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, 1998

                                       OR

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

               For the transition period from ________ to ________

                         Commission file number 0-28450

                                  Netopia, Inc.
             (Exact name of registrant as specified in its charter)

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

                            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 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, 1998 there were 12,036,566 shares of the Registrant's
Common Stock outstanding. The aggregate market value of the Common Stock held by
non-affiliates of the registrant, based on the closing price of the Common Stock
as reported  on The Nasdaq  Stock  Market on December 1, 1998 was  approximately
$61,726,681.
                       DOCUMENTS INCORPORATED BY REFERENCE

         The Registrant's definitive Proxy Statement for its Annual Stockholders
Meeting to be held on February 18, 1999 is incorporated by reference in Part III
of this Form 10-K.

<PAGE>
                       
                                  NETOPIA, INC.
                                    FORM 10-K
                                      INDEX

PART I.                                                                     PAGE


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

ITEM 2.     Properties........................................................18

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

ITEM 4.     Submission ofMatters toa Vote of Security Holders.................18


PART II.

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

ITEM 6.     Selected FinancialData............................................20

ITEM 7.     Management's Discussionand Analysisof Financial Condition and 
            Results of Operations.............................................21

ITEM 7(a).  Quantitativeand Qualitative Disclosures About Market Risk.........36

ITEM 8.     Financial Statements and Supplementary Data.......................37

ITEM 9.     Changes in and Disagreements with Accountants on Accounting and 
            Financial Disclosure..............................................37


PART III.

ITEM 10.    Directors andExecutive Officers of the Registrant.................37

ITEM 11.    Executive Compensation............................................37

ITEM 12.    Security Ownership of Certain Beneficial Owners and Management....37

ITEM 13.    Certain Relationships and Related Transactions....................37


PART IV.

ITEM 14.    Exhibits,Financial Schedules and Reports on Form 8-K..............38

INDEX TO EXHIBITS.............................................................38

SIGNATURES....................................................................40

<PAGE>

PART I.

         The discussion in this Report contains forward-looking  statements that
involve risks and  uncertainties.  The statements  contained in this Report that
are not purely historical are  forward-looking  statements within the meaning of
Section 27A of the  Securities  Act of 1933, as amended,  and Section 21E of the
Securities Exchange Act of 1934, as amended,  including statements regarding the
Company's expectations,  beliefs,  intentions,  strategies,  proceeds, expenses,
charges, accruals, losses and reserves regarding the future. All forward-looking
statements  included in this document are based on information  available to the
Company on the date hereof,  and the Company assumes no obligation to update any
such  forward-looking  statements.  The  Company's  actual  results could differ
materially from those discussed  herein.  Factors that could cause or contribute
to such differences  include,  but are not limited to, those discussed in "Other
Factors  That May Affect  Future  Results"  as well as those  discussed  in this
section and elsewhere in this Report,  and the risks  discussed in the Company's
other United States Securities and Exchange Commission filings.

Item 1.  DESCRIPTION OF BUSINESS

Company Background

         Netopia,  Inc. (the  "Company,"  "Netopia" or  "Registrant")  develops,
markets and supports products and services which enable growing organizations to
establish their presence on the Internet. The Company's products include Netopia
Virtual  Office  ("NVO")  software  which is a "no assembly  required"  web site
solution that allows Internet users to create their own customized,  interactive
web  site,  Netopia  Internet  Routers,  which  offer  a  range  of  high-speed,
multi-user digital and analog Internet connectivity solutions,  and Timbuktu Pro
real-time  communication  and remote  control  software for  workgroups,  remote
workers and help desk administrators.

         In 1993,  the Company  focused its business  strategy to concentrate on
the Internet and Intranet  markets through the  utilization of its  Transmission
Control  Protocol/Internet  Protocol ("TCP/IP") and routing expertise. In fiscal
1994,  the Company  released its Timbuktu  Pro  Internet/Intranet  collaboration
software product (TCP/IP  enabled).  In fiscal 1996, the Company  introduced its
Netopia Internet router products and services,  and, in fiscal 1997, the Company
introduced its NVO software  platform.  During fiscal 1998, the Company expanded
its Internet  product  offerings by releasing  the hosted  version of NVO and by
offering  additional Internet routers supporting Digital Subscriber Line ("DSL")
and 56K Dual  Analog  technologies.  The Company  also  expanded  its  strategic
Internet  relationships  in fiscal  1998 by  partnering  with  Netscape,  France
Telecom, Copper Mountain and Northpoint Communications.

         In the fourth  quarter of fiscal  1998,  the Company  sold its Farallon
Local Area Networking ("LAN") Division (the "LAN Division") through which it had
developed and sold LAN products primarily for Apple Macintosh computers. The LAN
Division's  operations,  products  and the market in which it  competed  were no
longer  considered core to the Company's  business  strategy.  As a result,  the
Company  sold  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").  Farallon also assumed certain accounts payable and
other liabilities of the LAN Division. In connection with such sale, the Company
received consideration  aggregating $4.9 million,  including (i) $2.0 million of
cash,  (ii)  royalties on Farallon's  revenues for a period of five years to the
extent that Farallon  achieves  revenues from the sale of its LAN Products of at
least $15.0 million per year, (iii) a two year $1.0 million promissory note from
Farallon,  guaranteed  by Gores,  and (iv) a warrant to purchase up to 5% of the
equity of Farallon. There can be no assurance that the business of Farallon will
be  sufficiently  successful  to allow the  Company to realize  the value of the
receivables,  note and warrant  described  in (ii),  (iii) and (iv)  above.  See
"Other Risks Associated with the Sale of the LAN Division."

         The Company is  incorporated in Delaware,  and its principal  executive
offices are located at 2470 Mariner Square Loop, Alameda, California, USA 94501.

<PAGE>

Events Occurring After September 30, 1998

         On December 17, 1998,  the Company  signed a definitive  agreement  and
closed a transaction to purchase Serus LLC ("Serus"),  a Utah limited  liability
company.  Serus is a developer of java-based web site editing software products.
Upon completion of the  development of such products,  Netopia intends to market
the  products  both  independently  and along with its  Netopia  Virtual  Office
software  platform  to allow users more  flexibility  in  customizing  their web
sites. As per the SERUS ASSET PURCHASE AGREEMENT by and among Netopia,  Inc. and
Serus LLC (the "Purchase Agreement"),  Netopia will acquire substantially all of
the assets and assume certain liabilities of Serus and existing operations which
include  in-process  research and development.  The maximum  aggregate  purchase
price of the Serus transaction is approximately  $7.0 million including (i) $3.0
million of cash due and payable on the  closing  date of the  transaction,  (ii)
409,556  shares of the Company's  Common Stock issued on the closing  date,  and
(iii) a $1.0 million  earnout  opportunity  based upon  certain  criteria as set
forth in the Purchase Agreement.

         The Company is in the process of completing the valuation of the assets
acquired and  liabilities  assumed in connection  with its  acquisition of Serus
including the  evaluation  of in-process  research and  development  costs.  The
Company  expects  to record a charge to  operations  during  the 3 months  ended
December  31, 1998 for  in-process  research  and  development  relating to this
recently  completed  acquisition.  The  amount of such  charge is not  presently
determinable, but could be material. The Company is aware that the United States
Securities  and Exchange  Commission  ("SEC") is reviewing the  assumptions  and
methodologies heretofore commonly used by companies in calculating such charges.
The Company  intends to follow recent  guidance  disseminated  by the SEC in its
valuation of the assets acquired and liabilities assumed and, in particular,  in
the valuation of in-process research and development.  

         In the course of integrating  Serus into the operations of the Company,
it is possible that facts or circumstances may be discovered that were not known
nor  apparent  prior to the time that the Company  executed  the Serus  Purchase
Agreement or during its financial and technical due diligence  reviews of Serus.
There  can  be no  assurance  that  difficulties  will  not  be  encountered  in
integrating the operations of Serus, or that the specific benefits expected from
the  integration  of Serus  will be  achieved.  The  acquisition  of Serus  also
involves  a number of other  risks,  including  technical  risks  related to the
completion of on-going development  efforts;  assimilation of new operations and
personnel;   the  diversion  of  resources  from  Netopia's  existing  business;
integration  of their  respective  equipment,  product  and  service  offerings,
networks and  technologies,  financial and information  systems and brand names;
coordination of geographically separated facilities and work forces;  management
challenges  associated  with the  integration of the companies;  coordination of
their   respective   engineering,   selling,   marketing  and  service  efforts,
assimilation  of  new  management  personnel;   and  maintenance  of  standards,
controls,  procedures  and  policies.  The  process  of  integrating  the  Serus
operations,  including its personnel,  could cause  interruption  of, or loss in
momentum in the activities of Netopia's business and operations, including those
of the  business  acquired.  Further,  employees  of Serus who may be key to the
integration effort or Netopia's ongoing operations may choose not to continue to
work for Netopia following the closing of the acquisition.

Industry Background

         The  emergence  and  continued  expansion  of the  Internet as a viable
medium for communications, collaboration and commerce has substantially enhanced
the value and potential of the Internet market.  The Internet is a global,  open
network of  thousands  of  interconnected  computer  networks  and  millions  of
computer connections that allow businesses,  individuals and other organizations
to communicate  worldwide.  Large enterprises are increasingly  adopting private
"Intranets" that employ Internet data formats and communications protocols, such
as  TCP/IP,  to  connect  geographically   dispersed  networks  and  facilities.
Intranets enable network users to communicate and access  information  within an
organization,  communicate with external users, such as suppliers, customers and
consultants,  and use the  World  Wide Web (the  "web")  to  access  information
available on the  Internet.  The emergence of the Internet and Intranets as well
as the increased affordability and availability of advanced hardware,  software,
communications   and   commerce   services   has  made   Internet  and  Intranet
communications available to a broader range of users.

<PAGE>

         The   increasing   utility  of  the  Internet  and  Intranets  and  the
availability   of   high-performance   infrastructures   that  enable   advanced
capabilities,  such as real-time communication,  collaboration and commerce, are
compelling  small  businesses,  geographically  dispersed  facilities  of  large
enterprises,  home offices,  mobile users, schools and other small organizations
to  establish  a web  presence  and adopt  complex  network  communications  and
computing systems.  However, these organizations typically do not have access to
sophisticated  technical support and therefore may not be well-served by complex
web site  development  and  networking  systems  requiring  extensive  technical
knowledge  or  expertise.  Today,  the  tasks  of  installing,  configuring  and
developing  web sites  and  networking  systems,  obtaining  high-speed  digital
services, such as DSL, Integrated Service Digital Network ("ISDN"),  frame relay
or fractional  T1/T1, and arranging for an Internet  connection from an Internet
Service  Provider  ("ISP")  can be costly  and  burdensome  for such  users.  In
addition,  traditional  vendors,  resellers and systems  integrators of Internet
networking   products   historically  have  not  offered  products  or  services
specifically  designed  for  users  who may not  have  access  to  sophisticated
technical   support.   Accordingly,   the  absence  of  complete,   easy-to-use,
plug-and-play  solutions  for  affordable  Internet/Intranet   connectivity  and
Internet presence software which enables real-time communication,  collaboration
and commerce  has  constrained  the ability of these users to fully  achieve the
benefits of the Internet.

The Netopia Solution

         As the use, functionality and importance of the Internet increases, the
Company believes the benefits provided by enabling  businesses to connect to the
Internet  and  establish an online  Internet  presence to help  increase  market
exposure, generate long-term cost savings and facilitate communications, are now
beginning to be realized by companies of all sizes. Although many small, growing
businesses  recognize  the  importance  of the  Internet,  they  often  lack the
expertise and internal resources to connect to and develop a successful Internet
presence for their company.  The Company believes that over the next few years a
large   number  of   organizations   will  be  looking  for  a   cost-effective,
user-friendly  solution  for  connecting  to the  Internet  and  establishing  a
professional web site.

         Netopia  believes  it is well  positioned  to serve  the needs of these
small businesses and other  organizations and individuals by providing them with
complete web site  services,  communication  software and  easy-to-use  Internet
connectivity solutions.  Netopia strives to develop products that can be used by
anyone regardless of their technical  background or access to technical support.
With Netopia's innovative Internet/Intranet solutions, users at organizations of
any  size  can  utilize  online  communication  and  collaboration  to  increase
productivity and add value to customer relationships.

         Netopia  believes  that the Internet  will become a central  system for
conducting  commerce.  To that end,  web  sites  can no  longer  exist as static
transmissions,  but  must  evolve  to  combine  value  added  functions  such as
interactive communication with e-commerce capabilities; Internet connections can
no longer be laborious,  but must be instantaneous and serve multiple users; and
online  collaboration must evolve from one-to-one into  many-to-many.  Netopia's
solutions seek to address these needs while  providing  simple setup and minimal
on-going maintenance. By designing innovative tools that go beyond the rigid use
of the web,  Netopia  believes  it is poised to lead  companies  worldwide  to a
simpler, more affordable method of using technology to improve business.

The Netopia Strategy

         Netopia's  objective  is to  become  a  leading  provider  of web  site
services and high-speed, multi-user Internet connectivity solutions which enable
small growing organizations to establish their presence on the Internet.

         Empower "Mere Mortals" to Establish an Internet  Presence.  The Company
focuses on providing  interactive web sites with built-in  functionality such as
communication  tools  including  chat,  intercom,  screen  sharing and web-based
e-mail.  These web sites allow the web site owner to add pictures,  links,  text
and files,  creating a customized web site, without any programming knowledge or
use of  expensive  consultants.  Through  partnerships  with  companies  such as
Netscape, Big Planet, McAfee and Intuit, Netopia is striving to create a diverse
distribution channel to provide "no assembly required" web sites worldwide.  The
Company targets  vertical target markets with web site  "templates"  designed by
the Company  providing  partial  customization  intended to add value to the web
site owners in a particular  profession,  market or common interest  group.  The
Company  intends to add  additional  features to its web site platform by adding
e-commerce, custom domain names and java-based web site editing.

<PAGE>

         Provide Complete,  Plug-and-Play Internet Connectivity  Solutions.  The
Company  focuses on providing a range of high-speed  digital and analog Internet
connectivity  solutions,  including DSL, Fractional T1/T1, Frame Relay, ISDN and
Dual 56K,  emphasizing ease of use and  plug-and-play  functionality  consistent
with Netopia's  tradition of providing products that are simple to install,  use
and  support.  The Netopia  Internet  connectivity  products  are  bundled  with
Internet   software  and  are  supported  with  the  Company's  "Up  &  Running,
Guaranteed!"  program,  providing  users a single  source for complete  Internet
connectivity.  The Company intends to develop future  generations of its Netopia
Internet   connectivity   hardware   products   that   incorporate   alternative
technologies  for high bandwidth  connectivity and increased  throughput,  while
retaining ease of use and plug-and-play features.

         Expand  Strategic  Alliances.  The  Company  has  formed  a  number  of
strategic relationships that assist the Company in developing,  distributing and
marketing its products. For example, to assist its customers in gaining Internet
access  and to  increase  sales of its  Internet  products,  Netopia  has formed
strategic  relationships  with PSINet,  Bell Atlantic,  France Telecom,  Telecom
Italia,  Netscape,  GeoCities,  McAfee,  Intuit and  approximately 200 ISPs. The
Company intends to sell its Netopia Internet  Connectivity  products and the NVO
software  platform  through  these ISPs.  The Company also intends to expand its
current strategic  relationships and to form additional strategic  relationships
to  augment  its  current  product   development,   distribution  and  marketing
strategies.

         Leverage   Collaboration   Software   Expertise.   Utilizing  expertise
developed in pioneering  collaboration  software for the workgroup,  remote user
and help desk  administrator,  the Company intends to continue to offer products
that  increase  user   productivity   and  efficiency  by  enabling   real-time,
peer-to-peer  collaboration  over the  Internet,  and  Intranets.  The Company's
Timbuktu Pro software  expands the  functionality  of the Internet beyond e-mail
and Web  browsing  by  enabling  users in any  location  to  remotely  access an
enterprise  network and to engage in real-time  collaboration  over Intranets or
the Internet -- viewing other users' screens, revising information, transferring
files, controlling other computers and remotely accessing network resources. The
Company  intends to enhance  and  expand the number of  real-time  collaboration
tools it offers.  For example,  the Company  recently  announced  its release of
Timbuktu Web Seminar which extends Timbuktu Pro's  capabilities  from one-to-one
collaboration to one-to-many collaboration.

         Target  Rapidly  Growing  Markets  for  Internet  Access  and  Presence
Solutions.  The  Company  targets  those  segments  of the  Internet  access and
presence  market which it believes are among the most rapidly  growing,  such as
small businesses,  branch offices of multi-national corporations,  home offices,
mobile users,  schools and other small  organizations.  These users generally do
not have access to  sophisticated  technical  support and are not well-served by
traditional  vendors of Internet access  products,  which have not  historically
offered products which the Company believes are well designed for these markets.
The  Company  intends to  leverage  its  expertise  in  developing  easy-to-use,
plug-and-play products to more rapidly penetrate these markets.

         Leverage Distribution Channels and Customer Support Infrastructure. The
Company believes that its relationships with approximately 57 distributors in 29
countries,  and with its ISPs, are a valuable asset and that these channels will
significantly enhance the marketing and sale of its products.  In addition,  the
Company believes that it is recognized in the industry as providing  outstanding
customer service and support.  The Company intends to leverage its positive name
recognition,   its   distribution   relationships   and  its  customer   support
organization to promote its products.

Products

         Netopia offers easy-to-use web site services and collaboration software
and plug-and-play,  high-speed,  multi-user Internet connectivity solutions. The
Company's  products  are  designed  for  users  that  may  not  have  access  to
sophisticated  technical support, so called "mere mortals," whether they work in
small businesses,  branch offices of multi-national  coporations,  home offices,
schools or other small  organizations.  The Company's  products  include its NVO
software  platform,  its Netopia Internet Routers and its Timbuktu Pro real-time
communication and remote control software.

<PAGE>

         Netopia  Virtual  Office.  The NVO software  platform is a "no assembly
required" web site solution that enables Internet users,  whether as independent
professionals or small businesses,  to create their own customized,  interactive
web site. The NVO software  platform  provides  flexibility and expandability in
the  creation  and  management  of  customizable   web  sites  with  value-added
functionality such as integrated communications technology. The Company has also
announced  plans to  incorporate  e-commerce  functionality  to the NVO software
platform in fiscal 1999.

         For web site  owners,  the platform  provides a feature  rich  Internet
presence without requiring any knowledge of Hypertext Markup Language  ("HTML"),
programming skills or a technical staff to maintain the site. For ISPs, Internet
Portals ("IPs"),  Internet product vendors and  professional  associations,  the
platform  is  an   opportunity   to  offer  their   customers   web  sites  with
customization, value-add features and ease of use advantages.
The NVO software platform consists of four main components:

     (i) Netopia Site Server.  The Netopia Site Server ("NSS") is the platform's
back end server  that  delivers  the web sites' web pages,  administers  the web
sites and enables  the  delivery of the  communication  features  within the web
site.

     Through its integration  with the Netscape  Enterprise  Server ("NES") as a
server  plug-in,  as well as its cohesion  with any standard  database,  the NSS
automatically   creates  web  sites,   serves  the  web  site  pages,   provides
administrative functions and enables the conferencing features of NVO. The NSS's
object-based site architecture  provides  flexibility (i.e., web site owners can
add  additional  pages to their web site at any  time),  while  its  centralized
administration   and   compatibility   with  registration   databases   automate
operations.

     (ii) Web Site  Templates.  Web Site Templates are no assembly  required web
sites  targeted to a common  interest group or industry and  pre-populated  with
information  useful to that group.  Netopia,  or its partners,  can pre-populate
each template with links, frequently asked questions ("FAQs"), formats, files or
other  information,  and the web site  can be  further  personalized  by the web
site's owner.  The template  design is  independent of the  information  the NSS
maintains about each web site owner. This centralized  location allows the owner
data to be separate from the template itself.  Therefore,  a Netopia partner can
add new  features to  existing  web sites and update all  customer  sites at one
time. Web site owners can also select a new template and immediately  change the
design of their  existing  web site  without  altering  or  losing  any of their
information.

     (iii) Third Party  Technology  Integration.  Functionality  can be extended
through the integration of third party  technologies  (e.g.,  web-based e-mail).
Users can leverage the Company's existing technology partnerships or replace and
augment  the  NVO  software   platform   features  with  their  own  proprietary
technology.

     (iv) Integrated  Conferencing and File Management Tools.  Netopia Owner and
Visitor  software  allows web site owners and  visitors to interact  directly in
real-time   through  chat   sessions,   screen   sharing,   intercom  and  other
communication   features.   It   allows   for  both   drag-and-drop   functions,
point-to-point communication capabilities and multiple file upload.

         When customers  license the NSS from the Company,  they have the option
of either hosting and  administering  their web sites  themselves or contracting
with Netopia to provide the hosting and administrative  services. When customers
choose to have Netopia host and administer their web sites,  Netopia handles the
hosting and  administrative  services  related to the web sites,  including  the
development,  marketing,  administrative  and  support  services  necessary  for
creating  and  hosting  web sites.  This  service  includes  "service  pages," a
co-branded  site where customers can sign up for their web site, view and select
a web site  template,  download  the  appropriate  software  and  utilize  owner
services and support.  Netopia can also assist with the creation and delivery of
mass e-mails, coordinate co-marketing efforts, offer web site move-in assistance
and provide site maintenance.

<PAGE>

         The  performance  of the  Company's  servers,  networking  hardware and
software infrastructure used for the hosting services offered by the Company for
NVO is critical to the  Company's  business  and  reputation  and its ability to
attract customers,  web users, new subscribers and partners.  Any system failure
that causes an  interruption in service or a decrease in  responsiveness  of the
Company's  hosting service could result in less traffic to the Company's  hosted
web sites and, if sustained or repeated,  could impair the Company's  reputation
and the  attractiveness  of its brand  name.  The  Company  maintains  redundant
systems for all critical  operational  areas. The Company also offers up to 10Mb
of disk space to each NVO web site hosted on the Company's servers. Disk storage
is  configured to survive  drive  failures  without risk of data loss using RAID
striping and mirroring.

         The Company  entered into an  eight-month  Web-hosting  agreement  with
Exodus  Communications,  Inc. ("Exodus")  effective June 1998. This agreement is
automatically renewed for subsequent one-year terms unless either party provides
notice at least 60 days prior to the  expiration  of any term.  Pursuant  to the
agreement,  Exodus  provides  and  manages  power  and  environmentals  for  the
Company's   networking   and  server   equipment.   Exodus  also  provides  site
connectivity  to  the  Internet  via  multiple  DS-3  and  OC-3  links  on  a 24
hour-a-day,  seven-days-per week basis. Under the terms of the agreement, Exodus
does  not,  however,  guarantee  that  the  Company's  Internet  access  will be
uninterrupted,  error-free or completely  secure. Any disruption in the Internet
access provided by Exodus or any failure of the Company's  server and networking
systems  to handle  current or higher  volumes of traffic  could have a material
adverse  effect on the  Company's  business,  operating  results  and  financial
condition.  An increase in the use of the  Company's  hosted NVO web sites could
strain the capacity of its systems,  which could lead to slower response time or
system  failures.  Slowdowns or system failures  adversely  affect the speed and
responsiveness  of the  Company's  hosted  web  sites  and  would  diminish  the
experience  for the  Company's  subscribers  and  visitors.  The  ability of the
Company to provide  effective  Internet  connections or of its systems to manage
substantially  larger numbers of customers at higher  transmission  speeds is as
yet unknown, and, as a result, the Company faces risks related to its ability to
scale up to its expected customer levels while maintaining superior performance.
If usage of  bandwidth  increases,  Netopia  will  need to  purchase  additional
servers and  networking  equipment and rely more heavily on its equipment and on
Exodus and its  services to maintain  adequate  data  transmission  speeds,  the
availability of which may be limited or the cost of which may be significant.

             The successful delivery of the Company's services is also dependent
in  substantial  part upon the  ability  of Exodus  and the  Company  to protect
Netopia's  servers and network  infrastructure  against damage from human error,
fire, flood, power loss, telecommunications failure, sabotage,  intentional acts
of vandalism and similar events. In addition, substantially all of the Company's
servers and network  infrastructure are located in Northern California,  an area
particularly  susceptible to earthquakes,  which also could cause system outages
or failures if one should occur. Despite precautions taken by, and planned to be
taken by, the Company and Exodus,  the occurrence of other natural  disasters or
other  unanticipated  problems at their  respective  facilities  could result in
interruption  in the services  provided by the Company or significant  damage to
Netopia's equipment.  Despite the implementation of network security measures by
the Company,  its servers are  vulnerable to computer  viruses,  break-ins,  and
similar disruptions from unauthorized tampering.  The occurrence of any of these
events could result in  interruptions,  delays or cessations  in service,  which
could  have a  material  adverse  effect on the  Company's  business,  operating
results and financial condition.  In addition,  the Company's reputation and the
Netopia brand name could be materially and adversely affected.

         Netopia Internet Connectivity Solutions. The Company's Netopia Internet
Connectivity  Solutions  offer a range of high speed digital and analog Internet
Routers which enable  cost-effective,  plug-and-play  Internet  connectivity for
individual  users  and  workgroups  who may not  have  access  to  sophisticated
technical  support,  and service  programs to assist users for connecting to the
Internet.  The Company's  Internet  Router  products  incorporate  the following
technologies:

     (i) Symmetric Digital Subscriber Line ("SDSL"). The Netopia Internet Router
with  SDSL is a  seven-speed  router  that  achieves  connection  speeds  to the
Internet  from  160Kbps to  1.6Mbps,  and  provides  a  business  with a shared,
simultaneous and permanent  connection to the Internet.  The seven-speed feature
of the SDSL  Router  enables a business to select the level of  bandwidth  given
budget and usage,  and the  ability to  increase  DSL speeds as  business  needs
change.  The Netopia SDSL Router comes  equipped with a built-in 8 port 10base-T
Ethernet hub and an uplink port to connect to another Ethernet hub so that users
can easily  create or expand a network.  The  Netopia  SDSL Router is a "No User
Configuration  Required" solution.  After connecting the router to the SDSL line

<PAGE>

and powering on, the SmartDSL  feature  connects to the ISP and  configures  the
router automatically.  For users on a LAN, the SmartIP feature (a combination of
Network  Address  Translation  ("NAT") and Dynamic Host  Configuration  Protocol
("DHCP")  server)  enables LAN managers to configure  workstations  for Internet
access without having to enter an IP address. Other features include built-in IP
firewall,  IP and  Internetwork  Packet Exchange  ("IPX")  (Routing  Information
Protocol ("RIP") and Service  Advertising  Protocol  ("SAP")) packet  filtering,
back-to-back  connections  and a modular  architecture  which  lets users add or
switch to  different  connection  types by changing  wide area  network  ("WAN")
module cards.

     (ii) DSL and Cable.  The Netopia 9100  Ethernet to Ethernet  Router  allows
small and medium sized  businesses to connect all users on a LAN to the Internet
via the Ethernet port on DSL or Cable modems. The Ethernet Router comes equipped
with a built-in 8 port  10base-T  Ethernet  hub and an uplink port to connect to
another Ethernet hub so that users can create or expand a network.  The Ethernet
Router is also equipped with features that simplify  router setup and management
with such features as NAT,  dynamic IP addressing and an integrated DHCP server.
These features enable  workstations to be configured for Internet access without
having to enter an IP  address,  allow a LAN to access  the  Internet  through a
single  dynamically  assigned IP address and increase  security.  Other features
include a built-in IP firewall, a modular architecture, IP and IPX (RIP and SAP)
packet filtering, among others.

     (iii) Fractional  T1/T1,  Digital Data Service ("DDS") and Frame Relay. The
Netopia leased line routers provide Internet  connections at 56K DDS, Fractional
T1 and T1 speeds to provide branch offices,  small to medium sized businesses or
schools a full-time  presence on the Internet.  Each model supports Frame Relay,
Point-to-Point  Protocol ("PPP") and Cisco High-level Data Link Control ("HDLC")
protocols and offers a serial interface  supporting  synchronous speeds of up to
1.5Mbps,  asynchronous  speeds up to  230Kbps  and a modular  architecture.  The
Synch/Async Serial ("SA") models support speeds up to Fractional T1/T1 (in North
America) and E1 (outside of North America)  through an external  Channel Service
Unit/Data Service Unit ("CSU/DSU").  The 56K DDS and Fractional T1/T1 models are
available in North America only.

     (iv) ISDN.  Netopia  Internet  Routers  for ISDN are LAN  attached  devices
supplying high-speed,  dial-up connectivity for all users on a network. The ISDN
Routers  include  a  basic  rate  interface  ("BRI")  port  with  built-in  NT-1
interface, PPP, Multilink PPP and 4:1 compression. In addition, the ISDN Routers
include patented  EtherWave  technology that enables  connectivity to a 10base-T
Ethernet  network  in a  "daisy-chain"  fashion  with or  without  the use of an
Ethernet  hub. The ISDN Routers are optimized for small office and home use. The
ISDN Routers include  SmartIP,  a cost-saving,  ease-of-use and security feature
that  integrates NAT technology  with a DHCP server to map multiple IP addresses
on the small office LAN to a single static or dynamically  assigned  Internet IP
address from the ISP; two Plain Old Telephone Service ("POTS")  interface ports;
an  integrated  two-port  10Base-T  Ethernet  hub  and  two  integrated  PC Card
slotswhich allow remote troubleshooting, diagnostics, configuration and firmware
upgrades in the event of ISDN line failure.

     (v) Dual 56K  Analog.  The  Netopia  Internet  Router with Dual Analog will
connect an entire LAN to the Internet  with speeds up to 168Kbps  over  standard
analog  telephone  lines.  By  integrating  two internal 56K analog  modems (and
supporting one additional external analog modem) and using analog Multilink PPP,
the Dual  Analog  Router  provides  multiple  users  on a LAN  with  high-speed,
dial-on-demand  Internet  access  without the expense or  complexity  of digital
lines. The Dual Analog Router supports ITU v.90 or K56flex standards, IP and IPX
network  protocols  and has a built-in 8 port 10baseT Hub and remote  management
capabilities.

<PAGE>

         The Company offers the users of Netopia  Internet Routers the "Customer
Care, Guaranteed!" service programs including "Up & Running, Guaranteed!." These
service programs assist users in ordering and provisioning the telecommunication
carrier line, and obtaining and establishing  their ISP service,  provide remote
configuration  of the Netopia Internet  Routers,  assist in the installation and
configuration of the client server software,  and provide  technical support for
the Netopia  product  line.  Toll-free  technical  support is included with this
service program for one year.

         Timbuktu Pro Collaboration  Software.  Timbuktu Pro is a multi-platform
remote control and file transfer  software for work groups and remote workers as
well as help desk, server and web site  administrators.  Timbuktu Pro's patented
screen  sharing  technology  allows  remote  control and file  transfer  between
Windows 3.x, Windows 95, Windows NT, Windows 98 and MacOS machines. Timbuktu Pro
software enables users to collaborate with other Timbuktu Pro users in real-time
over the Internet,  Intranets and LANs -- viewing other users' screens, revising
information,  transferring  files,  controlling  other  computers  and  remotely
accessing  network  resources.  Timbuktu Pro products are also used by help desk
and information systems personnel to remotely solve technical  problems,  update
software and train users on new applications and operating systems.  The Company
believes  that the  peer-to-peer  collaboration  features  in its  Timbuktu  Pro
products bring additional functionality to the Internet, Intranets and LANs. The
Timbuktu Pro Enterprise  edition  provides a  comprehensive  set of tools geared
towards Information  Technology ("IT")  professionals  responsible for deploying
and administering remote control technology in the enterprise  environment.  The
Timbuktu Pro  Enterprise  edition  includes the Timbuktu Pro  Universal  License
which  the  Company  believes  allows  customers  to  leverage   Timbuktu  Pro's
multi-platform  compatibility to reduce the cost of migrating  between platforms
and operating systems within the enterprise environment.  Additionally,  Netopia
has pursued  integration  opportunities  with application  developers focused on
systems management and help desk solutions for the large corporate customer.  As
a result,  Timbuktu Pro can be  integrated  with Remedy's  ARS,  Microsoft  SMS,
PLATINUM's Apriori,  Tivoli's TME, Allen Systems Group's ASG-IMPACT and Computer
Associates'   Unicenter  ING  technology  software  to  enhance  the  help  desk
functionality.  This  integration  is included with Timbuktu Pro  Enterprise and
allows the IT organization to deploy Timbuktu Pro's remote control functionality
directly with these leading  enterprise  applications which the Company believes
provide   seamless   execution  of  remote  control  sessions  from  within  the
applications  themselves.  On  December  7,  1998,  the  Company  announced  the
introduction of Timbuktu Web Seminar  ("TWS").  TWS is a web-based  conferencing
solution for the enterprise,  Internet and education  markets.  TWS is web-based
ScreenCasting  technology  that enables  professionals  to broadcast  from their
desktop to multiple meeting participants live via the Internet, or Intranet. The
TWS server allows the  presenter's  screen to be broadcast to the  participating
audience and includes  comprehensive  security,  administration  and web polling
capabilities. The TWS server installs on Microsoft Windows NT4.0 with IIS 3 or 4
servers and offers  organizations  savings in travel and meeting  expenses while
increasing productivity.

         The Company's  business is dependent upon continued  growth in the sale
of its  products.  The rapid growth in the use of the Internet and Intranets for
communication and commerce is a recent phenomenon, and there can be no assurance
that such communication or commerce over the Internet will become widespread. In
addition,  to the extent that the Internet  continues to experience  significant
growth in the number of users and level of use,  there can be no assurance  that
the  infrastructure  of the  Internet  will  continue  to be able to support the
demands placed upon it by such potential  growth,  or that it will not otherwise
lose its utility due to delays in the  development  or adoption of new standards
and  protocols  required  to  handle  increased  levels  of  activity  or due to
increased   government   regulation.   Although  the  Company  has   experienced
significant  revenue growth rates, the Company does not believe prior percentage
growth  rates  should be relied  upon as being  indicative  of future  operating
results.  The Company's limited operating history as an Internet company and the
dynamic market environment in which the Company operates makes the prediction of
future operating results difficult, if not impossible. There can be no assurance
that the Company will  increase  sales of its  products,  or that the  Company's
existing  distribution  channels are  appropriate  for the sale of its products.
Accordingly,  the failure of the Company's products to gain market acceptance or
to achieve significant sales would materially and adversely affect the Company's
business,  operating results and financial  condition.  The markets in which the
Company  competes  currently are subject to intense price  competition,  and the
Company expects  additional price and product  competition as other  established
and emerging companies enter these markets and new products and technologies are
introduced.  Additionally,  a number of competitors have  substantially  greater
financial,  technical, sales, marketing and other resources than the Company, as
well as greater name recognition and a larger customer base. These companies may
therefore be able to respond more  quickly to new or emerging  technologies  and
changes  in  customer  requirements  or  to  devote  greater  resources  to  the
development,  promotion and sales of their products.  Increased  competition may
result in further price reductions,  reduced gross margins,  increased operating
expenses  and loss of market  share,  any of which  could  materially  adversely
affect the Company's business, operating results and financial condition.

<PAGE>

Strategic Alliances

         The Company has entered  into  strategic  alliances to  facilitate  the
development,   distribution,  marketing  and  support  of  its  products.  These
alliances  enhance the Company's  ability to adapt  effectively to technological
change and leverage shared distribution  resources,  thereby providing increased
utility to end users.

         The  Company  relies on a number  of  strategic  relationships  to help
achieve  market  acceptance  of  the  Company's  products  and to  leverage  the
Company's development, sales and marketing resources. Although the Company views
these relationships as important factors in the development and marketing of the
Company's products and services, a majority of the Company's agreements with its
strategic  partners or customers do not require  future  minimum  commitments to
purchase  the  Company's  products,  are  not  exclusive  and  generally  may be
terminated at the  convenience  of either party.  There can be no assurance that
the Company's  strategic  partners regard their relationship with the Company as
strategic to their own respective businesses and operations,  that they will not
reassess  their  commitment  to the  Company or its  products at any time in the
future,  or that they  will not  develop  and/or  market  their own  competitive
technology.

         The Company  does not  manufacture  any of the  components  used in its
products and performs only limited assembly on some products. The Company relies
on  independent  contractors  to  manufacture  to  specification  the  Company's
components,  subassemblies,  systems and products.  The Company also relies upon
limited  source  suppliers  for a number  of  components  used in the  Company's
products,  including certain key microprocessors and integrated circuits.  There
can be no assurance  that these  independent  contractors  and suppliers will be
able to timely meet the Company's future requirements for manufactured products,
components and  subassemblies.  The Company  generally  purchases limited source
components pursuant to purchase orders and has no guaranteed supply arrangements
with these suppliers.  In addition, the availability of many of these components
to the  Company is  dependent  in part on the  Company's  ability to provide its
suppliers  with  accurate  forecasts of its future  requirements.  However,  any
extended  interruption  in the  supply  of any of the key  components  currently
obtained from a limited source would disrupt the Company's operations and have a
material  adverse  effect  on the  Company's  business,  operating  results  and
financial  condition.  In  addition,  the  Company  anticipates  that it will be
necessary to establish  additional  strategic  relationships  in the future,  in
particular  with  additional  distributors,   ISPs  and  Value  Added  Resellers
("VARs").  However,  there can be no assurance  that the Company will be able to
establish  such  alliances  or that such  alliances  will  result  in  increased
revenues.

Selling and Marketing

         The Company's sales force assists end users by providing  solutions for
their Internet presence,  connectivity and collaboration needs. In addition, the
sales force provides  pre-sales and order  management  support to  distributors,
resellers,  ISPs and VARs,  identifies new opportunities for product development
and provides general market information to management.  The Company's  marketing
strategy  is  to  achieve  broad  market   penetration  by  utilizing   multiple
distribution channels, including the use of two-tier distributors,  direct sales
and  telemarketing,  Affinity  partners,  ISPs and VARs,  mail  order,  K-12 and
electronic marketing and distribution.

         Two-Tier  Distributors.  Netopia's major  distributors in North America
are Ingram Micro ("Ingram") and Tech Data which distribute Netopia's products to
resellers, VARs, dealers and dealer chains. Internationally, Netopia distributes
its products through  approximately 57 distributors in 29 countries.  In Europe,
distributors sell primarily in the United Kingdom,  France,  Germany and Sweden,
and, in the Pacific Rim,  distributors sell primarily in Japan. Netopia provides
periodic training in the development of Internet  solutions to VARs who purchase
the Company's  products primarily from  distributors.  The Company's  agreements
with its  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 the Company's products in exchange for new purchases.

<PAGE>

         Direct Sales / Telemarketing.  Netopia's direct sales and telemarketing
sales  force are  primarily  focused  on the  execution  of high  volume or site
license  agreements  with  corporate  accounts  in North  America.  The  Company
currently plans on leveraging its telemarketing expertise developed domestically
to begin an international  direct  telemarketing  sales force located in Europe.
Timbuktu Pro software is the primary  product  sold  through this  channel.  The
Company intends to sell NVO through its telesales force in fiscal 1999.

         ISPs and VARs.  Netopia has formed  strategic  relationships  with ISPs
(including  telecommunication  carriers)  and VARs that  assist  the  Company in
developing,  distributing  and marketing its  products.  For example,  to assist
customers in  establishing  their  Internet  presence and access and to increase
sales of the Company's products, Netopia has formed strategic relationships with
PSINet,  France Telecom,  Telecom Italia,  Bell Atlantic and  approximately  200
other ISPs.  The Company also has recruited  over 400 Internet VARs for the sale
of the Company's products.

         Affinity Partners. Netopia plans to utilize Affinity Partners (a common
interest group or professional  association)  as a distribution  channel for its
NVO software  platform.  The Company's  Affinity  Partners are provided either a
button or banner on the Affinity Partners' web site that, when clicked on by the
visitor,  will direct visitors to the NVO service. Once visitors are directed to
the NVO service, they will have the opportunity to sign up for their own NVO web
site.

         Mail Order.  Netopia markets its products in mail order catalogs,  such
as those  offered  by  MicroWarehouse,  to reach  users who are  generally  more
technically sophisticated.  Through lower overhead and service costs, mail order
catalogs are generally able to offer lower prices than dealers and retailers.

         Electronic  Marketing  and  Distribution.  The Company has developed an
online  web store for the sale of its  products  and also  offers  its  products
through other online  stores such as Cyberian  Outpost,  Download  Warehouse and
software.net.  In addition to the  Company's  web store,  the Company's web site
also offers online technical support,  bulletin board and File Transfer Protocol
("ftp") service as well as product and Corporate  information.  This site allows
the Company to e-mail  focused  monthly  electronic  bulletins for customers and
partners,  providing  information  on the  Company's  most recent  upgrades  and
promotions.  The Company currently supports secure online commerce  transactions
through  its web  store  using  Netscape's  Secure  (SSL)  Commerce  Server  and
CyberCash's Secure Internet Payment Service.

         Other Marketing. The Company utilizes several other marketing programs,
such as trade  advertising,  participation in trade shows and press briefings on
strategy and new products to support the sale and  distribution of its products.
Through these marketing programs, Netopia seeks to build brand name recognition,
stimulate  demand and inform channels about the capabilities and benefits of the
Company's products.

         The Company relies primarily on its two-tier  distributors for the sale
of its products.  Revenues from  distributors  accounted for 45%, 43% and 37% of
total  revenues for the fiscal years ended  September  30, 1998,  1997 and 1996,
respectively.  A substantial amount of the Company's revenues are generated from
a  limited   number  of  these   distributors.   The  Company's   three  largest
distributors,  in  aggregate,  accounted  for 21%, 24% and 23% of the  Company's
total  revenues for the fiscal years ended  September  30, 1998,  1997 and 1996,
respectively.  During the fiscal years ended  September 30, 1998, 1997 and 1996,
revenue  from  Ingram  accounted  for 12%,  14% and 12% of the  Company's  total
revenues, respectively. No other customers have accounted for 10% or more of the
Company's  total revenues during the fiscal years ended September 30, 1998, 1997
and 1996.

         The  distribution  of products such as those offered by the Company has
been characterized by rapid change, including industry consolidations, financial
difficulties  of  distributors  and the  emergence of  alternative  distribution
channels.  There can be no assurance that current  distributors will continue to
serve as distributors  for the Company since the Company does not currently have
a written agreement regarding price or quantity  commitments with these or other
distributors  which  operate  on  a  purchase  order  basis.  The  LAN  Division

<PAGE>

historically   sold  significant   volumes  of  product  through  the  Company's
distributors. Due to the sale of the LAN Division there can be no assurance that
the  Company's  current  distributors  will  continue  to market  the  Company's
products or that the Company's  channel  expense  levels will not increase.  The
loss of, or a  significant  reduction  in  revenue  from,  one of the  Company's
distributors  could have a material  adverse  effect on the Company's  business,
operating results and financial condition.  The Company's distributors generally
offer  products of several  different  companies,  including  products  that are
competitive with the Company's  products.  There can be no assurance that future
sales by the Company's  distributors  will continue at current levels,  that the
Company will be able to retain its current  distributors  in the future on terms
which are  acceptable to the Company,  that the Company's  current  distributors
will choose to or be able to market the  Company's  products  effectively,  that
economic  conditions or industry demand will not adversely affect these or other
distributors,  that these  distributors  will not devote  greater  resources  to
marketing products of other companies or that internal staffing changes or other
changes at the Company's  distributors will not disrupt historical purchasing or
payment  patterns.  Accordingly,  the loss of,  or a  significant  reduction  in
revenue from, one of the Company's  distributors,  could have a material adverse
effect on the Company's business, operating results and financial condition.

         The Company grants to its distributors  limited rights to return unsold
inventories of the Company's products in exchange for new purchases and provides
price protection to its distributors.  Although the Company provides  allowances
for  projected  returns  and  price  decreases,  any  product  returns  or price
decreases in the future that exceed the Company's allowances will materially and
adversely  affect  the  Company's  business,  operating  results  and  financial
condition.  The Company  also  provides end users with a ninety (90) day and one
(1)  year  limited  warranty  on its  Timbuktu  Pro  and  Internet  connectivity
products,  respectively,  and  permits  end  users to  return  the  product  for
replacement  or its full  purchase  price if the  product  does not  perform  as
warranted.  The NVO  service  is  provided  on an "as is" basis,  therefore  the
Company does not  generally  offer a warranty on its NVO service.  End users are
offered a free thirty (30) day evaluation period to use and evaluate the service
prior to purchase and thereafter can discontinue their subscription at any time.
To date, the Company has not encountered material warranty claims. Nevertheless,
if future warranty claims exceed the Company's reserves, the Company's business,
operating  results and financial  condition  could be  materially  and adversely
affected.  In addition,  the Company  attempts to further limit its liability to
end users through disclaimers of special, consequential and indirect damages and
similar provisions in its end user warranty.  However, no assurance can be given
that such limitations of liability would be legally enforceable.

         The  Company's  Timbuktu  Pro software  products are often  licensed to
customers on a volume  license basis for use on private WAN Intranets  involving
thousands  of nodes.  These  licenses  often  involve  significant  license  and
maintenance  fees. As a result,  the license of the Company's  software products
often involves a significant commitment of management attention and resources by
prospective  customers.  Accordingly,  the  Company's  sales  process  for these
products is often subject to delays associated with long approval processes that
typically  accompany  significant  capital  expenditures.  For  these  and other
reasons,  the sales cycle associated with the license of the Company's  software
products is often  lengthy and  subject to a number of  significant  delays over
which the Company has little or no control.  There can be no assurance  that the
Company will not  experience  these and  additional  delays in the future on the
sales of its software or other products.

         The  Company's  Netopia  Internet  Router  products  and  NVO  software
platform  are  often  distributed  through  partnerships  with  ISPs,  VARs  and
telecommunications  carriers.  These  partnerships often involve lengthy testing
and certification  studies,  detailed agreements and financial  commitments from
the  prospective  partner.  As a result,  partnerships  with ISPs,  VARs  and/or
telecommunications  carriers to  distribute  the  Company's  products  involve a
significant  commitment  of management  attention  and resources by  prospective
partners.  Accordingly,  the Company's  business  development  process for these
distribution  channels is often subject to delays  associated with long approval
processes that  typically  accompany  significant  partnership  development  and
capital  expenditures.  For these and other  reasons,  the business  development
process  associated with the  partnerships is often lengthy and historically has
been subject to a number of significant delays over which the Company has little
or no control. Additionally,  credit risks related to the financial viability of
newly organized IPSs or VARs are often more significant than for other partners.
There  can be no  assurance  that the  Company  will not  experience  these  and
additional  delays or  financial  risks in the  future  related  to  partnership
development.

         The Company's  business  model for NVO is dependent  upon the Company's
ability to leverage  this  software  platform to generate  revenue  streams from
monthly  subscription  based  accounts and the  licensing of the  technology  to
future customers and partners. The potential profitability of the business model
is  unproven,  and, to be  successful,  the Company  must,  among other  things,
develop  and market  solutions  that  achieve  broad  market  acceptance  by its

<PAGE>

subscribers,  partners  and  Internet  users.  This model has existed for only a
limited period of time, and, as a result, is relatively  unproven.  There can be
no assurance that the Company will be able to retain its  subscribers or that it
will be able to attract new subscribers or licensors.  Accordingly, no assurance
can be given that the  Company's  business  model for NVO will be  successful or
that it can generate revenue growth or significant profits.

         Sales  orders  are  typically   shipped   shortly  after  receipt  and,
consequently,  order  backlog at the  beginning  of any  quarter has in the past
represented only a small portion of that quarter's  revenues.  Accordingly,  the
Company's  net  revenues in any quarter are  substantially  dependent  on orders
booked and shipped during that quarter.

Customer Service and Support

         The Company believes that it is recognized in the Internet  industry as
having an  outstanding  customer  support  organization.  Netopia  believes that
effective  customer  support is a key criterion  used in selecting the Company's
products.  Network  managers  and  administrators,   ISPs,  VARs,  distributors,
resellers,  consultants  and other  experienced  technical  experts  utilize the
Company's  toll-free telephone support lines, fax and online support services to
access   Netopia's   internal   technical   databases  and  support   personnel.
Additionally,  support  personnel  are trained to satisfy the needs of end users
who are not technical experts and do not have access to sophisticated  technical
support.  The Company believes that its support programs have been successful in
creating brand loyalty through its focused  support of the specialized  needs of
these end  users,  and  through  the  easy-to-use,  plug-and-play  design of its
products.

         With "Customer Care,  Guaranteed!"  service programs  including "Up and
Running,  Guaranteed!," Netopia remotely configures the Netopia Internet Routers
and assists  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
the  Company's  competitors.  However,  the  Company  believes  that its program
remains the most comprehensive in the market. The Company's expertise in solving
technical  problems enables it to commit its resources to analyze any problem an
end user may have, even if it involves a product from another  company,  thereby
building  customer  loyalty  to  Netopia  as  the  single  source  for  Internet
connectivity solutions.

Technology and Product Development

         The  Netopia  Internet  Routers  include  several  core  communications
technologies,  including a third-generation  multi-protocol  routing engine. The
product's operating software has been optimized for the special  requirements of
Internet access over high-speed  analog and digital WAN links, and provides both
packet  header  and  data-link  compression.  The  routing  engine  operates  in
conjunction with companion modules that provide connection/bandwidth management,
authentication/security  and  configuration/network  management  functions.  The
routing  engine  is  standards-based  and  supports  several  routing  protocols
including    Routing    Information    Protocol    ("RIP")   and   RIPv2.    The
connection/bandwidth  management module supports  dial-on-demand routing, tracks
incoming and outgoing  data calls and is optimized  for the  different  types of
supported WAN  interfaces.  Calls can be initiated based on time of day, type of
data traffic, and packet data thresholds.  Additionally, switched circuit models
support a "dynamic bandwidth allocation"  capability that transparently initiate
connections based on packet data thresholds.  These  technologies  significantly
reduce  telecommunications  costs,  particularly  with  analog and ISDN which is
typically   tariffed  on  the  basis  of  usage.   Additionally,   cost  control
functionality,  optimized for switched interfaces, allows users to determine the
amount of traffic used and terminate routing functionality based upon selectable
parameters.  The  authentication/security  module  provides  PPP  authentication
services,   including  Password  Authentication   Protocol  ("PAP"),   Challenge
Handshake  Authentication  Protocol ("CHAP"),  PAP-token and CHAP token, between
interconnected routers,  dial-back security, and packet filters that allow a LAN
to  maintain a degree of network  security  while  connecting  to the  Internet.
Netopia Internet Routers incorporate NAT, under the brand name, SmartIP. SmartIP
allows for the  development  of affordable  LAN Internet  accounts.  The Netopia
Internet    Routers    support   a   wide    variety   of   local   and   remote
configuration/network  management  capabilities.  These  capabilities  include a
utility for  assigning a LAN IP address to the router called  SmartStart,  which
includes a server for  assigning IP addresses to desktop  machines  based on the
DHCP, a utility for  automatically  configuring  router  Frame Relay  parameters

<PAGE>

called  SmartMatch,   a  menu-based  console  and  virtual  terminal  ("TELNET")
interface, Trivial File Transfer Protocol ("TFTP") client for firmware upgrades,
and the Simple  Network  Management  Protocol  ("SNMP").  The  Netopia  Internet
Routers  also  support  additional  utilities  and  diagnostics  such as  Packet
Internet  Groper  ("PING"),  trace  route  and  syslog,  which  allow  users  to
troubleshoot  network problems.  During fiscal 1998, the Company  introduced the
new  R-series  Internet  router  product  line  which is a new class of  modular
router. Designed and engineered to reduce the cost of investment in the customer
premises equipment ("CPE") market for Internet, Intranet and WAN connectivity to
the small to medium business enterprise  customer segment.  The R-series product
line incorporates the processing unit, memory, power supply, system input-output
and operating  system  software in the base unit. The base unit also supports an
optional,  standards-based,   hardware  encryption  and/or  compression  module.
Depending on the system requirements, customers then select from a wide range of
WAN interface modules to be plugged into the two configurable  slots,  including
dual v.90  modems,  U and S/T ISDN,  U and S/T ISDN  with two  analog  telephone
interfaces, ISDN DSL ("IDSL"), SDSL and Ethernet.

         The Company's  Timbuktu Pro software  products  include  patented cross
platform  collaboration  technology  that provides  remote control  capabilities
across disparate operating systems.  This collaboration system supports text and
graphical  image  display  between   homogeneous  and  heterogeneous   computers
connected on a network,  the Internet or via other transport  media.  The system
captures  drawing events during a recording  process and then  translates  these
events  into  procedure  calls  during the  imaging  process on the  destination
platform.  For example,  this technology allows a Windows NT workstation to view
the screen of a MacOS  computer  regardless of the  differences  in screen size,
resolution or color depth. This technology enables the Company to better address
the  heterogeneous  requirements of companies'  intranets and the Internet.  The
Company has also  developed  proprietary  compression  and caching  technologies
which are used to minimize resources  required for image  transmissions over the
Internet and slow speed networks.

         The Company's  Timbuktu Pro software products also include  multi-level
security  technology that protects  enterprise  network computing  resources and
individual  users from  unauthorized  intrusion.  In addition to supporting  the
native operating system security model, such as NT usernames and passwords, each
product can maintain its own database,  which is used to verify the identity and
define the  privileges of any user  attempting to gain access to a machine.  The
Company   has   also   developed    unique    administration    technology   for
security-conscious  network  administrators  that allows them to  customize  the
functionality  available to their organizations.  In addition,  the TCP/IP ports
assigned  to Netopia by the  Internet  Engineering  Task  Force  ("IETF")  allow
network  managers to safeguard  their  Intranets from  unauthorized  access with
widely   available   firewall   technology.   The  Company   believes  that  the
object-oriented  modular  architecture of its products allows Netopia to exploit
market  opportunities  quickly  and  address  OEM  customer  requirements.   For
instance,  by  leveraging  the  Timbuktu  Pro  for  Windows  product's  built-in
Component Object Model ("COM") architecture, the Company was one of the first to
market real-time  collaboration  Netscape  plug-ins and Internet  applets.  This
architecture  allows  new  features,  transports,  and  services  to be  quickly
incorporated  to meet future market demands as well as provide easy  integration
of this technology into other third-party applications.

         The Company's NVO product  provides a platform for creating,  managing,
and serving pre-built customizable web sites with integrated  communications and
collaboration technology.  The NSS, which is the core of the platform,  consists
of a web server that serves the web pages,  provides  message and file  handling
capabilities, and enables the conferencing features of the product; and an admin
server for managing the web sites.  The web server and the admin server both run
as NES plug-ins on Sun Solaris systems. The admin server provides the management
functionality for the web sites including creation,  deletion,  rename,  setting
values, and changing templates through callable functions. The NSS also provides
application  programming  interfaces  ("APIs")  for  password  handling  and for
hashing the web site files for  distribution  across the file system being used.
These  APIs  allow  host  providers  to  replace  default   functionality   with
site-specific functions for accessing backend registration  databases,  etc. The
web site  pages  served  by the NSS  server  are  built on a  defined  directory
structure in the native file system for efficient performance.  The NVO platform
includes a proprietary  server-side scripting language,  nHTML, which is used to
build the  customizable web site pages. To serve pages the NSS server parses and
executes nHTML directives that dynamically  generate standard HTML pages for the
client,  so  that  the  browsers  display  standard  pages.  The web  sites  can

<PAGE>

incorporate  the  patented  Timbuktu  cross-platform  collaboration  technology,
including  remote control.  The NSS server enables  visitors to the web sites to
make   connections  to  the  web  site  owners'  machines  for  screen  sharing,
point-to-point chat, and intercom features. The server also provides file upload
and download capabilities through the NVO Files feature. Collaboration features,
such as screen sharing, use the multi-level  security technology  implemented in
the Company's  Timbuktu Pro product.  The product provides secure access to site
customization and  configuration  pages and to files in the web site via browser
authentication.

         The personal  computer  industry is  characterized  by rapidly changing
technologies,  evolving industry standards,  frequent new product introductions,
short  product  life  cycles and rapidly  changing  customer  requirements.  The
introduction  of products  embodying new  technologies  and the emergence of new
industry  standards can render existing products obsolete and unmarketable.  The
Company's  future  success  will depend on its  ability to enhance its  existing
products and to introduce  new products to meet changing  customer  requirements
and emerging  technologies.  For example,  the Company's Netopia Internet Router
currently operates over ISDN, Fractional T1/T1 (domestically),  Fractional E1/E1
(international),  Frame Relay, SDSL,  Ethernet and 56K analog  telecommunication
services.  As other  communications  technologies such as Asynchronous  Transfer
Mode  ("ATM"),  Asymmetric  Digital  Subscriber  Line  ("ADSL"),  various  other
versions of DSL and communication  over cable or wireless networks are developed
or gain market acceptance,  the Company will be required to enhance its Internet
Router  products  to support  such  technologies,  which  will be  costly,  time
consuming  and have  uncertain  market  acceptance.  If the Company is unable to
modify its products to support new  Internet  access  technologies,  or if ISDN,
Fractional  T1/T1,   Fractional  E1/E1,  Frame  Relay,  SDSL,  Ethernet  or  56K
technologies do not achieve  widespread  customer  acceptance as a result of the
adoption of  alternative  technologies  or as a result of  de-emphasis  of ISDN,
Fractional  T1/T1,   Fractional  E1/E1,  Frame  Relay,  SDSL,  Ethernet  or  56K
technologies by  telecommunications  service providers,  the Company's business,
operating  results and financial  condition  would be  materially  and adversely
affected. The Company has in the past and may in the future experience delays in
new product  development.  There can be no  assurance  that the Company  will be
successful in developing and marketing product enhancements or new products that
respond to  technological  change,  evolving  industry  standards  and  changing
customer  requirements,  that the Company will not experience  difficulties that
could delay or prevent the successful development, introduction and marketing of
these  products or product  enhancements,  or that its new  products and product
enhancements  will  adequately  meet the  requirements  of the  marketplace  and
achieve any significant degree of market acceptance. Failure of the Company, for
technological  or other  reasons,  to develop and  introduce  new  products  and
product enhancements in a timely and cost-effective manner would have a material
adverse  effect on the  Company's  business,  operating  results  and  financial
condition. In addition, the future introduction or even announcement of products
by the Company or one or more of its competitors  embodying new  technologies or
changes  in  industry  standards  or  customer  requirements  could  render  the
Company's  then  existing  products  obsolete or  unmarketable.  There can be no
assurance that the introduction or announcement of new product  offerings by the
Company  or one or more of its  competitors  will not cause  customers  to defer
purchases of existing  Company  products.  Any such deferral of purchases  could
have a material adverse effect on the Company's  business,  operating results or
financial condition.

         Complex  products  such as those  offered by the  Company  may  contain
undetected  or unresolved  defects when first  introduced or as new versions are
released.  There can be no  assurance  that,  despite  testing  by the  Company,
defects will not be found in new products or new versions of products  following
commercial  release,  resulting  in loss of  market  share,  delay in or loss of
market  acceptance or product recall.  Any such occurrence could have a material
adverse  effect upon the  Company's  business,  operating  results or  financial
condition.

         The Company  believes that its future  business and  operating  results
depend in part on its ability to continue to enhance existing products,  develop
new products and improve the price and  performance  of its products in a timely
manner.  The Company  continuously  evaluates  the  emerging  needs,  developing
standards and emerging technologies of its target markets to identify new market
or product  opportunities.  Netopia is focusing its  development  efforts on its
Internet Routers through high-speed digital services, including ISDN, T-1, Frame
Relay,  DSL,  56K  analog  technologies  and  software  enhancements  to its NVO

<PAGE>

software platform and Timbuktu Pro products,  further international localization
of its products and cost-reducing design improvements.  In addition, the Company
has relied and will continue to rely on external development resources,  such as
OEM  suppliers,  for the  development  of certain of its  products  and  related
components.  The Company may in the future acquire  products or  technologies to
complement  current research and development  efforts.  Research and development
expenses were $7.2 million for each of the fiscal years ended September 30, 1998
and 1997 and $7.6 million for the fiscal year ended September 30, 1996.

         As of  December  1, 1998,  Netopia's  research  and  development  staff
consisted of 56 employees.  The Company  believes  that its future  success will
depend in large  part upon its  ability to  attract  and  retain  highly-skilled
engineering personnel.  Competition for such personnel is intense, and there can
be no assurance  that the Company will be successful in attracting and retaining
such personnel, the failure of which could have a material adverse effect on the
Company's business, operating results and financial condition.

Competition

         Netopia believes that the principal  competitive factors in its markets
are: (1) product  feature,  function and  reliability,  (2) customer service and
support, (3) price and performance,  (4) ease of use, (5) brand name recognition
(6)  strategic  alliances,  (7) size and  scope of  distribution  channels,  (8)
timeliness  of new product  introductions,  (9) breadth of product line and (10)
size and loyalty of customer base. While the Company believes,  in general, that
it currently  competes  favorably  with regard to these  factors there can be no
assurance that the Company will be able to compete  successfully  in the future,
the  failure  of which  would have a material  adverse  effect on the  Company's
business, operating results and financial condition.

         The markets for the Company's  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 the Company's  products.  The Company's  current and  prospective
competitors  include OEM product  manufacturers  of Internet  access  equipment,
manufacturers  of Internet  presence  and web site  software and  developers  of
remote control and  collaboration  software.  In the Internet  access  equipment
market, the Company competes primarily with Ascend, Cisco,  3Com/U.S.  Robotics,
Ramp Networks,  Intel,  Flowpoint and several other  companies.  In the Internet
presence and web site  software  market,  the Company  competes  with IBM,  Inc.
Online, The Globe, AOL, GeoCities,  Homestead,  Lycos, Zyworld and several other
companies. In the remote control and collaboration software markets, the Company
competes  primarily with Symantec,  Microsoft,  Tivoli (IBM),  Lotus (IBM), Stac
Electronics, Microcom (Compaq), Computer Associates and several other companies.
The Company has  experienced  and  expects to continue to  experience  increased
competition  from  current  and  potential   competitors,   many  of  whom  have
substantially  greater  financial,   technical,   sales,   marketing  and  other
resources,  as well as greater name  recognition and a larger customer base than
the Company.  Accordingly, such competitors or future competitors may be able to
respond  more  quickly to new or emerging  technologies  and changes in customer
requirements or devote greater resources to the development, promotion and sales
of their products than the Company.  Other companies in the personal computer or
Internet  industry may seek to expand their  product  offerings by designing and
selling  products using  competitive  technology that could render the Company's
products  obsolete or have a material adverse effect on the Company's sales. For
example,  Microsoft  has  available  for free,  via  download  on the  Internet,
communications and collaboration software compatible with the Microsoft Internet
Explorer and has publicly stated that they are committed to integrating Internet
technology  into  existing  products at no additional  cost to  customers.  This
software product, which enables real-time  communication within a workgroup,  as
well as similar future product  offerings from  Microsoft,  could  undermine the
Company's  ability to market its Timbuktu Pro and/or NVO software.  Accordingly,
there  can  be no  assurance  that  the  Company  can  continue  to  market  its
collaboration  and web office software,  which would have a material and adverse
effect on the Company's business,  operating results and financial condition. In
addition,  several of the Company's  current  competitors  have  introduced free
and/or paid guaranteed service and support programs that appear to be similar to
the Company's "Up & Running,  Guaranteed!" program. As a result, there can be no
assurance  that the  Company  can  continue  to  charge  a fee for this  support
program.  The markets in which the  Company  currently  competes  are subject to
intense price  competition and the Company expects  additional price and product

<PAGE>

competition as other established and emerging  companies enter these markets and
new products and technologies are introduced. Consolidations in the computer and
communication industries continue to create companies with substantially greater
financial,  technical, sales, marketing and other resources than the Company, as
well as greater name recognition and a significantly larger customer base. These
companies  may be able to respond more  quickly to new or emerging  technologies
and changes in  customer  requirements  or to devote  greater  resources  to the
development,  promotion and sales of its  products.  Increased  competition  may
result in the loss of market share,  further price  reductions and reduced gross
margins,  any of which  could  materially  and  adversely  affect the  Company's
business,  operating results and financial condition.  There can be no assurance
that the Company will be able to compete successfully against current and future
competitors,  or that  competitive  factors faced by the Company will not have a
material  adverse  effect  on the  Company's  business,  operating  results  and
financial condition.

Proprietary Rights and Technology

         The  Company's   ability  to  compete  is  dependent  in  part  on  its
proprietary rights and technology. The Company relies primarily on a combination
of  patent,  copyright  and  trademark  laws,  trade  secrets,   confidentiality
procedures and  contractual  provisions to protect its proprietary  rights.  The
Company  generally enters into  confidentiality  or license  agreements with its
employees, resellers, distributors, customers and potential customers and limits
access to the distribution of its software, hardware designs,  documentation and
other proprietary information, however in some instances the Company may find it
necessary to release its source code to certain parties, for example the Company
entered  into a product  development  agreement  pursuant  to which it  released
certain  source code to a third party in the People's  Republic of China.  There
can be no  assurance  that the steps taken by the Company in this regard will be
adequate to prevent  misappropriation  of its technology.  The Company currently
has three issued  United  States  patents.  There can be no  assurance  that the
Company's patents will not be invalidated,  circumvented or challenged, that the
rights granted thereunder will provide competitive  advantages to the Company or
that any of the Company's pending or future patent applications,  whether or not
being currently challenged by applicable governmental patent examiners,  will be
issued  with  the  scope  of the  claims  sought  by  the  Company,  if at  all.
Furthermore, there can be no assurance that others will not develop technologies
that are similar or superior to the  Company's  technology  or design around the
patents  owned by the  Company.  Despite  the  Company's  efforts to protect its
proprietary  rights,  unauthorized  parties may  attempt to copy  aspects of the
Company's  products or to obtain and use information that the Company regards as
proprietary.  Policing  unauthorized use of the Company's products is difficult,
and while the Company is unable to  determine  the extent to which piracy of its
software  products  exists,  software  piracy  is  expected  to be a  persistent
problem.  In selling its  software  products,  the Company  relies  primarily on
"shrink wrap"  licenses that are not signed by licensees and,  therefore,  it is
possible  that such  licenses  may be  unenforceable  under the laws of  certain
jurisdictions.  In  addition,  the  laws of some  foreign  countries  where  the
Company's 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 the Company's  proprietary  rights as fully as do the laws
of the United  States.  There can be no assurance  that the  Company's  means of
protecting  its  proprietary  rights in the  United  States  or  abroad  will be
adequate or that competing  companies  will not  independently  develop  similar
technology.

         The Company relies upon certain software, firmware and hardware designs
that it licenses from third parties,  including firmware that is integrated with
the Company's  internally  developed firmware and used in the Company's products
to perform  key  functions.  There can be no  assurance  that these  third-party
licenses will continue to be available to the Company on commercially reasonable
terms.  The loss of, or  inability to maintain,  such  licenses  could result in
shipment  delays or reductions  until  equivalent  firmware  could be developed,
identified,  licensed and integrated which would materially and adversely affect
the Company's business, operating results and financial condition.

Employees

         As of December 1, 1998, the Company employed 188 persons,  including 58
in sales and marketing,  56 in research and development,  30 in customer service
and  support,   14  in   manufacturing   operations,   and  30  in  general  and
administrative  functions.  The Company  also  contracts  with  consultants  who
provide short and long-term  services to the Company in various  areas.  Netopia
believes  that its  relations  with its  employees  are good.  None of Netopia's
employees is represented by a labor union, and the Company has not experienced a
work  stoppage.  The  Company  believes  its  business  is  dependent  upon  the
contributions of its senior  management and other key personnel and on Netopia's
ability to attract and retain highly  qualified  personnel.  Competition to hire
such personnel in Netopia's industry and location is intense.

<PAGE>

         The  Company's  business and prospects  depend to a significant  degree
upon the  continuing  contributions  of its key  management,  sales,  marketing,
product  development  and  administrative  personnel.  The Company does not have
employment contracts with its key personnel and does not maintain any key person
life insurance policies. The loss of key management or technical personnel could
materially  adversely  affect the  Company's  business,  operating  results  and
financial  condition.  The Company  believes that its prospects  depend in large
part  upon  its  ability  to  attract  and  retain  highly-skilled  engineering,
managerial,  sales and marketing, and administrative personnel.  Competition for
such  personnel is intense,  and there can be no assurance that the Company will
be successful in attracting and retaining such personnel. Failure to attract and
retain  key  personnel  could have a material  adverse  effect on the  Company's
business, operating results and financial condition.

Item 2.           PROPERTIES

         The Company leases approximately 49,000 square feet of office space for
its  headquarters  in Alameda,  California.  The site is used for  research  and
development,   administration,   customer   service  and  sales  and   marketing
activities.  The facility is currently leased for a five year term,  expiring on
December 31,  2002.  The Company has a five-year  renewal  option on the Alameda
headquarters facility which, if exercised, would commence on January 1, 2003. As
a result of the sale of the LAN  Division,  the Company  has  provided a partial
reserve  against the  remaining  term of the lease of the  Alameda  headquarters
related to the space which was  occupied by the LAN  Division.  The Company also
leases  approximately  29,000  square feet of  warehouse  space in San  Leandro,
California to accommodate  the Company's  distribution  center,  which maintains
inventory and provides  shipping and handling.  The facility is currently leased
for a five year term, expiring on December 31, 2002. The Company has a five-year
renewal option on the San Leandro warehouse facility which, if exercised,  would
commence on January 1, 2003. As a result of the sale of the LAN Division and per
the Separation Agreement made by and between Netopia, Inc. and Farallon, Netopia
is to assign the lease of the warehouse facility to Farallon.  The assignment of
such lease is expected to occur in fiscal  1999.  After the lease is assigned to
Farallon,  the Company will continue to utilize a portion of the warehouse space
under a  sublease  with  Farallon.  The term of the  sublease  will begin on the
effective  date of the lease  assignment and terminate on December 31, 2002. The
Company's  California  facilities are located near major earthquake fault lines.
In the event of an earthquake,  the Company's business,  financial condition and
operating results could be materially adversely affected.

         In  addition,  the Company  leases  approximately  7,000 square feet of
research and development office space in Lawrence,  Kansas and 1,450 square feet
in San Jose, California.  These leases expire on July 30, 1999 and September 30,
2002, respectively.  The Company leases approximately 4,500 square feet of sales
office space in Dallas,  Texas for its software telesales group. The facility is
currently  leased for a five year term,  expiring on July 31, 2003.  The Company
leases  approximately  1,900 square feet of sales  office space in  Springfield,
Virginia.  The  facility is currently  leased for a five year term,  expiring on
July 16, 2003. The Company also leases  approximately 1,200 square feet of sales
office space in France.  The facility is currently  leased for a nine year term,
expiring on February 28, 2005. The Company believes that its existing facilities
are adequate for its current needs and that additional  space sufficient to meet
the Company's needs for the foreseeable future is available on reasonable terms.

ITEM 3.  LEGAL PROCEEDINGS

         As of December  22,  1998 the  Company was not  involved in any pending
legal  proceedings  which the  Company  believes  could have a material  adverse
effect on the Company.

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

         No matters  were  submitted  to a vote of the  security  holders of the
Company during the fourth quarter ended September 30, 1998.

<PAGE>

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

         The Company's  Common Stock trades on The Nasdaq Stock Market under the
symbol  "NTPA."  The table  below  sets forth the  quarterly  high and low sales
prices per share as reported on The Nasdaq  Stock Market for the two most recent
fiscal years ended September 30, 1998 and 1997, respectively.

<TABLE>
<CAPTION>
                                                                          1998                          1997
                                                                 ----------------------        ----------------------
                                                                    High         Low              High         Low
                                                                 ---------    ---------        ---------    ---------
<S>                                                              <C>          <C>              <C>          <C>

Fourth fiscal quarter ended September 30.....................       $11.500      $ 4.375          $ 7.125      $ 4.375
Third fiscal quarter ended June 30...........................        10.875        5.625            5.375        3.938
Second fiscal quarter ended March 31.........................         6.375        4.125            6.313        4.250
First fiscal quarter ended December 31.......................         9.000        5.000           14.500        6.375

</TABLE>

         The market price of the shares of the Company's  Common Stock is highly
volatile  and  may be  significantly  affected  by  factors  such as  actual  or
anticipated  fluctuations in the Company's results of operations,  announcements
of technological innovations,  announcements of product distribution agreements,
introduction  of new  products by the Company or its  competitors,  developments
with respect to patents, copyrights or proprietary rights, conditions and trends
in the Internet and other  technology  industries,  changes in or failure by the
Company to meet  securities  analysts'  expectations,  large volume sales of the
Company's  Common Stock and activities  related to acquisitions or divestitures,
semi-professional and amateur day traders, postings on Internet message and chat
boards,  general market  conditions and other  factors.  In addition,  the stock
market  has  from  time  to  time  experienced   significant  price  and  volume
fluctuations  that have  particularly  affected the market prices for the common
stocks of Internet  technology  companies.  These broad market  fluctuations may
adversely  affect the market price of the Company's  Common Stock.  In the past,
following  periods of volatility  in the market price of a particular  company's
securities,  securities  class action  litigation has often been brought against
that company.  There can be no assurance that such  litigation will not occur in
the  future  with  respect  to the  Company.  Such  litigation  could  result in
substantial costs and a diversion of management's attention and resources, which
could have a material  adverse  effect upon the  Company's  business,  operating
results  and  financial  condition.  As of  December  1,  1998 the  Company  had
approximately  160 registered  stockholders of record.  The Company has not paid
cash dividends on its Common Stock.  The Company  currently  anticipates that it
will retain all future  earnings,  if any,  for use in its business and does not
anticipate  paying any cash  dividends  on its Common  Stock in the  foreseeable
future. The closing price per share of the Company's Common Stock as reported on
the Nasdaq Stock Market on December 22, 1998 was $7.188.

<PAGE>


ITEM 6.  SELECTED FINANCIAL DATA

         The following selected financial data has been derived from the audited
Consolidated  Financial  Statements.  The  information  set  forth  below is not
necessarily  indicative  of results of future  operations  and should be read in
conjunction with  "Management's  Discussion and Analysis of Financial  Condition
and Results of Operations" and the consolidated financial statements and related
notes thereto included elsewhere in this Form 10-K.

<TABLE>
<CAPTION>
                                                                   Fiscal years ended September 30,
                                                     ----------------------------------------------------------------
                                                        1998         1997         1996          1995        1994
                                                     -----------   -----------   ---------    ----------  -----------
                                                              (in thousands; except for per share amounts)
<S>                                                  <C>           <C>           <C>          <C>         <C>

  Revenues.........................................   $ 24,836       $20,170     $16,718       $ 6,569      $ 5,310
                                                                                  
  Cost of revenues.................................      7,955         6,396       3,811           674          447
                                                     -----------   -----------   ---------    ----------  -----------
      Gross profit.................................     16,881        13,774      12,907         5,895        4,863

  Operating expenses:
      Research and development.....................      7,201         7,177       7,603         5,905        2,787
      Selling and marketing .......................     14,404        11,288       9,410         4,463        2,841
      General and administrative...................      3,380         2,945       2,835         2,364        2,736
                                                     -----------   -----------   ---------    ----------  -----------
      Total operating expenses.....................     24,985        21,410      19,848        12,732        8,364
                                                     -----------   -----------   ---------    ----------  -----------

         Operating loss............................     (8,104)       (7,636)     (6,941)       (6,837)      (3,501)
  Other income, net................................      2,222         1,869       1,040           815          291
                                                     -----------   -----------   ---------    ----------  -----------
      Loss from continuing operations
         before income taxes.......................     (5,882)       (5,767)     (5,901)       (6,022)      (3,210)
  Income tax provision (benefit) (a)...............      2,155        (2,217)     (4,619)       (2,732)      (1,856)
                                                     -----------   -----------   ---------    ----------  -----------

         Loss from continuing operations...........     (8,037)       (3,550)     (1,282)       (3,290)      (1,354)
  Discontinued operations, net of taxes (b)........     (2,496)        3,021       4,983         5,796        3,541
                                                     -----------   -----------   ---------    ----------  -----------

         Net income (loss)........................     $(10,533)      $  (529)   $ 3,701       $ 2,506      $ 2,187
                                                     ===========   ===========   =========    ==========  ===========

</TABLE>

<PAGE>

<TABLE>
<CAPTION>

                                                                   Fiscal years ended September 30,
                                                     ----------------------------------------------------------------
                                                        1998         1997         1996          1995         1994
                                                     -----------   -----------   ---------    ----------  -----------
                                                              (in thousands; except for per share amounts)
<S>                                                  <C>           <C>           <C>          <C>         <C>
 Per share data, continuing operations:
      Basic and diluted loss per share.............     $ (0.69)      $ (0.31)    $ (0.13)      $ (0.36)       $ --
      Shares used in the per share calculations....      11,687        11,335       9,890         9,148          --

 Per share data, discontinued operations:
      Basic income (loss) per share................     $ (0.21)      $  0.27     $  0.50       $  0.63        $ --
      Diluted income (loss) per share..............     $ (0.21)      $  0.24     $  0.46       $  0.61        $ --
      Common shares used in the calculations of
        basic income (loss) per share..............      11,687        11,335       9,890         9,148          --
      Common and common equivalent shares
        used in the calculations of diluted net
        income (loss) per share....................      11,687        12,350      10,887         9,522          --

 Per share data, net income (loss):
      Basic net income (loss) per share............     $ (0.90)      $ (0.05)    $  0.37       $  0.27        $ --
      Diluted net income (loss) per share..........     $ (0.90)      $ (0.05)    $  0.34       $  0.26        $ --
      Common shares used in the calculations of
        basic net income (loss) per share..........      11,687        11,335       9,890         9,148          --
      Common and common equivalent shares
        used in the calculations of diluted net
        income (loss) per share....................      11,687        11,335      10,887         9,522          --
                                                      ==========    ==========   ==========    ==========   =========
</TABLE>

<TABLE>
<CAPTION>

                                                                             September 30,
                                                      ---------------------------------------------------------------
                                                         1998        1997          1996        1995         1994
                                                      -----------  -----------   ----------  -----------  -----------
                                                                             (in thousands)
<S>                                                   <C>          <C>           <C>         <C>          <C> 
 Consolidated balance sheet data:
  Working capital...................................   $ 38,152     $ 49,979      $49,469      $21,755      $19,569
  Total assets......................................     56,292       61,001       61,618       33,872       29,289
  Long-term liabilities.............................        260          361           46          218          689
  Total stockholders' equity........................     44,801       53,977       53,143       24,279       21,644
                                                      ===========  ===========   ==========  ===========  ===========
</TABLE>
                                                    
------------------------------------
(a)______See Note 5 of Notes to Consolidated Financial Statements.
(b)  On August 5, 1998, the Company sold its LAN Division.  The sale transaction
     and  operating  results of the LAN Division for the periods  presented  are
     reported as a discontinued  operation.  See Note 2 of Notes to Consolidated
     Financial Statements.

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

         The discussion in this Report contains forward-looking  statements that
involve risks and  uncertainties.  The statements  contained in this Report that
are not purely historical are  forward-looking  statements within the meaning of
Section 27A of the  Securities  Act of 1933, as amended,  and Section 21E of the
Securities Exchange Act of 1934, as amended,  including statements regarding the
Company's expectations,  beliefs,  intentions,  strategies,  proceeds, expenses,
charges, accruals, losses and reserves regarding the future. All forward-looking
statements  included in this document are based on information  available to the
Company on the date hereof,  and the Company assumes no obligation to update any
such  forward-looking  statements.  The  Company's  actual  results could differ
materially from those discussed  herein.  Factors that could cause or contribute
to such differences  include,  but are not limited to, those discussed in "Other
Factors  That May Affect  Future  Results"  as well as those  discussed  in this
section and elsewhere in this Report,  and the risks  discussed in the Company's
other United States Securities and Exchange Commission filings.

<PAGE>

Overview

         Netopia  develops,  markets and supports  products  and services  which
enable growing  organizations  to establish their presence on the Internet.  The
Company's  products  include NVO software which is a "no assembly  required" web
site  solution  that  allows  Internet  users to create  their  own  customized,
interactive  web  site,  Netopia  Internet  Routers,  which  offer  a  range  of
high-speed,  multi-user digital and analog Internet connectivity solutions,  and
Timbuktu Pro real-time communication and remote control software for workgroups,
remote workers and help desk administrators.

         In 1993,  the Company  focused its business  strategy to concentrate on
the Internet  and Intranet  markets  through the  utilization  of its TCP/IP and
routing  expertise.  In fiscal  1994,  the Company  released  its  Timbuktu  Pro
Internet/Intranet  collaboration  software product (TCP/IP  enabled).  In fiscal
1996, the Company  introduced its Netopia Internet router products and services,
and, in fiscal 1997, the Company  introduced its NVO software  platform.  During
fiscal 1998, the Company  expanded its Internet  product  offerings by releasing
the hosted version of NVO and by offering additional Internet routers supporting
DSL and 56K Dual Analog  technologies.  The Company also  expanded its strategic
Internet  relationships  in fiscal  1998 by  partnering  with  Netscape,  France
Telecom,  Copper Mountain and Northpoint  Communications.  Additionally,  in the
fourth quarter of fiscal 1998, the Company sold its LAN Division which developed
and sold LAN products primarily for Apple Macintosh computers.

         The Company's  total  revenues from  continuing  operations are derived
from the sale of hardware and software products and include license revenues for
its Timbuktu Pro and NVO software, sales of its Netopia Internet router products
and fees for related  services,  as well as revenue from licensing the Company's
patent covering cross-platform  screen-sharing  technology.  Revenue relating to
the sale and  licensing  of hardware and software  products is  recognized  upon
shipment of the products by the Company,  patent revenue is recognized  upon the
licensing  of the rights to the  patent  and  service  revenues  are  recognized
ratably over the term of the contract.  Certain of the Company's  sales are made
to customers  under  agreements  permitting  limited  rights of return for stock
balancing or with protection for future price decreases. Revenue is recorded net
of an estimated allowance for returns. Any product returns or price decreases in
the future that exceed the Company's  allowances may materially adversely affect
the Company's business, operating results and financial condition.  Although the
Company has experienced revenue growth over the last five years, there can be no
assurance  that the Company will be able to sustain or increase  revenue  growth
rates.  There can be no  assurance  that the  Company  will be  profitable  on a
quarterly  or annual  basis.  As a result of the sale of the LAN  Division,  the
Company's  consolidated  statements of operations  have been restated to reflect
the  discontinuation  of  the  operations  associated  with  the  Company's  LAN
Division.  The Company's  limited operating history without its LAN Division and
the dynamic market environment in which the Company competes make the prediction
of future operating results difficult, if not impossible.

         The Company  sells its  products and related  maintenance,  support and
other services through  distributors,  ISPs, VARs and directly by the Company to
corporate  accounts,  higher education  institutions and over the Internet.  The
Company's  revenues  from  distributors  accounted  for 45%,  43% and 37% of the
Company's total revenues for the fiscal years ended September 30, 1998, 1997 and
1996,  respectively.  The Company's  three largest  distributors,  in aggregate,
accounted  for 21%, 24% and 23% of the Company's  total  revenues for the fiscal
years ended September 30, 1998, 1997 and 1996,  respectively.  During the fiscal
years ended September 30, 1998, 1997 and 1996, revenue from Ingram accounted for
12%,  14%  and 12% of the  Company's  total  revenues,  respectively.  No  other
customers have accounted for 10% or more of the Company's  total revenues during
the fiscal years ended September 30, 1998, 1997 and 1996.

         The  distribution  of products such as those offered by the Company has
been characterized by rapid change, including industry consolidations, financial
difficulties  of  distributors  and the  emergence of  alternative  distribution
channels.  There can be no assurance that current  distributors will continue to
serve as distributors  for the Company since the Company does not currently have
a written agreement regarding price or quantity  commitments with these or other

<PAGE>

distributors  which  operate  on  a  purchase  order  basis.  The  LAN  Division
historically   sold  significant   volumes  of  product  through  the  Company's
distributors. Due to the sale of the LAN Division there can be no assurance that
the  Company's  current  distributors  will  continue  to market  the  Company's
products or that the Company's  channel  expense  levels will not increase.  The
loss of, or a  significant  reduction in revenue  from any one of the  Company's
distributors  could have a material  adverse  effect on the Company's  business,
operating results and financial condition.  The Company's distributors generally
offer  products of several  different  companies,  including  products  that are
competitive with the Company's  products.  There can be no assurance that future
sales by the Company's  distributors  will continue at current levels,  that the
Company will be able to retain its current  distributors  in the future on terms
which are  acceptable to the Company,  that the Company's  current  distributors
will choose to or be able to market the  Company's  products  effectively,  that
economic  conditions or industry demand will not adversely affect these or other
distributors,  that these  distributors  will not devote  greater  resources  to
marketing products of other companies or that internal staffing changes or other
changes at the Company's  distributors will not disrupt historical purchasing or
payment  patterns.  Accordingly,  the loss of,  or a  significant  reduction  in
revenue from, one of the Company's  distributors,  could have a material adverse
effect on the Company's business, operating results and financial condition.

         The Company grants to its distributors  limited rights to return unsold
inventories of the Company's products in exchange for new purchases and provides
price protection to its distributors.  Although the Company provides  allowances
for  projected  returns  and  price  decreases,  any  product  returns  or price
decreases in the future that exceed the Company's allowances will materially and
adversely  affect  the  Company's  business,  operating  results  and  financial
condition.  The Company  also  provides end users with a ninety (90) day and one
(1)  year  limited  warranty  on its  Timbuktu  Pro  and  Internet  connectivity
products,  respectively,  and  permits  end  users to  return  the  product  for
replacement  or its full  purchase  price if the  product  does not  perform  as
warranted.  The NVO  service  is  provided  on an "as is" basis,  therefore  the
Company does not  generally  offer a warranty on its NVO service.  End users are
offered a free thirty (30) day evaluation period to use and evaluate the service
prior to purchase and thereafter can discontinue their subscription at any time.
To date, the Company has not encountered material warranty claims. Nevertheless,
if future warranty claims exceed the Company's reserves, the Company's business,
operating  results and financial  condition  could be  materially  and adversely
affected.  In addition,  the Company  attempts to further limit its liability to
end users through disclaimers of special, consequential and indirect damages and
similar provisions in its end user warranty.  However, no assurance can be given
that such limitations of liability will be legally enforceable.

         International  revenues accounted for 33%, 27% and 20% of the Company's
total  revenues for the fiscal years ended  September  30, 1998,  1997 and 1996,
respectively.  The  following  table  provides a breakdown  of revenue by region
expressed as a percentage of total revenues for the periods presented:

<TABLE>
<CAPTION>
                                                                            Fiscal years ended September 30,
                                                                    -------------------------------------------------
                                                                         1998             1997             1996
                                                                    ---------------   --------------   --------------
<S>                                                                 <C>               <C>              <C>

  Europe..........................................................           25%              19%              11%
  Pacific Rim.....................................................            5                5                7
  Other...........................................................            3                3                2
                                                                    ---------------   --------------   --------------
    Subtotal international revenues...............................           33               27               20
  United States...................................................           67               73               80
                                                                    ---------------   --------------   --------------
      Total revenues..............................................          100%             100%             100%
                                                                    ===============   ==============   ==============
</TABLE>

         The  Company's  international  revenues are  currently  denominated  in
United States  dollars,  and revenues  generated by the  Company's  distributors
currently are paid to the Company in United States  dollars.  The results of the
Company's international  operations may fluctuate from period to period based on
global  economic  factors  including,  but not limited to, the current  economic
situation  in  Asia  and  Japan  and  movements  in  currency   exchange  rates.
Historically,  movements  in exchange  rates have not  materially  affected  the
Company's total revenues.  However,  there can be no assurance that movements in
currency exchange rates will not have a material adverse effect on the Company's
revenues in the future.

          The Company  expects  that  international  revenues  will  continue to
represent a significant  portion of its total revenues.  Any significant decline
in international demand for the Company's products would have a material adverse

<PAGE>

effect on the Company's business, operating results and financial condition. The
Company believes that in order to increase sales opportunities and profitability
it will be  required  to expand its  international  operations.  The Company has
committed and continues to commit significant management attention and financial
resources to developing  international sales and support channels.  There can be
no assurance that the Company will be able to maintain or increase international
market  demand for its  products.  To the extent  that the  Company is unable to
maintain  or  increase  international  demand for its  products,  the  Company's
international  sales will be  limited,  and the  Company's  business,  operating
results and financial condition would be materially and adversely affected.

         The Company's  international  operations are subject to inherent risks,
including,  but not  limited  to,  the impact of current  and  potential  future
recessionary  environments  in  economies  outside the United  States,  costs of
localizing products for foreign countries,  longer receivable collection periods
and greater difficulty in accounts receivable collection,  unexpected changes in
regulatory requirements, difficulties and costs of staffing and managing foreign
operations,  potentially  adverse tax  consequences  and  political and economic
instability.  In addition,  the laws of certain  foreign  countries in which the
Company's  products  are or may  be  manufactured  or  sold,  including  various
countries  in Asia such as the People's  Republic of China,  may not protect the
Company's products or intellectual  property rights to the same extent as do the
laws of the  United  States and thus may make the  possibility  of piracy of the
Company's  technology  and products more likely.  There can be no assurance that
the Company will be able to sustain or increase international  revenues, or that
the foregoing  factors will not have a material  adverse effect on the Company's
future international revenues and its business,  operating results and financial
condition.

         In the fourth quarter of fiscal 1998, the Company sold its LAN Division
through  which it had  developed  and  sold LAN  products  primarily  for  Apple
Macintosh computers.  The LAN Division's operations,  products and the market in
which it  competed  were no longer  considered  core to the  Company's  business
strategy.  As a result, the Company sold 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"). Farallon also assumed certain accounts payable
and other liabilities of the LAN Division. The LAN Division's products consisted
of Ethernet,  EtherWave,  Fast Ethernet and LocalTalk  compatible products which
included  the  PhoneNET  system  of  network  connectivity  products  (the  "LAN
Products").  In connection  with such sale, the Company  received  consideration
aggregating $4.9 million,  including (i) $2.0 million of cash, (ii) royalties on
Farallon's  revenues  for a period of five  years to the  extent  that  Farallon
achieves  revenues  from the sale of its LAN Products of at least $15.0  million
per  year,  (iii)  a two  year  $1.0  million  promissory  note  from  Farallon,
guaranteed  by Gores,  and (iv) a warrant to  purchase up to 5% of the equity of
Farallon.  There can be no  assurance  that the  business  of  Farallon  will be
sufficiently  successful  to allow  the  Company  to  realize  the  value of the
receivables,  note and warrant  described  in (ii),  (iii) and (iv)  above.  The
failure of the Company to realize the value of the receivables, note and warrant
could  have a  material  adverse  effect on the  Company's  business,  operating
results and financial  condition.  Also in  connection  with the sale of the LAN
Division,  the Company made certain  representations  and  warranties  about the
assets and liabilities transferred to Farallon.  While the Company believes such
representations  have been  accurate,  the Company  could be liable for up to $2
million for any damages to Farallon resulting from any breach or breaches of any
of such  representations  and  warranties.  As a result,  any material breach or
breaches of the  representations and warranties made in connection with the sale
of the LAN  Division  could  have a  material  adverse  effect on the  Company's
business, operating results and financial condition. See "Other Risks Associated
with the Sale of the LAN Division."

Events Occurring After September 30, 1998

         On December 17, 1998,  the Company  signed a definitive  agreement  and
closed a transaction to purchase Serus LLC ("Serus"),  a Utah limited  liability
company.  Serus is a developer of java-based web site editing software products.
Upon completion of the  development of such products,  Netopia intends to market
the  products  both  independently  and along with its  Netopia  Virtual  Office
software  platform  to allow users more  flexibility  in  customizing  their web
sites. As per the SERUS ASSET PURCHASE AGREEMENT by and among Netopia,  Inc. and
Serus LLC (the "Purchase Agreement"),  Netopia will acquire substantially all of
the assets and assume certain liabilities of Serus and existing operations which
include  in-process  research and development.  The maximum  aggregate  purchase
price of the Serus transaction is approximately  $7.0 million including (i) $3.0
million of cash due and payable on the  closing  date of the  transaction,  (ii)

<PAGE>

409,556  shares of the Company's  Common Stock issued on the closing  date,  and
(iii) a $1.0 million  earnout  opportunity  based upon  certain  criteria as set
forth in the Purchase Agreement.

         The Company is in the process of completing the valuation of the assets
acquired and  liabilities  assumed in connection  with its  acquisition of Serus
including the  evaluation  of in-process  research and  development  costs.  The
Company  expects  to record a charge to  operations  during  the 3 months  ended
December  31, 1998 for  in-process  research  and  development  relating to this
recently  completed  acquisition.  The  amount of such  charge is not  presently
determinable,  but  could be  material.  The  Company  is aware  that the SEC is
reviewing  the  assumptions  and  methodologies   heretofore  commonly  used  by
companies in  calculating  such  charges.  The Company  intends to follow recent
guidance  disseminated  by the SEC in its  valuation of the assets  acquired and
liabilities assumed and, in particular,  in the valuation of in-process research
and development.

         In the course of integrating  Serus into the operations of the Company,
it is possible that facts or circumstances may be discovered that were not known
nor  apparent  prior to the time that the Company  executed  the Serus  Purchase
Agreement or during its financial and technical due diligence  reviews of Serus.
There  can  be no  assurance  that  difficulties  will  not  be  encountered  in
integrating the operations of Serus, or that the specific benefits expected from
the  integration  of Serus  will be  achieved.  The  acquisition  of Serus  also
involves  a number of other  risks,  including  technical  risks  related to the
completion of on-going development  efforts;  assimilation of new operations and
personnel;   the  diversion  of  resources  from  Netopia's  existing  business;
integration  of their  respective  equipment,  product  and  service  offerings,
networks and  technologies,  financial and information  systems and brand names;
coordination of geographically separated facilities and work forces;  management
challenges  associated  with the  integration of the companies;  coordination of
their   respective   engineering,   selling,   marketing  and  service  efforts,
assimilation  of  new  management  personnel;   and  maintenance  of  standards,
controls,  procedures  and  policies.  The  process  of  integrating  the  Serus
operations,  including its personnel,  could cause  interruption  of, or loss in
momentum in the activities of Netopia's business and operations, including those
of the  business  acquired.  Further,  employees  of Serus who may be key to the
integration effort or Netopia's ongoing operations may choose not to continue to
work for Netopia following the closing of the acquisition.

<PAGE>

Results of Operations

         The  following  table  sets forth  certain  consolidated  statement  of
operations  data of the Company  expressed as a percentage of total revenues for
the periods presented:

<TABLE>
<CAPTION>
                                                                            Fiscal years ended September 30,
                                                                    -------------------------------------------------
                                                                         1998             1997             1996
                                                                    ---------------   --------------   --------------
<S>                                                                  <C>              <C>              <C>

  Revenues........................................................         100.0%           100.0%            100.0%

  Cost of revenues................................................          32.0             31.7              22.8
                                                                    ---------------   --------------   --------------

      Gross profit................................................          68.0             68.3              77.2

  Operating expenses:
      Research and development....................................          29.0             35.6              45.5
      Selling and marketing ......................................          58.0             56.0              56.3
      General and administrative..................................          13.6             14.6              16.9
                                                                    ---------------   --------------   --------------
      Total operating expenses....................................         100.6            106.2             118.7
                                                                    ---------------   --------------   --------------

         Operating loss...........................................         (32.6)           (37.9)            (41.5)
  Other income, net...............................................           8.9              9.3               6.2
                                                                    ---------------   --------------   --------------
      Loss from continuing operations
         before income taxes......................................         (23.7)           (28.6)            (35.3)
  Income tax provision (benefit)..................................           8.7            (11.0)            (27.6)
                                                                    ---------------   --------------   --------------

         Loss from continuing operations..........................         (32.4)           (17.6)             (7.7)
  Discontinued operations:
      Income from discontinued operations, net of taxes...........           2.4             15.0              29.8
      Loss on sale of discontinued operations, net of taxes.......         (12.4)              --                --
                                                                    ---------------   --------------   --------------

         Net income (loss).......................................          (42.4)%           (2.6)%            22.1%
                                                                    ===============   ==============   ==============
</TABLE>

Fiscal Years Ended September 30, 1998, 1997 and 1996

         Revenues. Total revenue increased 23.1% to $24.8 million in fiscal 1998
from $20.2 million in fiscal 1997,  which  increased 20.6% from $16.7 million in
fiscal 1996. The increase in fiscal 1998 was primarily due to increased sales of
the Windows version of Timbuktu Pro collaboration software,  particularly volume
site   licenses,   increased   sales  of  the  Netopia  ISDN   Internet   router
internationally  primarily as a result of the  Company's  relationship  with the
France Telecom  WANadoo  service  ("WANadoo") and increased sales of the Netopia
Frame Relay Internet router in North America which was not available  during the
entire 1997 fiscal year.  These  increases  were  partially  offset by decreased
sales of the MacOS  version of Timbuktu  Pro  collaboration  software  and price
competition  related to the Netopia ISDN Internet  router in North America.  The
increase in fiscal 1997 was primarily due to increased sales of the Netopia ISDN
Internet router  internationally,  which was introduced in the fourth quarter of
fiscal 1996, the fiscal 1997 first quarter introduction of the POTS enabled ISDN
Internet  router in North  America,  a greater  number of regional  ISPs selling
Netopia  Internet routers and increased sales of the Windows version of Timbuktu
Pro.  These  increases  were  partially  offset by decreased  sales of the MacOS
version of  Timbuktu  Pro,  decreased  revenue  from patent  licenses  and price
competition  related to Netopia ISDN Internet  routers in North America.  During
fiscal years 1998 and 1997, revenues from the MacOS version of Timbuktu Pro have
been adversely affected by declining sales of MacOS computers,  Apple Computer's
loss of market share and the reduction in sales of Macintosh clone computers due
to the  elimination of a number of cloning  licenses  issued by Apple  Computer.
Also during fiscal years 1998 and 1997, the Company's  Internet router products,
particularly its Netopia ISDN Internet router, have experienced increasing price
competition from both domestic and foreign  manufacturers of similar products as
well as  competition  from  newer  technologies  such as DSL and cable  Internet
router  products.  In fiscal 1999,  the Company  expects  revenue from the MacOS
version of Timbuktu  Pro to  continue  to decline in  absolute  dollars and as a
percent  of revenue  and  expects  continued  price  competition  related to its
Internet router products.

<PAGE>

         International  revenues  increased 47.6% to $8.2 million in fiscal 1998
from $5.5 million in fiscal  1997,  which  increased  64.4% from $3.3 million in
fiscal 1996. The increase in fiscal 1998 is primarily due to increased  sales of
the Company's Netopia Internet  routers,  particularly the Netopia ISDN Internet
router as a result of the  WANadoo  service.  The  increase  in fiscal  1997 was
primarily due to increased sales of the Netopia ISDN Internet router,  which was
introduced internationally in the fourth quarter of fiscal 1996.

         Gross Margin.  The Company's  total gross margin  decreased to 68.0% in
fiscal  1998 from 68.3% in fiscal  1997,  which  decreased  from 77.2% in fiscal
1996.  The decrease in fiscal 1998 was  primarily  due to the  write-down of the
Company's single user ISDN modem inventory which totaled approximately $200,000.
The  write-down of the  Company's  single user ISDN modem  inventory  reflects a
shift  in  the  Company's  strategic  focus  to  providing  multi-user  Internet
connectivity  products rather than single user Internet  connectivity  products.
The  decrease  in  fiscal  1997  was  primarily  due to  increased  sales of the
Company's  Netopia Internet router products which have a lower gross margin than
the Company's software products and decreased revenue from patent licenses.  The
Company's gross margin has varied significantly in the past and will likely vary
significantly in the future  depending  primarily on the mix of products sold by
the Company, 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.  The  Company's  Timbuktu  Pro and NVO
collaboration  software  products  have a higher  average  gross margin than the
balance of the Company's  products.  Accordingly,  to the extent the product mix
for any  particular  quarter  includes a substantial  proportion of lower margin
products,  there will be a material  adverse  effect on the Company's  business,
operating results and financial condition.

         Research and Development.  Research and development  expenses were $7.2
million for fiscal 1998 and $7.2 million for fiscal 1997,  which  decreased 5.6%
from $7.6 million in fiscal 1996.  Although  research and  development  expenses
remained  unchanged  between fiscal 1998 and fiscal 1997, third party contractor
expenses increased but were offset by reduced product localization expenses. The
decrease  in  fiscal  1997  was  primarily  due  to  decreased  product  design,
prototyping  and  regulatory  compliance  related  expenses  as well as  reduced
incentives,  recruiting,  travel and  contractor  expenses  partially  offset by
increased  product  localization  expenses.  Research and  development  expenses
represented  29.0%, 35.6% and 45.5% of total revenues for the fiscal years ended
September 30, 1998, 1997 and 1996,  respectively.  The Company  believes that it
will  continue to devote  substantial  resources  to product  and  technological
development  and that  research and  development  costs may increase in absolute
dollars in fiscal 1999.  Historically,  the Company has believed its process for
developing software is essentially completed concurrently with the establishment
of  technological   feasibility  and  no  internal   software  costs  have  been
capitalized to date.  During the fiscal year ended September 30, 1998,  $237,000
of product  development  costs incurred  subsequent to the delivery of a working
model, under a development agreement with third parties, were capitalized.

         Selling and Marketing.  Selling and marketing  expenses increased 27.6%
to $14.4  million  in fiscal  1998 from  $11.3  million  in fiscal  1997,  which
increased  20.0% from $9.4 million in fiscal  1996.  The increase in fiscal 1998
was primarily due to increased headcount and increased advertising,  promotional
and channel  development  expenses  related to the  introduction of new products
including  the  hosted  version  of NVO and the  Netopia  Dual  Analog  and SDSL
routers.  The increase in fiscal 1997 was primarily  due to increased  headcount
and related expenses.  Selling and marketing  expenses  represented 58.0%, 56.0%
and 56.3% of total revenues for the fiscal years ended  September 30, 1998, 1997
and 1996, respectively. The Company believes that selling and marketing expenses
may  increase  in  absolute  dollars  in fiscal  1999 as a result  of  increased
advertising and promotion campaigns as well as expansion of its telesales staff.

         General  and  Administrative.   General  and  administrative   expenses
increased 14.8% to $3.4 million in fiscal 1998 from $2.9 million in fiscal 1997,
which  increased  0.4% from $2.8 million in fiscal 1996.  The increase in fiscal
1998 was primarily due to the accrual of additional  bad-debt  expense  reserves
and  increased  facility  related  costs,  partially  offset by decreased use of
information systems  contractors.  The increase in fiscal 1997 was primarily due
to increased  legal,  accounting  and  insurance  fees related to being a public
company  partially offset by reduced  consulting and employee related  expenses.
General and administrative  expenses represented 13.6%, 14.6% and 16.9% of total
revenues  for the  fiscal  years  ended  September  30,  1998,  1997  and  1996,
respectively.

<PAGE>

         Other Income,  Net. Other income,  net, primarily  represents  interest
earned by the Company on its cash, cash equivalents and short-term  investments.
Other income increased 18.9% to $2.2 million in fiscal 1998 from $1.9 million in
fiscal  1997,  which  increased  79.7%  from $1.0  million in fiscal  1996.  The
increase in fiscal 1998 was primarily due to the Company  moving its  short-term
investments to non-tax advantaged  investments from tax advantaged  investments.
The increase in fiscal 1997 was  primarily  due to the  interest  earned on cash
raised from the Company's  June 1996 Initial Public  Offering  ("IPO") which was
invested during the entire fiscal year of 1997.

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

         At September 30, 1998,  the Company  believed that based upon available
objective evidence, there was sufficient uncertainty regarding the realizability
of its tax assets to warrant a full valuation allowance.  The factors considered
included the relative  shorter life cycles in the high  technology  industry and
the uncertainty of longer-term taxable income estimates related thereto and as a
result of the sale of the historically profitable LAN Division. At September 30,
1997,  the  Company  believed  that  based  upon  the then  available  objective
evidence,  there was  sufficient  uncertainty  regarding  the  realizability  of
certain of its tax assets to warrant a partial  valuation  allowance,  primarily
related to the expected realizability of its research credit carryforwards.  The
factors considered included the relative shorter product life cycles in the high
technology  industry and the uncertainty of longer-term taxable income estimates
related thereto and limits on the carryback potential for realizing deferred tax
assets. In fiscal 1996, the Company reversed a full valuation  allowance that it
had previously provided against its deferred tax assets,  resulting in an income
tax benefit of  approximately  $2.3  million.  During  fiscal 1996,  the Company
believed   that  due  to  the   demonstrated   market   acceptance  of  its  new
Internet/Intranet  products,  the uncertainty regarding the realizability of its
deferred  tax assets had  diminished  to the point where it was more likely than
not that the deferred tax assets would be realized.

         Discontinued  Operations.  On August 5, 1998,  the Company sold its LAN
Division for consideration aggregating $4.9 million,  including (i) $2.0 million
of cash, (ii) royalties on Farallon's revenues for a period of five years to the
extent that Farallon  achieves  revenues from the sale of its LAN Products of at
least $15.0 million per year, (iii) a two year $1.0 million promissory note from
Farallon,  guaranteed  by Gores,  and (iv) a warrant to purchase up to 5% of the
equity of Farallon.  The sale of the LAN Division  has been  accounted  for as a
discontinued  operation and prior period consolidated  financial statements have
been restated to reflect the  discontinuation  of the LAN Division.  Income from
discontinued  operations  of  $602,000,  $3.0 million and $5.0 million in fiscal
years ended  September 30, 1998,  1997 and 1996,  respectively,  represents  the
operating  income,  net of taxes of the  discontinued  operations.  The net book
value  of the LAN  Division  approximated  the fair  value of the  consideration
received,  accordingly,  the  loss on sale of  discontinued  operations  of $3.1
million in the fiscal year ended September 30, 1998,  primarily represents costs
and transaction expenses incurred and accrued as a result of the sale of the LAN
Division.  Such expenses are directly  attributable to the sale  transaction and
are primarily  related to projected  costs of abandoned  facilities,  investment
advisory, legal and accounting fees and certain expenses related to employees of
the LAN Division.

Other Factors That May Affect Future Operating Results

         The Company operates in a rapidly changing  environment that involves a
number of risks, many of which are beyond the Company's  control.  The following
discussion  highlights some of these risks.  The Company's  actual results could

<PAGE>

differ  materially  from those  discussed  herein.  Factors  that could cause or
contribute to such differences  include, but are not limited to, those discussed
in this section and  elsewhere in this  Report,  and the risks  discussed in the
Company's other United States Securities and Exchange Commission filings.

         Fluctuations in Quarterly Results;  Future Operating Results Uncertain.
The Company's quarterly operating results have varied  significantly in the past
and are likely to vary  significantly in the future.  Historically,  the Company
had been dependent  upon the sales of its LAN Products.  As a result of the sale
of the LAN Division,  the Company's future operating  results are dependent upon
the  market  acceptance  of  its  Internet/Intranet  products  and  enhancements
thereto.  To the  extent  that  the  loss of  revenue  from  the sale of the LAN
Division and its products is not offset by increases in revenue from the sale of
the Company's  Internet/Intranet  products,  the Company's  business,  operating
results and  financial  condition  will be materially  and  adversely  affected.
Historically,   the   Company's   continuing   operations   have  not   achieved
profitability  and there  can be no  assurance  that the  Company  will  achieve
profitability in the future.  The Company's  operating results depend on factors
such as changes in networking and communications technologies, price and product
competition,  usage of the Internet and developments and changes in the Internet
market,  the  demand for the  Company's  products,  retention  and growth of the
Company's  NVO   subscriber   base,   product   enhancements   and  new  product
announcements  by the  Company and its  competitors,  market  acceptance  of new
products  of the  Company or its  competitors,  the size and timing of  customer
orders and  purchasing  cycles,  customer  order  deferrals in  anticipation  of
enhancements to the Company's or competitors' products, customer order deferrals
for budgetary or other reasons,  manufacturing delays, disruptions in sources of
supply, product life cycles,  product quality problems,  changes in the level of
operating expenses, the timing of research and development  expenditures and the
level of the Company's international revenues. The Company's results also depend
on the demand for vendor  products  related to the  Company's  products  such as
Windows or Apple  Macintosh  personal  computers  and operating  systems,  among
others, and customer order deferrals in anticipation of new product offerings by
these  vendors.  The Company's  gross margins and  operating  results  depend on
factors such as raw material costs, write-offs of obsolete inventory, changes in
pricing policies by the Company or its competitors, including the grant of price
protection  terms and  discounts by the Company,  changes in the mix of products
sold by the Company and the resulting  change in total gross margin,  changes in
the mix of channels through which the Company's  products are offered as well as
the structure of planned NVO partnerships which may be reported as either higher
margin  royalty  arrangements  or lower  margin  operations  subject to royalty,
amortization  or other costs.  Additionally,  the  Company's  operating  results
depend on general  factors such as personnel  changes,  changes in the Company's
strategy,  fluctuations in foreign  currency  exchange rates,  general  economic
conditions,  both in the  United  States and  abroad,  and  economic  conditions
specific to the  industries in which the Company  competes,  among  others.  The
Company's  limited  Internet/Intranet  operating  history and the dynamic market
environment  in which  the  Company  competes  make  the  prediction  of  future
operating  results  difficult,  if not  impossible.  Sales orders are  typically
shipped shortly after receipt and, consequently,  order backlog at the beginning
of any  quarter  has in the  past  represented  only a  small  portion  of  that
quarter's revenues.  Accordingly,  the Company's net revenues in any quarter are
substantially  dependent  on orders  booked and  shipped  during  that  quarter.
Historically, the Company has often shipped and recognized a significant portion
of its revenues in the last weeks, or even days, of a quarter.  As a result, the
magnitude of quarterly  fluctuations  may not become  evident  until late in, or
after the close of a  particular  quarter.  The  Company  typically  experiences
significant  volumes of shipments at the end of the quarter which may be exposed
to  delays  caused by  shipping  halts or other  factors  beyond  the  Company's
control.  In addition,  the Company  recognizes revenue on products sold through
distributors,  ISPs and VARs  upon  shipment  to the  distributor,  ISP and VAR.
Although  the  Company  maintains  reserves  for  projected  returns  and  price
decreases,  there can be no assurance  that such reserves will be adequate.  The
Company's business also has experienced  seasonality in the past, largely due to
customer buying patterns,  such as budgeting cycles of educational  institutions
that  purchase the Company's  products and the summer  slowdown in most European
markets. There can be no assurance that the Company's operating results will not
be affected by seasonality in the future or that such  seasonality will occur in
a manner consistent with prior periods.

         The Company's expense levels are based in large part on expectations as
to future revenues and, as a result,  are relatively fixed in the short term. If
revenues  are below  expectations  in any given  quarter,  net income or loss is
likely to be disproportionately  affected.  Due to all of the foregoing factors,
and other  factors  discussed  herein,  revenues  and net income or loss for any
future  period are not  predictable  with any  significant  degree of certainty.

<PAGE>

Accordingly,  the Company  believes  that  period-to-period  comparisons  of its
results of operations  are not  necessarily  meaningful and should not be relied
upon as indicators  of future  performance.  There can be no assurance  that the
Company's  business  strategies  will be  successful or that the Company will be
able to return to or sustain profitability on a quarterly or annual basis in the
future. It is likely that in some future quarter the Company's operating results
will be below the expectations of public market analysts and investors.  In such
event,  the price of the Company's  Common Stock would likely be materially  and
adversely affected.

         Risks  Associated  with Potential  Acquisitions  or  Divestitures.  The
Company  may  acquire or invest in  companies,  technologies  or  products  that
complement the Company's  business or its product  offerings.  In addition,  the
Company  continues to evaluate the  performance  of all its products and product
lines and may sell or  discontinue  current  technologies,  products  or product
lines.  Any  acquisitions  or  divestitures  may  result  in the  use  of  cash,
potentially  dilutive issuances of equity securities,  the write-off of software
development  costs or other  assets,  incurrance of severance  liabilities,  the
amortization of expenses related to goodwill and other intangible  assets and/or
the incurrance of debt, any of which could have a material adverse effect on the
Company's business,  financial condition,  cash flows and results of operations.
Acquisitions or divestitures  would involve numerous  additional risks including
difficulties in the assimilation or separation of operations, services, products
and  personnel,  the diversion of  management's  attention  from other  business
concerns,  the disruption of the Company's  business,  the entry into markets in
which the Company has little or no direct prior  experience,  the potential loss
of key  employees  and  the  potential  loss  of  key  distributor  or  supplier
relationships.  In addition,  potential  acquisition  candidates targeted by the
Company  may  not  have  audited  financial   statements,   detailed   financial
information or any degree of internal  controls.  There can be no assurance that
an audit  subsequent to any  successful  completion of an  acquisition  will not
reveal matters of  significance,  including with respect to revenues,  expenses,
liabilities, contingent or otherwise, and intellectual property. There can be no
assurance that the Company would be successful in overcoming  these or any other
significant  risks  encountered  and the  failure to do so could have a material
adverse  effect upon the  Company's  business,  operating  results and financial
condition.

         Management  of  Changing  Business.  Managing  the  Company's  business
following the sale of the LAN Division  represents a  significant  challenge for
the Company and its  administrative,  operational  and  financial  resources and
places increased  demands on its systems and controls.  The Company's ability to
manage the continuing development of its Internet/Intranet business will require
the  Company  to  continue  to  change,  expand  and  improve  its  operational,
management  and financial  systems and controls and to modify its  manufacturing
capabilities. This transition has resulted in a continuing increase in the level
of responsibility  for both existing and new management  personnel.  The Company
anticipates that any growth in its Internet/Intranet business will require it to
recruit and hire a substantial  number of new engineering,  sales and marketing,
customer  service,  administrative  and  managerial  personnel.  There can be no
assurance  that the Company  will be  successful  in hiring or  retaining  these
personnel,   if  needed.   In  addition,   certain   aspects  of  the  Company's
Internet/Intranet business require volume sales to achieve profitability. If the
Company  is unable to  achieve  such  volumes,  offset the loss of revenue or to
manage the transition effectively, the Company's business, operating results and
financial condition will be materially and adversely affected.

         Other Risks Associated with the Sale of the LAN Division. In connection
with  the  sale  of  the  LAN  Division,   the  Company  received  consideration
aggregating $4.9 million,  including (i) $2.0 million of cash, (ii) royalties on
Farallon's  revenues  for a period of five  years to the  extent  that  Farallon
achieves  revenues  from the sale of its LAN Products of at least $15.0  million
per  year,  (iii)  a two  year  $1.0  million  promissory  note  from  Farallon,
guaranteed  by Gores,  and (iv) a warrant to  purchase up to 5% of the equity of
Farallon.

         Pursuant to the Agreement of Purchase and Sale of Assets,  dated August
5, 1998 (the "Purchase  Agreement"),  by and between the Registrant and Farallon
Communications,  Inc.,  formerly known as Farallon Networking  Corporation,  the
purchase  price of the LAN Division is subject to a purchase  price  adjustment.
Such adjustment is based upon the difference between the unaudited balance sheet
of the LAN Division as of the effective date of sale (the "Draft Balance Sheet")
and the  estimated  book value of the LAN  Division  at March 31,  1998.  On the
effective  date  of  sale,  the  Company  estimated  that  this  difference  was
approximately  $165,000 and  accordingly  recorded that amount as a liability on
the  Company's  Balance Sheet as of September  30, 1998.  Any  adjustment to the
purchase  price of the LAN in  excess of the  amount  accrued  for could  have a
material  adverse  effect  on the  Company's  business,  operating  results  and
financial condition.

<PAGE>

     The Company's  successful  realization of assets related to the sale of the
LAN Division,  such as the royalty and note  receivable,  is dependent  upon the
successful  operation  of  Farallon  by its  management  team and by Gores.  For
example, if Farallon is unable to achieve revenues from LAN Products of at least
$15.0  million  per year,  the  Company  will  lose its  right to a  portion  of
Farallon's revenue which could have a material adverse affect upon the Company's
business, operating results and financial condition.  Farallon's use of its bank
credit  facility  or  incurrance  of other debt  related  financing  may require
Netopia to take a subordinate position to such debt. Such subordinate  position,
if required,  could  potentially  decrease the  likelihood of Netopia  receiving
payments on its future  receivables  from Farallon which would allow  Farallon's
other debt  holders to be repaid on their loans before  Farallon  would make any
payments  to Netopia  on  Netopia's  Farallon  related  receivables.  Failure to
receive such  payments  would have a material  adverse  effect on the  Company's
business, operating results and financial condition.  Additionally,  the Company
made customary  representations  and warranties about the assets and liabilities
transferred  to Farallon in the Purchase  Agreement  which the Company  believes
were materially  accurate but which could become the topic of future negotiation
or dispute.  While the Company believes such representations have been accurate,
the  Company  could be liable for up to $2 million  for any  damages to Farallon
resulting from any breach or breaches of any such representation and warranties.
These or other aspects of the transaction  would have a material  adverse affect
upon the Company's business, operating results and financial condition.

         Tariff and Regulatory Matters.  The Company is not currently subject to
direct regulation by any government agency, other than regulations applicable to
businesses  generally.   However,  rates  for  telecommunications  services  are
governed  by  tariffs  of  licensed  carriers  that are  subject  to  regulatory
approval.  Future changes in these tariffs could have a material  adverse effect
on the  Company's  business,  operating  results and  financial  condition.  For
example,  if tariffs for public switched digital services increase in the future
relative to tariffs for private leased services,  then the cost-effectiveness of
the Company's products would be reduced and its business,  operating results and
financial condition would be materially and adversely affected. In addition, the
Company's   telecommunications   products   must  meet   standards  and  receive
certification  for  connection to public  telecommunications  networks  prior to
their sale.  In the United  States,  such  products  must comply with Part 15(a)
(industrial  equipment),  Part 15(b) (residential equipment) and Part 68 (analog
and ISDN  lines)  of the  Federal  Communications  Commission  regulations.  The
Company's telecommunications products also must be certified by certain domestic
telecommunications  carriers.  In many  foreign  countries,  such  products  are
subject to a wide variety of governmental review and certification requirements.
While the  European  Economic  Community  and certain  other  foreign  countries
regulate the  importation  and  certification  of the Company's  products,  most
foreign  customers   typically  require  that  the  Company's  products  receive
certification  from their  country's  primary  telecommunication  carriers.  Any
future  inability to retain,  or obtain on a timely  basis,  domestic or foreign
regulatory    approvals    and    certifications,     including    safety    and
telecommunications,  could  have a  material  adverse  effect  on the  Company's
business, operating results and financial condition.

         Due to the increasing  popularity and use of the Internet,  a number of
legislative and regulatory proposals are under consideration by federal,  state,
local and foreign governmental  organizations,  and it is possible that a number
of laws or regulations  may be adopted with respect to the Internet  relating to
such issues as user privacy, user screening to prevent inappropriate uses of the
Internet by, for example, minors or convicted criminals, taxation, infringement,
pricing,  content regulation,  quality of products and services and intellectual
property  ownership  and  infringement.   The  adoption  of  any  such  laws  or
regulations  may decrease the growth in the use of the Internet,  which could in
turn decrease the demand for the Company's products, increase the Company's cost
of doing business,  or otherwise have a material adverse effect on the Company's
business,   results  of  operations  and  financial  condition.   Moreover,  the
applicability to the Internet of existing laws governing issues such as property
ownership,  copyright,  trademark,  trade secret, obscenity,  libel and personal
privacy is uncertain and  developing.  Any new  legislation  or  regulation,  or
application or  interpretation  of existing laws,  could have a material adverse
effect on the Company's business, operating results and financial condition. For
example,  although it was held  unconstitutional,  the Telecommunications Act of
1996  prohibited  the  transmission  over  the  Internet  of  certain  types  of
information and content. Other nations,  including Germany and China, have taken
actions  to  restrict  the  free  flow  of  material  on the  web  deemed  to be
objectionable.  In addition, although substantial portions of the Communications
Decency  Act (the  "CDA")  were  held to be  unconstitutional,  there  can be no
assurance that similar  legislation will not be enacted in the future, and it is
possible  that  such  legislation   could  expose  the  Company  to  substantial
liability.  Legislation  like the CDA could also dampen the growth in use of the

<PAGE>

web  generally and decrease the  acceptance of the  web as a  communications and
commercial  medium,  and could,  thereby,  have a material adverse effect on the
Company's  business,  operating  results  and  financial  condition.  It is also
possible that the use of "cookies" to track  demographic  information  and users
may become  subject to laws limiting or  prohibiting  their use. A "cookie" is a
bit of  information  keyed to a  specific  server,  file  pathway  or  directory
location  that is stored on a user's  hard  drive,  possibly  without the user's
knowledge. A user is generally able to remove cookies. Germany, for example, has
imposed laws limiting the use of cookies, and a number of Internet commentators,
advocates and governmental  bodies in the United States and other countries have
urged the passage of laws limiting or abolishing the use of cookies. Limitations
on the Company's  potential use of cookies could limit the  effectiveness of the
Company's  tracking user data, which could have a material adverse effect on the
Company's business,  operating results and financial  condition.  In addition, a
number of legislative  proposals have been made at the federal,  state and local
level that would impose  additional taxes on the sale of goods and services over
the  Internet  and certain  states have taken  measures to tax  Internet-related
activities.  Moreover,  it is likely that, once such moratorium is lifted,  some
type of federal and/or state taxes will be imposed upon Internet  commerce,  and
there can be no assurance that such  legislation or other attempts at regulating
commerce over the Internet will not substantially  impair the growth of commerce
on the Internet and, as a result,  adversely affect the Company's opportunity to
derive  financial  benefit from such  activities.  In addition to the  foregoing
areas of recent legislative activities,  several telecommunications carriers are
currently  seeking  to have  telecommunications  over the web  regulated  by the
Federal  Communications  Commission  (the  "FCC")  in the same  manner  as other
telecommunications  services. For example, America's Carriers Telecommunications
Association  has filed a petition  with the FCC for this  purpose.  In addition,
because the growing  popularity  and use of the web have  burdened  the existing
telecommunications infrastructure and many areas with high web use have begun to
experience  interruptions  in  phone  service,  local  telephone  carriers  have
petitioned  the  FCC to  regulate  ISPs in a  manner  similar  to  long-distance
telephone  carriers  and to impose  access fees on the ISPs.  If either of these
petitions is granted,  or the relief sought  therein is otherwise  granted,  the
costs of  communicating  on the web could  increase  substantially,  potentially
slowing  growth in use of the web,  which could in turn decrease  demand for the
Company's services or increase the Company's cost of doing business.

         Due to the global  nature of the web,  it is  possible  that,  although
transmissions by the Company over the Internet originate  primarily in the State
of  California,  the  governments  of other states and foreign  countries  might
attempt to regulate the  Company's  transmissions  or prosecute  the Company for
violations  of their laws.  There can be no assurance  that  violations of local
laws will not be alleged or  charged by state or foreign  governments,  that the
Company might not  unintentionally  violate such laws or that such laws will not
be  modified,  or new  laws  enacted,  in  the  future.  Any  of  the  foregoing
developments  could have a material  adverse  effect on the Company's  business,
operating results and financial condition.

         In addition,  as the Company's services are available over the Internet
in multiple states and foreign countries,  such jurisdictions may claim that the
Company is required to qualify to do business as a foreign  corporation  in each
such  state or  foreign  country.  The  failure  by the  Company to qualify as a
foreign  corporation  in a  jurisdiction  where  it is  required  to do so could
subject the Company to taxes and  penalties and could result in the inability of
the Company to enforce contracts in such jurisdictions. Any such new legislation
or regulation,  the application of laws and regulations from jurisdictions whose
laws do not currently  apply to the Company's  business,  or the  application of
existing laws and  regulations  to the Internet and other online  services could
have a material adverse effect on the Company's business,  operating results and
financial condition.

         Liability for Information Retrieved From the Web. Because materials may
be downloaded by subscribers  and other users of the Company's NVO web sites and
subsequently  distributed  to others,  there is a potential  that claims will be
made  against the Company for  defamation,  negligence,  copyright  or trademark
infringement,  personal  injury or other theories based on the nature,  content,
publication and  distribution of such materials.  Such claims have been brought,
and sometimes  successfully  pressed,  in the past.  In addition,  the increased
attention  focused  upon  liability  issues  as a result of these  lawsuits  and
legislative  proposals  could  impact the overall  growth of Internet  use.  The
Company  could also be exposed to  liability  with  respect to the  offering  of
third-party  content that may be accessible  through  content and materials that

<PAGE>

may be posted by subscribers on their personal web sites or chat sessions.  Such
claims might include,  among others,  that by directly or indirectly hosting the
personal  web sites of third  parties,  the Company is liable for  copyright  or
trademark  infringement or other wrongful  actions by such third parties through
such web sites.  The  Company  also offers  e-mail  services,  which  expose the
Company  to  potential  risk,  such as  liabilities  or  claims  resulting  from
unsolicited  e-mail  (spamming),   lost  or  misdirected  messages,  illegal  or
fraudulent use of e-mail or interruptions  or delays in e-mail service.  Even to
the extent  that such  claims do not result in  liability  to the  Company,  the
Company could incur  significant  costs in investigating  and defending  against
such  claims.  The  imposition  on  the  Company  of  potential   liability  for
information  carried on or  disseminated  through its systems  could require the
Company to implement  measures to reduce its exposure to such  liability,  which
may  require  the   expenditure   of   substantial   resources   and  limit  the
attractiveness  of the Company's  services to its subscribers which would have a
material  adverse  effect  on the  Company's  business,  operating  results  and
financial condition.

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

         Through  testing,  the Company has determined that its Netopia Internet
router products, Netopia Virtual Office software and the versions later than 1.5
of the Company's  Windows,  MacOS and  Enterprise  versions of Timbuktu Pro, are
Year 2000  Compliant.  Although the Company's  products are Year 2000 compliant,
the Company  believes  that the  purchasing  patterns of customers and potential
customers  may be affected by Year 2000 issues as companies  expend  significant
resources  to correct or patch  their  current  software  systems  for Year 2000
compliance. These expenditures may result in reduced funds available to purchase
products  such as those  offered  by the  Company,  which  could have a material
adverse  effect on the  Company's  business,  operating  results  and  financial
condition.  In addition, even if the Company's products are Year 2000 compliant,
other systems or software  used by the Company's  customers may not be Year 2000
compliant.  The failure of such  non-compliant  third-party  software or systems
could affect the perceived  performance of the Company's  products,  which could
have a material adverse effect on the Company's business,  operating results and
financial condition.

         The Company's internal systems include  information  technology systems
such as  financial,  order entry,  inventory,  shipping  and  customer  database
computer  systems,  desktop  computer  systems  and  non-information  technology
systems  such  as  telephones  and  facilities.  The  Company  has  conducted  a
comprehensive  review of its  internal  information  technology  systems such as
financial,  order entry,  inventory,  shipping and  customer  database  computer
systems  to  determine  if any  actions  need to be taken  regarding  Year  2000
date-related  effects.  These  underlying  systems  are  based  on a  relational
database  language which identifies dates based on four (4) digit numbers rather
than two (2) digit  numbers and therefore  the Company has  determined  that the
Year  2000  issue  will not pose  significant  operational  problems  for  these
computer  systems.  The Company is in the process of initiating a  comprehensive
inventory  and  evaluation  of all desktop  systems and expects to complete this
process and upgrade such  non-compliant  desktop  systems to Year 2000 compliant
systems by June 1999. The additional costs of remediation are not expected to be
material to the Company's financial condition or results of operations. However,
if  implementation  of  replacement  systems is delayed  or if  significant  new
non-compliance  issues  are  identified,   the  Company's  business,   financial
condition and results of operations could be materially adversely affected.

         The Company is in the process of identifying and prioritizing  critical
third party vendors, strategic partners and suppliers of non-information related
products and services concerning their plans and progress in addressing the Year
2000  problem.  The Company is also working  with key  suppliers of products and
services to determine that their operations and products are Year 2000 compliant
or to monitor their progress toward Year 2000 compliance, as appropriate.

<PAGE>

         To date, the Company has not incurred  material expenses related to its
Year 2000  compliance  effort  other than the  investment  of employee  time and
resources. The Company has currently identified certain facilities related items
that the Company  estimates will cost  approximately  $45,000 to upgrade to Year
2000 compliance. While the Company has dedicated and will continue to dedicate a
substantial  amount of time and internal  resources  towards attaining Year 2000
compliance,  there can be no assurance that the Company's  Year 2000  compliance
program  will be  completed  on a timely  basis.  In  addition,  there can be no
assurance  that  there  will  not be an  interruption  of  operations  or  other
limitations  of  system  functionality  or  that  the  Company  will  not  incur
substantial costs to avoid such limitations. Any failure to effectively monitor,
implement  or improve  the  Company's  operational,  financial,  management  and
technical  support systems could have a material adverse effect on the Company's
business,  financial  condition  and  results of  operations.  Furthermore,  the
Company  believes  that the  purchasing  patterns  of  customers  and  potential
customers  may be affected by Year 2000 issues as companies  expend  significant
resources  to correct or patch  their  current  software  systems  for Year 2000
compliance. These expenditures may result in reduced funds available to purchase
software  products  such as those  offered by the  Company,  which  could have a
material  adverse  effect on the  Company's  business,  financial  condition and
results of operations. In addition, even if the Company's products are Year 2000
compliant,  other systems or software used by the Company's customers may not be
Year 2000 compliant.  The failure of such non-compliant  third-party software or
systems could affect the perceived performance of the Company's products,  which
could  have a  material  adverse  effect on the  Company's  business,  financial
condition and results of operations.  The most likely worst case scenarios would
include hardware failure and the failure of infrastructure  services provided by
government  agencies  and other  third  parties  (e.g.,  electricity,  telephone
service, water transport,  internet services, etc.). In such worst case scenario
the Company would lose customers and revenue which would have a material adverse
effect on the Company's business, financial condition and results of operations.
The Company is in the process of completing  its  contingency  planning for high
risk areas at this time and is  scheduled to commence  contingency  planning for
medium to low risk areas by June 1999. The Company expects its contingency plans
to include,  among other things, manual "work-arounds" for software and hardware
failures, as well as substitution of systems, if necessary.

         Dependence on Apple. The Company believes that approximately 25% to 30%
of its  revenues are derived from  customers  purchasing  products for the Apple
MacOS environment. Accordingly, the Company is dependent on the market for MacOS
computers  and the  development  and sale of new Apple  computers,  particularly
sales of such  computers into business  environments.  There can be no assurance
that  competitive  personal  computers  will not displace the MacOS  products or
reduce sales of MacOS products. Sales of the Company's products in the past have
been adversely  affected by the  announcement  by Apple of new products with the
potential to replace existing products, customer order deferrals in anticipation
of new MacOS  product  offerings  and the  elimination  of a number of Macintosh
cloning  licenses  issued  by Apple  and  potential  limitations  on the  retail
distribution of Apple products.  The inability of Apple to successfully develop,
manufacture,  market  or sell new  products,  and any  decrease  in the sales or
market  acceptance  of the MacOS  family of  computers,  would  have a  material
adverse  effect on the  Company's  business,  operating  results  and  financial
condition.  For  example,  during  fiscal 1997 and 1998,  the  Company  believes
revenues  were  adversely  affected by declining  sales of MacOS  computers  and
Apple's loss of market share. In addition,  sales of the Company's  products are
dependent upon the international  demand for Apple products.  To the extent that
the  Company is unable to  maintain  or  increase  international  demand for its
products,  or that  international  demand for Apple  products  does not meet the
Company's expectations,  the Company's international sales would be limited, and
the  Company's  business,  operating  results and financial  condition  would be
materially and adversely affected.

         Litigation.  From time to time,  the  Company  has  received  claims of
infringement of other parties' proprietary rights. Although the Company believes
that all such claims received to date are without merit or are immaterial, there
can be no assurance  that third  parties will not assert  infringement  or other
claims in the future with respect to the Company's current or future products or
activities.  The  Company  expects  that  it will  increasingly  be  subject  to
infringement  claims as the number of products and  competitors in the Company's
industry segments grow and the  functionality of products in different  industry
segments  overlap.  Any  such  claims,  with or  without  merit,  could  be time
consuming to defend, result in costly litigation,  divert management's attention
and  resources,  cause product  shipment  delays or require the Company to enter
into  additional  royalty or  licensing  agreements.  Such  royalty or licensing
agreements,  if  required,  may not be  available  on  terms  acceptable  to the

<PAGE>

Company,  if at all. In the event of a successful claim of product  infringement
against  the  Company  and  failure or  inability  of the Company to license the
infringed or similar technology,  the Company's business,  operating results and
financial condition would be materially and adversely affected.

         From  time to time,  the  Company  may be  involved  in  litigation  or
administrative  claims  arising out of its  operations  in the normal  course of
business.  In the event of a successful claim against the Company, the Company's
business,  operating  results and financial  condition  would be materially  and
adversely affected.

Liquidity and Capital Resources

         The Company has funded its  operations  to date  primarily  through the
private sale of equity securities, the IPO of the Company's Common Stock and, in
fiscal 1997, cash flow from operations.  Since inception, the Company has raised
$19.4 million from the private sale of equity securities and approximately $24.8
million,  net of offering  expenses,  from the  Company's  IPO completed in June
1996.  As of September  30, 1998,  the Company had cash,  cash  equivalents  and
short-term  investments  representing  75%  of  total  assets.  Included  in the
Company's  cash  balances  at  September  30,  1998  was  $736,000  of  accounts
receivable  collections  related to the LAN Division's  operations which had not
yet been remitted to Farallon.

         The  Company's  operating  activities  used  $926,000 of cash in fiscal
1998,  generated  $4.9  million of cash in fiscal 1997 and used $3.3  million of
cash in fiscal 1996.  The cash used in  operations  in fiscal 1998 was primarily
due to  expenses  related  to  the  sale  of  the  LAN  Division  and  increased
advertising  and  promotional  expenses  related  to  the  introduction  of  new
products.  The cash  generated by operations in fiscal 1997 was primarily due to
collection of accounts receivable and decreased  inventory,  partially offset by
reductions of accounts payable and other accrued  liabilities.  The cash used in
operations in fiscal 1996 was primarily due to increases in accounts  receivable
related  to  volume  license  sales of the  Company's  software  products,  that
occurred  in the last weeks of the fourth  quarter  ended  September  30,  1996,
increases in operating  expenses related to the introduction of Netopia Internet
router  products,  reduction  in accounts  payable and  increases  in  inventory
related to the Company's Netopia Internet router products and the LAN Division's
Fast Ethernet products.

         The  Company's   investing   activities  have  consisted  primarily  of
purchases of short-term investments and capital equipment.  The cash provided by
investing  activities  during fiscal 1998 was  primarily  from proceeds from the
sale  of  short-term   investments   partially   offset  by  purchases  of  such
investments, proceeds from the sale of the LAN Division, less the acquisition of
a trademark  license related to the Netscape  Internet portal for NVO, which the
Company  expects  to  amortize  over  a  period  not  to  exceed  2  years,  and
expenditures  for  capital  equipment,  representing  acquisitions  of  computer
equipment used  predominantly in product  development.  The Company expects that
its capital  expenditures will increase in future periods to support new product
development  and  production.  The cash used in investing  activities  in fiscal
years  1997  and  1996 was  primarily  related  to the  purchase  of  short-term
investments and capital equipment.  The Company's financing activities in fiscal
1998, 1997 and 1996 represent the exercise of stock options,  activities related
to the  Company's  Employee  Stock  Purchase  Plan  and the IPO.  The  Company's
principal commitments consist primarily of leases on its headquarters facilities
and certain operating equipment.  See Note 7 of Notes to Consolidated  Financial
Statements.

         Although  the Company  believes  that its  existing  cash  balance will
decrease  moderately  during  fiscal  1999 as a result  of  increased  operating
expenses and  acquisition  related  activities,  the Company  believes  that its
existing cash, cash  equivalents and short-term  investments will be adequate to
meet its cash needs for working  capital and capital  expenditures  for at least
the  next  12  months.   Thereafter,   if  cash  generated  from  operations  is
insufficient to satisfy the Company's  liquidity  requirements,  the Company may
seek  to sell  additional  equity  or  convertible  debt  securities  or  obtain
additional credit facilities.  The sale of additional equity or convertible debt
securities  could result in additional  dilution to the Company's  stockholders.
From time to time,  in the ordinary  course of business,  the Company  evaluates
potential acquisitions of businesses, products and technologies.  Accordingly, a
portion of the Company's 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.

<PAGE>

Recent Accounting Pronouncements

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

         In June 1997, the Financial  Accounting Standards Board issued SFAS No.
130, Reporting Comprehensive Income and SFAS No. 131, Disclosures about Segments
of an  Enterprise  and Related  Information  which are effective for the Company
beginning  with  the  fiscal  year  ended  September  30,  1999.  SFAS  No.  130
establishes  standards for the reporting and disclosure of comprehensive  income
and its  components  which will be  presented  in  association  with a company's
financial  statements.  Comprehensive  income  is  defined  as the  change  in a
business enterprise's equity during the period arising from transactions, events
or  circumstances  relating  to  non-owner  sources,  such as  foreign  currency
translation  adjustments  and unrealized  gains or losses on  available-for-sale
securities.  SFAS No. 131  establishes  annual and interim  reporting  standards
relating to the  disclosure  of an  enterprise's  business  segments,  products,
services,  geographic areas and major customers.  Adoption of these standards is
not expected to have a material effect on the Company's  consolidated  financial
position or results of operations.

         In June 1998, the Financial  Accounting Standards Board issued SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities.  SFAS No. 133
establishes  accounting  and  reporting  standards for  derivative  instruments,
including   certain   derivative   instruments   embedded  in  other   contracts
(collectively  referred  to as  derivatives),  and for  hedging  activities.  It
requires  that  an  entity   recognize  all  derivatives  as  either  assets  or
liabilities in the statement of financial position and measure those instruments
at fair value.  If certain  conditions are met, a derivative may be specifically
designated  and  accounted  for as (a) a firm  commitment,  (b) a  hedge  of the
exposure to variable cash flows of a forecasted  transaction,  or (c) a hedge of
the foreign  currency  exposure of a net investment in a foreign  operation,  an
unrecognized   firm   commitment,   an   available-for-sale   security,   or   a
foreign-currency-denominated   forecasted  transaction.  For  a  derivative  not
designated as a hedging instrument,  changes in the fair value of the derivative
are  recognized  in earnings  in the period of change.  This  statement  will be
effective for all annual and interim  periods for fiscal years  beginning  after
June 15,  1999.  The Company  does not expect the  adoption of SFAS No. 133 will
have a material effect on the financial position of the Company.

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

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

         The  Company's  exposure to market  risk for changes in interest  rates
relates  primarily  to its  investment  portfolio.  The  Company  does  not  use
derivative  financial  instruments  for  speculative  or trading  purposes.  The
Company  places its  investments  in  instruments  that meet high credit quality
standards,  as specified in the  Company's  investment  policy.  The policy also
limits  the  amount of credit  exposure  to any one  issue,  issuer  and type of
instrument.  The Company  does not expect any  material  loss with respect to it
investment portfolio.

<PAGE>

         The table  below  presents  the  carrying  value and  related  weighted
average  interest  rates for the Company's  investment  portfolio.  The carrying
value  approximates  fair  value  at  September  30,  1998.  All  the  Company's
investments mature in twelve months or less.

<TABLE>
<CAPTION>
                                                                                Carrying               Average
                                                                                 Amount             Interest Rate
                                                                           ------------------     ------------------
<S>                                                                        <C>                    <C>
          Principal (notional) amounts in United States dollars:
          Cash equivalents - fixed rate.................................         $    11,657                5.31%
          Short-term investments - fixed rate...........................              24,461                5.61
                                                                           ------------------
                                                                                 $    36,118
                                                                           ==================
</TABLE>


ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

         See Item 14(a) for an index to the  consolidated  financial  statements
and supplementary financial information which are attached hereto.

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

         None.

PART III.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

         The  information  required by this item is incorporated by reference to
the  information  contained  in the  section  captioned  "Proposal 1 Election of
Directors"  in the Proxy  Statement to be filed with the  Commission  within 120
days after the end of the fiscal year ended September 30, 1998.

ITEM 11. EXECUTIVE COMPENSATION

         Pursuant  to General  Instruction  G(3) to Form 10-K,  the  information
required by this item is incorporated by reference to the information  contained
in the section captioned "Executive Compensation and Other Matters" in the Proxy
Statement to be filed with the  Commission  within 120 days after the end of the
fiscal year ended September 30, 1998.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         The  information  required by this item is incorporated by reference to
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, 1998.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         The  information  required by this item is incorporated by reference to
the information contained in the section captioned  "Compensation  Committee and
Insider  Participation"  in the Proxy  Statement to be filed with the Commission
within 120 days after the end of the fiscal year ended September 30, 1998.

<PAGE>

PART IV.

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

(a)      Financial Schedules

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

INDEX TO FINANCIAL STATEMENTS                                               PAGE

Independent Auditors'Report...................................................41
Consolidated Balance Sheets at September30, 1998 and 1997.....................42
ConsolidatedStatements of Operations for the fiscal years ended September 30, 
   1998, 1997 and 1996........................................................43
Consolidated Statements of Stockholders'Equity for the fiscal years ended 
   September 30, 1998, 1997 and 1996..........................................44
Consolidated Statements of CashFlows for the fiscal years ended September 30, 
   1998, 1997 and 1996........................................................45
Notes to Consolidated FinancialStatements.....................................46

(b)      Reports on Form 8-K

         The Company  filed the  following  Reports on Form 8-K during the three
months ended September 30, 1998:

Event Reported     Items Reported       Date Filed   Financial Statements Filed

Sale of Farallon  Item 2. Disposition   August 20,   None (such statements filed
LAN Division              of Assets       1998       by  amendment on Form 8-K/A
                  Item 7. Financial                  dated  October 19, 1998 and
                          Statements                 on Form 8-K/A dated 
                          and Exhibits               December 1, 1998)
                                                                              
                                                                               
(c)      Exhibits

         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.

Exhibit
Number   Description
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

<PAGE>

10.7     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)
11.1     Reference is made to Note 1 of Notes to Consolidated Financial 
         Statements
21.1(a)  Subsidiary of the Registrant
23.1     Report on Schedule and Consent of Independent Auditors
24.1     Power of Attorney (see Signature page)
27.1     Financial Data Schedule

------------------------------------
(a)  Incorporated herein by reference to the Company's Registration Statement on
     Form S-1 (No. 333-3868).
(b)  Incorporated herein by reference to the Company's Form 10-K for the  fiscal
     year ended September 30, 1997.
(c)  Incorporated  herein  by  reference  to the  Company's Form 8-K as filed on
     August 20, 1998.

(d)      Financial Statement Schedule

           Schedule - Valuation and Qualifying Accounts (in thousands)
<TABLE>
<CAPTION>
                                                                 Charged
                                               Balance at       (credited)                               Balance
                                              beginning of     to costs and                             at end of
                 Description                     period          expenses      Deductions     Other(a)    period 
  ------------------------------------------  ---------------  --------------  ------------  ---------  ----------
<S>                                           <C>              <C>             <C>           <C>        <C>    
  Allowance for doubtful accounts:
   Fiscal year ended September 30, 1998....        $    566        $     96       $    31      $ 231      $  400
   Fiscal year ended September 30, 1997....             659              21           114         --         566
   Fiscal year ended September 30, 1996....             517             179            37         --         659

  Allowance for returns:
   Fiscal year ended September 30, 1998....        $    561        $    105       $   210      $ 239      $  217
   Fiscal year ended September 30, 1997....             669             200           308         --         561
   Fiscal year ended September 30, 1996....             737             300           368         --         669

  Valuation allowance for deferred tax assets:
   Fiscal year ended September 30, 1998....        $    512       $   6,082        $   --       $ --     $ 6,594
   Fiscal year ended September 30, 1997....              --             512            --         --         512
   Fiscal year ended September 30, 1996....           2,295          (2,295)           --         --          --

------------------------------------
(a)  Amounts transferred with sale of LAN Division.

</TABLE>

<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 22nd day of December, 1998.

NETOPIA, INC.



BY:      /s/ Alan B. Lefkof
         ----------------------------------------
         Alan B. Lefkof
         President and Chief Executive Officer


Dated: December 22, 1998

         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.

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

/s/ Alan B. Lefkof                         President, Chief Executive Officer and Director         December 22, 1998
---------------------------------------
Alan B. Lefkof                             (Principal Executive Officer)


/s/ James A. Clark                         Vice President and Chief Financial Officer              December 22, 1998
---------------------------------------
James A. Clark                             (Principal Financial and Accounting Officer)


/s/ Reese M. Jones                         Chairman of the Board of Directors                      December 22, 1998
---------------------------------------
Reese M. Jones


/s/ David F. Marquardt                     Director                                                December 22, 1998
---------------------------------------
David F. Marquardt


/s/ James R. Swartz                        Director                                                December 22, 1998
---------------------------------------
James R. Swartz

</TABLE>

<PAGE>

                          INDEPENDENT AUDITORS' REPORT


The Board of Directors
Netopia, Inc. and subsidiary:

         We  have  audited  the  accompanying  consolidated  balance  sheets  of
Netopia,  Inc. and  subsidiary as of September 30, 1998 and 1997 and the related
consolidated statements of operations,  stockholders' equity, and cash flows for
each of the years in the  three-year  period ended  September  30,  1998.  These
consolidated  financial  statements  are  the  responsibility  of the  Company's
management.  Our  responsibility is to express an opinion on these  consolidated
financial statements based on our audits.

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

         In our opinion, the consolidated financial statements referred to above
present fairly,  in all material  respects,  the financial  position of Netopia,
Inc. and  subsidiary  as of September 30, 1998 and 1997 and the results of their
operations and their cash flows for each of the years in the  three-year  period
ended  September  30, 1998 in  conformity  with  generally  accepted  accounting
principles.



                                                           KPMG PEAT MARWICK LLP



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

<PAGE>

<TABLE>
<CAPTION>

                          NETOPIA, INC. AND SUBSIDIARY
                           CONSOLIDATED BALANCE SHEETS
             (in thousands; except for share and per share amounts)

                                                                                             September 30,
                                                                                   ----------------------------------
                                                                                       1998               1997
                                                                                   --------------     ---------------
<S>                                                                                <C>                <C>
                                       ASSETS
  Current assets:
      Cash and cash equivalents..................................................     $  19,244           $  14,444
      Short-term investments.....................................................        22,851              27,192
      Trade accounts receivable less allowance for doubtful accounts and
           returns of $617 and $1,127, respectively..............................         4,358               8,332
      Royalties receivable.......................................................           410                  --
      Inventories, net...........................................................         1,591               4,421
      Deferred tax assets........................................................            --               1,463
      Prepaid expenses and other current assets..................................           929                 790
                                                                                   --------------     ---------------
              Total current assets...............................................        49,383              56,642
  Note receivable................................................................           900                  --
  Royalties receivable...........................................................         1,372                  --
  Furniture, fixtures and equipment, net.........................................         2,068               2,321
  Deferred tax assets............................................................            --               1,406
  Deposits and other assets......................................................         2,569                 632
                                                                                   ==============     ===============
                                                                                      $  56,292           $  61,001
                                                                                   ==============     ===============

                        LIABILITIES AND STOCKHOLDERS' EQUITY
  Current liabilities:
      Accounts payable...........................................................     $   5,440           $   4,302
      Accrued compensation ......................................................         1,217               1,237
      Accrued liabilities........................................................         3,468                 195
      Deferred revenue...........................................................           807                 874
      Other current liabilities..................................................           299                  55
                                                                                   --------------     ---------------
              Total current liabilities..........................................        11,231               6,663
  Long-term liabilities..........................................................           260                 361
                                                                                   --------------     ---------------
              Total liabilities..................................................        11,491               7,024

  Commitments and contingencies

  Stockholders' equity:
      Preferred stock:
      $0.001 par value, 5,000,000 shares authorized, none issued
           or outstanding........................................................            --                  --
      Common stock:
      $0.001 par value, 25,000,000 shares authorized; 11,953,908 and
           11,492,732 shares issued and outstanding at September 30, 1998
           and 1997, respectively...............................................             12                  12
      Additional paid-in capital.................................................        51,871              50,568
      Deferred compensation......................................................            --                 (54)
      Retained earnings (deficit)................................................        (7,082)              3,451
                                                                                   --------------     ---------------
              Total stockholders' equity.........................................        44,801              53,977
                                                                                   --------------     ---------------
                                                                                      $  56,292           $  61,001
                                                                                   ==============     ===============

</TABLE>


          See accompanying notes to consolidated financial statements.

<PAGE>

<TABLE>
<CAPTION>

                          NETOPIA, INC. AND SUBSIDIARY
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                  (in thousands; except for per share amounts)

                                                                            Fiscal years ended September 30,
                                                                    -------------------------------------------------
                                                                         1998             1997             1996
                                                                    ---------------   --------------   --------------
<S>                                                                 <C>               <C>              <C>

  Revenues........................................................      $  24,836        $  20,170        $  16,718

  Cost of revenues................................................          7,955            6,396            3,811
                                                                    ---------------   --------------   --------------

      Gross profit................................................         16,881           13,774           12,907

  Operating expenses:
      Research and development....................................          7,201            7,177            7,603
      Selling and marketing ......................................         14,404           11,288            9,410
      General and administrative..................................          3,380            2,945            2,835
                                                                    ---------------   --------------   --------------
                                                                                      
      Total operating expenses....................................         24,985           21,410           19,848
                                                                    ---------------   --------------   --------------

         Operating loss...........................................         (8,104)          (7,636)          (6,941)
  Other income, net...............................................          2,222            1,869            1,040
                                                                    ---------------   --------------   --------------
      Loss from continuing operations
         before income taxes......................................         (5,882)          (5,767)         (5,901)
  Income tax provision (benefit)..................................          2,155           (2,217)         (4,619)
                                                                    ---------------   --------------   --------------

         Loss from continuing operations..........................         (8,037)          (3,550)          (1,282)
  Discontinued operations:
      Income from discontinued operations, net of taxes...........            602            3,021            4,983
      Loss on sale of discontinued operations, net of taxes.......         (3,098)             --               --
                                                                    ---------------   --------------   --------------

         Net income (loss).......................................      $  (10,533)        $   (529)      $    3,701
                                                                    ===============   ==============   ==============

 Per share data, continuing operations:
      Basic and diluted loss per share............................      $   (0.69)       $   (0.31)       $   (0.13)
                                                                    ===============   ==============   ==============
      Shares used in the per share calculations...................         11,687           11,335            9,890
                                                                    ===============   ==============   ==============

 Per share data, discontinued operations:
      Basic income per share......................................      $    0.05        $    0.27         $   0.50
                                                                    ===============   ==============   ==============
      Diluted income per share....................................      $    0.05        $    0.24         $   0.46
                                                                    ===============   ==============   ==============
      Common shares used in the calculations of basic income
          per share...............................................         11,687           11,335            9,890
                                                                    ===============   ==============   ==============
      Common and common equivalent shares used in the calculations
        of diluted income per share...............................         12,830           12,350           10,887
                                                                    ===============   ==============   ==============
      Basic and diluted per share loss on sale....................      $   (0.27)        $    --           $   --
                                                                    ===============   ==============   ==============
      Shares used in the per share calculation....................         11,687              --               --
                                                                    ===============   ==============   ==============

 Per share data, net income (loss):
      Basic net income (loss) per share...........................      $   (0.90)       $   (0.05)       $   0.37
                                                                    ===============   ==============   ==============
      Diluted net income (loss) per share.........................      $   (0.90)       $   (0.05)       $   0.34
                                                                    ===============   ==============   ==============
      Common shares used in the calculations of basic net income
        (loss) per share..........................................         11,687           11,335           9,890
                                                                    ===============   ==============   ==============
      Common and common equivalent shares used in the calculations
       of diluted net income (loss) per share.....................         11,687           11,335          10,887
                                                                    ===============   ==============   ==============
</TABLE>

          See accompanying notes to consolidated financial statements.


<PAGE>

<TABLE>
<CAPTION>

                          NETOPIA, INC. AND SUBSIDIARY
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                    (in thousands; except for share amounts)


                                                                          
                                  Preferred Stock       Common Stock      Additional Deferred  Retained    Total
                                -------------------- --------------------  paid-in   compen-   earnings  stockholders'
                                  Shares    Amount     Shares    Amount    capital    sation   (deficit)   equity
                                ----------- -------- ----------- -------- ---------- --------- --------- -----------
<S>                             <C>         <C>      <C>         <C>      <C>        <C>       <C>       <C>

Balances , September  30, 1995. 5,591,207     $  6   3,624,231     $  4    $23,990      $ --     $ 279    $ 24,279
Exercise of stock options......        --       --     135,238       --        148        --        --         148
Issuance of common stock net
   of issuance costs of $1,222.        --       --   1,750,000        2     24,812        --        --      24,814
Conversion of preferred stock
   to common stock............. (5,591,207)     (6)  5,591,207        6         --        --        --          --
Issuance of common stock for
   consulting services.........        --       --       5,000       --         30        --        --          30
Issuance of common stock for
   rights and services.........        --       --      14,285       --        162        --        --         162
Deferred compensation related
   to grant of stock options...        --       --          --       --         90       (90)       --          --
Amortization of deferred
   compensation................        --       --          --       --         --         9        --           9
Net income.....................        --       --          --       --         --        --     3,701       3,701
                                ----------- -------- ----------- -------- ---------- --------- --------- -----------
Balances, September 30, 1996...        --       --   11,119,961      12     49,232       (81)    3,980      53,143
                                ----------- -------- ----------- -------- ---------- --------- --------- -----------

Exercise of stock options......        --       --     194,535       --        443        --        --         443
Issuance of common stock under
   Employee Stock Purchase Plan        --       --     178,236       --        833        --        --         833
Issuance of stock warrants.....        --       --          --       --         60        --        --          60
Amortization of deferred
   compensation................        --       --          --       --         --        27        --          27
Net loss.......................        --       --          --       --         --        --      (529)       (529)
                                ----------- -------- ----------- -------- ---------- --------- --------- -----------
Balances, September 30, 1997...        --       --   11,492,732      12     50,568       (54)    3,451      53,977
                                ----------- -------- ----------- -------- ---------- --------- --------- -----------

Exercise of stock options......        --       --     308,019       --        729        --        --         729
Issuance of common stock under
   Employee Stock Purchase Plan        --       --     153,157       --        604        --        --         604
Amortization of deferred
   compensation................        --       --          --       --         --        24        --          24
Forfeiture of deferred
   compensation................        --       --          --       --        (30)       30        --          --
Net loss.......................        --       --          --       --         --        --   (10,533)    (10,533)
                                ----------- -------- ----------- -------- ---------- --------- --------- -----------
Balances, September 30, 1998...        --      $--   11,953,908    $ 12    $51,871      $ --   $(7,082)   $ 44,801
                                =========== ======== =========== ======== ========== ========= ========= ===========

</TABLE>

          See accompanying notes to consolidated financial statements.


<PAGE>

<TABLE>
<CAPTION>

                          NETOPIA, INC. AND SUBSIDIARY
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (in thousands)
                                                                            Fiscal years ended September 30,
                                                                    -------------------------------------------------
                                                                          1998             1997             1996
                                                                    ---------------   --------------   --------------
<S>                                                                 <C>               <C>              <C>
  Cash flows from operating activities:                             
  Net income (loss) ..............................................     $  (10,533)        $   (529)       $   3,701
  Adjustments to reconcile net income (loss) to net cash
     provided by (used in) operating activities:
     Depreciation and amortization................................            995            1,812            1,757
     Deferred income taxes........................................          2,869            (673)           (2,197)
     Amortization of deferred compensation........................             24               27                9
     Noncash compensation for services............................             --               60              192
     Changes in allowance for doubtful accounts and returns
          on accounts receivable..................................            (40)            (201)              74
     Changes in operating assets and liabilities:
        Trade accounts receivable.................................          1,549            3,041           (3,522)
        Inventories...............................................           (618)           1,874           (1,537)
        Prepaid expenses and other current assets.................           (443)             667             (453)
        Deposits and other assets.................................           (127)              49             (186)
        Accounts payable and accrued liabilities..................          5,310           (1,508)          (1,563)
        Deferred revenue..........................................            (67)              87              619
        Other liabilities.........................................            155              185             (173)
                                                                    ---------------   --------------   --------------
           Net cash provided by (used in) operating activities....           (926)           4,891           (3,279)
                                                                    ---------------   --------------   --------------
  Cash flows from investing activities:
     Purchase of furniture, fixtures and equipment................           (711)          (1,111)          (2,182)
     Acquisition of trademark license.............................         (1,000)              --               --
     Capitalization of software development costs.................           (237)            (350)              --
     Proceeds from sale of discontinued operations................          2,000               --               --
     Purchase of short-term investments...........................        (47,706)         (35,900)        (124,337)
     Proceeds from the sale of short-term investments.............         52,047           25,943          110,783
                                                                    ---------------   --------------   --------------
           Net cash provided by (used in) investing activities....          4,393          (11,418)         (15,736)
                                                                    ---------------   --------------   --------------
  Cash flows from financing activities:
     Proceeds from the issuance of common stock, net..............          1,333            1,061           24,962
                                                                    ---------------   --------------   --------------
           Net cash provided by financing activities..............          1,333            1,061           24,962
                                                                    ---------------   --------------   --------------
  Net increase (decrease) in cash and cash equivalents............          4,800           (5,466)           5,947
  Cash and cash equivalents, beginning of year....................         14,444           19,910           13,963
                                                                    ---------------   --------------   --------------
  Cash and cash equivalents, end of year..........................      $  19,244        $  14,444        $  19,910
                                                                    ===============   ==============   ==============
  Supplemental disclosures of cash flow activities:
     Income taxes paid............................................       $    193         $    289        $   1,050
                                                                    ===============   ==============   ==============
  Supplemental disclosures of noncash investing and
     financing activities:
     Accrual of stock option deferred compensation................        $    --          $    --          $    90
                                                                    ===============   ==============   ==============
     Issuance of warrants for consulting services.................        $    --         $     60           $   --
                                                                    ===============   ==============   ==============
     Issuance of common stock for consulting services.............        $    --          $    --          $    30
                                                                    ===============   ==============   ==============
     Issuance of common stock and redeemable common stock
          for rights and services.................................        $    --          $    --         $    162
                                                                    ===============   ==============   ==============
     Tax benefit of stock options exercised.......................        $    --         $    215           $   --
                                                                    ===============   ==============   ==============
     Note receivable from sale of discontinued operations.........       $    888          $    --           $   --
                                                                    ===============   ==============   ==============
     Royalties receivable from sale of discontinued operations....      $   1,782          $    --           $   --
                                                                    ===============   ==============   ==============
     Note issued for other assets.................................       $    800          $    --           $   --
                                                                    ===============   ==============   ==============
</TABLE>
                         
          See accompanying notes to consolidated financial statements.

<PAGE>


                          NETOPIA, INC. AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        September 30, 1998, 1997 and 1996

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

         Nature of Business

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

         Principles of Consolidation

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

         Cash Equivalents and Short-Term Investments

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

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

         Cash   equivalents   and   short-term    investments    classified   as
available-for-sale as of September 30, 1998 and 1997, consisted of the following
(in thousands):

<TABLE>
<CAPTION>
 
                                                                                         September 30,
                                                                           -----------------------------------------
                                                                                  1998                   1997
                                                                           ------------------     ------------------
<S>                                                                       <C>                     <C>

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

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

         Expected  maturities  may differ from  contractual  maturities  because
issuers  of the  securities  may have the  right to prepay  obligations  without
penalties.

         Revenue Recognition

         The Company recognizes revenue from sales of its hardware products upon
shipment  of the  product.  The Company  recognizes  revenues  from  licenses of
computer  software  provided that a firm purchase order has been  received,  the
software  and  related  documentation  have  been  shipped,  collection  of  the
resulting  receivable  is  deemed  probable,  and no  other  significant  vendor
obligations exist. Patent revenue is recognized upon the licensing of the rights
to the patent.  Maintenance and service  revenues are recognized over the period
in which services are provided.  Hardware revenues are recognized upon shipment.
Certain of the Company's sales are made to customers under agreements permitting
right of return for stock  balancing and price  protection.  Revenue is recorded
net of an estimated  allowance  for  returns.  Revenues and Cost of Revenues are
broken down as follows (in thousands):

<PAGE>
                          
                          NETOPIA, INC. AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        September 30, 1998, 1997 and 1996

<TABLE>
<CAPTION>
                                                                               September 30,
                                                        ------------------------------------------------------------
                                                              1998                 1997                  1996
                                                        ------------------   ------------------    -----------------
<S>                                                     <C>                  <C>                   <C>
          Revenues:
             Hardware products........................        $    10,884          $     8,134          $     3,741
             Software products........................             13,952               12,036               12,977
                                                        ------------------   ------------------    -----------------

                                                              $    24,836          $    20,170          $    16,718
                                                        ==================   ==================    =================

          Cost of revenues:
             Hardware products........................                  $                    $                    $
                                                                    7,064                5,258                2,584
             Software products........................                891                1,138                1,227
                                                        ------------------   ------------------    -----------------

                                                              $     7,955          $     6,396          $     3,811
                                                        ==================   ==================    =================
</TABLE>

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

         Concentrations of Credit Risk

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

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

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

         Inventories

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

         Furniture, Fixtures, and Equipment

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

         Impairment of Long-Lived Assets

         The Company adopted the provisions of SFAS No. 121,  Accounting for the
Impairment of Long-Lived  Assets and for Long-Lived Assets to Be Disposed Of, in
fiscal  1997.  SFAS  No.  121  requires  that  long-lived   assets  and  certain

<PAGE>

                          NETOPIA, INC. AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        September 30, 1998, 1997 and 1996

identifiable  intangibles be reviewed for impairment  whenever events or changes
in  circumstances  indicate  that the  carrying  amount  of an asset  may not be
recoverable.  Recoverability  of  assets  to be held  and  used is  measured  by
comparison of the carrying  amount of an asset to future net  undiscounted  cash
flows expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceed the fair value of the assets.  Assets to be
disposed of are reported at the lower of the  carrying  value amount or the fair
value less costs to sell.  The  adoption of SFAS No. 121 did not have a material
impact on the Company's financial position, results of operations, or liquidity.

         Software Development Costs

         Research  and  development  costs  include  costs  related to  software
products that are expensed as incurred  until the  technological  feasibility of
the  product  has  been  established.  The  Company  has  defined  technological
feasibility as completion of a working model. After technological feasibility is
established,  any  additional  software  development  costs are  capitalized  in
accordance with SFAS No. 86, Accounting for the Costs of Computer Software to Be
Sold, Leased, or Otherwise  Marketed.  Product development costs capitalized are
amortized over a future period.  Amortization of capitalized product development
costs is computed on a straight-line  basis over the estimated  economic life of
the product,  which is generally 1-2 years.  All other research and  development
expenditures  are  charged to  research  and  development  expense in the period
incurred.  During  fiscal  1998,  1997  and  1996,  $237,000,  $350,000  and $0,
respectively,  of product  development cost incurred subsequent to delivery of a
working  model,  under a  development  agreement  with a third party,  have been
capitalized.

         Advertising Costs

         The Company expenses advertising costs as incurred. Advertising expense
was $1.3 million,  $1.0 million and $845,000 for fiscal  1998,  1997  and  1996,
respectively.

         Income Taxes

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

         Stock-Based Compensation

         The Company has  elected to continue to use the  intrinsic  value-based
method as allowed under  Accounting  Principles  Board  ("APB")  Opinion No. 25,
Accounting for Stock Issued to Employees,  to account for all of its stock-based
employee   compensation  plans.   Pursuant  to  SFAS  No.  123,  Accounting  for
Stock-Based  Compensation,  the Company is  required  to disclose  the pro forma
effects on operating results as if the Company had elected to use the fair value
approach to account for all its stock-based employee compensation plans.

         Use of Estimates

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

<PAGE>

                          NETOPIA, INC. AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        September 30, 1998, 1997 and 1996

         Per Share Calculations

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

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

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

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

<TABLE>
<CAPTION>
                                                                       Years ended September 30,
                                                    ----------------------------------------------------------------
                                                           1998                   1997                   1996
                                                    ------------------     ------------------     ------------------
<S>                                                 <C>                    <C>                    <C>
 Computation of basic net income (loss) per share:
 Net income (loss) ..............................        $   (10,533)            $     (529)            $    3,701
                                                    ==================     ==================     ==================
 Weighted average number of common shares
   outstanding...................................             11,687                 11,335                  9,890
                                                    ==================     ==================     ==================
 Basic net income (loss) per share...............        $     (0.90)           $     (0.05)            $     0.37
                                                    ==================     ==================     ==================

 Computation of diluted net income (loss) per share:
 Net income (loss) ..............................        $   (10,533)            $     (529)            $    3,701
                                                    ==================     ==================     ==================
 Weighted average number of common shares
   outstanding...................................             11,687                 11,335                  9,890
 Number of dilutive common stock equivalents -
   stock options.................................                 --                     --                    997
                                                    ------------------     ------------------     ------------------
 Shares used in per share calculation............             11,687                 11,335                 10,887
                                                    ==================     ==================     ==================
 Diluted net income (loss) per share.............        $     (0.90)           $     (0.05)            $     0.34
                                                    ==================     ==================     ==================
</TABLE>

         Recent Accounting Pronouncements

         In June 1997, the Financial  Accounting Standards Board issued SFAS No.
130, Reporting Comprehensive Income and SFAS No. 131, Disclosures about Segments
of an  Enterprise  and Related  Information  which are effective for the Company
beginning  with  the  fiscal  year  ended  September  30,  1999.  SFAS  No.  130
establishes  standards for the reporting and disclosure of comprehensive  income

<PAGE>

                          NETOPIA, INC. AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        September 30, 1998, 1997 and 1996

and its  components  which will be  presented  in  association  with a company's
financial  statements.  Comprehensive  income  is  defined  as the  change  in a
business enterprise's equity during the period arising from transactions, events
or  circumstances  relating  to  non-owner  sources,  such as  foreign  currency
translation  adjustments  and unrealized  gains or losses on  available-for-sale
securities.  SFAS No. 131  establishes  annual and interim  reporting  standards
relating to the  disclosure  of an  enterprise's  business  segments,  products,
services,  geographic areas and major customers.  Adoption of these standards is
not expected to have a material effect on the Company's  consolidated  financial
position or results of operations.

         In June 1998, the Financial  Accounting Standards Board issued SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities.  SFAS No. 133
establishes  accounting  and  reporting  standards for  derivative  instruments,
including   certain   derivative   instruments   embedded  in  other   contracts
(collectively  referred  to as  derivatives),  and for  hedging  activities.  It
requires  that  an  entity   recognize  all  derivatives  as  either  assets  or
liabilities in the statement of financial position and measure those instruments
at fair value.  If certain  conditions are met, a derivative may be specifically
designated  and  accounted  for as (a) a firm  commitment,  (b) a  hedge  of the
exposure to variable cash flows of a forecasted  transaction,  or (c) a hedge of
the foreign  currency  exposure of a net investment in a foreign  operation,  an
unrecognized   firm   commitment,   an   available-for-sale   security,   or   a
foreign-currency-denominated   forecasted  transaction.  For  a  derivative  not
designated as a hedging instrument,  changes in the fair value of the derivative
are  recognized  in earnings  in the period of change.  This  statement  will be
effective for all annual and interim  periods for fiscal years  beginning  after
June 15,  1999.  The Company  does not expect the  adoption of SFAS No. 133 will
have a material effect on the financial position of the Company.

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

(2)      Discontinued Operations

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

<TABLE>

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

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

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

<PAGE>

                          NETOPIA, INC. AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        September 30, 1998, 1997 and 1996

<TABLE>
<CAPTION>
                                                               Royalty Rate on
                      If Farallon Revenues are                  Total Farallon
                           (in thousands):                      Revenue Equals
         ----------------------------------------------------  -----------------
<S>                                                            <C>    

                          Less than $15,001                          0.0%

                          $15,001 - $16,000                          1.5%
                          $16,001 - $17,000                          2.5%
                        greater than $17,000                         5.0%

</TABLE>

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

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

         The  disposition  of the LAN Division in August 1998 has been accounted
for as a discontinued operation in accordance with APB Opinion No. 30, and prior
period consolidated  financial  statements have been restated to reflect the LAN
Division's  operations as a discontinued  operation.  Revenue from  discontinued
operations was $15.1 million, $32.0 million, and $44.9 million, respectively, in
fiscal  1998,  1997,  and 1996.  The  income  from  discontinued  operations  of
$602,000,  $3.0  million,  and $5.0  million  in fiscal  1998,  1997,  and 1996,
respectively,  represents  operating  income,  net of taxes, of the discontinued
operation. The loss on sale of discontinued operations of $3.1 million in fiscal
1998 is principally comprised of the transaction expenses and costs incurred and
accrued as a result of the sale of the LAN Division.  Such expenses are directly
attributable to the sale transaction and are primarily related to reserves taken
against the lease of the Company's Alameda, California headquarters,  investment
advisory, legal and accounting fees and certain expenses related to employees of
the LAN Division.  Of the amount  recorded as a loss on the sale of discontinued
operations,  $2.5 million is included in accrued  liabilities  at September  30,
1998.  Such accrual  consists of $1.7 million of facility  costs,  approximately
$300,000 in  employee-related  costs and other  costs  consisting  primarily  of
services fees of approximately  $500,000.  As of September 30, 1998, the Company
has  recorded  a payable  to  Farallon  for  $736,000  related  to LAN  Division
receivables collected subsequent to the sale of the LAN Division.  The following
approximates  assets and  liabilities  of the LAN Division which are included in
the consolidated balance sheet as of September 30, 1997 (in thousands):

<TABLE>
<CAPTION>
                                                                    1997
                                                              ------------------
<S>                                                           <C>

           Accounts receivable, net...........................      $     4,832
           Inventory..........................................            3,247
           Prepaid expenses and other current assets..........              209
           Property and equipment.............................              359
           Deposits and other assets..........................               54
                                                              ------------------

                    Total.....................................            8,701
           Other liabilities..................................           (1,970)
                                                              ------------------

                    Net assets................................      $     6,731
                                                              ==================
</TABLE>


<PAGE>

                         NETOPIA, INC. AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        September 30, 1998, 1997 and 1996


(3)      Inventories

         Inventories consisted of the following (in thousands):

<TABLE>
<CAPTION>
                                                                                         September 30,
                                                                             ---------------------------------------
                                                                                   1998                 1997
                                                                             ------------------   ------------------
<S>                                                                          <C>                  <C>

         Raw materials and work in process................................   $                    $
                                                                                         1,080                1,966
         Finished goods...................................................                 511                2,455
                                                                             ------------------   ------------------

                                                                             $                    $
                                                                                         1,591                4,421
                                                                             ==================   ==================
</TABLE>

(4)      Furniture, Fixtures, and Equipment

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

<TABLE>
<CAPTION>

                                                                                         September 30,
                                                                             ---------------------------------------
                                                                                   1998                 1997
                                                                             ------------------   ------------------
<S>                                                                          <C>                  <C>

         Office equipment.................................................          $    2,457           $    3,263
         Furniture and fixtures...........................................               1,186                1,367
         Computers........................................................               7,757                7,954
         Leasehold improvements...........................................                 540                  521
                                                                             ------------------   ------------------

                                                                                        11,940               13,105

         Accumulated depreciation and amortization........................              (9,872)             (10,784)
                                                                             ------------------   ------------------

                                                                                    $    2,068           $    2,321
                                                                             ==================   ==================
</TABLE>

(5)      Income Taxes

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

<TABLE>
<CAPTION>


                                                                               September 30,
                                                        ------------------------------------------------------------
                                                              1998                 1997                  1996
                                                        ------------------   ------------------    -----------------
<S>                                                     <C>                  <C>                   <C> 

          Continuing operations.......................        $     2,155          $    (2,217)         $    (4,619)
          Discontinued operations.....................                385                1,932                3,186
                                                        ------------------   ------------------    -----------------

                                                              $     2,540           $     (285)         $    (1,433)
                                                        ==================   ==================    =================

</TABLE>

<PAGE>
                         NETOPIA, INC. AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        September 30, 1998, 1997 and 1996

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

<TABLE>
<CAPTION>

                                                                               September 30,
                                                        ------------------------------------------------------------
                                                              1998                 1997                  1996
                                                        ------------------   ------------------    -----------------
<S>                                                     <C>                  <C>                   <C>   
         Current:
             Federal..................................         $     (596)         $    (1,753)         $    (2,714)
             State....................................               (118)                  (6)                 244
             Foreign..................................                --                   --                    48
                                                        ------------------   ------------------    -----------------

                                                                     (714)              (1,759)     
                                                                                                             (2,422)
                                                        ------------------   ------------------    -----------------
         Deferred:
             Federal..................................              2,191                 (378)              (1,814)
             State....................................                678                 (295)                (383)
                                                        ------------------   ------------------    -----------------

                                                                    2,869                 (673)              (2,197)
          Charge in lieu of taxes attributable to
             employer stock option plans..............                 --                  215                   --
                                                        ------------------   ------------------    -----------------

                  Total...............................        $     2,155          $    (2,217)         $    (4,619)
                                                        ==================   ==================    =================
</TABLE>

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

<TABLE>
<CAPTION>

                                                                               September 30,
                                                        ------------------------------------------------------------
                                                              1998                 1997                  1996
                                                        ------------------   ------------------    -----------------
<S>                                                     <C>                  <C>                   <C>

          Computed "expected" tax (benefit) of 34%....        $    (2,000)         $    (1,960)         $    (2,006)
          Change in valuation allowance for deferred
             tax assets...............................              5,459                  512               (2,295)
          Tax exempt interest income..................                 --                 (163)                  --
          Research credits............................               (770)                (172)                 (72)
          State tax and other, net....................               (534)                (434)                (246)
                                                        ------------------   ------------------    -----------------

                                                              $     2,155          $    (2,217)         $    (4,619)
                                                        ==================   ==================    =================
</TABLE>

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

<TABLE>
<CAPTION>
                                                                                         September 30,
                                                                             ---------------------------------------
                                                                                   1998                 1997
                                                                             ------------------   ------------------

<S>                                                                          <C>                  <C>
         Deferred tax asset:
             Reserves and accruals not currently deductible...............         $     1,010          $     1,541
             Deferred rent................................................                 119                   16
             Research and other credits...................................               1,782                1,012
             Alternative minimum tax credit carryforward..................                  --                  183
             Tangible and intangible assets...............................                 349                  462
             Net operating losses.........................................               2,377                   --
             State tax and other, net.....................................                 957                  167
                                                                             ------------------   ------------------

                  Total gross deferred assets.............................               6,594                3,381

         Less valuation allowance.........................................              (6,594)                (512)
                                                                             ------------------   ------------------

                  Net deferred tax assets.................................            $     --          $     2,869
                                                                             ==================   ==================
</TABLE>

<PAGE>
                         NETOPIA, INC. AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        September 30, 1998, 1997 and 1996

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

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

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

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

         At September 30, 1998, the Company had net operating loss carryforwards
of  approximately  $6.0  million for federal tax  purposes  and $4.5 million for
state tax purposes.  If not earlier  utilized,  the federal net  operating  loss
carryforwards will expire in 2018 and the state net operating loss carryforwards
will expire in 2003.  At  September  30, 1998,  the Company had research  credit
carryforwards  of  approximately  $1.4  million  for federal  tax  purposes  and
$280,000 for state tax purposes.  If not earlier utilized,  the federal research
credit  carryforwards  will expire in years 2009 through 2018. Also, the Company
had alternative minimum tax credit  carryforwards of approximately  $92,000. The
Company's  future  ability to utilize the net operating loss  carryforwards  and
research  credit  carryforwards  may be subject to  limitations  in the event of
ownership changes as defined in the Internal Revenue Code of 1986.

(6)      Stockholders' Equity and Stock Option Plan

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

         Common Stock

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

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

<PAGE>
                         NETOPIA, INC. AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        September 30, 1998, 1997 and 1996

         Preferred Stock

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

         Common Stock Warrants

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

         Stock Option Plan

         On April 16,  1996,  the Board  adopted the 1996 Stock Option Plan (the
1996 Plan) providing for the issuance of incentive or  non-statutory  options to
directors,  employees, and non-employee consultants.  Options are granted at the
discretion of the Board of Directors.

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

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

         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  proposed IPO at the initial  offering
price.  These shares have been granted to three  non-employee  Board of Director
members.  Thereafter,  each new  director  will be granted an option to purchase
25,000  shares of Common  Stock on the date  they  become a Board  member of the
Company at the then current fair market value.  Options  issued to Directors are
exercisable  immediately  subject  to the  Company's  right of  repurchase.  The
Company's  right to  repurchase  will lapse  ratably over five years or upon the
Director's departure from the Board.

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

         The  Company  has  recorded  deferred  compensation  of $90,000 for the
difference between the grant price and the deemed fair value of the Common Stock
underlying options granted in October and December of 1995. This amount is being
amortized  over the vesting  period of the  individual  options,  generally five
years.  Amortization  of deferred  compensation  is being  charged to  operating
expense. The balance has been fully amortized as of September 30, 1998.

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

<PAGE>
                         NETOPIA, INC. AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        September 30, 1998, 1997 and 1996

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

<TABLE>
<CAPTION>

                                                                            Incentive Stock Options
                                                           ---------------------------------------------------------
                                                                                                      Weighted
                                                               Number of                               Average
                                                                Options          Price Range        Exercise Price
                                                           ------------------ ------------------  ------------------
<S>                                                        <C>                <C>                 <C>

          Outstanding as of September 30, 1995............        1,350,539    $ 1.00 -   1.60          $     1.19
          Options granted.................................          518,975      1.60 -  16.00                9.07
          Options exercised...............................         (135,238)     1.00 -   1.60                1.10
          Options cancelled...............................         (132,971)     1.00 -  12.50                2.58
                                                           ------------------

          Outstanding as of September 30, 1996............        1,601,305       1.00 - 16.00                3.64
          Options granted.................................        1,787,365       4.00 - 13.25                5.36
          Options exercised...............................         (194,535)      1.00 - 11.25                1.17
          Options cancelled...............................         (326,935)      1.00 - 15.00                8.53
                                                           ------------------

          Outstanding as of September 30, 1997............        2,867,200       1.00 - 16.00                4.32
          Options granted.................................        1,409,425       4.38 -  8.19                5.51
          Options exercised...............................         (312,090)      1.00 - 11.25                2.40
          Options cancelled...............................         (443,636)      1.20 - 10.50                4.80
                                                           ------------------

          Outstanding as of September 30, 1998............        3,520,899     $ 1.00 - 16.00                4.90
                                                           ==================

          Exercisable.....................................        1,338,228                             $     3.88
                                                           ==================
</TABLE>

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

<TABLE>
<CAPTION>

                                              Options Outstanding                        Options Exercisable
                              --------------------------------------------------- ----------------------------------
                                Number of        Weighted -                           Number
                               outstanding         average         Weighted -       exercisable       Weighted -
          Range of exercise    shares as of       remaining          average           as of            average
               prices         September 30,      contractual        exercise       September 30,       exercise
                                   1998         life (years)          price            1998              price
         -------------------  ---------------  ----------------  ---------------- ----------------  ----------------
<S>     <C>                   <C>              <C>               <C>              <C>               <C>

           $1.00                    251,577              2.86         $    1.00          251,577         $    1.00
           $1.20                    270,746              5.48              1.20          219,651              1.20
           $1.60 - $4.00            300,641              7.51              2.96          165,889              2.71
           $4.25 - $4.50            418,437              8.89              4.39          120,737              4.38
           $4.63 - $5.19            347,406              9.62              4.72           69,708              4.63
           $5.25 - $5.63            608,056              8.73              5.35          207,309              5.37
           $5.69                    620,500              9.53              5.69           69,131              5.69
           $5.75 - $6.75            393,761              8.30              6.37          172,689              6.37
           $7.13 - $11.25           234,775              9.42              7.81           31,537              9.02
           $16.00                    75,000              7.70             16.00           30,000             16.00
                              ---------------  ----------------  ---------------- ----------------  ----------------

          $1.00 - $16.00          3,520,899              8.18         $    4.90        1,338,228         $    3.88
                              ===============  ================  ================ ================  ================
</TABLE>

         1996 Employee Stock Purchase Plan

         On April 16, 1996,  the Board adopted the 1996 Employee  Stock Purchase
Plan  (the  Purchase  Plan) and  reserved  300,000  shares  of Common  Stock for
issuance under the Purchase Plan. To date an additional 300,000 shares have been
approved for issuance under the Purchase Plan. As of September 30, 1998, 331,393
shares have been issued under the Purchase Plan.

<PAGE>
                        NETOPIA, INC. AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        September 30, 1998, 1997 and 1996

         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 123, net income (loss) and per
share results would have been the pro forma amounts indicated in the table below
(in thousands except per share amounts):

<TABLE>
<CAPTION>

                                                                                    September 30,
                                                                   -------------------------------------------------
                                                                        1998             1997             1996
                                                                   ---------------   --------------   --------------
<S>                                                                <C>               <C>              <C> 

           Net income (loss) - as reported.......................      $  (10,533)        $   (529)      $   3,701
           Net income (loss) - pro forma.........................         (13,384)          (1,109)          3,492

           Basic net income (loss) per share - as reported.......       $   (0.90)       $   (0.05)       $   0.37
           Basic net income (loss) per share - pro forma.........           (1.15)           (0.10)           0.35

           Diluted net income (loss) per share - as reported.....       $   (0.90)       $   (0.05)       $   0.34
           Diluted net income (loss) per share - pro forma.......           (1.15)           (0.10)           0.32
</TABLE>

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

         The effect of applying SFAS No. 123 for disclosing  compensation  costs
may not be  representative  of the effects on reported net income (loss) for the
future years because pro forma net income  (loss)  reflects  compensation  costs
only for stock options  granted in fiscal 1998, 1997 and 1996. The fair value of
options granted during fiscal 1998 under SFAS 123 was $4,906,099.

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

<TABLE>
<CAPTION>
                                                                          Fiscal years ended September 30,
                                                                   -------------------------------------------------
                                                                        1998             1997             1996
                                                                   ---------------   --------------   --------------
<S>                                                                <C>               <C>              <C>

           Expected volatility...................................              84%              70%              70%
           Risk-free interest rate...............................            4.25%            5.60%            5.60%
           Expected dividend yield...............................             --               --               --
</TABLE>

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

<PAGE>
                        NETOPIA, INC. AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        September 30, 1998, 1997 and 1996

(7)      Commitments and Contingencies

         Leases

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

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

<TABLE>
<CAPTION>

                  Year ending September 30,
                 ---------------------------------
<S>              <C>                                                             <C>    

                  1999.........................................................       $    1,210
                  2000.........................................................            1,114
                  2001.........................................................            1,116
                  2002.........................................................            1,111
                  2003.........................................................               55
                  thereafter...................................................               42
                                                                                 ----------------

                      Total minimum lease payments.............................       $    4,648
                                                                                 ================
</TABLE>

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

         Litigation

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

Plan for Savings and Investments

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

(8)      Significant Customers and Revenue by Geographic Region

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

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

<TABLE>
<CAPTION>

                                                                                 September 30,
                                                            --------------------------------------------------------
                                                                  1998               1997               1996
                                                            -----------------  ------------------ ------------------
<S>                                                         <C>                <C>                <C>   

           United States..................................      $    16,670         $    14,637        $    13,412
           Europe.........................................            6,215               3,929              1,769
           Asia/Pacific...................................            1,175               1,018              1,219
           Canada.........................................              706                 542                308
           Latin America..................................               70                  44                 10
                                                            -----------------  ------------------ ------------------

              Total revenues..............................      $    24,836         $    20,170        $    16,718
                                                            =================  ================== ==================
</TABLE>
                                                            
<PAGE>
                        NETOPIA, INC. AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        September 30, 1998, 1997 and 1996

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

(9)      Subsequent Event

         On December 17, 1998,  the Company  signed a definitive  agreement  and
closed a transaction to purchase Serus LLC ("Serus"),  a Utah limited  liability
company.  Serus is a developer of java-based web site editing software products.
Upon completion of the  development of such products,  Netopia intends to market
the  products  both  independently  and along with its  Netopia  Virtual  Office
software  platform.  As per the  SERUS  ASSET  PURCHASE  AGREEMENT  by and among
Netopia,  Inc. and Serus LLC (the  "Purchase  Agreement"),  Netopia will acquire
substantially  all of the  assets and assume  certain  liabilities  of Serus and
existing  operations  which include  in-process  research and  development.  The
maximum aggregate  purchase price of the Serus transaction is approximately $7.0
million including (i) $3.0 million of cash, (ii) 409,556 shares of the Company's
Common Stock,  and (iii) a $1.0 million earnout  opportunity  based upon certain
criteria as set forth in the Purchase Agreement.

<PAGE>