necessary to our future success. In
addition, any delay in developing, introducing or marketing these or other
products would seriously harm our business.

9
<PAGE>

Web Platforms

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

<TABLE>
<CAPTION>
Estimated
U.S.
Supported Our Products Street
Platforms And Services Functions and Features Price
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Site Visitors: a) Netopia We license our Web site platform to ISPs, CLECs, Individual
Netscape Site Internet portals, ASPs, associations and others. We Pricing
Navigator 3.02 Server also provide hosting services for co-branded and
and above with (NSS) private label services marketed by licensees to
JavaScript their end customers. Our technology provides an
Support or b) Web sites easy-to-use and cost-effective way to set up a Web
Microsoft site on the Internet without requiring any knowledge
Internet of hypertext markup language (HTML), programming
Explorer skills or a technical staff to maintain the site. As
versions 3.02 part of NSS, we have created over 50 industry
and above with specific vertical content packages targeted to an
Authenticode 2.0 industry or common interest group. Merchants can
and JavaScript choose from a spectrum of page templates and add
Support. pages instantly anywhere in the site's navigational
index. Our Web site content packages are "no
Site Owners: assembly required" Web sites that come pre-populated
Netscape 4.0 or with information and functionality useful to the
above or targeted industry or group and contain pre-
Internet configured vertical content packages that cater to a
Explorer 4.0 and wide cross-section of businesses and services,
above. containing pages, content, pictures, and other
functionalities specific to the business.
--------------------------------------------------------------------------------------------------
Site Visitors: a) Netopia We license our e-commerce platform to ISPs, CLECs, Individual
Netscape Commerce Internet portals, ASPs, associations and others. We Pricing
Navigator 3.02 Server also provide hosting services for co-branded and
and above with (NCS) private label services marketed by licensees to
JavaScript their end customers. We also provide direct e-store
Support or b) e-stores creation and hosting to end--customers. NCS works
Microsoft together with NSS to integrate an end-to-end
Internet e-commerce solution with a Web site. NCS enables
Explorer users to upgrade their Web site with an e-store in
versions 3.02 order to sell their product or service over the
and above with Internet without requiring any knowledge of
Authenticode 2.0 hypertext markup language (HTML), programming skills
and JavaScript or a technical staff to maintain the e-store. NCS
Support. provides a shopping cart and secure checkout
procedure giving instant e-commerce capability to a
Site Owners: Web site and providing the e-store owner full
Netscape 4.0 or control over store administration. A "point and
above or click" procedure adds products, prices with shipping
Internet and tax information on the fly. Merchants can add e-
Explorer 4.0 and commerce to their sites without needing to migrate
above. an NSS Web site. Behind the scenes, NCS handles all
administrative and storefront requests for the e-
store, and includes a robust storage area for all
transaction information. The NCS comes complete with
a full range of security-related features including
a Secure Socket Layer (SSL) encryption technology.
--------------------------------------------------------------------------------------------------
Windows ME, Timbuktu Pro Enables users to communicate and collaborate in real $20-$90
2000, 3.X, 95, time over the Internet and within Intranets with per seat
98, and NT Mac other Timbuktu Pro users. Our Timbuktu Pro product
OS. family also includes netOctopus network systems
management tools.
--------------------------------------------------------------------------------------------------
Netscape iConcierge Provides secure Web based customer service and $400-$1200
Navigator or support application delivering point-to-point per agent
Microsoft services that enable remote problem solving over the
Internet Internet or an IP enterprise network. iConcierge can
Explorerversions be used for customer service and support, systems
3.02 and higher. administration, sales support, help desk, asset
management, or to provide a wide range of
interactive services across the Internet or any IP-
based network.
</TABLE>

10
<PAGE>

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

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 certain customers. In addition,
our servers are located at third-party facilities. Failure or poor performance
by the third parties with which we contract to maintain our servers, hardware
and software, could lead to interruption or deterioration of our Web site and
e-store 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 and e-store hosting services. If
there is an interruption or a deterioration of our Web site or e-store 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 and e-store hosting services at
a subsidized price or even at no cost. In addition, if our Web site and e-store
hosting services are interrupted, perform poorly, or are unreliable, we are at
risk of litigation from our customers.

11
<PAGE>

Strategic Distribution Relationships

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

<TABLE>
<CAPTION>
Internet Web
Distribution Channel Company Equipment Platforms
-------------------------------------------------------------------------------------
<S> <C> <C> <C>
ISPs Bell Atlantic X
Big Planet X
Bell South X
Earthlink Network X
Epoch Networks X
France Telecom
(Wanadoo) X X
Freeserve X
Megapath Networks X X
Mpower Communications X
Onsite Access X
PSINet X
Telecom Italia
(Telecom Italia Net) X X
UUNET Technologies X
Verio X
(and over 400
additional Internet
service providers)
-------------------------------------------------------------------------------------
Competitive Local Exchange Carriers Birch Telecom
(CLECs) X X
BTI X
Covad Communications X
DSL.net X
Florida Digital
Networks X
Gabriel
Communications X
Jato Communications X X
KKF.net X
MCIWorldCom X
Network Plus Inc. X
NorthPoint
Communications X
Rhythms
NetConnections X
-------------------------------------------------------------------------------------
Internet Portals and Industry American Dental
Associations Association (ADA E-
commerce Company) X
Cendant Corporation X
Tribune Co.'s
Blackvoices.com X
Yahoo X
Netscape Netcenter X
Virgin Biznet X
-------------------------------------------------------------------------------------
Two-Tier Distributors Alias SRL X X
Computers Unlimited X X
Ingram Micro X X
Merisel X X
Softway International X X
Tech Data X X
</TABLE>

12
<PAGE>

Strategic Product Development Relationships

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

<TABLE>
<CAPTION>
Product Development Company Product
-------------------------------------------------------------------------------------
<S> <C> <C>
Digital Subscriber Line AccessLan DSL Internet equipment
Alcatel
Broadcom
Centillium
Cisco
Conexant
Copper Mountain
Ericsson
Globespan
Hi/fn
Lucent
Metalink
Nokia
Paradyne
Virata
-------------------------------------------------------------------------------------
Voice over Digital
Subscriber Line CopperCom DSL Internet equipment
General Bandwidth
Jetstream Communications
TdSoft
TollBridge Technologies
Zhone
-------------------------------------------------------------------------------------
E-commerce CyberSource Web Sites / e-stores
Card Service International
Hewlett-Packard
Instantis
Linkpoint
Oracle
-------------------------------------------------------------------------------------
Internet/Intranet Marimba Timbuktu Pro & netOctopus
Communications
Front Range Solutions
Microsoft
Remedy
Tivoli Systems
-------------------------------------------------------------------------------------
Internet/Intranet
Communications Primus Knowledge Systems I-Concierge
Support.com
Siebel Systems
</TABLE>

Distribution, Sales and Marketing

We sell our products and provide services worldwide through
telecommunication service providers, ISPs, independent distributors and
dealers, value-added resellers (VARs) and directly to end users. Our marketing
strategy is to achieve broad market penetration by utilizing these multiple
distribution channels.

13
<PAGE>

Telecommunication Service Providers / Carriers. We sell our DSL Internet
equipment primarily to CLECs such as Covad Communications, NorthPoint
Communications and Rhythms NetConnections. 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. 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.
These competitive telecommunications service providers have generally incurred
operating losses and negative cash flows as they establish their networks and
operations. Accordingly, these channel partners are dependent on continued
access to new sources of capital. We believe that the current external
financing environment is challenging for these competitive telecommunications
service providers. Covad Communications accounted for 16% of our total revenues
for the fiscal year ended September 30, 2000 and Northpoint Communications
accounted for 12% of our total revenues for the fiscal year ended September 30,
2000. For the fiscal years ended September 30, 1999 and 1998, Covad
Communications and Northpoint Communications each accounted for less than 10%
of our total revenues. During the fiscal year ended September 30, 2000, our top
three telecommunication service provider customers, who each individually
represented at least 5% of our total revenues accounted for 34% of our total
revenue. During the fiscal years ended September 30, 1999 and 1998, sales to
telecommunication service providers accounted for less than 10% of our total
revenues. Our revenues will decline and our losses will increase if we lose one
or more of our significant telecommunication service provider customers or if
our telecommunication service provider customers reduce or delay purchases of
our products.

Independent Distributors/Dealers. Our major distributor/dealer in North
America is Ingram Micro who distributes our Internet equipment and Web platform
products to ISPs, resellers, and VARs. Internationally, we distribute our
products through approximately 100 distributors in over 30 countries. In
Europe, distributors sell primarily in France, Italy and the United Kingdom,
and, in the Pacific Rim, distributors sell primarily in Japan. We provide
periodic training in the development of Internet and e-commerce infrastructure
to VARs who purchase our products primarily from distributors, and we have
recruited more than 1500 Internet VARs for the sale of our products. Our
agreements with distributors can generally be terminated without cause and do
not provide for minimum purchase commitments. Additionally, the agreements
provide price protection and grant the distributors limited rights to return
unsold inventories of our products in exchange for new purchases. Ingram Micro
has accounted for 7%, 10%, and 12% or our total revenues for the fiscal years
ended September 30, 2000, 1999 and 1998, respectively.

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. Our revenues will decline and our losses
will increase if we lose one or more of our significant distributors or
customers or if our key distributors or customers reduce or delay purchases of
our products.

ISPs. We have formed strategic relationships with ISPs that assist us in
developing, distributing and marketing our Internet equipment and Web platform
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, XO
Communications, UUNET Technologies, Onsite Access, Megapath Networks, France
Telecom and more than 400 other ISPs.

Franchises, Industry Associations, and Internet Portals. We utilize
franchise organizations and common interest communities to assist us in
developing, distributing and marketing our Web platform products. We believe
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), vertical portals (such as American Dental Association) and
other common interest groups.

14
<PAGE>

Direct Sales to Business Customers. Our direct sales and telemarketing force
focuses on large opportunities to sell our Internet equipment and Web platform
products to business customers. Our sales force assists end users by providing
solutions for their needs related to Internet equipment, establishing and
enhancing their Web presence, and conducting business on the Web, including e-
commerce, communication and collaboration, and customer support services. In
addition, the sales force provides pre-sales, promotional and order management
support to telecommunication service providers, distributors/dealers, ISPs,
Internet portals, resellers and VARs, identifies new opportunities for product
development and provides general market information to management. Our Web
platform products are currently the primary products sold through this channel.

Other Marketing. We utilize several other marketing programs, such as our
online Web site, trade advertising, participation in trade shows and press
briefings on strategy and new products to support the sale and distribution of
our Internet equipment and Web platform 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 Internet
equipment and Web platform products.

Customer Service and Support

We believe that effective customer support is a key criterion used in
selecting our Internet equipment and Web platform products. Telecommunication
service providers, ISPs, independent distributors and dealers, VARs, end users,
network managers and administrators, consultants and other experienced
technical experts utilize our toll-free telephone support lines, fax and online
support services to access our support personnel and internal technical
databases. 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 Internet equipment and Web platform 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 ISP. 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 equipment 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 Internet equipment and
Web platform products incorporating new technologies and standards.

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

Our Web platform products 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 advanced addressing techniques, e-
commerce reporting enhancements, faxing, video and multimedia presentations.
All

15
<PAGE>

functionality will be accessible from standard PCs running standard Internet
browsers. Future enhancements are anticipated to accommodate new computer
systems, including 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 $13.3 million
for the fiscal year ended September 30, 2000, $9.2 million for the fiscal year
ended September 30, 1999, and $7.2 million for the fiscal year ended September
30, 1998. We expect to continue to devote substantial resources to product and
technological development.

Competition

The markets for our Internet equipment and Web platform 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. We expect competition to
intensify as current competitors expand their product and service offerings and
new competitors enter the market. Increased competition is likely to result in
price reductions, reduced gross margins and loss of market share, any one of
which could seriously harm our business.

Competitors vary in size, scope and breadth of the products and services
offered. Our current and prospective competitors include original equipment
manufacturers, product manufacturers of Internet equipment, developers of
Internet presence and Web site and e-commerce software, developers of remote
control and collaboration software, and developers of Web based help desk
applications.

In the DSL router market, we primarily compete with 3Com, Arescom, Cayman
Systems, Cisco Systems, Efficient Networks (FlowPoint), Lucent, Ramp Networks,
Zyxel Communications 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 and IAD markets. 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 e-commerce platforms, we encounter
competition primarily from Homestead Technologies, IBM, Inc. Online,
NetObjects, Verio, BigStep.com, Intershop and several other companies. In the
market for our remote control and enterprise software, we primarily encounter
competition from Computer Associates, Intel, Microcom (Compaq), Microsoft,
Vector Networks, 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 each product area have
longer operating histories, significantly greater financial, technical,
marketing and other resources, significantly greater name recognition and a
larger base of customers than we do. In addition, many of our competitors have
well-established relationships with our current and potential customers and
have extensive knowledge of these industries. In the past, we have lost
potential customers to competitors in each product area for various reasons,
including lower prices and other incentives not matched by us. In addition,
current and potential competitors have established or may establish cooperative
relationships among themselves or with third parties to increase the ability of
their products and services to address customer needs. Accordingly, new
competitors or alliances among competitors may emerge and rapidly acquire
significant market share. We also expect that competition will increase as a
result of industry consolidation.

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

. Product feature, function and reliability;

. Customer service and support;

16
<PAGE>

. 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.

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.

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

Employees

As of December 1, 2000, we employed 330 persons, including 108 in sales and
marketing, 86 in research and development, 67 in customer service and support,
31 in manufacturing operations, and 38 in general and administrative functions.
We also contract with consultants who provide us short and long-term services
in various areas of our business.

Our future performance depends on the continued service of our senior
management, product development and sales personnel, particularly Alan Lefkof,
our President and Chief Executive Officer. None of these persons, including Mr.
Lefkof, is bound by an employment agreement. 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

17
<PAGE>

desired levels of productivity. Competition for qualified personnel is intense,
and we may fail to retain our key employees or to attract or retain other
highly qualified personnel.

Item 2. Properties

Each of the facilities we occupy is leased for a term of one to nine years.
We believe that our existing facilities are adequate for our current needs and
that additional space sufficient to meet our needs for the foreseeable future
will be available on reasonable terms. We believe it may be necessary to secure
additional space should our business operations expand beyond our current
productive capacity.

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 for
our Internet equipment and Web platform products. 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.

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

. 7,465 square feet of office space for research and development related to
our Web platform products in Lawrence, Kansas. 7,000 square feet of this
facility is currently leased for a one-year term expiring on June 30,
2001. 465 square feet is leased for a two-year term, expiring May 31,
2002.

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

. 7,869 square feet of office space for telesales activities related to our
Web platform products in Dallas, Texas. The facility is currently leased
for a five-year term, expiring on July 31, 2003.

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

. 3,000 square feet of office space for research and development related to
our Web platform products in Los Altos, California. The facility is
currently leased for a three year term, expiring March 31, 2002.

. Other office space with less than 2,000 square feet per location in
Paris, France; Neunkirchen am Brand, Germany; Maastricht, The
Netherlands; Hong Kong; Springfield, Virginia; and San Jose, California
used primarily for sales and research and development of both our
Internet equipment and Web platform products

Item 3. Legal Proceedings

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

Item 4. Submission of Matters to a Vote of Security Holders

There were no matters submitted to a vote of our security holders during the
fourth quarter ended September 30, 2000.

18
<PAGE>

PART II

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

Since our initial public offering in June 1996, our common stock has been
traded on the Nasdaq National Market. We were originally listed under the
symbol FRLN. In November 1997, we changed our symbol to NTPA. The following
table sets forth the range of quarterly intra-day high and low sale prices of
our common stock on the Nasdaq National Market for the last three fiscal years
ended September 30, 2000, 1999 and 1998.

<TABLE>
<CAPTION>
2000 1999 1998
--------------- --------------- --------------
High Low High Low High Low
------- ------- ------- ------- ------- ------
<S> <C> <C> <C> <C> <C> <C>
Fourth fiscal quarter ended
September 30.................. $57.250 $10.750 $42.625 $17.375 $11.500 $4.375
Third fiscal quarter ended June
30............................ 74.938 27.000 37.000 8.250 10.875 5.625
Second fiscal quarter ended
March 31...................... 92.000 47.000 9.938 5.250 6.375 4.125
First fiscal quarter ended
December 31................... $63.875 $37.250 $11.250 $ 3.625 $ 9.000 $5.000
</TABLE>

On December 1, 2000, we had approximately 17,607,608 shares of our common
stock outstanding. The closing price of our common stock as reported on the
Nasdaq National Market was $4.25 per share.

Historically, we have neither declared nor paid cash dividends on our common
equity securities, and we expect this trend to continue.

The market price of our common stock may fluctuate significantly in response
to several factors, some of which are beyond our control. These factors
include, but are not limited to:

. Variations in our quarterly operating results;

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

. Changes in market valuations of similar companies;

. Announcements by our competitors, our partners or other similar
companies, of significant events including, but not limited to contracts,
acquisitions, strategic partnerships, joint ventures or capital
commitments;

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

. Additions or departures of key personnel; and

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

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

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

19
<PAGE>

Item 6. Selected Financial Data

In the tables below, we provide you with our selected consolidated financial
data. We have prepared this information using our audited consolidated
financial statements for the fiscal years ended September 30, 2000, 1999, 1998,
1997 and 1996. These consolidated financial statements have been audited by
KPMG LLP, our independent auditors.

When you read this selected financial data, it is important that you read it
along with Management's Discussion and Analysis of Financial Condition and
Results of Operations, the historical consolidated financial statements and
related notes included elsewhere in this Form 10-K.

<TABLE>
<CAPTION>
Fiscal years ended September 30,
---------------------------------------------
2000 1999 1998 1997 1996
-------- ------- -------- ------- -------
(in thousands, except for per share
amounts)
<S> <C> <C> <C> <C> <C>
Revenues:
Internet equipment............ $ 65,546 $24,460 $ 10,885 $ 8,133 $ 3,792
Web platform licenses and
services..................... 24,660 19,691 13,951 12,037 12,926
-------- ------- -------- ------- -------
Total revenues.............. 90,206 44,151 24,836 20,170 16,718
Cost of revenues:
Internet equipment............ 46,582 15,597 7,064 5,256 2,634
Web platform licenses and
services..................... 697 646 891 1,140 1,177
-------- ------- -------- ------- -------
Total cost of revenues...... 47,279 16,243 7,955 6,396 3,811
-------- ------- -------- ------- -------
Gross profit................ 42,927 27,908 16,881 13,774 12,907
Operating expenses:
Research and development...... 13,324 9,211 7,201 7,177 7,603
Selling and marketing......... 25,842 20,221 14,404 11,288 9,410
General and administrative.... 6,554 3,654 3,380 2,945 2,835
Acquired in-process research
and development(1)........... 8,658 4,205 -- -- --
Amortization of goodwill(2)... 9,746 543 -- -- --
-------- ------- -------- ------- -------
Total operating expenses.... 64,124 37,834 24,985 21,410 19,848
-------- ------- -------- ------- -------
Operating loss.............. (21,197) (9,926) (8,104) (7,636) (6,941)
Other income, net............... 3,579 2,066 2,222 1,869 1,040
-------- ------- -------- ------- -------
Loss from continuing
operations before income
taxes...................... (17,618) (7,860) (5,882) (5,767) (5,901)
Income tax provision
(benefit)(3)................... -- -- 2,155 (2,217) (4,619)
-------- ------- -------- ------- -------
Loss from continuing
operations................. (17,618) (7,860) (8,037) (3,550) (1,282)
Discontinued operations, net of
taxes(4)....................... 2,481 -- (2,496) 3,021 4,983
-------- ------- -------- ------- -------
Net income (loss)........... $(15,137) $(7,860) $(10,533) $ (529) $ 3,701
======== ======= ======== ======= =======
Per share data, continuing
operations:
Basic and diluted loss per
share........................ $ (1.05) $ (0.60) $ (0.69) $ (0.31) $ (0.13)
======== ======= ======== ======= =======
Shares used in the per share
calculations................. 16,830 13,092 11,687 11,335 9,890
======== ======= ======== ======= =======
Per share data, net income
(loss):
Basic net income (loss) per
share........................ $ (0.90) $ (0.60) $ (0.90) $ (0.05) $ 0.37
======== ======= ======== ======= =======
Diluted net income (loss) per
share........................ $ (0.90) $ (0.60) $ (0.90) $ (0.05) $ 0.34
======== ======= ======== ======= =======
Common shares used in the
calculations of basic net
income (loss) per share...... 16,830 13,092 11,687 11,335 9,890
======== ======= ======== ======= =======
Common and common equivalent
shares used in the
calculations of diluted net
income (loss) per share...... 16,830 13,092 11,687 11,335 10,887
======== ======= ======== ======= =======
</TABLE>

20
<PAGE>

<TABLE>
<CAPTION>
September 30,
----------------------------------------
2000 1999 1998 1997 1996
-------- ------- ------- ------- -------
(in thousands)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash, cash equivalents and short-term
investments......................... $ 59,777 $69,483 $42,095 $41,636 $37,145
Working capital...................... 72,292 75,394 38,152 49,979 49,469
Total assets......................... 128,373 95,969 56,292 61,001 61,618
Long-term liabilities................ 328 544 260 361 46
Total stockholders' equity(5)........ $112,289 $85,079 $44,801 $53,977 $53,143
</TABLE>
--------
(1) As a result of our acquisitions of WebOrder in March 2000, StarNet in
October 1999, and Serus and netOctopus in December 1998, we allocated a
portion of the purchase price to in-process research and development. We
allocated approximately $3.0 million to in-process research and development
related to the acquisition of WebOrder; approximately $5.7 million to in-
process research and development related to the acquisition of StarNet;
approximately $3.9 million to in-process research and development related
to the acquisition of Serus; and approximately $400,000 to in-process
research and development related to the acquisition of netOctopus.

(2) Amortization of goodwill represents the amounts we allocated to goodwill
and other intangible assets related to our acquisitions of WebOrder,
StarNet, Serus and netOctopus. We are amortizing goodwill over three years
and other intangible assets over four years.

(3) See Note 6 of Notes to Consolidated Financial Statements.

(4) In August 1998, we sold our LAN Division. The disposition has been
accounted for as a discontinued operation in accordance with Accounting
Principles Board Opinion No. 30, and prior period consolidated financial
statements have been restated to reflect the LAN Division's operations as a
discontinued operation. (See Note 3 of "Notes to Consolidated Financial
Statements.") During the fiscal third quarter of 2000, Farallon bought out
its royalty obligation to us in its entirety for an amount in excess of the
receivable on our balance sheet. In addition, we exercised our warrant in
Farallon and sold the shares received upon exercise of the warrant. These
transactions resulted in income of $1.3 million, net of taxes, and are
included in the gain on sale from discontinued operations for the fiscal
year ended September 30, 2000. In addition, the gain on sale from
discontinued operations also represents the reversal of a liability
recorded for the excess space created at the our Alameda, California
headquarters that we believed could not be subleased to third parties at
the time of sale. During the three months ended December 31, 1999, we found
alternative uses for this excess space. (See Note 3 of "Notes to
Consolidated Financial Statements.")

(5) Historically, we have neither paid nor declared cash dividends on our
common equity securities, and we expect this trend to continue.

21
<PAGE>

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

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

Overview

Our broadband Internet equipment includes DSL, T1/Frame Relay, integrated
services digital network (ISDN) and dual analog Internet routers. Our DSL
Internet routers are interoperable with major central office equipment
suppliers, including Alcatel, Cisco, Ericsson, Copper Mountain Networks, Lucent
Technologies, Nokia, Orckit, Paradyne, and Siemens.

Our Web platform includes the Netopia Site Server (NSS) and the Netopia
Commerce Server (NCS). The NSS delivers Web sites, and the NCS provides those
web sites full electronic commerce capabilities. The NSS offers customers a
wide array of Web site content packages which are pre-configured Web site
templates. Customers can choose content packages to create sites that contain
the pages, tools, and information they want. NCS works together with NSS to
integrate an end-to-end e-commerce solution with a Web site. NCS provides
shopping cart and secure checkout capabilities, giving an e-store owner full
control over store administration. Our Web platform offers a "no assembly
required" set-up and hosting service which is optimized for partner
integration.

We sell our products and provide services worldwide through
telecommunication service providers and carriers, Internet service providers
(ISPs), independent distributors and dealers, value-added resellers (VARs), and
directly to end users. We sell our DSL Internet equipment primarily through
competitive local exchange carriers (CLECs). 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.

During the fiscal years ended September 30, 2000, 1999 and 1998:

. Revenues from CLECs accounted for 40%, 9% and 0%, respectively, of our
total revenues;

. Covad Communications, a CLEC, accounted for 16%, 0% and 0%, respectively,
of our total revenues;

22
<PAGE>

. Northpoint Communications, a CLEC, accounted for 12%, 6% and 0%,
respectively, of our total revenues; and

. Ingram Micro, a worldwide distributor of computer technology products and
services, accounted for 7%, 10% and 12%, respectively, of our total
revenues.

No other customers during the fiscal years ended September 30, 2000, 1999
and 1998 accounted for 10% or more of our total revenues.

For the fiscal year ended September 30, 2000, there were five customers who
each individually represented at least 5% of our total revenues and in
aggregate, accounted for 46% of our total revenues. For the fiscal year ended
September 30, 1999, there were two customers who each individually represented
at least 5% of our total revenues and in aggregate accounted for 15% of our
total revenues. For the fiscal year ended September 30, 1998, there were three
customers who each individually represented at least 5% of our total revenues
and in aggregate accounted for 21% of our total revenues.

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

Historically, a significant portion of our revenues has been derived from
customers outside of the United States, and we expect this trend to continue.
For the fiscal years ended September 30, 2000, 1999, and 1998, international
revenues accounted for 18%, 28% and 33% of our total revenues, respectively.
Beginning in our fiscal third quarter of 2000, sales to international customers
located in countries that are members of the European Union have been
denominated in Euros, and revenues generated by our international customers are
paid to us in Euros. Historically our international revenues had been
denominated in United States dollars, and revenues generated by our
international customers were paid to us in United States dollars.

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 one-year limited warranty on our
Internet equipment and a 90-day limited warranty on single-user versions of our
Timbuktu Pro software. We permit end users to return our Internet equipment and
Timbuktu Pro for replacements or for refund of the full purchase price if the
products do not perform as warranted. Our e-commerce products are provided on
an "as is" basis, and we generally do not offer a warranty on these products.
End users of our Web platform generally 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 March 2000, we acquired all the outstanding common and preferred stock of
WebOrder, a California corporation, in a merger transaction in which WebOrder
merged into a wholly owned subsidiary formed in connection with the
transaction. WebOrder was a developer of e-commerce infrastructure for small
and medium size businesses. WebOrder's Smart Commerce System offers e-commerce
solutions to on-line businesses including the ability to manage order
processing, and the ability to maintain records of customer transactions
flowing through a merchant's e-store. We have fully integrated WebOrder's
technology into our

23
<PAGE>

e-commerce product development. We accounted for the transaction under the
purchase method. The aggregate purchase price of the transaction was
approximately $20.7 million, based on the consideration we paid at closing. The
final purchase price is dependent on potential earnout payments which will be
added to and included in the purchase price if certain milestones are achieved
and additional consideration is distributable.

In October 1999, we acquired StarNet Technologies, Inc. (StarNet), a
California corporation, in a merger transaction in which StarNet merged into a
wholly owned subsidiary formed in connection with the transaction. StarNet had
been developing a voice channel technology architecture that allows the
simultaneous transmission of voice and standard data packets over a digital
subscriber line. We intend to fully integrate StarNet's technology into our
Internet equipment development and begin offering voice and data IADs. Any
delay in the completion of the development of the products would cause us to
incur additional unplanned development expenses as well as the loss or deferral
of customer purchases, either of which could seriously harm our business. We
accounted for the transaction under the purchase method. The aggregate
consideration constituting the purchase price was approximately $27.5 million
at closing which included $1.0 million of potential earnout payments. During
our fiscal third quarter of 2000, we determined that the milestones for the
$1.0 million potential earnout payment would not be met and accordingly,
reduced the purchase price and amortization of goodwill relating to the
purchase of StarNet by such amount. Additional earnout payments will be added
to and included in the purchase price if certain milestones are achieved and
additional consideration is distributable

We believe we followed recent guidance disseminated by the United States
Securities and Exchange Commission in our valuation of the assets acquired and
liabilities assumed and, in particular, in the valuation of in-process research
and development related to our acquisition of StarNet and WebOrder. However, in
the event that it is determined that we did not properly value such assets,
liabilities, and in-process research and development, we may have to restate
the charges to operations taken in connection with such transactions.

24
<PAGE>

Results of Operations

The following table sets forth for the periods indicated, certain statement
of operations data as well as such data expressed as a percentage of revenues.

<TABLE>
<CAPTION>
Fiscal years ended
September 30,
---------------------------
2000 1999 1998
-------- ------- --------
(in thousands)
<S> <C> <C> <C>
Revenues:
Internet equipment.............................. $ 65,546 $24,460 $ 10,885
Web platform licenses and services.............. 24,660 19,691 13,951
-------- ------- --------
Total revenues................................ 90,206 44,151 24,836
Cost of revenues:
Internet equipment.............................. 46,582 15,597 7,064
Web platform licenses and services.............. 697 646 891
-------- ------- --------
Total cost of revenues........................ 47,279 16,243 7,955
-------- ------- --------
Gross profit.................................. 42,927 27,908 16,881
Operating expenses:
Research and development........................ 13,324 9,211 7,201
Selling and marketing........................... 25,842 20,221 14,404
General and administrative...................... 6,554 3,654 3,380
Acquired in-process research and development.... 8,658 4,205 --
Amortization of goodwill........................ 9,746 543 --
-------- ------- --------
Total operating expenses...................... 64,124 37,834 24,985
-------- ------- --------
Operating loss................................ (21,197) (9,926) (8,104)
Other income, net................................. 3,579 2,066 2,222
-------- ------- --------
Loss from continuing operations before income
taxes........................................ (17,618) (7,860) (5,882)
Income tax provision.............................. -- -- 2,155
-------- ------- --------
Loss from continuing operations............... (17,618) (7,860) (8,037)
Discontinued operations:
Income from discontinued operations, net of
taxes.......................................... -- -- 602
Gain (loss) on sale of discontinued operations,
net of taxes................................... 2,481 -- (3,098)
-------- ------- --------
Net loss...................................... $(15,137) $(7,860) $(10,533)
======== ======= ========
</TABLE>

25
<PAGE>

As a percent of revenues:

<TABLE>
<CAPTION>
Fiscal years
ended
September 30,
---------------------
2000 1999 1998
----- ----- -----
<S> <C> <C> <C>
Revenues:
Internet equipment................................... 72.7 % 55.4 % 43.8 %
Web platform licenses and services................... 27.3 % 44.6 % 56.2 %
----- ----- -----
Total revenues..................................... 100.0 % 100.0 % 100.0 %
Cost of revenues:
Internet equipment................................... 51.6 % 35.3 % 28.4 %
Web platform licenses and services................... 0.8 % 1.5 % 3.6 %
----- ----- -----
Total cost of revenues............................. 52.4 % 36.8 % 32.0 %
----- ----- -----
Gross profit....................................... 47.6 % 63.2 % 68.0 %
Operating expenses:
Research and development............................. 14.8 % 20.9 % 29.0 %
Selling and marketing................................ 28.6 % 45.8 % 58.0 %
General and administrative........................... 7.3 % 8.3 % 13.6 %
Acquired in-process research and development......... 9.6 % 9.5 % --
Amortization of goodwill............................. 10.8 % 1.2 % --
----- ----- -----
Total operating expenses........................... 71.1 % 85.7 % 100.6 %
----- ----- -----
Operating loss..................................... (23.5)% (22.5)% (32.6)%
Other income, net...................................... 4.0 % 4.7 % 8.9 %
----- ----- -----
Loss from continuing operations before income
taxes............................................. (19.5)% (17.8)% (23.7)%
Income tax provision................................... -- -- 8.7 %
----- ----- -----
Loss from continuing operations.................... (19.5)% (17.8)% (32.4)%
Discontinued operations:
Income from discontinued operation net of taxes...... -- -- 2.4 %
Gain (loss) on sale of discontinued operations, net
of taxes............................................ 2.7 % -- (12.5)%
----- ----- -----
Net loss........................................... (16.8)% (17.8)% (42.4)%
===== ===== =====
</TABLE>

Fiscal Years Ended September 30, 2000, 1999 and 1998

Revenue. Our total revenues increased 104.3% to $90.2 million in fiscal 2000
from $44.1 million in fiscal 1999, which increased 77.8% from $24.8 million in
fiscal 1998. Internet equipment revenue increased 168.0% to $65.5 million in
fiscal 2000 from $24.5 million in fiscal 1999, which increased 124.8% from
$10.9 million in fiscal 1998. Web platform license and service revenue
increased 25.2% to $24.7 million from $19.7 million in fiscal 1999, which
increased 41.1% from $14.0 million in fiscal 1998.

The increase in fiscal 2000 was primarily due to:

. Increased sales in North America of our DSL Internet equipment which
includes our symmetric digital subscriber line (SDSL), and ISDN digital
subscriber line (IDSL) Internet equipment, most notably to CLECs such as
Covad Communications and Northpoint Communications who distribute our
products to end users. The increase in DSL revenue was mainly
attributable to larger volume DSL sales that were partially offset by
declining average selling prices. In addition, fiscal 2000 revenue
included sales of our DSL Internet equipment that is interoperable with
Nokia's central office equipment which was not available in fiscal 1999;

. Increased license sales of our Web platform products; and

. Increased sales of our T1 frame relay Internet equipment.

26
<PAGE>

These increases were partially offset by decreased sales of our ISDN
Internet routers in North America as demand for DSL products increased,
decreased sales of our Timbuktu Pro site licenses, and decreased sales of our
Timbuktu products for the Macintosh.

The increase in fiscal 1999 was primarily due to:

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

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

. Increased sales of our ISDN Internet router internationally, primarily as
a result of our relationship with France Telecom Wanadoo (Wanadoo),
France Telecom's ISP marketing arm; and

. Increased sales of our T1 Frame Relay and analog Internet equipment.

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

During fiscal years 2000 and 1999, our Internet equipment, particularly our
DSL routers, experienced increasing price competition from both domestic and
foreign manufacturers of similar products. We expect that our Internet
equipment will continue to experience increasing price competition as well as
competition from alternative technologies. Increased price or technology
competition could seriously harm our business. A portion of our revenues from
Internet equipment is derived from sales of non-DSL routers. We anticipate that
in the future the market for such non-DSL products will decrease and that sales
of our non-DSL products will decline as a percentage of our total revenues.
Accordingly, our revenues will not grow if we are unable to continue to
introduce, market and sell our DSL Internet equipment.

The sale of our Web site and e-commerce 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. Growth in revenues from our Web site and e-commerce
products will be heavily dependent on recurring revenue from Web sites and e-
stores created by licensees. Our failure to retain these customers or our
inability to attract new customers or licensees would seriously harm our
business.

International revenues increased 34.9% to $16.5 million in fiscal 2000 from
$12.2 million in fiscal 1999, which increased 49.5% from $8.2 million in fiscal
1998. International revenues increased in fiscal 2000 primarily due to sales of
our DSL Internet equipment. The increase in fiscal 1999 was primarily due to
increased sales of our ISDN Internet router as a result of the Wanadoo service.
International revenues accounted for 18%, 28% and 33% of our total revenues for
the fiscal years ended September 30, 2000, 1999 and 1998, respectively.
International revenues declined as a percentage of total revenues in fiscal
2000 primarily due to increasing sales of our Internet equipment and Web
platform products in the United States.

The following table provides a breakdown of revenue by region expressed as a
percentage of total revenues for the periods presented.

<TABLE>
<CAPTION>
Fiscal years
ended
September 30,
----------------
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Europe..................................................... 15% 22% 25%
Pacific Rim................................................ 1 3 5
Canada and other........................................... 2 3 3
--- --- ---
Subtotal international revenues.......................... 18 28 33
United States.............................................. 82 72 67
--- --- ---
Total revenues........................................... 100% 100% 100%
=== === ===
</TABLE>

27
<PAGE>

Although international revenues decreased as a percentage of total revenue
in fiscal 2000, a substantial portion of our revenues were derived from sales
to international customers, and we expect sales to international customers to
increase in absolute dollars on an annual basis.

Beginning in our fiscal third quarter of 2000, sales to most international
customers located in countries that are members of the European Union have been
denominated in Euros, and revenues generated by our international customers are
paid to us in Euros. Historically our international revenues had been
denominated in United States dollars, and revenues generated by our
international customers were paid to us in United States dollars. Foreign
currency and exchange rate fluctuations may make our dollar-denominated
products more expensive in those foreign markets where we sell our products in
United States dollars or could expose us to currency rate fluctuation risks to
the extent we do not adequately hedge these foreign currency sales.

During our fiscal fourth quarter of 2000, we experienced a slow down in the
rate of our revenue growth although our fiscal fourth quarter revenue
represented a 75% increase over the same period in the prior year. Accordingly,
our fiscal fourth quarter revenue of $23.6 million represented a sequential
decrease from our fiscal third quarter revenue of $28.5 million. The sequential
decrease was attributable to a decrease in our Internet equipment revenue which
was $16.9 million in our fiscal fourth quarter compared to $22.1 million in our
fiscal third quarter. We believe the sequential revenue decline reflects
changes in the external financing environment for the telecommunication
carriers and service providers that are the primary channel for our products.
These competitive telecommunications service providers have generally incurred
operating losses and negative cash flows as they establish their networks and
operations. Accordingly, these channel partners are dependent on continued
access to new sources of capital. We believe that the current external
financing environment is challenging for these competitive telecommunications
service providers. For example, we fully reserved $1.9 million of outstanding
accounts receivable owed by one CLEC customer during our fiscal fourth quarter.
We expect that we will not achieve sequential revenue growth from our fiscal
fourth quarter of 2000 to our fiscal first quarter of 2001.

Gross Margin. Our total gross margin decreased to 47.6% in fiscal 2000 from
63.2% in fiscal 1999 which decreased from 68.0% in fiscal 1998.

The decrease in fiscal 2000 was primarily due to:

. Increased sales of our Internet equipment, particularly our DSL routers,
which have a lower gross margin than our Web platform products;

. Declining average selling prices of our Internet equipment as a result of
price competition;

. Increased costs of flash memory chips, capacitors and other components
used in our DSL routers; and

. A non-recurring inventory charge of $1.1 million taken in our fiscal
fourth quarter related to the discontinuation of certain non-DSL
products.

These decreases were partially offset by increased license sales of our Web
platform products which carry higher gross margins than our Internet equipment
products.

The decrease in fiscal 1999 was primarily due to:

. Increased sales of our Internet equipment, 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 increased volume license sales of
our Web platform which carry higher gross margins than our Internet equipment
products.

28
<PAGE>

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 equipment products. Accordingly, to the extent we sell more Internet
equipment than Web platform products, our total gross margins would be lower.

Research and Development. Our research and development expenses increased
44.7% to $13.3 million in fiscal 2000 from $9.2 million in fiscal 1999, which
increased 27.9% from $7.2 million in fiscal 1998.

The increase in fiscal 2000 was primarily due to:

. Increased headcount and employee related expenses related to our Internet
equipment and Web platform products in connection with our acquisitions
of StarNet in October 1999 and WebOrder in March 2000 as well as the
expansion of the breadth and depth of our product offerings; and

. Increased development expenses related to our new and existing DSL
Internet equipment.

The increase in fiscal 1999 was primarily due to:

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

. Increased development expenses related to our DSL Internet equipment.

These increases were partially offset by reduced software localization
expenses.

We expect to continue to devote substantial resources to product and
technological development. We expect research and development costs to increase
in absolute dollars in fiscal 2001 as we continue to expand the breadth and
depth of our Internet equipment and Web platform products. We believe our
process for developing software is essentially completed concurrently with the
establishment of technological feasibility, and we have not capitalized any
internal software development costs to date. For the fiscal years ended
September 30, 2000, 1999, and 1998, we capitalized $679,000, $656,000 and
$237,000, respectively, for acquired software developed by third parties. We
expect our capitalized software costs from acquired software developed by third
parties to increase in fiscal 2001 in connection with our iConcierge related
products which are Internet service platforms for improving "Help Desk" and
customer support services.

Selling and Marketing. Our selling and marketing expenses increased 27.8% to
$25.8 million in fiscal 2000 from $20.2 million in fiscal 1999, which increased
40.4% from $14.4 million in fiscal 1998.

The increase in fiscal 2000 was primarily due to:

. Increased headcount and other employee related expenses, including
commissions, related to developing our Internet equipment and Web
platform sales and marketing channels;

. Increased travel costs related to developing our sales and marketing
channels for our Internet equipment and Web platform products; and

. Increased customer service costs related to the expansion of the breadth
and depth of our product offerings.

29
<PAGE>

The increase in fiscal 1999 was primarily due to:

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

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

We believe that our selling and marketing expenses will increase in absolute
dollars in fiscal 2001 as a result of:

. The expansion of our Internet equipment and Web platform sales and
marketing staff, both domestically and internationally; and

. The expansion of our selling and marketing channels in Europe and Asia.

General and Administrative. Our general and administrative expenses
increased 79.4% to $6.6 million in fiscal 2000 from $3.7 million in fiscal
1999, which increased 8.1% from $3.4 million in fiscal 1998.

The increase in fiscal 2000 was primarily due to:

. Fully reserving $1.9 million of outstanding accounts receivable owed by
one CLEC customer;

. Increased occupancy costs related to our Alameda facility, including
increased telecom expenses; and

. Increased headcount and other employee related expenses including
employee recruitment costs.

The increase in fiscal 1999 was primarily due to:

. Increased employee related expenses;

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

. Increased accruals related to the allowance for doubtful accounts and
returns on accounts receivable.

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

Acquired In-Process Research and Development. For fiscal 2000, based upon
independent third party valuation analysis of our acquisitions of WebOrder and
StarNet, we allocated one-time charges of approximately $3.0 million of the
WebOrder purchase price and $5.7 million of the StarNet purchase price to
acquired in-process research and development. (See Note 2 of "Notes To
Condensed Consolidated Financial Statements.")

For fiscal 1999, based upon independent third party valuation analysis of
our acquisitions of Serus and netOctopus, we allocated one time charges of
approximately $3.9 million of the Serus purchase price and $400,000 of the
netOctopus purchase price to acquired in-process research and development for
the fiscal year ended September 30, 1999.

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, liabilities,
and in-process research and development, we may have to restate the charges to
operations taken in connection with such transactions.

Amortization of Goodwill. Amortization of goodwill and other intangible
assets represents the amortization of such amounts allocated to goodwill and
other intangible assets related to our acquisitions of WebOrder, StarNet, Serus
and netOctopus which were determined by an independent third party valuation

30
<PAGE>

analysis for each transaction. The amount allocated to goodwill and other
intangible assets in connection with our acquisition of:

. WebOrder was $17.1 million. We are amortizing the goodwill and other
intangible assets over four and three years, respectively. For the fiscal
year ended September 30, 2000, we amortized $2.4 million in goodwill and
other intangible assets related to our acquisition of WebOrder.

. StarNet was $22.4 million. We are amortizing the goodwill and other
intangible assets over four and three years, respectively. For the fiscal
year ended September 30, 2000, we amortized $6.6 million in goodwill and
other intangible assets related to our acquisition of StarNet.

. Serus was $2.1 million. We are amortizing the goodwill and other
intangible assets over four years. For the fiscal year ended September
30, 2000, we amortized $533,000 in goodwill and other intangible assets
related to our acquisition of Serus.

. netOctopus was $700,000. We are amortizing the goodwill and other
intangible assets over four years. For the fiscal year ended September
30, 2000, we amortized $226,000 in goodwill and other intangible assets
related to our acquisition of netOctopus.

For the fiscal year ended September 30, 1999, 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. For the fiscal year ended September 30, 1999, we
amortized $398,000 in goodwill and other intangible assets related to our
acquisition of Serus.

For the fiscal year ended September 30, 1999, we amortized $144,000 in
goodwill and other intangible assets related to our acquisition of netOctopus.

Other Income, Net. Other income, net, primarily represents interest we earn
on our cash, cash equivalents and short-term investments as well as both
realized and unrealized gains and losses on foreign currency receivables and
related hedge contracts. Other income, net, increased 73.2% to $3.6 million for
the fiscal year ended September 30, 2000 from $2.1 million for the fiscal year
ended September 30, 1999, which decreased 7.0% from $2.2 million in fiscal
1998. The increase in fiscal 2000 was primarily related to higher interest
rates we earned on our cash balances as well as net foreign currency gains on
our foreign currency denominated accounts receivable and related hedge
contracts. The decrease in fiscal 1999 was primarily due to the cash used for
the acquisitions of Serus and netOctopus and for operating activities. The
decrease in fiscal 1999 was partially offset by the cash raised from our
secondary offering in August 1999. We expect interest income to increase in
absolute dollars as we expect to generate positive net cash flows.

Income Taxes. We did not record an income tax benefit for the fiscal years
ended September 30, 2000 or 1999 primarily due to continued substantial
uncertainty regarding our ability to realize our tax assets. The tax expense
recorded in fiscal 1998 was primarily related to the increase in the valuation
allowance against deferred tax assets. We may begin recording a provision for
income taxes in our 2001 fiscal year. Based upon available objective evidence,
there has been sufficient uncertainty regarding the realizability of our
deferred tax assets to warrant a valuation allowance in our financial
statements. The factors considered included prior losses, inconsistent profits,
and lack of carryback potential to realize our deferred tax assets. Based on
our economic outlook for fiscal years 2001 and beyond, we believe the
uncertainty regarding the realizability of our deferred tax assets may diminish
to the point where it is more likely than not that our deferred tax assets will
be realized. At such point, we would also reverse all or a portion of our
valuation allowance which will result in a non-recurring income tax benefit.

Discontinued Operations. In August 1998, we sold our Farallon Local Area
Networking (LAN) Division (the LAN Division). The consideration we received, in
aggregate, for the sale of the LAN Division totaled $4.9 million and consisted
of cash, a note receivable, royalties receivable and a warrant to purchase up
to 5% of the equity of Farallon. The gain on sale of discontinued operations,
net of taxes, was $2.5 million for the

31
<PAGE>

fiscal year ended September 30, 2000. Farallon bought out its royalty
obligation for an amount in excess of the receivable on our balance sheet. In
addition, we exercised our warrant in Farallon and sold the shares we received.
Each item generated gain on sale from discontinued operations during our fiscal
third quarter of 2000. In addition, gain on sale from discontinued operations
also represents the reversal of a liability we recorded for the excess space
created at our Alameda, California headquarters that we believed could not be
subleased to third parties at the time of sale. During our fiscal first quarter
of 2000, we found alternative uses for this excess space.

Income from discontinued operations during fiscal 1998 of $602,000
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 at the time of sale. 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.

Liquidity and Capital Resources

We have funded our operations to date primarily through the initial and
secondary public offerings of our common stock in addition to the private sale
of equity securities before out initial public offering. As of September 30,
2000, we had cash, cash equivalents and short-term investments totaling $59.8
million representing 47% of our total assets.

Our operating activities provided $61,000 of cash in fiscal 2000, used $8.4
million of cash in fiscal 1999, and used $926,000 of cash in fiscal 1998. The
cash provided in fiscal 2000 was primarily due to increases in revenues, gross
profits, accounts payable and accrued liabilities and decreases in deposits and
other assets, partially offset by increases in operating expenses, accounts
receivable and inventory levels. We expect to generate positive cash flow from
operations in fiscal 2001 and beyond.

Cash used in fiscal 1999 was primarily due to supporting our operating
activities as well as the increase in accounts receivable and inventory levels,
and the reduction of accounts payable and accrued liabilities related to the
sale of the LAN Division. The cash used to support our operations in the fiscal
year ended September 30, 1998 was primarily due to expenses related to the sale
of the LAN Division and increased advertising and promotional expenses related
to the introduction of new products.

Cash used in investing activities for the fiscal year ended September 30,
2000 was primarily due to:

. Purchases of short term investments;

. Our acquisitions of technology (WebOrder and StarNet);

. Our acquisition of long term investment (equity investment in Everdream
Corporation); and

. Purchases of furniture, fixtures and equipment.

The cash used in investing activities was partially offset by proceeds from
the sale and maturity of short-term investments. We expect cash used in
investing activities to increase in fiscal 2001 in connection with the purchase
of new server capital equipment for hosting our Web platform products. We
expect to increase our cash payments in fiscal 2001 made for software costs
under agreements with third parties for our iConcierge products which are
Internet service platforms for improving "Help Desk" and customer support
services.

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

. The purchase of short term investments;

. The acquisitions of technology (Serus and netOctopus);

. The purchase of furniture, fixtures and equipment;

32
<PAGE>

. The acquisition of intangible assets; and

. Our acquisition of long term investment (Northpoint Communications Group,
Inc.)

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

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

. Proceeds from the sale of the LAN Division.

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

. Purchases of short term investments;

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

. Purchases of capital equipment.

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

Cash provided by our financing activities for the fiscal year ended
September 30, 2000 was primarily related to:

. $5.8 million from the exercise of employee stock options; and

. $1.7 million from the activities related to our Employee Stock Purchase
Plan.

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

. The $41.3 million, net of underwriting discounts and commissions, raised
from our secondary offering completed in August 1999;

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

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

Cash provided by our financing activities for the fiscal year ended
September 30, 1998 was primarily related from the exercise of stock options and
activities related to our Employee Stock Purchase Plan.

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

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 earnout payments related to our acquisitions for at
least the next twelve months. We may require substantial capital to finance our
future growth and fund our ongoing research and development activities in
fiscal 2001 and thereafter. If we issue additional stock to raise capital, the
percentage ownership in Netopia of existing stockholders would be reduced.
Additional financing may not be available when needed and, if such financing is
available, it may not be available on terms favorable to us.

From time to time, in the ordinary course of business, we may 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 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

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significant expenses and write-offs. For example, in December 1998, we acquired
netOctopus and Serus, in October 1999, we acquired StarNet and, in March 2000,
we acquired WebOrder. The success of these acquisitions depends upon our
ability to timely and successfully develop, manufacture and gain market
acceptance for the products we acquired. If we engage in additional
acquisitions or divestitures in future periods, we may not be able to address
these risks and our business may be harmed.

In December 2000, we purchased $2.0 million of Series D Preferred stock in
Megapath Networks Incorporated (Megapath). Megapath, a broadband service
provider, provides high-speed, Internet access to small and midsize businesses.
MegaPath offers high-speed DSL access, Web-site design and development,
e-commerce and Web hosting services. During the year ended September 30, 2000
Megapath had purchased our Internet equipment and licensed our Web site and e-
commerce platform. Although there is no public market for Megapath's stock, we
believe the market value of these shares remains at $2.0 million. As part of
the purchase, we bear the economic risk of the investment indefinitely. There
is no assurance that the purchased shares will be registered pursuant to the
Securities Act, or that an exemption from registration would be available for
any resale by us of these shares. Accordingly, we may not be able to transfer
all or any portion of the shares in the amounts or at times we would propose.

In August 2000, we purchased $2.0 million of Series C Preferred Stock in
Everdream Corporation (Everdream). Everdream provides outsourced IT expertise,
products and services that enable small and medium size businesses to focus on
their core competencies. In April 2000, we had entered into an agreement with
Everdream to host a co-branded version of the Web e-commerce platform for
Everdream's customers. Although there is no public market for Everdream's
stock, we believe that at September 30, 2000, the market value of these shares
remained at $2.0 million. As part of the purchase, we bear the economic risk of
the investment indefinitely. There is no assurance that the purchased shares
will be registered pursuant to the Securities Act, or that an exemption from
registration would be available for any resale by us of these shares.
Accordingly, we may not be able to transfer all or any portion of the shares in
the amounts or at times we would propose.

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. We have
agreed not to acquire more than 10% of NorthPoint Communications' voting stock
without NorthPoint Communications' consent until March 2002. In addition, as a
Series D-1 purchaser, we have agreed to vote any voting securities held by us
as recommended by NorthPoint Communications' Board of Directors, except with
respect to votes pursuant to the protective provisions in NorthPoint
Communications' Certificate of Incorporation. As of September 30, 2000, the
market value of these shares was approximately $493,000.

Recent Accounting Pronouncements

In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard (SFAS) No. 133, Accounting for
Derivative and Hedging Activities. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments (including derivative
instruments embedded in other contracts) and for hedging activities. SFAS No.
133, as amended by SFAS No. 137, is effective for all fiscal quarters of fiscal
years beginning after June 15, 2000. The Company will adopt SFAS 133 in our
first fiscal quarter of 2001 and the Company does not expect a material impact
on its consolidated results of operations and financial position.

In December 1999, the SEC issued Staff Accounting Bulletin (SAB) 101,
Revenue Recognition in Financial Statements. SAB 101 provides guidance on
applying generally accepted accounting principles to revenue recognition issues
in financial statements. The Company will adopt SAB 101 in fiscal 2001 and the
Company is evaluating the effect, if any, that such adoption may have on its
consolidated results of operations and financial position.

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In March 2000, the FASB issued Interpretation (FIN) No.44, Accounting for
Certain Transactions Involving Stock Compensation--an Interpretation of
Accounting Principles Board (APB) No. 25. APB No. 25 clarifies (a) the
definition of employee for purposes of applying APB No. 25; (b) the criteria
for determining whether a plan qualifies as a noncompensatory plan; (c) the
accounting consequences of various modifications to the terms of a previously
fixed stock option or award; and (d) the accounting for an exchange of stock
compensation awards in a business compensation. The Company adopted FIN No. 44
on July 1, 2000 which did not have a material effect on the Company's
consolidated results of operations and financial position.

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

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

The purchasers of our DSL Internet equipment are primarily emerging
competitive telecommunications service carriers and providers such as Covad
Communications, Northpoint Communications, and Rhythms Netconnections and
Internet service providers such as PSINet, Onsite Access, and Verio. We depend
upon the ability of such competitive telecommunications service providers to
offer DSL services successfully and become sustainable businesses. These
competitive telecommunications service providers are competing with traditional
regional telephone companies and with each other. 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. These competitive telecommunications service providers have generally
incurred operating losses and negative cash flows as they establish their
networks and operations. Accordingly, these channel partners are dependent on
continued access to new sources of capital. We believe that the current
external financing environment is challenging for these competitive
telecommunications service providers.

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

Our revenues will decline and we may incur losses if we lose one or more of
our significant customers or if our customers reduce or delay purchases of our
products. During the fiscal year ended September 30, 2000, our top five
customers who each individually represented at least 5% of our total revenues
accounted for approximately 46% of our total revenues. In this period, sales to
Covad Communications and Northpoint Communications represented approximately
16% and 12% of our total revenues, respectively. These competitive
telecommunications service providers have generally incurred operating losses
and negative cash flows as they attempt to establish their networks and
operations. Accordingly, these channel partners are dependent on continued
access to new sources of capital. To the extent they are unable to secure new
sources of capital, our revenues and profitability would be harmed. We believe
that the current external financing environment is challenging for these
competitive telecommunications service providers. For example, we fully
reserved $1.9 million of outstanding accounts receivable owed by one CLEC
customer during our fiscal fourth quarter.

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

Our failure to significantly increase our revenues would result in
continuing losses. We incurred losses from continuing operations of $17.6
million, $7.9 million and $8.0 million for the fiscal years ended September 30,
2000, 1999 and 1998, respectively. Our cash flow from operations provided
$61,000 in fiscal 2000, used $518,000 in 1999, and used $8.4 million in fiscal
1998. Even if we do maintain profitability and positive cash flow from
operations, we may not be able to sustain or increase profitability or cash
flow from operations on a quarterly or annual basis.

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

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

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

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

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

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

. Decreases or delays in purchases by significant customers, or loss of
such customers such as Covad Communications, Ingram Micro, Northpoint
Communications, and Rhythms Netconnections;

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

. The growth rate in the number of Web sites and e-stores that are built
using our e-commerce products from which we derive revenues;

. The mix of products and services and the gross margins associated with
such products and services, including the impact of our increased sales
of lower margin Internet equipment as a percentage of our total revenues;

. Shifts in the channel fulfilling demand from small businesses for DSL to
entities with whom we do not have historical relationships;

. The price and availability of chip for our DSL Internet routers;

. 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, rate and ability of telecommunications service providers to
deploy DSL services;

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

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

. The ability of competitive telecommunication service providers to obtain
required capital resources;

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

. Anticipated increases in competition among producers of e-commerce
products, including the impact of products that are available from some
of our competitors at no cost.

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

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

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

. Foreign currency and exchange rate fluctuations which may make our
dollar-denominated products more expensive in those foreign markets where
we sell our products in United States dollars or could expose us to
currency rate fluctuation risks to the extent we do not adequately hedge
these foreign currency sales; and

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

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

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

In the DSL router market, we primarily compete with 3Com, Arescom, Cayman
Systems, Cisco Systems, Efficient Networks (FlowPoint), Lucent Technologies,
Ramp Networks, Zyxel Communications 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 primarily
compete with Homestead Technologies, IBM, Inc. Online, NetObjects, Verio,
BigStep.com, Intershop and several other companies. In the market for our
remote control and enterprise software, we primarily compete with Computer
Associates, Intel, Microcom (Compaq), Microsoft, Vector Networks, 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 product areas
have longer operating histories, significantly greater financial, technical,
marketing and other resources, significantly greater name recognition and a
larger base of customers than we do. In addition, many of our competitors have
well-established relationships with our current and potential customers and
have extensive knowledge of these industries. In the past, we have lost
potential customers to competitors in all three product areas for various
reasons, including lower prices and other incentives not matched by us. In
addition, current and potential competitors have established or may establish
cooperative relationships among themselves or with third parties to increase
the ability of their products and services to address customer needs.
Accordingly, new competitors or alliances among competitors may emerge and
rapidly acquire significant market share. We also expect that competition will
increase as a result of industry consolidation.

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

Our DSL Internet equipment has a relatively short history. 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

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requirements. It is possible that the market for DSL Internet equipment 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 we may incur losses if we cannot continue to
successfully introduce, market and sell our DSL Internet equipment.

A portion of our revenues from Internet equipment is derived from non-DSL
routers. We anticipate that in the future the market for such non-DSL products
will decrease and that sales of our non-DSL products will decline as a
percentage of our total revenues. Accordingly, our revenues will not grow if we
are unable to continue to introduce, market and sell our DSL Internet
equipment.

Sales of our DSL Internet equipment will decline substantially if central
office DSL equipment is not widely deployed.

We are currently dependent on the central office equipment by
telecommunications service providers that are deploying DSL services.
Historically, substantially all of our sales of DSL routers have been for use
with DSL central office equipment manufactured by Copper Mountain Networks and
Nokia. We have recently introduced DSL routers that are interoperable with
Alcatel, Cisco, Lucent Technologies, Orckit, Paradyne, and Siemens central
office access concentrators. If central office DSL equipment with which our
routers are interoperable are not widely used in DSL deployments, our business
will be seriously harmed.

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

The success of our DSL Internet equipment 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;

. The ability of competitive telecommunication service providers to obtain
required capital resources;

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

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

. Evolving industry standards for DSL technologies; and

. Government regulation.

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

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

DSL services are competing with a variety of different high-speed Internet
equipment, including cable, satellite and other wireless technologies. Many of
these technologies will compete effectively with DSL services. If any
technology competing with DSL technology is more reliable, faster, less
expensive, reaches more customers or has other advantages over DSL technology,
then the demand for our products and services and our revenues and gross
margins may decrease.

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

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

Substantially all of our circuit boards are manufactured by SMTC Corporation
(SMTC), a contract manufacturer.

Substantially all of our Internet equipment include circuit boards that are
manufactured by SMTC. Additionally, certain of our DSL routers are assembled
and packaged by SMTC. If supplies of circuit boards or DSL routers from SMTC
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 equipment from
independent contractors and specialized suppliers.

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

We need to develop, introduce and market new and enhanced products 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, reliability
and compatibility. For example, we anticipate that voice over DSL technology
will become an important feature of future DSL router products. As a result, we
believe we will need to successfully develop, introduce and market integrated
access devices that will combine voice over DSL and data routing functionality
in our products. Additionally, we will need to continue to integrate our DSL
router technology with the architectures of leading central office equipment
providers in order to enhance the reliability, ease-of-use and management
functions of each of our DSL products. Currently, our router products are fully
integrated with Copper Mountain Networks central office access concentrators
and are interoperable with Alcatel, Cisco, Lucent Technologies, Nokia, Orckit,
Paradyne, and Siemens central office access concentrators. However, we may not
be able to successfully develop, introduce, enhance or market these or other
products necessary to our future success. In addition, any delay in developing,
introducing or marketing these or other products would seriously harm our
business.

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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 December 1998, we acquired netOctopus and Serus, in October 1999,
we acquired StarNet and in March 2000, we acquired WebOrder. In addition, in
August 1998, we sold our LAN Division, which developed and sold local area
network (LAN) products. We may 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. Incremental acquisition
related charges including in-process research and development and amortization
of goodwill and other intangibles or divestitures of profitable technologies or
products could adversely impact our profitability. The success of these
acquisitions depends upon our ability to timely and successfully develop,
manufacture and gain market acceptance for the products we acquired. If we
engage in additional acquisitions or divestitures in future periods, we may not
be able to address these risks and our business may be harmed.

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

A 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 our 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 and e-stores. 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 successfully promote our Web
platform, we will not generate recurring revenues from royalties on Web sites
and e-stores promoted by licensees of our Web platform.

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

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

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

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

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our Web site and e-store 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 and e-store hosting
services. If there is an interruption or a deterioration of our Web site or e-
store 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 and e-
store hosting services at a subsidized price or even at no cost. In addition,
if our Web site and e-store hosting services are interrupted, perform poorly,
or are unreliable, we are at risk of litigation from our customers.

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

We expect that sales of our Internet equipment may account for a larger
percentage of our total revenues in future periods. Because these products 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 equipment, in particular DSL products, will become
increasingly competitive and that we will be forced to lower the prices we
charge for our Internet equipment in the future. As the average selling price
of our routers declines, our gross margins related to such products, and in
general, are likely to decline.

We license a substantial portion of our Web platform products 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 are derived from sales to international
customers.

A substantial portion of our revenues are derived from sales to
international customers. We expect sales to international customers to continue
to comprise a significant portion of our revenues. In the past, our
international sales have typically been denominated in United States dollars.
Beginning in the third quarter of fiscal 2000, sales to our European customers
who are members of the European Union are being denominated in the Euro. All
other international sales will continue to be denominated in United States
dollars. For our international sales that continue to be denominated in United
States dollars, fluctuations in currency exchange rates could cause our
products and services to become relatively more expensive to our foreign
customers. This could lead to decreased profitability of our products and
services. In addition, changes in the value of the Euro relative to the United
States dollar, could adversely affect our operating results, to the extent we
do not hedge sales denominated in the Euro.

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.

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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
secrets, and patent, copyright and trademark law.

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

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

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

We provide end users of our products with a one-year limited warranty on our
Internet equipment and a 90-day limited warranty on single-user versions of our
Timbuktu Pro software. We permit end users to return our Internet equipment and
Timbuktu Pro for replacements or for refund of the full purchase price if the
products do not perform as warranted. Our e-commerce products are provided on
an "as is" basis, and we generally do not offer a warranty on this product. End
users of our Web sites and e-stores generally 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.

42
<PAGE>

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

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

Substantial sales of our common stock by our large stockholders could cause our
stock price to 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
telecommunications service providers for sales of our DSL Internet equipment,
and companies in the telecommunications industry must comply with numerous
regulations and pay numerous tariffs. If our industry or industries that we
depend on become subject to increases in tariffs and regulations that lead to
corresponding increases in the cost of doing our business or doing business
with us, our revenues could decline. For example, if a regulatory agency
imposed restrictions on DSL service that were not also imposed on other forms
of high-speed Internet access, our business could be harmed.

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 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. Our capital requirements will
depend on many factors, including:

. Acceptance of and demand for our products;

. The number and timing of acquisitions;

. The costs of developing new products;

. The costs associated with our expansion; and

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

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

43
<PAGE>

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

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

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

Interest Rate Risk

The table below presents the carrying value and related weighted-average
interest rates for our investment portfolio. The carrying value approximates
fair value at September 30, 2000, and 1999. All of our investments mature in
twelve months or less.

<TABLE>
<CAPTION>
2000 1999
----------------------- -----------------------
Average Average
Carrying Interest Carrying Interest
Amount Rate Amount Rate
-------------- -------- -------------- --------
(in thousands) (in thousands)
<S> <C> <C> <C> <C>
Principal (notional) amounts
in United States dollars:
Cash equivalents--fixed
rate(1)...................... 37,720 6.49% $45,893 5.31%
Short-term investments--fixed
rate(2)...................... 21,841 6.51% 7,940 5.67%
------ -------
59,561 $53,833
</TABLE>

44
<PAGE>

--------
(1) Cash equivalents represent the portion of our investment portfolio which
mature in less than 90 days.
(2) Short term investments represent the portion of our investment portfolio
which mature in greater than or equal to 90 days.

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

Foreign Currency Exchange Risk

The table below presents the carrying value, in U.S. dollars, of our
accounts receivable denominated in Euros at September 30, 2000 and 1999. These
accounts receivable are valued at the Euro exchange rate as of September 30,
2000. The carrying value approximates fair value at September 30, 2000, and
1999.

<TABLE>
<CAPTION>
2000 1999
--------------------------- ---------------------------
Exchange Exchange
Carrying Rate At Carrying Rate At
Amount September 30 Amount September 30
-------------- ------------ ------------- ------------
(in thousands) (in thousands)
<S> <C> <C> <C> <C>
Principal (notional)
amounts in United
States dollars:
Accounts receivable
denominated in Euros... 2,007 0.8837 -- --
</TABLE>

The table below presents the carrying value, in U.S. dollars, of our
currency exchange forward contracts at September 30, 2000 and 1999. The
carrying value approximates fair value at September 30, 2000, and 1999.

<TABLE>
<CAPTION>
2000 1999
---------------------------------- ------------------------------
Carrying Spot Settlement Carrying Spot Settlement
Amount Rate Date Amount Rate Date
-------------- ------ ------------ ------------- ---- ----------
(in thousands) (in thousands)
<S> <C> <C> <C> <C> <C> <C>
Principal (notional)
amounts in Euros:
Currency exchange
forward contract # 1... 675 0.9107 Oct 31, 2000 -- -- --
Currency exchange
forward contract # 2... 250 0.9122 Nov 30, 2000 -- -- --
</TABLE>

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

At December 1, 2000 the Euro exchange rate was $0.8765. This number
represents U.S. dollars per foreign currency unit.

45
<PAGE>

Item 8. Consolidated Financial Statements and Supplementary Data

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

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

<TABLE>
<CAPTION>
Page
----
<S> <C>
Consolidated Financial Statements:
Independent Auditors' Report............................................. 47
Consolidated Balance Sheets at September 30, 2000 and 1999............... 48
Consolidated Statements of Operations for the fiscal years ended
September 30, 2000, 1999 and 1998....................................... 49
Consolidated Statements of Stockholders' Equity for the fiscal years
ended September 30,2000, 1999 and 1998.................................. 50
Consolidated Statements of Cash Flows for the fiscal years ended
September 30, 2000, 1999 and 1998....................................... 51
Notes to Consolidated Financial Statements............................... 52

Financial Statement Schedules:
Valuation and Qualifying Accounts........................................ 72
</TABLE>

46
<PAGE>

INDEPENDENT AUDITORS' REPORT

The Board of Directors
Netopia, Inc. and subsidiaries:

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

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

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Netopia,
Inc. and subsidiaries as of September 30, 2000 and 1999 and the results of
their operations and their cash flows for each of the years in the three-year
period ended September 30, 2000 in conformity with auditing principles
generally accepted in the United States of America. Also in our opinion, the
related financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information set forth herein.

KPMG LLP

San Francisco, California
October 23, 2000

47
<PAGE>

NETOPIA, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
September 30,
------------------
2000 1999
-------- --------
(in thousands)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................ $ 37,839 $ 61,381
Short-term investments................................... 21,938 8,102
Trade accounts receivable less allowance for doubtful
accounts and returns of $3,258 and $796, respectively... 15,646 9,852
Inventories, net......................................... 10,284 3,681
Prepaid expenses and other current assets................ 2,341 2,724
-------- --------
Total current assets................................... 88,048 85,740
Royalties receivable....................................... -- 377
Furniture, fixtures and equipment, net..................... 4,469 2,403
Intangible assets, net..................................... 31,016 2,362
Deposits and other assets.................................. 4,840 5,087
-------- --------
$128,373 $ 95,969
======== ========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable......................................... $ 8,547 $ 5,258
Accrued compensation..................................... 2,756 2,170
Accrued liabilities...................................... 1,332 1,564
Deferred revenue......................................... 2,215 1,343
Other current liabilities................................ 906 11
-------- --------
Total current liabilities.............................. 15,756 10,346
Long-term liabilities...................................... 328 544
-------- --------
Total liabilities...................................... 16,084 10,890
Commitments and contingencies
Stockholders' equity:
Common stock: $0.001 par value, 25,000,000 shares
authorized; 17,587,615 and 15,519,198 shares issued and
outstanding at September 30, 2000 and 1999,
respectively............................................ 17 15
Additional paid-in capital................................. 142,857 99,978
Accumulated deficit........................................ (30,079) (14,942)
Accumulated other comprehensive income (loss).............. (506) 28
-------- --------
Total stockholders' equity............................. 112,289 85,079
-------- --------
$128,373 $ 95,969
======== ========
</TABLE>

See accompanying notes to consolidated financial statements.

48
<PAGE>

NETOPIA, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
Fiscal years ended
September 30,
---------------------------
2000 1999 1998
-------- ------- --------
(in thousands, except for
per share amounts)
<S> <C> <C> <C>
Revenues:
Internet equipment.............................. $ 65,546 $24,460 $ 10,885
Web platform licenses and services.............. 24,660 19,691 13,951
-------- ------- --------
90,206 44,151 24,836
Cost of revenues:
Internet equipment.............................. 46,582 15,597 7,064
Web platform licenses and services.............. 697 646 891
-------- ------- --------
47,279 16,243 7,955
-------- ------- --------
Gross profit...................................... 42,927 27,908 16,881
Operating expenses:
Research and development........................ 13,324 9,211 7,201
Selling and marketing........................... 25,842 20,221 14,404
General and administrative...................... 6,554 3,654 3,380
Acquired in-process research and development.... 8,658 4,205 --
Amortization of goodwill and other intangible
assets......................................... 9,746 543 --
-------- ------- --------
Total operating expenses...................... 64,124 37,834 24,985
-------- ------- --------
Operating loss.................................... (21,197) (9,926) (8,104)
Other income, net................................. 3,579 2,066 2,222
-------- ------- --------
Loss from continuing operations before income
taxes............................................ (17,618) (7,860) (5,882)
Income tax provision.............................. -- -- 2,155
-------- ------- --------
Loss from continuing operations................... (17,618) (7,860) (8,037)
Discontinued operations:
Income from discontinued operations, net of
taxes.......................................... -- -- 602
Gain (loss) on sale of discontinued operations,
net of taxes................................... 2,481 -- (3,098)
-------- ------- --------
Net loss...................................... $(15,137) $(7,860) $(10,533)
======== ======= ========
Comprehensive loss:
Net loss........................................ $(15,137) $(7,860) $(10,533)
Other comprehensive income (loss)............... (534) 28 --
-------- ------- --------
Total comprehensive loss...................... $(15,671) $(7,832) $(10,533)
======== ======= ========
Per share data, continuing operations:
Basic and diluted loss per share................ $ (1.05) $ (0.60) $ (0.69)
======== ======= ========
Common shares used in the per share
calculations................................... 16,830 13,092 11,687
======== ======= ========
Per share data, net loss:
Basic and diluted net loss per share............ $ (0.90) $ (0.60) $ (0.90)
======== ======= ========
Common shares used in the per share
calculations................................... 16,830 13,092 11,687
======== ======= ========
</TABLE>

See accompanying notes to consolidated financial statements.

49
<PAGE>

NETOPIA, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
Accumulated
Common stock Additional other Retained Total
----------------- paid-in Deferred comprehensive earnings stockholders'
Shares Amount capital compensation income (deficit) equity
---------- ------ ---------- ------------ ------------- --------- -------------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C>
Balances, September 30,
1997................... 11,492,732 $ 12 $ 50,568 $ (54) $ -- $ 3,451 $ 53,977
Exercise of stock
options................ 308,019 -- 729 -- -- -- 729
Issuance of common stock
under Employee Stock
Purchase Plan.......... 153,157 -- 604 -- -- -- 604
Amortization of deferred
compensation........... -- -- -- 24 -- -- 24
Forfeiture of deferred
compensation........... -- -- (30) 30 -- -- --
Net loss................ -- -- -- -- -- (10,533) (10,533)
---------- ---- -------- ----- ----- -------- --------
Balances, September 30,
1998................... 11,953,908 12 51,871 -- -- (7,082) 44,801
Exercise of stock
options................ 626,013 1 2,834 -- -- -- 2,835
Acceleration and
extension
of stock options....... -- -- 176 -- -- -- 176
Issuance of common stock
under secondary
offering (net of share
issuance costs of $3.0
million)............... 2,330,000 2 41,315 -- -- -- 41,317
Net unrealized
investment gain........ -- -- -- -- 28 -- 28
Issuance of common stock
for acquisitions....... 409,556 -- 2,811 -- -- -- 2,811
Issuance of common stock
under Employee Stock
Purchase Plan.......... 199,721 -- 855 -- -- -- 855
Issuance of non-employee
stock options.......... -- -- 116 -- -- -- 116
Net loss................ -- -- -- -- -- (7,860) (7,860)
---------- ---- -------- ----- ----- -------- --------
Balances, September 30,
1999................... 15,519,198 15 99,978 -- 28 (14,942) 85,079
Exercise of stock
options................ 1,203,369 1 5,794 -- -- -- 5,795
Issuance of common stock
under Employee Stock
Purchase Plan.......... 130,306 -- 1,738 -- -- -- 1,738
Issuance of common stock
for acquisitions....... 677,848 1 35,386 -- -- -- 35,387
Exercise of stock
warrants............... 56,875 -- -- -- -- -- --
Costs related to
issuance of common
stock under secondary
offering............... -- -- (39) -- -- -- (39)
Net unrealized
investment loss........ -- -- -- -- (534) -- (534)
Net loss................ -- -- -- -- -- (15,137) (15,137)
---------- ---- -------- ----- ----- -------- --------
Balances, September 30,
2000................... 17,587,615 $ 17 $142,857 $ -- $(506) $(30,079) $112,289
========== ==== ======== ===== ===== ======== ========
</TABLE>

See accompanying notes to consolidated financial statements

50
<PAGE>

NETOPIA, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
Fiscal years ended
September 30,
---------------------------
2000 1999 1998
-------- ------- --------
(in thousands)
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss.......................................... $(15,137) $(7,860) $(10,533)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization.................... 12,324 2,990 995
Deferred income taxes............................ -- -- 2,869
Amortization of deferred compensation............ -- -- 24
Noncash compensation for services................ -- 292 --
Charge for in-process research and development... 8,658 4,205 --
Changes in allowance for doubtful accounts and
returns on accounts receivable.................. 2,462 179 (40)
Changes in operating assets and liabilities, net
of effects of acquisition:
Trade accounts receivable....................... (8,255) (5,673) 1,549
Inventories..................................... (6,603) (2,090) (618)
Prepaid expenses and other current assets....... 383 (470) (443)
Deposits and other assets....................... 1,035 637 (127)
Accounts payable and accrued liabilities........ 3,643 (1,133) 5,310
Deferred revenue................................ 748 627 (67)
Other liabilities............................... 803 (94) 155
-------- ------- --------
Net cash provided by (used in) operating
activities..................................... 61 (8,390) (926)
-------- ------- --------
Cash flows from investing activities:
Purchase of furniture, fixtures and equipment.... (2,914) (1,625) (711)
Acquisition of trademark license................. -- -- (1,000)
Capitalization of software development costs..... (679) (656) (237)
Proceeds from sale of discontinued operations.... -- -- 2,000
Acquisition of long term investment.............. (2,000) (1,000) --
Acquisition of technology........................ (11,669) (4,298) --
Purchase of intangibles.......................... -- (1,650) --
Purchase of short-term investments............... (62,025) (19,472) (47,706)
Proceeds from the sale of short-term
investments..................................... 48,190 34,221 52,047
-------- ------- --------
Net cash provided by (used in) investing
activities..................................... (31,097) 5,520 4,393
-------- ------- --------
Cash flows from financing activities:
Proceeds from the issuance of common stock, net.. 7,494 45,007 1,333
-------- ------- --------
Net cash provided by financing activities....... 7,494 45,007 1,333
-------- ------- --------
Net increase (decrease) in cash and cash
equivalents...................................... (23,542) 42,137 4,800
Cash and cash equivalents, beginning of year...... 61,381 19,244 14,444
-------- ------- --------
Cash and cash equivalents, end of year............ $ 37,839 $61,381 $ 19,244
======== ======= ========
Supplemental disclosures of cash flow activities:
Income taxes paid................................ $ -- $ -- $ 193
======== ======= ========
Supplemental disclosures of noncash investing and
financing activities:
Issuance of common stock for acquisition of
intangible assets............................... $ 35,387 $ 2,811 $ --
======== ======= ========
Note receivable from sale of discontinued
operations...................................... $ -- $ -- $ 888
======== ======= ========
Royalties receivable from sale of discontinued
operations...................................... $ -- $ -- $ 1,782
======== ======= ========
Note issued for other assets..................... $ -- $ -- $ 800
======== ======= ========
Warrant received from sale of discontinued
operations...................................... $ -- $ -- $ 189
======== ======= ========
</TABLE>

See accompanying notes to consolidated financial statements

51
<PAGE>

NETOPIA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Nature of Business

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

Principles of Consolidation

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

Cash Equivalents and Short-Term Investments

Cash equivalents consist of instruments with purchased maturities of 90 days
or less. Certain cash equivalents and all of the Company's investments are
classified as available-for-sale. The securities are carried at fair value,
which approximates cost.

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

Cash equivalents and short-term investments classified as available-for-sale
as of September 30, 2000 and 1999, consisted of the following (in thousands):

<TABLE>
<CAPTION>
September 30,
---------------
2000 1999
------- -------
<S> <C> <C>
U.S. Treasury Securities and obligations of U.S.
Government agencies...................................... $ -- $ 996
Money market funds........................................ 478 --
Corporate debt............................................ 22,370 3,015
Commercial paper.......................................... 36,713 49,822
------- -------
$59,561 $53,833
======= =======
</TABLE>

The available-for-sale securities as of September 30, 2000 and 1999 were all
due in one year or less. As of September 30, 2000, the Company had an
unrealized loss on short-term investments of approximately $506,000. Expected
maturities may differ from contractual maturities because issuers of the
securities may have the right to prepay obligations without penalties.

Revenue Recognition

The Company's revenue recognition policies are in accordance with Statement
of Position (SOP) 97-2, Software Revenue Recognition, as amended. In general,
software license revenues are recognized when a non-cancelable license
agreement has been signed and the customer acknowledges an unconditional
obligation to

52
<PAGE>

NETOPIA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

pay, the software product has been delivered, there are no uncertainties
surrounding product acceptance, the fees are fixed and determinable, and
collection is considered probable; professional services revenues are
recognized as such services are performed; and maintenance revenues, including
revenues bundled with software agreements which entitle the customers to
technical support and future unspecified enhancements to the Company's
products, are deferred and recognized ratably over the related contract period,
generally twelve months. Revenues recognized from multiple-element software
arrangements are allocated to each element of the arrangement based on the fair
values of the elements, such as software products, upgrades, enhancements, post
contract customer support, installation, or training. The determination of fair
value is based on objective evidence which is specific to the Company.

The Company records unearned revenue for software arrangements when cash has
been received from the customer and the arrangement does not qualify for
revenue recognition under the Company's revenue recognition policy. The Company
records accounts receivable for software arrangements when the arrangement
qualifies for revenue recognition and cash or other consideration has not been
received from the customer.

In December 1998, AcSEC issued SOP 98-9, Software Revenue Recognition, With
Respect to Certain Transactions, which requires recognition of revenue using
the "residual method" in a multiple-element arrangement when fair value does
not exist for one or more of the delivered elements in the arrangement. Under
the "residual method", the total fair value of the undelivered elements is
deferred and subsequently recognized in accordance with SOP 97-2. There was no
material change to the Company's accounting for revenues as a result of the
provisions of SOP 98-9.

Concentrations of Credit Risk

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

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

The Company sells its products primarily through distributors and resellers.
Sales are generally not collateralized, credit evaluations are performed as
appropriate, and allowances are provided for estimated credit losses.
Historically, the Company has not experienced significant losses on trade
receivables from any particular customer, industry, or geographic region.
However, during the fiscal fourth quarter of 2000, the Company fully reserved
$1.9 million of outstanding accounts receivable owed by one Competitive Local
Exchange (CLEC) customer.

Inventories

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

Furniture, Fixtures, and Equipment

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

53
<PAGE>

NETOPIA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Impairment of Long-Lived Assets, Including Identifiable Intangibles

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

Intangible assets consists of developed and core technology, assembled
workforce and a non-compete agreement related to the Company's acquisitions of
WebOrder, StarNet, Serus and netOctopus. Goodwill is amortized over a four year
period. Intangible assets are being amortized over their estimated useful life
of approximately three years.

Software Development Costs

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

Amortization of capitalized product development costs begins when the
products are available for general release to customers, and is computed on a
product-by-product basis as the greater of: (i) the ratio of current gross
revenue for a product to the total of current and anticipated future gross
revenues for the product; or (ii) the straight-line method over the remaining
estimated economic life of the product, which is generally two years. All other
research and development expenditures are charged to research and development
expense in the period incurred. During fiscal 2000, 1999 and 1998, $679,000,
$656,000 and $237,000, respectively, of product development cost incurred
subsequent to delivery of a working model, under a development agreement with a
third party, have been capitalized.

Advertising Costs

The Company records advertising costs in accordance with SOP 93-7, Reporting
On Advertising Costs. SOP 93-7 permits the capitalization and amortization of
direct response advertising costs when persuasive historical evidence exists
that allows the entity to reliably predict future net revenues that will be
obtained as a result of the advertising. Advertising expense was $707,000, $1.7
million and $1.3 million for fiscal 2000, 1999 and 1998, respectively. For the
fiscal years ended September 30, 2000, 1999 and 1998, the Company did not
capitalize advertising costs.

Income Taxes

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

54
<PAGE>

NETOPIA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Investments

The Company accounts for investments in equity securities in accordance with
the provisions of Statement of Financial Accounting Standards (SFAS) No. 115,
Accounting for Certain Investments in Debt and Equity Securities. Marketable
securities are composed primarily of equity securities. The Company has equity
securities in one publicly traded Company and in two privately held companies.
The Company classifies all of its equity securities as available-for-sale.
These securities are carried at fair value, with the unrealized gains and
losses, net of income taxes, reported as a component of comprehensive income
(loss).

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

Basic net loss per share (EPS) is based on the weighted average number of
shares of common stock outstanding during the period. Diluted net loss per
share is based on the weighted average number of shares of common stock
outstanding during the period and dilutive common equivalent shares from
options and warrants outstanding during the period. No common equivalent shares
are included for loss periods as they would be anti-dilutive. Dilutive common
equivalent shares consist of options and warrants.

Potentially dilutive common shares have been excluded from the computation
of diluted EPS for fiscal 2000, 1999 and 1998 since their effect on EPS is
antidilutive due to the losses incurred in each period. Potentially dilutive
common shares which were excluded from the computation of diluted EPS consisted
of options to purchase common stock totaling 4,019,480 in fiscal 2000;
4,040,520 in fiscal 1999; 3,520,899 in fiscal 1998, and warrants to purchase
common stock totaling 60,000 in each of fiscal 1999 and 1998.

Comprehensive Income (Loss)

The Company adopted SFAS No. 130, Reporting Comprehensive Income in April
1999. SFAS No. 130 establishes standards for the reporting and disclosure of
comprehensive income (loss) and its components. Comprehensive income (loss)
includes all changes in equity during a period except those resulting from
investments by or distributions to owners.

For the years ended September 30 2000 and 1999, comprehensive income /
(loss) was ($534,000) and $28,000, respectively. There was no comprehensive
income / (loss) for the fiscal year ended September 30, 1998. The components of
other comprehensive income for the fiscal years ended September 30, 2000 and
1999 relate solely to unrealized gains and losses on available-for-sale
investments.

55
<PAGE>

NETOPIA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Recent Accounting Pronouncements

In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
No. 133, Accounting for Derivative and Hedging Activities. SFAS No. 133
establishes accounting and reporting standards for derivative instruments
(including derivative instruments embedded in other contracts) and for hedging
activities. SFAS No. 133, as amended by SFAS No. 137, is effective for all
fiscal quarters of fiscal years beginning after June 15, 2000. The Company will
adopt SFAS 133 in our first fiscal quarter of 2001 and the Company does not
expect a material effect on its consolidated financial position results of
operations.

In March 2000, the FASB issued Interpretation (FIN) No.44, Accounting for
Certain Transactions Involving Stock Compensation--an Interpretation of
Accounting Principles Board APB No. 25. APB No. 25 clarifies (a) the definition
of employee for purposes of applying APB No. 25; (b) the criteria for
determining whether a plan qualifies as a noncompensatory plan; (c) the
accounting consequences of various modifications to the terms of a previously
fixed stock option or award; and (d) the accounting for an exchange of stock
compensation awards in a business compensation. The Company adopted FIN No. 44
on July 1, 2000 which did not have a material effect on the Company's
consolidated results of operations and financial position.

(2) Acquisitions

WebOrder

On March 23, 2000, the Company acquired all the outstanding common and
preferred stock of WebOrder, a California corporation, in a merger transaction
in which WebOrder merged into WO Merger Corporation, a wholly owned subsidiary
formed in connection with the transaction. WebOrder was a developer of e-
commerce infrastructure for small and medium size businesses. WebOrder's Smart
Commerce System offers e-commerce solutions to on-line businesses including the
ability to manage order processing, and the ability to maintain records of
customer transactions flowing through a merchant's e-store.

The Company accounted for the transaction under the purchase method. The
aggregate purchase price of the transaction was approximately $20.7 million,
based on the consideration paid at closing. The final purchase price is
dependent on potential earnout payments as discussed below. The aggregate
purchase price includes:

. $1.6 million in cash paid on the closing date of the transaction;

. 233,119 shares of our common stock issued on the closing date;

. A series of potential earnout payments paid in cash and common stock
after the closing date if certain revenue milestones are achieved. These
earnout opportunities will be added to and included in the purchase price
for accounting purposes when the earnouts have been achieved and
additional consideration is distributable. At September 30, 2000, no
milestones had been achieved;

. The substitution of stock options to purchase the Company's common stock
in replacement of the WebOrder options held by WebOrder's former
employees, who joined Netopia after the closing, valued at approximately
$2.1 million. The Company used the Black-Scholes method to value the
options issued using the following assumptions: volatility of 101%,
expected life of 5 years, interest rate of 5.7%, and no dividends; and

. Transaction costs of approximately $975,000 which includes legal fees,
accounting fees, and fees for other related professional services.

56
<PAGE>

NETOPIA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Approximately 15,695 shares of the Company's common stock will be held in
escrow for one year after the closing to satisfy WebOrder's indemnification
obligations.

The excess purchase price over the net book value of the assets acquired was
approximately $20.1 million. The transaction resulted in goodwill and other
intangible assets of approximately $17.1 million, which is being amortized over
four and three years, respectively and a charge for acquired in-process
research and development of approximately $3.0 million. During the fiscal year
ended September 30, 2000, the Company amortized $2.4 million in goodwill and
other intangible assets related to the acquisition of WebOrder.

Both cost and income approaches were used to appraise the value of the
business and projects acquired. Such methods take into consideration
replacement costs of assets acquired, the stage of completion of the projects
and estimates related to expected future revenues, expenses and cash flows
which are then discounted back to present day amounts. Based upon these
estimates, material net cash flows from the acquired business are expected to
occur during the Company's first quarter of 2001. These cash flows were
discounted using a weighted average discount rate of 42%. Based upon the
expenses incurred and the development time invested in the products prior to
the acquisition and the estimated expenses and development time to complete the
products, the Company determined the products purchased in aggregate, including
products under development and completed products, to be approximately 82%
complete at the time of acquisition. The Company completed the in-process
research and development during the fiscal fourth quarter of 2000 and expended
approximately $326,000 to complete the in-process research and development.

All of WebOrder's former full time employees became employees of Netopia.
WebOrder's founder and one other key shareholder/employee entered into non-
competition agreements in connection with the acquisition.

StarNet Technologies

On October 13, 1999, the Company acquired StarNet Technologies, Inc.,
(StarNet), a California corporation, in a merger transaction in which StarNet
merged into a wholly owned subsidiary. StarNet had been developing a voice
channel technology architecture that allows the transmission of voice lines
over a digital subscriber line along with the simultaneous transmission of
standard data packets.

The Company accounted for the transaction under the purchase method. The
aggregate consideration constituting the purchase price was approximately $27.5
million at closing and may increase by up to an additional $4.9 million
depending on potential earnout payments. The aggregate consideration included:

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

. 447,852 shares of our common stock issued on the closing date;

. A series of potential cash earnout payments aggregating up to
approximately $5.9 million at various times after the closing date if
certain technical and revenue milestones are achieved. These earnout
opportunities will be included in the purchase price for accounting
purposes when the milestones are achieved and additional consideration is
distributable. At the acquisition date, we had deemed probable and
recorded approximately $1.0 million in earnout payments. During the three
months ended June 30, 2000, the Company determined that the milestones
for the $1.0 million potential earnout payment would not be met and
accordingly, reduced the purchase price and amortization of goodwill
relating to the purchase of StarNet by such amount. As of September 30,
2000, no earnouts have been achieved.

57
<PAGE>

NETOPIA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

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

. Transaction costs of approximately $820,000 which includes legal fees,
accounting fees, fees paid for an independent fairness opinion, and fees
for other services.

Approximately 30,673 shares of common stock were held in escrow for a period
of time after the closing to satisfy StarNet's indemnification obligations
under the definitive acquisition agreements. During the three months ended June
30, 2000, a portion of these shares were released from the escrow to Netopia to
satisfy Netopia's indemnification claims, and the remaining shares were
released from escrow to StarNet's former shareholders.

The acquisition has been accounted for as a purchase and resulted in
goodwill and other intangible assets of approximately $22.4 million at closing
which is being amortized over four and three years, respectively, and a charge
for acquired in-process research and development of $5.7 million. During the
fiscal year ended September 30, 2000, the Company amortized $6.6 million in
goodwill and other intangible assets related to the purchase of StarNet.

The Company used the income approach to appraise the value of the business
and projects acquired. Such method takes into consideration the stage of
completion of the projects and estimates related to expected future revenues,
expenses and cash flows which are then discounted back to present day amounts.
Based upon these estimates, material net cash flows from the acquired business
were expected to occur during the fiscal fourth quarter of 2000. These cash
flows were discounted using a weighted average discount rate of 20%. Based upon
the expenses incurred and the development time invested in the products prior
to the acquisition and the estimated expenses and development time to complete
the products, the Company determined the products purchased in aggregate,
including products under development and completed products, to be
approximately 73% complete at the time of acquisition. The Company expects to
complete the in-process research and development in the second fiscal quarter
of 2001 and the Company estimates the cost to complete the in-process research
and development to be approximately $287,000.

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

The following summary, prepared on an unaudited pro forma basis, reflects
the condensed consolidated statements of operations for the fiscal years ended
September 30, 2000 and 1999 assuming WebOrder and StarNet had been acquired as
of the beginning of the periods presented (in thousands, except per share
data):

<TABLE>
<CAPTION>
September 30,
-----------------
2000 1999
------- --------
<S> <C> <C>
Revenues................................................ $90,475 $ 45,387
Net loss................................................ $(9,647) $(21,928)
Basic and diluted loss per share........................ $ (0.57) $ (1.59)
Weighted average shares used in the computation of basic
and diluted loss per share............................. 16,957 13,773
</TABLE>

The above pro forma results for the fiscal years ended September 30, 2000
and 1999 exclude the charges for acquired in-process research and development.
The above pro forma results for the fiscal years ended September 30, 2000 and
1999 and have been adjusted to include the amortization of goodwill and other
intangibles related to the acquisitions of StarNet and WebOrder for each
period.

58
<PAGE>

NETOPIA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

The above pro forma results are not necessarily indicative of what would
have occurred if the acquisitions had been in effect for the periods presented.
In addition, they are not intended to be a projection of future results and do
not reflect any synergies that might be achieved from combined operations.

netOctopus

On December 31, 1998, the Company purchased from Network Associates'
substantially all of the assets and assumed certain liabilities related to the
netOctopus systems management software (netOctopus). The netOctopus software is
a suite of administration tools under development that allows for simultaneous
system support of multiple users across MacOS computer networks. 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 Company accounted for the transaction under the purchase method. The
aggregate purchase price of the transaction was approximately $1.1 million,
based on the consideration paid at closing. The final purchase price is
dependent on potential earnout payments. The aggregate purchase price includes:

. $1.1 million in cash paid on the closing date of the transaction; and

. A series of potential earnout payments totaling $300,000 if certain
revenue and technical milestones are achieved. These earnout
opportunities will be added to and included in the purchase price for
accounting purposes when the milestones have achieved and additional
consideration is distributable. In our first fiscal quarter of 2000, we
made a $100,000 earnout payment which we recorded as part of the purchase
price of the transaction.

The excess purchase price over the net book value acquired was $1.1 million,
of which, based upon the Company's estimates prepared in conjunction with a
third party valuation consultant, $400,000 was allocated to acquired in-process
research and development and $753,000 was allocated to intangible assets. The
amounts allocated to intangible assets include assembled workforces of $60,000,
developed technology of $540,000 and goodwill of $100,000. The Company is
amortizing goodwill and other intangible assets related to the netOctopus
transaction over four years. During the fiscal years ended September 30, 2000
and 1999, the Company amortized $226,000 and $144,000, respectively, in
goodwill and other intangible assets related to the acquisition of netOctopus.

The Company used the income approach to appraise the value of the business
and projects acquired. Such method takes into consideration the stage of
completion of the project and estimates related to expected future revenues,
expenses and cash flows which are then discounted back to present day amounts.
Based upon these estimates, material net cash flows from the acquired business
are expected to begin in the calendar year 2000. These cash flows were
discounted using a discount rate of 25.0%. Based upon the expenses incurred and
the development time invested in the product prior to the acquisition and the
estimated expenses and development time to complete the product, the Company
determined the product to be approximately 70% complete at the time of
acquisition. In fiscal 1999, the Company completed the development of the
Windows versions of the product. From the acquisition date, the Company
expended approximately $287,000 to complete development of the product.

Serus LLC

On December 17, 1998, the Company purchased substantially all of the assets
and assumed certain liabilities and the existing operations of Serus LLC
(Serus), a Utah limited liability company. Serus was developing a java-based
web site editing software product which would allow web site owners to modify
and

59
<PAGE>

NETOPIA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

edit the appearance of their web site through their web browser with minimal
knowledge of Hypertext Markup Language (HTML). The Company is marketing the
products both independently and along with its Netopia Web platform 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 Company accounted for the transaction under the purchase method. The
aggregate purchase price of the transaction was approximately $7.0 million,
based on the consideration paid at closing. The final purchase price is
dependent on potential earnout payments. The aggregate purchase price includes:

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

. 409,556 shares of the Company's common stock issued on the closing date;
and

. A $1.0 million earnout opportunity based upon certain revenue and
technical milestones achieved. As of September 30, 2000 the earnout
period had expired and no milestones had been achieved. 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 is amortizing goodwill and other intangible assets related to the
Serus transaction over four years. During the fiscal years ended
September 30, 2000 and 1999, the Company amortized $533,000 and $398,000,
respectively, in goodwill and other intangible assets related to the
acquisition of Serus.

The Company used the income approach to appraise the value of the business
and projects acquired. Such method takes into consideration the stage of
completion of the project and estimates related to expected future revenues,
expenses and cash flows which are then discounted back to present day amounts.
Based upon these estimates, material net cash flows from the acquired business
are expected to begin in the calendar year 2001. These cash flows were
discounted using a discount rate of 44.0%. Based upon the expenses incurred and
the development time invested in the product prior to the acquisition and the
estimated expenses and development time to complete the product, the Company
determined the product to be approximately 85% complete at the time of
acquisition. On November 15, 1999, the Company launched the product and is
marketing the product under the Net Jane product brand name. Since the
acquisition date, the Company expended approximately $664,000 to complete
development of the product.

The following table represents the balances in goodwill and other intangible
assets, net of accumulated amortization, related to the Company's acquisitions
of WebOrder, StarNet, Serus, and netOctopus at September 30, 2000 and 1999:

<TABLE>
<CAPTION>
September 30,
(in thousands)
----------------
2000 1999
-------- ------
<S> <C> <C>
Goodwill and Other Intangible Assets Remaining at
September 30:
Goodwill................................................ $ 26,014 $2,204
Developed and Core Technology Acquired.................. 12,172 60
Assembled Workforce..................................... 1,458 640
Non-Compete Agreement................................... 1,660 --
-------- ------
41,304 2,904
Accumulated amortization................................ (10,288) (542)
-------- ------
$ 31,016 $2,362
======== ======
</TABLE>

60
<PAGE>

NETOPIA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

(3) Discontinued Operations

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

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

The note receivable was for $1.0 million which was payable on July 31, 2000,
bearing interest at 8% per annum. Farallon paid the note and related interest
receivable in its entirety on May 9, 2000.

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

Additionally, the Company received and valued a warrant to purchase up to 5%
of the equity of Farallon as of the closing of the transaction. Subsequently,
the Company entered into an agreement with the buyer to reduce the warrant
entitlement to 3% of the equity of Farallon.

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

During the fiscal third quarter of 2000, Farallon bought out its royalty
obligation in its entirety for an amount in excess of the receivable on the
Company's balance sheet. In addition, the Company exercised our warrant in
Farallon and sold the shares received upon exercise of the warrant. These
transactions resulted in income of $1.3 million, net of taxes, and are included
in the gain on sale from discontinued operations for the fiscal year ended
September 30, 2000. In addition, the gain on sale from discontinued operations
also represents the reversal of a liability recorded for the excess space
created at the Company's Alameda, California headquarters that the Company
believed could not be subleased to third parties at the time of sale. During
the three months ended December 31, 1999, the Company found alternative uses
for this excess space.

61
<PAGE>

NETOPIA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

(4) Inventories

Inventories consisted of the following (in thousands):

<TABLE>
<CAPTION>
September 30,
--------------
2000 1999
------- ------
<S> <C> <C>
Raw materials and work in process............................ $ 4,723 $1,699
Finished goods............................................... 5,561 1,982
------- ------
$10,284 $3,681
======= ======
</TABLE>

(5) Furniture, Fixtures, and Equipment

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

<TABLE>
<CAPTION>
September 30,
------------------
2000 1999
-------- --------
<S> <C> <C>
Office equipment......................................... $ 3,568 $ 2,684
Furniture and fixtures................................... 2,198 1,637
Computers................................................ 10,505 8,675
Leasehold improvements................................... 209 569
-------- --------
16,480 13,565
Accumulated depreciation and amortization................ (12,011) (11,162)
-------- --------
$ 4,469 $ 2,403
======== ========
</TABLE>

(6) Income Taxes

Total income tax expense (benefit) for the years ended September 30, 2000,
1999, and 1998 is allocated as follows (in thousands):

<TABLE>
<CAPTION>
September 30,
-------------------
2000 1999 1998
----- ----- ------
<S> <C> <C> <C>
Continuing operations................................... $ -- $ -- $2,155
Discontinued operations................................. (397) -- 385
----- ----- ------
$(397) $ -- $2,540
===== ===== ======
</TABLE>

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

<TABLE>
<CAPTION>
September 30,
------------------
2000 1999 1998
----- ----- ------
<S> <C> <C> <C>
Current:
Federal................................................ $ -- $ -- $ (596)
State.................................................. -- -- (118)
----- ----- ------
-- -- (714)
Deferred:
Federal................................................ -- -- 2,191
State.................................................. -- -- 678
----- ----- ------
-- -- 2,869
----- ----- ------
Total................................................ $ -- $ -- $2,155
===== ===== ======
</TABLE>

62
<PAGE>

NETOPIA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

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

<TABLE>
<CAPTION>
September 30,
-------------------------
2000 1999 1998
------- ------- -------
<S> <C> <C> <C>
Computed "expected" tax (benefit) of 34%........ $(5,990) $(2,672) $(2,000)
Change in valuation allowance for deferred tax
assets......................................... 1,853 2,772 5,459
Research credits................................ -- (100) (770)
Acquired intangibles............................ 4,073 -- --
State tax and other, net........................ 64 -- (534)
------- ------- -------
$ -- $ -- $ 2,155
======= ======= =======
</TABLE>

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,
-----------------
2000 1999
-------- -------
<S> <C> <C>
Deferred tax assets:
Reserves and accruals not currently deductible.......... $ 3,096 $ 1,373
Deferred rent........................................... 49 119
Research and other credits.............................. 2,950 1,882
Tangible and intangible assets.......................... -- 279
Net operating losses.................................... 11,689 5,713
State tax and other, net................................ -- --
-------- -------
Gross deferred assets................................. 17,784 9,366
Less valuation allowance................................ (13,710) (9,366)
-------- -------
Total deferred tax assets............................. $ 4,074 $ --
-------- -------
Deferred tax liabilities:
Tangible and intangible assets.......................... (4,074) --
-------- -------
Total deferred tax liabilities............................ $ (4,074) $ --
-------- -------
Net deferred tax liabilities.............................. $ -- $ --
======== =======
</TABLE>

The net change in the total valuation allowance for the years ended
September 30, 2000 and 1999 was increases of $4.3 million and $2.8 million,
respectively.

At September 30, 2000 and 1999, 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. Included in the valuation allowance is a tax benefit attributable to
noncompensatory stock options of $7.4 million of tax benefit attributable to
purchase acquisitions which, when realized, will be a credit to additional
paid-in-capital.

At September 30, 2000, the Company had net operating loss carryforwards of
approximately $30.1 million for federal tax purposes and $16.1 million for
state tax purposes. If not earlier utilized, the federal net operating loss
carryforwards will expire in various years beginning in 2019 through 2020 and
the state net operating loss carryforwards will expire in various years
beginning 2003 through 2005.

63
<PAGE>

NETOPIA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

At September 30, 2000, the Company had research credit carryforwards of
approximately $1.8 million for federal tax purposes and $700,000 for state tax
purposes. If not earlier utilized, the federal research credit carryforwards
will expire in various years beginning 2006 through 2020. The state research
credits carry forward indefinitely until utilized. The Company has California
manufacturing credit carryforwards of approximately $49,000 which expire in
various years beginning 2006 through 2008.

At September 30, 2000, the Company also had minimum tax credit carryforwards
of approximately $149,000 for federal tax purposes and $169,000 for state tax
purposes. These credits carryforward indefinitely until utilized.

Federal and California state tax laws impose substantial restrictions on the
utilization of net operating loss carryforwards in the event of an "ownership
change" for tax purposes, as defined in section 382 of the Internal Revenue
Code. If such ownership change were to occur, utilization of net operating
losses would be subject to annual limitations in future years.

(7) Stockholders' Equity and Stock Option Plan

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

Common Stock

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

Common Stock Warrants

Warrants to purchase 60,000 shares of common stock were issued in fiscal
1997 for consulting services provided. The exercise price of the warrants was
$4.00. The Company recognized an expense of $60,000 for the estimated fair
value of the warrants issued. The warrants were exercised, in full, on March
24, 2000 in a cashless transaction. In payment of the exercise price of the
warrants, the Company retained 3,125 warrants which was based on the fair
market value of the Company's stock on March 24, 2000.

Stock Option Plan

On April 16, 1996, the Company adopted the 1996 Stock Option Plan (the 1996
Plan) providing for the issuance of incentive or non-statutory options to
directors, employees, and non-employee consultants. Options are granted at the
discretion of the Board of Directors. As of September 30, 2000, the 1996 Plan
share reserve of 4,281,418 shares is comprised of (i) 4,019,480 shares subject
to outstanding options and (ii) 261,938 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.

64
<PAGE>

NETOPIA, INC. AND SUBSIDIARIES

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 initial public offering at the initial
offering price. These options were granted to two non-employee Board of
Director members, of which one currently remains on the Company's Board of
Directors. Thereafter, each new director will be granted an option to purchase
25,000 shares of common stock on the date they become a Board member of the
Company at the then current fair market value. Options issued to Board members
after January 13, 2000 will become exercisable in four successive and equal
annual installments over the non-employee Board member's period of continued
service as a Board member, beginning one year from the grant date of the
option.

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

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

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

<TABLE>
<CAPTION>
Incentive Stock Options
----------------------------
Weighted
Shares Average
Under Options Exercise Price
------------- --------------
<S> <C> <C>
Outstanding as of September 30, 1997............ 2,867,200 4.32
Options granted................................. 1,409,425 5.51
Options exercised............................... (312,090) 2.40
Options cancelled............................... (443,636) 4.80
----------
Outstanding as of September 30, 1998............ 3,520,899 4.90
Options granted................................. 1,413,900 11.87
Options exercised............................... (626,013) 4.55
Options cancelled............................... (268,266) 6.89
----------
Outstanding as of September 30, 1999............ 4,040,520 7.26
Options granted................................. 1,564,823 41.13
Options exercised............................... (1,203,369) 4.81
Options cancelled............................... (382,494) 20.34
----------
Outstanding as of September 30, 2000............ 4,019,480 19.94
==========
Exercisable..................................... 1,431,806 $ 9.73
==========
</TABLE>

65
<PAGE>

NETOPIA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

The following table summarizes information about stock options outstanding
at September 30, 2000:

<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------------- ----------------------------
Weighted-
Number of average Number
outstanding remaining exercisable
shares as of contractual Weighted- as of Weighted-
September 30, life average September 30, average
Range of exercise prices 2000 (years) exercise price 2000 exercise price
------------------------ ------------- ----------- -------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
$ 0.6105-$4.375 456,968 5.39 $ 2.8306 348,733 $ 2.5364
4.5000- 5.2500 463,398 7.34 5.0200 233,507 5.0540
5.3125- 6.3750 698,435 7.14 5.8584 403,939 5.9783
6.4375-14.8750 573,087 8.08 7.6381 185,608 7.8448
16.0000-31.0000 621,752 8.82 22.6390 145,342 19.3761
31.6250-47.0000 415,538 9.62 37.0716 27,139 36.0207
48.0000-48.0000 718,927 9.34 48.0000 83,410 48.0000
49.0000-86.2500 71,375 9.24 56.7933 4,128 49.0000
--------- ---- -------- --------- --------
4,019,480 8.05 $19.9358 1,431,806 $ 9.7326
========= ==== ======== ========= ========
</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 500,000 shares have been
approved for issuance under the Purchase Plan. Employees may purchase shares of
common stock at a price per share that is 85% of the lesser of the fair market
value as of the beginning or the end of the semi-annual option period.

Shares issued under the Purchase Plan totaled 130,306 in fiscal 2000,
199,721 in fiscal 1999, 153,157 in fiscal 1998 and 178,236 in fiscal 1997. As
of September 30, 2000, 661,420 shares have been issued under the Purchase Plan
and 138,580 shares were reserved for future issuances under the plan.

Pro Forma Disclosure--Compensatory Stock Arrangements

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

If the Company had elected to recognize compensation cost based on the fair
value of the options granted at grant date and the fair value of shares
purchased under the plan as prescribed by SFAS No. 123, net 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,
----------------------------
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Net income (loss)--as reported............... $(15,137) $ (7,860) $(10,533)
Net income (loss)--pro forma................. $(28,892) $(12,143) $(13,384)
Basic and diluted net loss per share--as
reported.................................... $ (0.90) $ (0.60) $ (0.90)
Basic and diluted net loss per share--pro
forma....................................... $ (1.72) $ (0.93) $ (1.15)
</TABLE>

66
<PAGE>

NETOPIA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

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

The effect of applying SFAS No. 123 for disclosing compensation costs may
not be representative of the effects on reported net loss for the future years
because pro forma net loss reflects compensation costs only for stock options
granted in fiscal 2000, 1999, 1998 and 1997. The weighted average fair value of
employee stock options granted during fiscal 2000, 1999, 1998 and 1997 was
$31.22, $8.08, $3.48 and $3.05 respectively.

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

<TABLE>
<CAPTION>
Years ended
September 30,
-----------------
2000 1999 1998
----- ---- ----
<S> <C> <C> <C>
Expected volatility....................................... 103.5% 95% 84%
Risk-free interest rate................................... 5.77 4.59% 4.25%
Expected dividend yield................................... -- -- --
</TABLE>

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

(8) Commitments and Contingencies

Leases

The Company conducts its operations in leased facilities and with equipment
under operating lease agreements expiring at various dates through 2005.

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>
2001.................................................................. $1,758
2002.................................................................. 1,590
2003.................................................................. 367
2004.................................................................. 72
2005.................................................................. 11
thereafter............................................................ --
------
Total minimum lease payments........................................ $3,798
======
</TABLE>

Total rental expense for all operating leases amounted to approximately $1.7
million, $1.1 million and $1.2 million for the fiscal years ended September 30,
2000, 1999 and 1998, respectively.

67
<PAGE>

NETOPIA, INC. AND SUBSIDIARIES

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.

(9) Geographic, Segment and Significant Customer Information

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

68
<PAGE>

NETOPIA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

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

<TABLE>
<CAPTION>
WEB PLATFORM PRODUCTS
---------------------
WEB SITE
/ E-
INTERNET STORE TIMBUKTU TOTAL
EQUIPMENT PRODUCTS PRODUCTS PRODUCTS
--------- -------- -------- --------
<S> <C> <C> <C> <C>
2000
Revenues.................................. $65,546 $9,398 $15,262 $ 90,206
Cost of revenues.......................... 46,582 247 450 47,279
------- ------ ------- --------
Gross profit.............................. 18,964 9,151 14,812 42,927
Unallocated operating expenses............ 64,124
--------
Operating loss.......................... (21,197)
Other income, net......................... 3,579
--------
Loss before income taxes................ (17,618)
Income tax provision...................... --
--------
Loss from continuing operations......... $(17,618)
========
</TABLE>

<TABLE>
<CAPTION>
WEB PLATFORM PRODUCTS
---------------------
WEB SITE
/ E-
INTERNET STORE TIMBUKTU INTERNET
EQUIPMENT PRODUCTS PRODUCTS EQUIPMENT
--------- -------- -------- ---------
<S> <C> <C> <C> <C>
1999
Revenues.................................. $24,460 $3,826 $15,865 $44,151
Cost of revenues.......................... 15,597 13 633 16,243
------- ------ ------- -------
Gross profit.............................. 8,863 3,813 15,232 27,908
Unallocated operating expenses............ 37,834
-------
Operating loss.......................... (9,926)
Other income, net......................... 2,066
-------
Loss before income taxes................ (7,860)
Income tax provision...................... --
-------
Loss from continuing operations......... $(7,860)
=======
</TABLE>

<TABLE>
<CAPTION>
WEB PLATFORM PRODUCTS
---------------------
WEB SITE
/ E-
INTERNET STORE TIMBUKTU INTERNET
EQUIPMENT PRODUCTS PRODUCTS EQUIPMENT
--------- -------- -------- ---------
<S> <C> <C> <C> <C>
1998
Revenues.................................. $10,885 $691 $13,260 $24,836
Cost of revenues.......................... 7,064 16 875 7,955
------- ---- ------- -------
Gross profit.............................. 3,821 675 12,385 16,881
Unallocated operating expenses............ 24,985
-------
Operating loss.......................... (8,104)
Other income, net......................... 2,222
-------
Loss before income taxes................ (5,882)
Income tax provision...................... 2,155
-------
Loss from continuing operations......... $(8,037)
=======
</TABLE>

69
<PAGE>

NETOPIA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

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

<TABLE>
<CAPTION>
Years ended September
30,
-----------------------
2000 1999 1998
------- ------- -------
<S> <C> <C> <C>
United States........................................ $73,744 $31,945 $16,670
Europe............................................... 13,558 9,820 6,215
Asia/Pacific......................................... 826 1,066 1,175
Canada and Other..................................... 1,689 1,222 706
Latin America........................................ 389 98 70
------- ------- -------
Total revenues..................................... $90,206 $44,151 $24,836
======= ======= =======
</TABLE>

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

During the fiscal years ended September 30, 2000, 1999 and 1998:

. Revenues from CLECs accounted for 40%, 9% and 0%, respectively, of our
total revenues;

. Covad Communications, a CLEC, accounted for 16%, 0% and 0%, respectively,
of our total revenues;

. Northpoint Communications, a CLEC, accounted for 12%, 6% and 0%,
respectively, of our total revenues; and

. Ingram Micro, a worldwide distributor of computer technology products and
services, accounted for 7%, 10% and 12%, respectively, of our total
revenues.

No other customers during the fiscal years ended September 30, 2000, 1999
and 1998 accounted for 10% or more of our total revenues.

For the fiscal year ended September 30, 2000, all revenue from Covad
Communications related to our Internet equipment.

For the fiscal years ended September 30, 2000 and 1999, all revenue from
Northpoint Communications related to our Internet equipment.

For the fiscal year ended September 30, 2000, 77% of our revenue from Ingram
Micro related to our Internet equipment and 23% related to our Web Platform
products. For the fiscal year ended September 30, 1999, 61% of our revenue from
Ingram Micro related to our Internet equipment and 39% related to our Web
Platform products. For the fiscal year ended September 30, 1998, 50% of our
revenue from Ingram Micro related to our Internet equipment and 50% related to
our Web Platform products.

70
<PAGE>

NETOPIA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

(10) Subsequent Events

On December 8, 2000, we purchased $2.0 million of Series D Preferred stock
in Megapath Networks Incorporated (Megapath). Megapath, a broadband service
provider, provides high-speed, Internet access to small and midsize businesses.
Megapath offers high-speed DSL access, Web-site design and development, e-
commerce and Web hosting services. During the year ended September 30, 2000
Megapath had purchased our Internet equipment and licensed our Web site and e-
commerce platform.

71
<PAGE>

FINANCIAL STATEMENT SCHEDULE

Schedule--Valuation and Qualifying Accounts (in thousands)

<TABLE>
<CAPTION>
Charged
Balance at (credited) Balance
beginning to costs and at end of
Description of period expenses Deductions Other(a) period
----------- ---------- ------------ ---------- -------- ---------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful
accounts:
Fiscal year ended
September 30, 2000.... $579 $2,832 $594 -- $2,817
Fiscal year ended
September 30, 1999.... 400 534 355 -- 579
Fiscal year ended
September 30, 1998.... 566 96 31 231 400

Allowance for returns and
rebates:
Fiscal year ended
September 30, 2000.... $217 $ 336 $112 -- $ 441
Fiscal year ended
September 30, 1999.... 217 -- -- -- 217
Fiscal year ended
September 30, 1998.... 561 105 210 239 217
</TABLE>
--------
(a) Amounts transferred with sale of LAN Division

72
<PAGE>

Item 9. Changes In and Disagreements With Accountants On Accounting And
Financial Disclosure

Not applicable

PART III

Item 10. Directors and Executive Officers of the Registrant

Our executive officers and directors, and their ages as of December 1, 2000,
are as follows:

<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Alan B. Lefkof(1)....... 47 President, Chief Executive Officer and Director
James A. Clark.......... 44 Vice President and Chief Financial Officer
Brooke A. Hauch......... 52 Senior Vice President and Chief Information Officer
David A. Kadish......... 48 Vice President, General Counsel and Secretary
Thomas A. Skoulis....... 44 Senior Vice President and General Manager, Web Platforms
Thomas J. Spadafore..... 42 Senior Vice President, Sales and Service, Web Platforms
Michael P. Trupiano..... 44 Senior Vice President and General Manager, Internet Equipment
Reese M. Jones.......... 42 Chairman of the Board of Directors
David C. King(2)(3)..... 40 Director
David F. 51 Director
Marquardt(2)(3)........
</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.

Ms. Hauch. Brooke A. Hauch, Senior Vice President and Chief Information
Officer, joined Netopia in October 1991. Prior to joining Netopia, Ms. Hauch
was Vice President of Customer Service at Argonaut Information Systems, Inc.,
Western Regional Vice President of Software Sales and Consulting at Ross
Systems, Inc. and Project Manager at Blue Cross of Northern California. Ms.
Hauch holds a bachelor's degree in business from Arizona State University.

Mr. Kadish. David A. Kadish, Vice President, General Counsel and Secretary,
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.

73
<PAGE>

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

Mr. Spadafore. Thomas J. Spadafore, Senior Vice President, Sales and
Service, Web Platforms, joined Netopia in July 1997. Prior to joining Netopia,
Mr. Spadafore was Senior Director of major accounts at NETCOM Communications
form March 1994 to June 1997. Before joining NETCOM, Mr. Spadafore was Senior
Account Executive at Apple Computer from 1984 to 1993 and was a professional
football player in the NFL for the San Diego Chargers, Washington Redskins and
the Los Angelas Rams from 1980 to 1983. He holds a B.A. in Elementary Education
and Special Education and an M.A. in Computer Technology and Education from
Boise State University.

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

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

Mr. King. David C. King has been a director of Netopia since January 2000.
Mr. King is currently President, Chief Executive Officer and Chairman of the
Board of Directors of Proxim, Inc., a developer of wireless local area
networking products. Mr. King joined Proxim in December 1992 as Vice President
of Marketing and Acting Chief Financial Officer. In July 1993, Mr. King was
appointed President, Chief Executive Officer and director, and in January 1996,
was appointed Chairman of the Board. From December 1990 to November 1992, Mr.
King served in various executive capacities at Vitalink Communications
Corporation. From 1985 to 1990, Mr. King was Senior Manager in the San
Francisco office of McKinsey & Company, Inc. Mr. King holds an A.B. in
Economics, as well as an M.B.A. and J.D. from Harvard University.

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

Item 11. Executive Compensation

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

Item 12. Security Ownership Of Certain Beneficial Owners And Management

The information required by item 12 is incorporated by reference from the
information contained in the section captioned "Security Ownership of Certain
Beneficial Owners and Management" in the Proxy Statement to be filed with the
Commission within 120 days after the end of the fiscal year ended September 30,
2000.

74
<PAGE>

Item 13. Certain Relationships And Related Transactions

The information required by item 13 is incorporated by reference from the
information contained in the section captioned "Certain Relationships and
Related Transactions" in the Proxy Statement to be filed with the Commission
within 120 days after the end of the fiscal year ended September 30, 2000.

75
<PAGE>

PART IV.

Item 14. Exhibits, Financial Schedules And Reports On Form 8-K

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

(B) There were no filings on Form 8-K for the three months ended September
30, 2000.

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

<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
3.1(a) Restated and Amended Certificate of Incorporation

3.2(a) Restated and Amended Bylaws of the Registrant

3.3(b) Certificate of Ownership and Merger (Corporate Name Change)

4.1 Reference is made to Exhibits 3.1, 3.2 and 3.3

4.2(a) Amended and Restated Investor Rights Agreement, dated March 27,
1992, among the Registrant and the Investors and Founders named
therein, as amended

10.1(a) Form of Indemnification Agreement entered into between the
Registrant and it Directors and Officers

10.2(a) 1996 Stock Option Plan and forms of agreements thereunder

10.3(a) Employee Stock Purchase Plan

10.4(b) Office Lease Agreement between the Company and WHLW Real Estate
Limited Partnership, dated May 1, 1997

10.5(b) Real Property Lease Extension Agreement between the Company and
Bobwhite Meadow, L.P., dated March 1, 1996

10.6(c) Agreement of Purchase and Sale of Assets, dated August 5, 1998, by
and between Netopia, Inc., a Delaware corporation, and Farallon
Networking Corporation, a Delaware corporation

10.7(d) Serus Asset Purchase Agreement by and among Netopia, Inc., Serus
LLC, Serus Acquisition Corporation and the Members of Serus LLC
dated as of December 16, 1998 (including exhibits thereto)

10.8(e) Agreement and Plan of Reorganization dated September 28, 1999 by and
between Netopia, Inc., a Delaware corporation, SN Merger
Corporation, a Delaware corporation that is a wholly-owned
subsidiary of Netopia, and StarNet Technologies, Inc. a California
corporation

10.9(f) Agreement and Plan of Reorganization, dated February 22, 2000 by and
among Netopia, Inc., a Delaware corporation, WO Merger Corporation,
a Delaware corporation and wholly-owned subsidiary of Netopia (Sub)
and WebOrder, a California corporation (WebOrder)

11.1 Reference is made to Note 1 of Notes to Consolidated Financial
Statements

21.1(g,h) Subsidiaries of the Registrant

23.1 Consent of Independent Auditors

24.1 Power of Attorney (see Signature page)

27.1 Financial Data Schedule
</TABLE>

76
<PAGE>

--------
(a) Incorporated by reference to our Registration Statement on Form S-1 (No.
333-3868).
(b) Incorporated by reference to our Form 10-K for the fiscal year ended
September 30, 1997.
(c) Incorporated by reference to our Form 8-K as filed on August 20, 1998.
(d) Incorporated by reference to our form 10-K for the fiscal year ended
September 30, 1998.
(e) Incorporated by reference to our Form 8-K as filed on October 28, 1999.
(f) Incorporated by reference to our Form 8-K as filed on April 7, 2000.
(g) Incorporated by reference to our Registration Statement on Form S-1 (No.
333-3868) for our Subsidiary in France.
(h) Updated for our new subsidiaries in the United States.

77
<PAGE>

SIGNATURES

Pursuant to the requirements of Sections 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on behalf by the undersigned, thereunto duly authorized, in the City of
Alameda, State of California on this 19th day of December, 2000.

Netopia, Inc.

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

Dated: December 19, 2000

POWER OF ATTORNEY

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

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

<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----

<S> <C> <C>
/s/ Alan B. Lefkof President, Chief Executive December 19, 2000
______________________________________ Officer and Director
Alan B. Lefkof (Principal Executive
Officer)

/s/ James A. Clark Vice President and Chief December 19, 2000
______________________________________ Financial Officer
James A. Clark (Principal Financial and
Accounting Officer)

/s/ Reese M. Jones Chairman of the Board of December 19, 2000
______________________________________ Directors
Reese M. Jones

/s/ David F. Marquardt Director December 19, 2000
______________________________________
David F. Marquardt

/s/ David C. King Director December 19, 2000
______________________________________
David C. King
</TABLE>