<PAGE>

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

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

                                   FORM 10-K

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

             For the fiscal year ended September 30, 2001

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

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

   As of December 14, 2001 there were 18,114,924 shares of the Registrant's
Common Stock outstanding. The aggregate market value of the Common Stock held
by non-affiliates of the registrant, based on the closing price of the Common
Stock as reported on The Nasdaq National Market on December 14, 2000 was
approximately $104,186,933.

                      DOCUMENTS INCORPORATED BY REFERENCE

   The Registrant's definitive Proxy Statement for its Annual Stockholders
Meeting to be held on January 30, 2002 is incorporated by reference in Part III
of this Form 10-K.

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

<PAGE>

                                 NETOPIA, INC.
                                   FORM 10-K

                               TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                                                 Page
                                                                                                 ----
<C>        <S>                                                                                   <C>
                                                  PART I.

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

Item 2.    Properties...........................................................................  16

Item 3.    Legal Proceedings....................................................................  17

Item 4.    Submission of Matters to a Vote of Security Holders..................................  17

Item 4(a). Executive Officers of the Registrant.................................................  18

                                                 PART II.

Item 5.    Market for Netopia's Common Stock and Related Stockholder Matters....................  20

Item 6.    Selected Financial Data..............................................................  21

Item 7.    Management's Discussion and Analysis of Financial Condition and Results of Operations  24

Item 7(a). Quantitative and Qualitative Disclosures About Market Risk...........................  48

Item 8.    Consolidated Financial Statements and Supplementary Data.............................  50

Item 9.    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.  78

                                                 PART III.

Item 10.   Directors and Executive Officers of the Registrant...................................  78

Item 11.   Executive Compensation...............................................................  78

Item 12.   Security Ownership of Certain Beneficial Owners and Management.......................  78

Item 13.   Certain Relationships and Related Transactions.......................................  78

                                                 PART IV.

Item 14.   Exhibits, Financial Schedules and Reports on Form 8-K................................  79

Index to Exhibits...............................................................................  79

Signatures......................................................................................  81
</TABLE>

<PAGE>

                                    PART I

Item 1. Description of Business

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

Company Background

   We are a developer of broadband Internet equipment and Web platform software
solutions. Our broadband Internet equipment and software platforms are designed
to enable our telecommunications carrier customers, such as incumbent local
exchange carriers (ILECs) and competitive local exchange carriers (CLECs), and
our distributor and Internet service provider (ISP) customers to create and
offer expanded broadband service offerings focused on the needs of
multi-location distributed enterprises, small and medium size businesses, small
office/home office professionals, and multi-personal computer (PC) households.
These expanded broadband service offerings often include digital subscriber
line (DSL) gateways bundled with back-up, bonding, virtual private networking
(VPN), voice over DSL, and services such as "no assembly required" Web site and
electronic commerce (eCommerce) enabled Web site creation and hosting through
our eSite and eStore applications.

   The market for broadband Internet equipment and Web platform software
solutions continues to grow as broadband Internet connectivity has become more
affordable and offers increasing benefits to the end user. To address this
market, we have developed easy to use broadband Internet equipment that support
all types of high-speed Internet connections for the transmission of both data
and voice services. Our Web platform software solutions provide "no assembly
required" eSites and eStores as well as remote help desk and systems management
applications designed to reduce the cost of ownership of networked computers.

   Our broadband Internet equipment gateways consist principally of DSL routers
and integrated access devices (IADs) which enable the transmission of data
and/or voice over DSL networks as well as Cable Ethernet, T1/Frame Relay,
integrated services digital network (ISDN) and dual analog routers. Our Web
platform software products consist principally of our eSite, eStore and eCare
products, sold through our telecommunications carrier partners that provide Web
sites and eCommerce enabled Web sites as well as electronic customer
relationship management (eCRM), and Timbuktu Pro and netOctopus products,
primarily sold to enterprise and distribution customers that provide help desk
and systems management applications.

   Our broadband Internet equipment enables our telecommunications carrier and
other distribution partners to offer distributed enterprises, small and medium
size businesses, small office/home office users and multi-PC households the
opportunity to take advantage of high-speed Internet access technologies and,
in particular, DSL technologies. Our broadband Internet equipment, including
routers, digital service devices, filtering bridges, and modems, provides a
flexible and scaleable platform that can be easily integrated into existing
business infrastructures. In addition to supporting various broadband Internet
equipment technologies, our broadband Internet equipment is designed to be
plug-and-play and incorporates many value-added features such as back-up,
bonding, VPN and firewall protection.

                                      1

<PAGE>

   Our Web platform allows our telecommunications carrier and ISP customers to
capture incremental revenue by offering turnkey, private labeled eSite, eStores
and eCRM services to their distributed enterprise and small and medium size
business customers. Through the Web platform, these customers generate
incremental recurring revenue (in which Netopia shares) and add value and
differentiation to their current product and service offerings. The Web
platform's eSite and eStore applications provide "no assembly required" Web
sites and online stores in a variety of configurations scaled to suit almost
every need. Additional features include eCommerce services such as electronic
shopping carts, secure checkout, real-time credit card transaction processing,
as well as an array of eCRM and marketing tools. Our Web platform also offers
interactive support and customer service solutions. The Web platform's eCare
application enables support agents to communicate online and remotely control
and operate the end customers PC. Through this application, our
telecommunication carrier and ISP customers can provide live online support and
customer service across virtually any Internet connection.

   Our Web platform also includes help desk and systems management applications
designed to reduce the total cost of ownership of networked computers and
enable remote desktop administration. Timbuktu Pro, our remote network
management software, is used on a worldwide basis, and is netOctopus, our
desktop administration software used in multi-platform systems administration
for assisting help desk managers and network administrators.

   We were incorporated in California in 1986 as Farallon Computing, Inc. In
1996 we were reincorporated in Delaware and in November 1997, we changed our
corporate name from Farallon Communications, Inc. to Netopia, Inc. When
founded, we initially focused on the development of networking products for
AppleTalk local area networks (LANs). In 1993, we revised our business strategy
to concentrate on the Internet and Intranet markets thru the utilization of our
transmission control protocol/Internet protocol (TCP/IP) and routing expertise.
In 1994, we released our first Timbuktu Pro Internet/Intranet collaboration
software product (TCP/IP) enabled; in 1996, we introduced our family of ISDN
Internet equipment; in 1998, we introduced our family of DSL routers; and in
2001, we introduced our IADs. Our principal offices are located at 2470 Mariner
Square Loop, Alameda, California 94501 and our telephone number is (510)
814-5100.

Acquisitions

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

  Cayman Systems, Inc.

   In October 2001, we acquired Cayman Systems, Inc. (Cayman), a provider of
business class asynchronous digital subscriber line (ADSL) and Ethernet
routers. Cayman's largest customers include ILECs SBC Communications, Inc.
(SBC) and BellSouth Communications, Inc. (BellSouth), and Comcast Cable
Communications, Inc. (Comcast), a leading cable provider. We intend to
integrate fully Cayman's technology into our broadband Internet equipment
development.

  WebOrder

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

                                      2

<PAGE>

  StarNet Technologies, Inc.

   In October 1999, we acquired StarNet Technologies, Inc. (StarNet), a
developer of voice channel technology architecture that allows the simultaneous
transmission of voice and standard data packets over a digital subscriber line.
We have integrated StarNet's technology into our broadband Internet equipment,
including our IADs for both voice and data transmission.

Industry Background

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

   Broadband Internet connectivity has become more affordable and broadband
technology now offers significant benefits to the end user as it evolves to
offer high-value broadband services across wide geographies. Additionally, as
disaster recovery initiatives are formalized in the context of current business
conditions, businesses are de-centralizing at an unprecedented rate. These
distributed enterprises may include up to an estimated two million branch
offices around the world. Industry experts believe that approximately
one-fourth of the workforce in the United States telecommutes at some time
during the week, adding up to more than 25 million at-home workers. The number
of branch offices and telecommuters is only expected to increase. Distributed
enterprises can easily expand by leveraging lower cost broadband connectivity
and the value-added services such as firewall protection and VPNs to support
branch and telecommuting connectivity requirements.

   Furthermore, the average number of PCs connected to the Internet in the
traditional household of the United States has continued to grow in calendar
year 2001. These multi-PC households are seeking to share a broadband
connection across multiple devices to integrate work and leisure applications
on a small home based network. Further driving the need for broadband
connectivity to these household networks are telecommuting or day-extender
applications, such as access to email on employer Intranets, as well as access
to content and entertainment for household members.

   The demand for high-speed broadband Internet access has grown dramatically
due to the increasing use of data-intensive multimedia in Web sites and the
development of eCommerce. As a result, service providers are deploying new
technologies that allow them to quickly and cost-effectively provide a full
range of voice, data and video services. One such technology is DSL, which
enables data transmission speeds of 128 kilobits per second (Kbps) to 52
megabits per second (Mbps), as compared to 56 Kbps using standard analog
technology. DSL delivers ''always on'' connectivity, eliminating the tedious
dial-up process associated with traditional analog modem technologies. DSL is a
point-to-point technology that connects the end user to a telecommunications
service provider's central office, or to an intermediate hub. DSL equipment is
deployed at each end of the copper wire and the transmission speed depends on
the length and condition of the existing wire. Historically, small and medium
size businesses and individuals have not had the internal resources necessary
to establish high-speed access to or maximize the potential benefits of the
Internet. However, growing competition in the telecommunications industry,
including the emergence of new market entrants such as CLECs, ISPs and cable
companies, and the proliferation of DSL have greatly increased the availability
and lowered the cost of high-speed broadband Internet access. Due to its low
cost, high speed and utilization of existing infrastructure, DSL is an
attractive broadband solution for distributed enterprises, small and medium
size businesses, small office/home office professionals, and multi-PC
households.

                                      3

<PAGE>

The Netopia Solution

   We develop, market and support broadband Internet equipment and Web platform
software solutions. Our platforms are designed to enable our telecommunications
carrier, distributor and ISP customers to create and offer expanded broadband
service offerings focused on the needs of distributed enterprises, small and
medium size businesses, small office/home office professionals, and multi-PC
households. These expanded broadband service offerings often include DSL
Internet equipment bundled with back-up, bonding, VPN, voice over DSL, and
eSite and eStore hosting.

   We offer a full line of broadband Internet equipment, including routers and
IADs, that support every type of high-speed Internet connection, including
ADSL, symmetric digital subscriber line (SDSL), Symmetric High bit-rate Digital
Subscriber Loop (SHDSL), integrated services digital network digital subscriber
line (IDSL), cable, ISDN, and analog devices and Web platform software to meet
the needs of our distribution partners to provide value added services and
generate increased revenues in their market place. The distributed enterprises,
small and medium size business, and multi-PC households to which our products
are distributed, need different types of broadband access, accompanied by
hardware designed for each type. We provide the broad range of product and
capabilities that allow our distribution partners to address this need without
having to learn to support multiple platforms. For example, a corporate
headquarters may require a router for scalable T1 access, a small enterprise
SDSL, while the needs of a telecommuter's home office can be met with an ADSL
router and remote management tools. Because all of our broadband gateways are
built from a common architecture, knowing one piece of our equipment means
knowing them all. This translates into faster, better customer service and
lower support costs for our service provider partners. Additionally, the
built-in dial backup capability in our broadband Internet equipment enables our
telecommunications carrier and ISP partners to deliver high-level customer
service virtually guaranteeing un-interrupted Internet connectivity.

   Our routers and IADs offer built-in, no-cost VPN gateways. We facilitate all
three VPN techniques: Point to Point Tunneling Protocol (PPTP), Ascend Tunnel
Management Protocol (ATMP), and Internet Protocol Security Data Encryption
Standard (IPSec DES). Our routers support multiple, simultaneous VPNs, making
it possible to set up and maintain separate VPNs for telecommunters, branch
offices and business partners. In addition, Netopia provides Internet Protocol
Security (IPSec) with Internet key exchange (IKE) for scalable VPN operations.
Our VPN acceleration feature also guarantees the highest level of security
available through Triple Data Encryption Standard (3DES) data encryption. The
standard inclusion of VPN capability in all Netopia routers leads to
significant savings because businesses do not have to purchase separate VPN
equipment to accompany the investment in each router. Our routers and IADs also
come with no-cost built-in firewalls to protect the user's network from
intruders. An integrated firewall eliminates the need for remote office
locations and telecommuters to purchase and install other firewall software and
equipment.

   Our broadband Internet equipment is interoperable with major central office
equipment provided by Alcatel, Cisco Systems, Inc. (Cisco), Copper Mountain
Networks, Inc. (Copper Mountain), Lucent Technologies, Inc. (Lucent), Nokia
Corporation (Nokia), Orckit Communications Ltd. (Orckit), Paradyne Networks,
Inc. (Paradyne), Siemens and Zhone Technologies, Inc. (Zhone). We have
established strategic distribution relationships with leading carriers and
service providers including BellSouth, Covad Communications, Inc. (Covad),
Earthlink, Inc. (Earthlink), Everdream Corporation (Everdream), France Telecom,
MegaPath Networks, Inc. (MegaPath), SBC, Telecom Italia, Verio, Inc. (Verio),
and Verizon Communications, Inc. (Verizon).

   Our Web platform software solutions address a complementary market allowing
our telecommunications carrier and ISP customers to capture incremental
recurring revenue by offering turnkey, private labeled eSites, eStores and eCRM
services to their distributed enterprises and small and medium size business
customers. Through the Web platform, these customers generate recurring revenue
and add value and differentiation to their current product and service
offerings. The Web platform's eSite and eStore applications provide "no
assembly required" Web sites and online stores in a variety of configurations.
Additional features include electronic commerce services such as electronic
shopping carts, secure checkout, real-time credit card transaction processing,
as well as an array of customer relationship management and marketing tools.
Our Web platform also

                                      4

<PAGE>

offers interactive support and customer service solutions. Our Web platform's
eCare application enables support agents to communicate online and remotely
control and operate the end customers PC. Through this application, Netopia's
partners can provide live online support and customer service across virtually
any Internet connection.

   Our Web platform also includes help desk and systems management applications
designed to reduce the total cost of ownership of networked computers and
enable remote desktop administration. Timbuktu Pro, our remote network
management software, is used on a worldwide basis, as is netOctopus, our
desktop administration software used in multi-platform systems administration
for assisting help desk managers and network administrators.

Strategy

   Our objective is to be a leading developer and provider of broadband
Internet equipment and Web platforms for distributed enterprises, small and
medium size businesses, small office/home office professionals, and multi-PC
households. Key elements of our strategy include the following:

    .  Target the Distributed Enterprise, Small and Medium Size Business, Small
       Office/Home Office Professional,and Multi-PC Household Markets. We
       target distributed enterprises, small and medium size businesses, small
       office/home office professionals, and multi-PC households that seek
       high-speed broadband Internet equipment, Web site creation and hosting,
       and eCommerce enabled products and services. We believe the demand for
       these services is rapidly growing due to the increasing use of
       data-intensive multimedia in Web sites and the development of eCommerce
       and as broadband Internet connectivity has become more affordable and
       broadband technology now offers significant benefits to the end user. We
       believe distributed enterprises and small and medium size businesses
       generally do not have the financial resources or technical expertise
       necessary to establish and maintain a competitive Web presence through a
       Web site or an eCommerce enabled Web site, or are seeking lower cost
       alternatives to traditional high-speed Internet access solutions. As a
       result, this market requires plug-and-play products and services that
       are easy to use and maintain and are cost-effective. We believe that we
       have developed a specific expertise in serving the needs of these
       markets. We intend to continue to develop products and services that
       meet these needs.

    .  Leverage Strategic Relationships with Telecommunication Carriers, ISPs,
       and Other Distribution Channels.  We believe that the distribution
       channels for high-speed Internet access and broadband Internet
       applications are converging. Our combined broadband Internet equipment
       and Web platform products provide competitive differentiation and have
       enabled us to establish strong distribution relationships and recruit
       new strategic partners. Our platforms are designed to enable
       telecommunication carriers and ISPs to create and offer value-added,
       bundled service offerings for their small and medium size business
       customers. These bundled service offerings often include DSL service
       bundled with back-up, bonding, VPN, voice over DSL, and eSite and eStore
       hosting. Our relationships with leading telecommunication carriers and
       ISPs include BellSouth, Covad, Earthlink, Everdream, France Telecom,
       MegaPath, SBC, Telecom Italia, UUNet Technologies, Inc. (UUnet), Verio,
       and Verizon.

    .  Provide a Comprehensive Suite of Plug-and-Play Broadband Gateway
       Products and Web Platforms. We provide a comprehensive suite of customer
       premise broadband Internet equipment and Web platform software
       solutions. Our broadband Internet equipment products include routers,
       modems, bridges, and digital service devices. We also provide
       proprietary applications that increase the functionality of our
       broadband Internet equipment, including encryption, VPN and firewall
       protection. We intend to continue to develop new generations of our
       equipment for emerging broadband technologies and continue to add
       functionality that will enable us to meet the changing needs of
       distributed enterprises and small and medium size businesses and to
       further differentiate our products. Our Web platforms include eSite and
       eStore applications that provide "no assembly required" Web sites and
       online stores in a variety of configurations. Additional features
       include eCommerce services such as electronic shopping carts, secure
       checkout, real-time credit card transaction processing, as well

                                      5

<PAGE>

       as an array of customer relationship management and marketing tools. Our
       Web platform also offers interactive support and customer service
       solutions. Our Web platform's eCare application enables support agents
       to communicate online and remotely control and operate the end customers
       PC. Through this application, Netopia's partners can provide live online
       support and customer service across virtually any Internet connection.

    .  Enable Distributed, Small and Medium Size Businesses to Leverage the
       Internet.  We provide a Web platform for easily creating, enhancing and
       hosting Web sites, and providing eCommerce capability. Our Web platform
       provides customizable Web site content packages, complete eStores, and
       full administrative control. Merchants can use our Web platform's
       editing interface to ensure their sites perform to high standards. Our
       Web platform also provides real-time Internet communication and
       collaboration capabilities and Web based customer service and support
       capabilities. We continue to enhance our Web platform to include new
       features and functionality, including additional industry content
       packages (currently 65 available), and to further the ability to create
       and remodel Web sites and enhance eStore functionality with minimal
       technical expertise.

    .  Maintain and Extend Technology Leadership.  We believe an important
       competitive advantage is the ability to fully integrate our products
       into those of other telecommunications equipment providers. We also
       believe that timely introduction of our products and services are
       imperative for our success. We therefore have developed close working
       relationships with leading central office equipment providers such as
       Alcatel, Cisco, Copper Mountain, Lucent, Nokia, Orckit, Paradyne,
       Siemens and Zhone. We will continue to develop relationships with other
       leading central office equipment providers, and we intend to integrate
       future generations of our DSL equipment into their architectures. In
       addition, we will continue to provide our customers with new
       functionality by developing relationships with providers of related and
       complementary technologies. For example, we have relationships with
       leading voice over DSL gateway developers such as Jetstream
       Communications, Inc. (Jetstream). Furthermore, we will continue to
       incorporate new features and functionality into our Web platform, either
       through internal development or by acquiring technology where
       appropriate, to enable small and medium size businesses to conduct an
       increasingly broad range of business activities on the Web.

    .  Leverage Brand Name Recognition and Customer Support Infrastructure. We
       believe that we have established a brand name with partner companies
       seeking high-speed broadband Internet equipment and Web platform
       products and services. We believe that continuing to strengthen the
       Netopia brand name will facilitate market acceptance of new products and
       services. We continue to leverage our reputation and expertise in
       providing complete, easy-to-use, plug-and-play solutions to more fully
       penetrate our target market. In addition, we will continue to leverage
       our positive brand name recognition and our customer support
       organization to promote the sale of our products and services.

                                      6

<PAGE>

Products and Services

  Broadband Internet Equipment

   Our broadband Internet equipment provides cost-effective, high-speed,
multi-user, plug-and-play solutions for Internet access with advanced value
added features including automated backup, DSL bonding, virtual private network
gateways, and firewall protection. Our customer premise broadband Internet
equipment allows our telecommunications carrier, distributor and ISP customers
to offer distributed enterprises, small and medium size businesses, and
multi-PC households the flexibility to use the communication technology which
best meets their needs for economy and performance. Our broadband Internet
equipment is summarized in the following table.

<TABLE>
<CAPTION>
     Internet Access
       Technology           Our Products                      Functions and Features
--------------------------------------------------------------------------------------------------------
<S>                       <C>               <C>
DSL including SDSL, IDSL, Data Routers      Provide a shared and permanent connection to the Internet
ADSL, and                                   at speeds up to 2.3 Mbps and offer a cost-effective
SHDSL                                       solution for customers that require an ''always on''
                                            Internet presence for applications such as hosting a Web
                                            server or conducting eCommerce through an online
                                            eStore.
--------------------------------------------------------------------------------------------------------
                          Digital Service   Provide a cost-effective method to migrate Internet access
                          Devices           from a T1 or 56K digital dataphone service connection to
                                            DSL without having to replace or disrupt current network
                                            hardware or infrastructure.
--------------------------------------------------------------------------------------------------------
                          Filtering Bridges Provide a shared, permanent connection to the Internet
                                            using the simplicity of a bridged connection with the
                                            added security of packet filtering and Internet Protocol
                                            (IP) based remote management.
--------------------------------------------------------------------------------------------------------
                          IADs              Provide simultaneous data access to the Internet plus up to
                                            8 concurrent voice telephony calls.
--------------------------------------------------------------------------------------------------------
Cable                     Routers           Provide a shared connection to the Internet through the
                                            Ethernet port on a cable modem.
--------------------------------------------------------------------------------------------------------
T1 and Frame Relay        Routers           Provide a dedicated, high-speed, shared connection to the
                                            Internet through a traditional T1 leased line service.
--------------------------------------------------------------------------------------------------------
ISDN                      Routers           Provide shared Internet access at speeds up to 128 Kbps
                                            over an ISDN phone line.
--------------------------------------------------------------------------------------------------------
56K Digital Dataphone     Routers           Provide a shared, dedicated connection to the Internet at
Service                                     56 Kbps or 64 Kbps speeds through a traditional digital
                                            dataphone leased line service
                                            .
--------------------------------------------------------------------------------------------------------
Dual Analog               Routers           Provide an entry-level solution for Internet connections
                                            that will work over standard analog phone lines. By
                                            aggregating as many as three analog telephone lines, our
                                            dual analog routers provide shared Internet access at
                                            speeds up to 168 Kbps.
</TABLE>

                                      7

<PAGE>

  Broadband Internet Equipment Value-Added Features

   In addition to supporting various Internet protocols and technologies, our
broadband Internet equipment is designed to be plug-and-play and incorporates
many value-added features. We believe these features provide our customers with
additional ease-of-use, security and cost savings benefits, and differentiate
our offerings from those of our competitors. Some of these features include:

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

                                                                      [GRAPHIC]

                          WIDE AREA NETWORK MODULE CARD

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

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

    .  IPSec to enable businesses to securely connect to branch offices,
       telecommuters and partners;

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

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

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

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

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

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

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

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

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

                                      8

<PAGE>

   We also offer end-users of our broadband Internet equipment different
service programs, including VPN set-up services. These service programs assist
customers in ordering and provisioning the telecommunication carrier line, and
obtaining and establishing their service from an ISP. These programs also
provide for the remote configuration of the router and the VPN, assist in the
installation and configuration of the client server software and provide
technical support for our product line. Extended service programs are available
for up to three years.

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

   All of our DSL routers rely on specialized semiconductor chips that we
purchase from a limited number of suppliers. We do not have volume purchase
contracts with any of our suppliers and they could cease selling us these
semiconductor chips at any time. If we are unable to timely obtain a sufficient
quantity of these semiconductor chips from any of our suppliers, for any
reason, sales of our DSL routers could be delayed or halted. Further, we could
also be forced to redesign our DSL routers and qualify new suppliers of
semiconductor chip sets. The resulting stoppage or delay in selling our
products and the expense of redesigning our DSL routers would seriously harm
our reputation and business. Additionally, substantially all of our broadband
Internet equipment includes circuit boards that are manufactured by a limited
number of contract manufacturers. Certain of our broadband Internet equipment
products are assembled and packaged by these contract manufacturers. If
supplies of circuit boards or broadband Internet equipment products from these
contract manufacturers are interrupted for any reason, we will incur
significant losses until we can arrange for alternative sources. Any such
interruption may seriously harm our reputation and business.

                                      9

<PAGE>

  Web Platform

   Our Web platforms enable distributed enterprises, small and medium size
businesses and other organizations to extend their business online through the
benefits of having a Web presence, conducting eCommerce, communicating in real
time with customers and colleagues over the Internet, and providing Web based
customer service and support services. Our Web platform applications are
summarized in the following table.

<TABLE>
<CAPTION>
                       Our Products
 Supported Platforms   And Services                                    Functions and Features
---------------------------------------------------------------------------------------------------------------------------------
<C>                    <C>          <S>
Site Visitors:         a.) Netopia  We license our Web platform to ISPs, ILECs, Yellow Pages providers, Internet portals,
Netscape Navigator     Web platform franchisors and others on a private label or co-branded basis. We also provide direct
3.02 and above or      eSite        fulfillment and hosting services for our partners' services based on the Web platform.
Microsoft Internet     b.) Netopia
Explorer versions      Web platform a.) Using the Netopia Web platform eSite application, our partners help their distributed
3.02 and above.        eStore.      and small to medium size enterprise customers run their business online. With no
Site Owners:                        software downloads, or any technical knowledge, our partners' customers can build a
Netscape 4.0 or above               complete and affordable Web site, including powerful business and marketing tools. We
or Internet Explorer                provide customers with a wide array of over 65 vertical Web site content packages
4.0 and above.                      targeted on specific industries or common interest groups.

                                    b.) The Netopia Web platform eStore application enables our partners to provision
                                    eCommerce services to their distributed, and small to medium size enterprise customers.
                                    Our partners' customers can use their eStore to sell products and services online, create
                                    Web catalogs and manage orders from start to finish, affordably and flexibly. Key eStore
                                    features and services include electronic shopping cart functionality, secure checkout, real-
                                    time and offline credit card transaction processing, cross merchandising, reporting,
                                    statistics other powerful eCommerce sales and marketing tools.
---------------------------------------------------------------------------------------------------------------------------------
Windows based PC       Netopia Web  The Netopia Web platform eCare application provides a complete and secure Web based
with either Microsoft  platform     customer service and support solution delivering powerful, point-to-point services that
Internet Explorer      eCare        enable remote problem solving over the Internet or an IP enterprise network. eCare can
versions 5.0 and                    be used for customer service and support, systems administration, sales support, help
above or Netscape                   desk, asset management, or to provide a wide range of interactive services across the
Navigator 4.00 and                  Internet or any IP-based network. eCare's services include, text based chat, desktop
above.                              assist, desktop observe, file transfer, and co-browsing.
---------------------------------------------------------------------------------------------------------------------------------
Windows XP, ME,        Timbuktu Pro Allows enterprise help desks to remotely control and view employees networked PCs to
2000, 3.X, 95, 98, and              resolve end user problems. Additionally, Timbuktu is utilized as a telecommunications
NT Mac OS 8.x, 9.x,                 tool to enable users to communicate and collaborate in real time over the Internet and
X                                   within Intranets.
---------------------------------------------------------------------------------------------------------------------------------
Windows XP, ME,        netOctopus   Multi-platform systems administration and asset management solution focused on the
2000, 3.X, 95, 98, and              needs of information technology (IT) professionals and network administrators.
NT Mac OS 8.x, 9.x,                 netOctopus greatly reduces the cost of managing networked PCs and eases OS migration
X                                   projects, software deployment, and desktop management.
</TABLE>

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

   We depend on our servers, networking hardware and software infrastructure,
and third-party service and maintenance of these systems to provide reliable,
high-performance Web site hosting services for certain customers. In addition,
our servers are located at third-party facilities. Failure or poor performance
by the third parties with which we contract to maintain our servers, hardware
and software, could lead to interruption or deterioration of our eSite and
eStore hosting services. Additionally, a slowdown or failure of our systems due
to an increase in the use of the eSites and eStores we currently host, or due
to damage or destruction of our systems

                                      10

<PAGE>

for any reason, could also lead to interruption or deterioration of our eSite
and eStore hosting services. If there is an interruption or a deterioration of
our eSite or eStore hosting services, our reputation would be seriously harmed
and, consequently, sales of our products and services would decrease. If such
circumstances do arise in some future period, in order to retain current
customers and attract new customers, we may have to provide our eSite and
eStore hosting services at a subsidized price or even at no cost. In addition,
if our eSite and eStore hosting services are interrupted, perform poorly, or
are unreliable, we are at risk of litigation from our customers.

   We generally do not receive long-lead time purchase orders from our
customers. As such, the orders we receive in any quarter are generally shipped
within that quarter and therefore, our backorder at the end of any quarter is
not meaningful and not indicative of future results.

Distribution, Sales and Marketing

   We sell our products and provide services worldwide through
telecommunication carriers, ISPs, independent distributors and dealers and
directly to end-users. Our marketing strategy is to achieve broad market
penetration by utilizing these multiple distribution channels.

 .  Telecommunication Carriers.  We historically have sold our broadband
                     Internet equipment primarily to emerging CLECs such as
                     Covad. Following the acquisition of Cayman, we now are
                     selling our broadband Internet equipment to ILECs
                     including BellSouth, SBC, and Verizon. We depend upon the
                     ability of such telecommunications carriers to
                     successfully offer DSL services. The CLECs are competing
                     with the ILECs, the traditional regional telephone
                     companies. Traditional regional telephone companies may
                     have a number of competitive advantages over their new
                     competitors, including greater resources, name recognition
                     and access to customers. Traditional regional telephone
                     companies may restrict, or attempt to restrict, the
                     ability of CLECs to install DSL equipment at the regional
                     telephone companies' central offices. The CLECs have
                     generally incurred operating losses and negative cash
                     flows as they establish their networks and operations.
                     Accordingly, these channel partners are dependent on
                     continued access to new sources of capital. We believe
                     that the current external financing environment is
                     challenging for the CLECs. Covad, which accounted for 16%
                     of our total revenues for fiscal year 2001, and continues
                     to be our largest customer, filed a voluntary petition
                     under the Bankruptcy Act in August 2001 as part of a
                     capital restructuring plan. On November 13, 2001 Covad
                     announced that it had secured an agreement with SBC to
                     provide Covad with$150 million in funding. The funding,
                     which received bankruptcy court approval on December 13,
                     2001 and is subject to customary closing conditions, would
                     occur on the same day that the reorganization plan becomes
                     effective, which is expected by January 2002.
                     Additionally, Covad has announced that this funding is
                     expected to provide the cash that they believe will allow
                     them to become cash flow positive by the latter half of
                     2003. Additionally, Rhythms Netconnections, Inc.
                     (Rhythms), which accounted for 11% of our total revenues
                     for fiscal year 2001, filed a voluntary petition under the
                     Bankruptcy Act in August 2001, and ceased normal
                     operations during September 2001. In December 2001,
                     WorldCom, Inc. (WorldCom) purchased Rhythm's key DSL
                     assets. As a result, WorldCom will be able to deliver
                     uninterrupted service to existing Rhythms customers served
                     by the portion of the network that WorldCom is acquiring.
                     However, there is no certainty that WorldCom will continue
                     to purchase our equipment for deployment on the Rhythms
                     network. Our revenues will decline and our losses will
                     increase if we lose one or more of our significant
                     telecommunications carrier customers or if our
                     telecommunications carrier customers reduce or delay
                     purchases of our products. During fiscal year 2001, sales
                     to CLECs and ILECs, accounted for 39% of our total
                     revenue. During fiscal year 2000, sales to CLECs and ILECs
                     accounted for 42% of our total revenues. During the fiscal
                     year ended September 30, 1999, sales to CLECs and ILECs
                     accounted for less than 10% of our total revenues.

 .  Independent Distributors/Dealers.  Our major distributor/dealer in North
               America is Ingram Micro who distributes our broadband Internet
               equipment and Web platform products to ISPs, resellers, and
               value added resellers (VARs). Internationally, we distribute our
               products through approximately 100 distributors in over 30
               countries. In Europe, distributors sell primarily in France,
               Italy and the

                                      11

<PAGE>

       United Kingdom, and, in the Pacific Rim, distributors sell primarily in
       Japan. We provide periodic training in the development of Internet and
       eCommerce infrastructure to VARs who purchase our products primarily
       from distributors. Our agreements with distributors can generally be
       terminated without cause and do not provide for minimum purchase
       commitments. Additionally, the agreements provide price protection and
       grant the distributors limited rights to return unsold inventories of
       our products in exchange for new purchases. Ingram Micro has accounted
       for 11%, 7%, and 10% or our total revenues for fiscal years 2001, 2000
       and 1999, respectively. We do not have a purchase contract with Ingram
       Micro that obligates them to continue to purchase our products. As a
       result, Ingram Micro could cease purchasing our products at any time.

 .  ISPs.  We have formed strategic relationships with ISPs that assist us in
          developing, distributing and marketing our broadband Internet
          equipment and Web platform products. For example, to assist customers
          in establishing their Internet access, Web sites and/or online
          stores, and to increase sales of our products, we have formed, over
          several years, strategic relationships with Verio, UUnet, Onsite
          Access, Inc. (Onsite Access), MegaPath, France Telecom, and more than
          400 other ISPs. Our products can be purchased from an ISP or directly
          from us.

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

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

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

Customer Service and Support

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

   With different service programs, including VPN set up services, we remotely
configure our Internet routers and assist users in setting up service with the
user's telephone company and ISP. Our expertise in solving technical problems
enables us to commit our resources to analyze any problem a customer or end
user may have, even if it involves a product from another company. The effect
of these activities is to build customer loyalty to us as the single source for
broadband Internet equipment solutions.

                                      12

<PAGE>

Research and Development

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

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

   Our Web platform products have been designed to facilitate the integration
of both current and future Internet technologies. We will continue to add new
capabilities to these products, including advanced addressing techniques and
eCommerce reporting enhancements. All functionality will be accessible from
standard PCs running standard Internet browsers.

                                      13

<PAGE>

   We have developed many strategic relationships related to the development of
our products. These relationships enable us to reduce the time to market for
our products, ensure greater interoperability of technologies and equipment,
and leverage the names/brands of our development partners for marketing
purposes. These relationships are listed in the following table.

<TABLE>
<CAPTION>
      Product Development                 Company                     Product
-----------------------------------------------------------------------------------------
<C>                              <S>                        <C>
DSL                              AccessLan                  Broadband Internet equipment
                                 Alcatel
                                 Broadcom
                                 Centillium
                                 Cisco
                                 Conexant
                                 Copper Mountain
                                 Ericsson
                                 Globespan
                                 Hi/fn
                                 Lucent
                                 Metalink
                                 Nokia
                                 Paradyne
-----------------------------------------------------------------------------------------
Voice over DSL                   General Bandwidth          Broadband Internet equipment
                                 Jetstream
                                 TdSoft
                                 Zhone
-----------------------------------------------------------------------------------------
E-commerce                       Card Service International Netopia Web platform
                                 Hewlett-Packard
                                 Oracle
-----------------------------------------------------------------------------------------
Internet/Intranet Communications Marimba                    Timbuktu Pro & netOctopus
                                 Front Range Solutions
                                 Microsoft
                                 Remedy
                                 Tivoli Systems
-----------------------------------------------------------------------------------------
Internet/Intranet Communications Siebel Systems             eCare
</TABLE>

   Historically, we have devoted a significant amount of our resources to
research and development. Research and development expenses were $13.8 million,
$13.3 million and $9.2 million for fiscal years 2001, 2000 and 1999,
respectively. We expect to continue to devote substantial resources to product
and technological development.

Competition

   The markets for our broadband Internet equipment and Web platform products
and services are intensely competitive, highly fragmented and characterized by
rapidly changing technology, evolving industry standards, price competition and
frequent new product introductions. A number of companies offer products that
compete with one or more of our products. We expect competition to intensify as
current competitors expand their product and service offerings and new
competitors enter the market. Increased competition is likely to result in
price reductions, reduced gross margins and loss of market share, any one of
which could seriously harm our business.

   Competitors vary in size, scope and breadth of the products and services
offered. Our current and prospective competitors include original equipment
manufacturers, product manufacturers of broadband Internet

                                      14

<PAGE>

equipment, developers of Internet presence and Web site and eCommerce software,
developers of remote control and collaboration software, and developers of Web
based help desk applications.

   In the broadband Internet equipment market, we primarily compete with Cisco,
Siemens (through its Efficient Networks subsidiary), Lucent, Linksys Group,
Inc. (Linksys), 2Wire, Inc. (2Wire), Polycom, Inc. (Polycom) (in the integrated
access device market only), and ZyXEL Communications Company (ZyXEL).

   In the market for Web sites and eCommerce platforms, we encounter
competition primarily from Big Step, Nextron, Trellix, and Web Site Pros. In
the market for our remote control and enterprise software, we primarily
encounter competition from Computer Associates, Intel, Microsoft, Vector
Networks, Symantec and Tivoli Systems (IBM). We anticipate intense competition
from some of these companies because some of these competitors provide their
products to consumers at no cost. For example, Microsoft has available at no
cost a communications and collaboration software product that could limit the
market for Timbuktu Pro.

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

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

 . Product feature, function and reliability;

 . Customer service and support;

 . Price and performance;

 . Ease of use;

 . Brand name recognition;

 . Strategic alliances;

 . Size and scope of distribution channels;

 . Timeliness of new product introductions;

 . Breadth of product line; and

 . Size and loyalty of customer base.

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

Intellectual Property and Other Proprietary Rights

   Our ability to compete is dependent in part on our proprietary rights and
technology. We rely primarily on a combination of patent, copyright, trademark
and trade secret laws, confidentiality procedures and contractual provisions to
protect our proprietary rights. We generally enter into confidentiality or
license agreements with our employees, consultants, resellers, distributors,
customers and potential customers and limit access to the distribution of our
software, hardware designs, documentation and other proprietary information.
However, in some instances, we may find it necessary to release our source code
to certain parties.

                                      15

<PAGE>

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

Employees

   As of December 14, 2001, we employed 329 persons, including 98 in sales and
marketing, 107 in research and development, 64 in customer service and support,
28 in manufacturing operations, and 32 in general and administrative functions.
We also contract with consultants who provide us short and long-term services
in various areas of our business.

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

Item 2.  Properties

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

   Since our California facilities are located near major earthquake fault
lines in the San Francisco Bay area, our business could be seriously harmed in
the event of a major earthquake.

   As of September 30, 2001 we had under lease:

 .  49,047 square feet of office space for our headquarters in Alameda,
          California. This facility is used for research and development,
          administration, customer service and sales and marketing activities
          for our broadband Internet equipment and Web platform products and is
          leased for a five-year term, expiring on December 31, 2002. We have a
          five-year renewal option on this facility which, if exercised, would
          commence on January 1, 2003.

  .  A portion (currently approximately 14,406 square feet) of a 28,813 square
       foot warehouse in San Leandro, California to accommodate our
       distribution center, where we receive and maintain our

                                      16

<PAGE>

       inventory and ship our broadband Internet equipment products. This
       facility is currently subleased from Farallon Communications, a
       subsidiary of Proxim, Inc. (Proxim), for a term expiring on December 31,
       2002. We have a five-year renewal option on this space which, if
       exercised, would commence on January 1, 2003.

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

 .  7,061 square feet of office space for research and development activities
         related to our broadband Internet equipment products in Fremont,
         California. This facility is currently leased for a five-year term,
         expiring on December 1, 2004.

 .  7,847 square feet of office space for telesales activities related to our
         Web platform products in Addison, Texas. The facility is currently
         leased for a five-year term, expiring on July 31, 2003.

 .  4,249 square feet of office space for research and development activities
         related to our Web platform products in Orem, Utah. The facility is
         currently leased for a three-year term, expiring February 28, 2002.

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

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

   In connection with our acquisition of Cayman in October 2001, we assumed the
lease of 24,200 square feet of office space in Billerica, Massachusetts. We
intend to use this facility for research and development and customer service
activities related to our broadband Internet equipment products. 19,291 square
feet of this facility is subleased from Eastman Kodak Company for a five-year
term expiring on March 31, 2005. We have a three-year, nine-month renewal
option on this space which, if exercised, would commence on April 1, 2005.
4,909 square feet of this facility is leased for a five-year term, expiring on
March 31, 2005. We have a three-year renewal option on this space which, if
exercised, would commence on April 1, 2005.

Item 3. Legal Proceedings

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

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

   There were no matters submitted to a vote of our security holders during the
fiscal fourth quarter ended September 30, 2001.

                                      17

<PAGE>

Item 4A. Executive Officers of the Registrant

   Our executive officers, and their ages as of December 14, 2001, are as
follows:

<TABLE>
<CAPTION>
       Name         Age                         Position
       ----         ---                         --------
<C>                 <C> <S>
Alan B. Lefkof..... 48  President, Chief Executive Officer and Director
William D. Baker... 55  Senior Vice President and Chief Financial Officer
Brooke A. Hauch.... 53  Senior Vice President and Chief Information Officer
David A. Kadish.... 49  Senior Vice President, General Counsel and Secretary
Jeffrey G. Porter.. 38  Vice President, Marketing
Thomas A. Skoulis.. 45  Senior Vice President and General Manager, Web Platforms
Michael P. Trupiano 45  Senior Vice President and General Manager, Internet
                          Equipment
</TABLE>

   Mr. Lefkof. Alan B. Lefkof joined Netopia as President and a member of the
Board of Directors in August 1991 and has been Chief Executive Officer since
November 1994. Prior to joining Netopia, Mr. Lefkof served as President of GRiD
Systems, and as a Management Consultant at McKinsey & Company. Mr. Lefkof
received a B.S. in computer science from the Massachusetts Institute of
Technology in 1975 and an M.B.A. from Harvard Business School in 1977.

   Mr. Baker. William D. Baker, Senior Vice President and Chief Financial
Officer, joined Netopia in July 2001. Prior to joining Netopia, Mr. Baker was
Vice President and Chief Financial Officer at BITMICRO NETWORKS, Inc., a
developer of solid-state storage devices, from June 2000 through April 2001.
Before joining BITMICRO NETWORKS, Inc., Mr. Baker was Vice President and Chief
Financial Officer at the JPM Company, an international manufacturer of wire
harness and cable assemblies for the computer, networking and
telecommunications industries, from January 1996 through June 2000. Mr. Baker
received a B.A. in Business Administration from St. Francis College in 1969 and
is a Certified Public Accountant.

   Ms. Hauch. Brooke A. Hauch, Senior Vice President and Chief Information
Officer, joined Netopia in October 1991 as Director, MIS. Ms. Hauch was
appointed Vice President and Chief Information Officer in May 1997, and became
Senior Vice President in October 2000. Prior to joining Netopia, Ms. Hauch
served in various positions at Argonaut Information Systems, Inc., Ross
Systems, Inc. and Blue Cross of Northern California. Ms. Hauch holds a
bachelor's degree in business from Arizona State University.

   Mr. Kadish. David A. Kadish, Senior Vice President, General Counsel and
Secretary, joined Netopia in June 1999. Prior to joining Netopia, Mr. Kadish
provided legal consulting services to Netopia from September 1996 to June 1999.
Mr. Kadish operated an independent legal consulting practice from May 1996 to
June 1999. He previously served in various corporate legal positions at the
Electric Power Research Institute, Integral Systems and BRAE Corporation, and
as an associate at Morrison & Foerster. Mr. Kadish received a B.A. in American
history from University of California at Santa Cruz in 1973, an M.A. in
American history from Brandeis University in 1974 and a J.D. from Yale
University in 1979.

   Mr. Porter. Jeffrey G. Porter, Vice President, Marketing, joined Netopia in
July 1991 as Inside Sales Representative. Mr. Porter was appointed Vice
President, Timbuktu Marketing in November 1999, and he became Vice President,
Web Platform Marketing in November 2000. He was appointed to his current
position in October 2001. He previously held various sales positions at
Logitech Corporation. Mr. Porter a B.A. in Management Science from University
of California at San Diego in 1986.

   Mr. Skoulis. Thomas A. Skoulis, Senior Vice President and General Manager,
Web Platforms, joined Netopia in September 1991 as Corporate Accounts Manager.
Mr. Skoulis was appointed Vice President, North America Sales in October 1994,
and became Senior Vice President in February 1997. Prior to joining Netopia,
Mr. Skoulis held various sales management positions with 3Com and Digital
Equipment Corporation. Mr. Skoulis received a B.A. in business administration
from Miami University in Oxford, Ohio, in 1980.

                                      18

<PAGE>

   Mr. Trupiano. Michael P. Trupiano, Senior Vice President and General
Manager, Internet Equipment, joined Netopia in May 1992 as Hardware Development
Manager. Mr. Trupiano was appointed Vice President, Networks Systems
Development in October 1994, and became Senior Vice President and General
Manager in October 1998. Prior to joining Netopia, Mr. Trupiano served in
product development and engineering management positions at Verifone, Isix and
Amtel Systems. Mr. Trupiano received a B.S. in electrical engineering and
computer science from Santa Clara University in 1978.

                                      19

<PAGE>

                                    PART II

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

   Since our initial public offering in June 1996, our Common Stock has been
traded on the Nasdaq National Market. We were originally listed under the
symbol FRLN. In November 1997, after we changed our name from Farallon
Communications, Inc. to Netopia, Inc., our symbol changed to NTPA. The
following table sets forth the range of quarterly intra-day high and low sale
prices of our Common Stock on the Nasdaq National Market for the last three
fiscal years ended September 30, 2001, 2000 and 1999.

<TABLE>
<CAPTION>
                                              2001           2000            1999
                                         -------------- --------------- ---------------
                                          High    Low    High     Low    High     Low
                                         ------- ------ ------- ------- ------- -------
<S>                                      <C>     <C>    <C>     <C>     <C>     <C>
Fourth fiscal quarter ended September 30 $ 6.850 $2.900 $57.250 $10.750 $42.625 $17.375
Third fiscal quarter ended June 30......   7.560  2.125  74.938  27.000  37.000   8.250
Second fiscal quarter ended March 31....  10.125  1.938  92.000  47.000   9.938   5.250
First fiscal quarter ended December 31.. $14.188 $3.313 $63.875 $37.250 $11.250 $ 3.625
</TABLE>

   On December 14, 2001, we had 167 stockholders of record and 18,114,924
shares of our Common Stock outstanding. The closing price of our Common Stock
as reported on the Nasdaq National Market was $6.20 per share. Historically, we
have neither declared nor paid cash dividends on our Common Stock, and we
expect this trend to continue.

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

    .  Variations in our quarterly operating results;

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

    .  Changes in market valuations of similar companies;

    .  Announcements by us or our competitors of technological innovations, new
       products or enhancements, significant contracts, acquisitions, strategic
       partnerships, joint ventures or capital commitments;

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

    .  Additions or departures of key personnel;

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

    .  General conditions in the broadband communications industry, in
       particular the DSL market, or the domestic and worldwide economies;

    .  Decreases or delays in purchases by significant customers;

    .  Ashortfall in revenue or earnings from securities analysts' expectations
       or other announcements by securities analysts;

    .  Our ability to protect and exploit our intellectual property or defend
       against the intellectual property rights of others; and

    .  Developments in our relationships with customers, distributors and
       suppliers.

   In recent years the stock market in general, and the market for shares of
high technology stocks in particular, have experienced extreme price
fluctuations, which often have been unrelated to the operating performance of
affected companies. There can be no assurance that the market price of our
Common Stock will not experience significant fluctuations in the future,
including fluctuations that are unrelated to our performance.

                                      20

<PAGE>

Item 6. Selected Financial Data

   In the tables below, we provide you with our selected consolidated financial
data. We have prepared this information using our audited consolidated
financial statements for the fiscal years ended September 30, 2001, 2000, 1999,
1998 and 1997.

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

<TABLE>
<CAPTION>
                                                                     Fiscal years ended September 30,
                                                              ----------------------------------------------
                                                                2001      2000     1999      1998     1997
                                                              --------  --------  -------  --------  -------
                                                               (in thousands, except for per share amounts)
<S>                                                           <C>       <C>       <C>      <C>       <C>
Revenues:
   Internet equipment........................................ $ 58,861  $ 65,546  $24,460  $ 10,885  $ 8,133
   Web platform licenses and services........................   18,457    24,660   19,691    13,951   12,037
                                                              --------  --------  -------  --------  -------
      Total revenues.........................................   77,318    90,206   44,151    24,836   20,170
 Cost of revenues:
   Internet equipment........................................   39,165    46,582   15,597     7,064    5,256
   Web platform licenses and services........................      795       697      646       891    1,140
                                                              --------  --------  -------  --------  -------
      Total cost of revenues.................................   39,960    47,279   16,243     7,955    6,396
                                                              --------  --------  -------  --------  -------
          Gross profit.......................................   37,358    42,927   27,908    16,881   13,774
 Operating expenses:
   Research and development..................................   13,836    13,324    9,211     7,201    7,177
   Selling and marketing.....................................   27,144    25,842   20,221    14,404   11,288
   General and administrative [a]............................    7,528     6,554    3,654     3,380    2,945
   Acquired in-process research and development [b]..........       --     8,658    4,205        --       --
   Amortization of goodwill and other intangible assets [c]..   11,984     9,746      543        --       --
   Impairment of goodwill and other intangible assets [d]....   16,375        --       --        --       --
   Restructuring costs [e]...................................    1,073        --       --        --       --
   Terminated merger costs [f]...............................    2,640        --       --        --       --
                                                              --------  --------  -------  --------  -------
      Total operating expenses...............................   80,580    64,124   37,834    24,985   21,410
                                                              --------  --------  -------  --------  -------
          Operating loss.....................................  (43,222)  (21,197)  (9,926)   (8,104)  (7,636)
 Other income, net...........................................    1,510     3,579    2,066     2,222    1,869
                                                              --------  --------  -------  --------  -------
      Loss from continuing operations before
        income taxes.........................................  (41,712)  (17,618)  (7,860)   (5,882)  (5,767)
 Income tax provision (benefit)..............................       --        --       --     2,155   (2,217)
                                                              --------  --------  -------  --------  -------
      Loss from continuing operations........................  (41,712)  (17,618)  (7,860)   (8,037)  (3,550)
 Cumulative effect from adoption of Staff Accounting Bulletin
   (SAB) 101 [g].............................................   (1,555)       --       --        --       --
 Discontinued operations, net of taxes [h]...................      156     2,481       --    (2,496)   3,021
                                                              --------  --------  -------  --------  -------
          Net loss........................................... $(43,111) $(15,137) $(7,860) $(10,533) $  (529)
                                                              ========  ========  =======  ========  =======
 Per share data, continuing operations:
   Basic and diluted loss per share.......................... $  (2.33) $  (1.05) $ (0.60) $  (0.69) $ (0.31)
                                                              ========  ========  =======  ========  =======
   Shares used in the per share calculations.................   17,902    16,830   13,092    11,687   11,335
                                                              ========  ========  =======  ========  =======
 Per share data, net loss:
   Basic and diluted loss per share.......................... $  (2.41) $  (0.90) $ (0.60) $  (0.90) $ (0.05)
                                                              ========  ========  =======  ========  =======
   Shares used in the per share calculations.................   17,902    16,830   13,092    11,687   11,335
                                                              ========  ========  =======  ========  =======
</TABLE>

                                      21

<PAGE>

<TABLE>
<CAPTION>
                                                               September 30,
                                                  ----------------------------------------
                                                   2001     2000    1999    1998    1997
                                                  ------- -------- ------- ------- -------
                                                               (in thousands)
<S>                                               <C>     <C>      <C>     <C>     <C>
Balance Sheet Data:
Cash, cash equivalents and short-term investments $48,996 $ 59,777 $69,483 $42,095 $41,636
Working capital..................................  56,593   72,292  75,394  38,152  49,979
Total assets.....................................  82,712  128,373  95,969  56,292  61,001
Long-term liabilities............................     256      328     544     260     361
Total stockholders' equity [i]................... $71,713 $112,289 $85,079 $44,801 $53,977
</TABLE>
--------
[a] General and administrative expense includes $2.9 million and $1.9 million
    of incremental provisions for doubtful accounts in fiscal years 2001 and
    2000, respectively. (See Note 1 of Notes to Consolidated Financial
    Statements.)

[b] Represents the amount of purchase price we allocated to in-process research
    and development in connection with acquisitions of WebOrder and StarNet in
    fiscal year 2000 and our acquisitions of Serus LLC (Serus) and netOctopus
    in fiscal year 1999. (See Note 2 of Notes to Consolidated Financial
    Statements.)

[c] Represents amortization of the amounts we allocated to goodwill and other
    intangible assets related to our acquisitions of WebOrder, StarNet, Serus
    and netOctopus. (See Note 2 of Notes to Consolidated Financial Statements.)

[d] Represents the estimated impairment and write-down of the amounts we
    allocated to goodwill and other intangible assets related to our
    acquisitions of WebOrder, StarNet and Serus. (See Note 2 of Notes to
    Consolidated Financial Statements.)

[e] Represents the charge we recorded in connection with a reduction in our
    workforce and costs to exit certain business activities. (See Note 11 of
    Notes to Consolidated Financial Statements.)

[f] Represents the charge we recorded in connection with the terminated merger
    with Proxim. (See Note 12 of Notes to Consolidated Financial Statements.)

[g] Represents our adoption of SAB 101, Revenue Recognition in Financial
    Statements, for Web platform license sales that provided for nonrefundable
    upfront payments. (See Note 1 of Notes to Consolidated Financial
    Statements.)

[h] Represents the disposition of our LAN Division. (See Note 3 of Notes to
    Consolidated Financial Statements.)

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

                                      22

<PAGE>

   The following tables set forth certain unaudited selected quarterly results
of operations data for the eight quarters ended September 30, 2001. This data
has been derived from our unaudited condensed consolidated financial statements
that, in our opinion, include all adjustments (consisting only of normal
recurring adjustments) necessary for a fair presentation of such information.
It is important that when you read this information you also read Item 7,
Management's Discussion and Analysis of Financial Condition and Results of
Operations, and our annual audited consolidated financial statements and
related notes thereto appearing elsewhere in this Form 10-K.

<TABLE>
<CAPTION>
                                                                         Three months ended,
                                               -----------------------------------------------------------------------
                                               Sep. 30,  Jun. 30, Mar. 31, Dec. 30, Sep. 30, Jun. 30, Mar. 31, Dec. 30,
                                                 2001      2001     2001     2000     2000     2000     2000     1999
                                               --------  -------- -------- -------- -------- -------- -------- --------
                                                               (in thousands, except per share amounts)
<S>                                            <C>       <C>      <C>      <C>      <C>      <C>      <C>      <C>
Revenues:
   Internet equipment......................... $ 13,080  $14,478  $16,458  $14,845  $16,913  $22,134  $15,660  $10,839
   Web platform licenses and services.........    4,056    4,483    4,370    5,548    6,690    6,381    6,136    5,453
                                               --------  -------  -------  -------  -------  -------  -------  -------
      Total revenues..........................   17,136   18,961   20,828   20,393   23,603   28,515   21,796   16,292
Cost of revenues:
   Internet equipment.........................    8,872    9,653   10,845    9,795   12,633   15,461   10,879    7,609
   Web platform licenses and services.........      187      182      225      201      229      222      124      122
                                               --------  -------  -------  -------  -------  -------  -------  -------
      Total cost of revenues..................    9,059    9,835   11,070    9,996   12,862   15,683   11,003    7,731
                                               --------  -------  -------  -------  -------  -------  -------  -------
         Gross profit.........................    8,077    9,126    9,758   10,397   10,741   12,832   10,793    8,561
Operating expenses:
   Research and development...................    3,460    3,444    3,263    3,669    3,684    3,499    3,143    2,998
   Selling and marketing......................    5,878    6,577    7,504    7,185    7,037    6,886    6,272    5,647
   General and administrative.................    1,015    2,010    1,360    3,143    3,196    1,065    1,317      976
   Acquired in-process research and
    development...............................       --       --       --       --       --       --    2,990    5,668
   Amortization of goodwill and other
    intangible assets.........................    2,996    2,996    2,996    2,996    2,996    3,003    2,038    1,709
   Impairment of goodwill and other
    intangible assets.........................   16,375       --       --       --       --       --       --       --
   Restructuring costs........................       --       --    1,073       --       --       --       --       --
   Terminated merger costs....................       --       --    2,640       --       --       --       --       --
                                               --------  -------  -------  -------  -------  -------  -------  -------
      Total operating expenses................   29,724   15,027   18,836   16,993   16,913   14,453   15,760   16,998
                                               --------  -------  -------  -------  -------  -------  -------  -------
         Operating loss.......................  (21,647)  (5,901)  (9,078)  (6,596)  (6,172)  (1,621)  (4,967)  (8,437)
Other income, net.............................      440      509      569       (8)     916      943      892      828
                                               --------  -------  -------  -------  -------  -------  -------  -------
   Loss from continuing operations before
    cumulative effect from adoption of
    SAB 101 and before gain on sale of
    discontinued operation....................  (21,207)  (5,392)  (8,509)  (6,604)  (5,256)    (678)  (4,075)  (7,609)
   Cumulative effect from adoption of
    SAB 101...................................       --       --       --   (1,555)      --       --       --       --
Discontinued operations, net of taxes.........      156       --       --       --       --    1,334       --    1,147
                                               --------  -------  -------  -------  -------  -------  -------  -------
         Net loss............................. $(21,051) $(5,392) $(8,509) $(8,159) $(5,256) $   656  $(4,075) $(6,462)
                                               ========  =======  =======  =======  =======  =======  =======  =======
Per share data, continuing operations:
   Basic and diluted loss per share........... $  (1.18) $ (0.30) $ (0.48) $ (0.38) $ (0.30) $ (0.04) $ (0.25) $ (0.47)
                                               ========  =======  =======  =======  =======  =======  =======  =======
   Shares used in the per share calculations..   18,020   17,882   17,819   17,607   17,470   17,239   16,564   16,047
                                               ========  =======  =======  =======  =======  =======  =======  =======
Per share data, net loss:
   Basic and diluted loss per share........... $  (1.17) $ (0.30) $ (0.48) $ (0.46) $ (0.30) $  0.04  $ (0.25) $ (0.40)
                                               ========  =======  =======  =======  =======  =======  =======  =======
   Shares used in the per share calculations..   18,020   17,882   17,819   17,607   17,470   17,239   16,564   16,047
                                               ========  =======  =======  =======  =======  =======  =======  =======
</TABLE>

                                      23

<PAGE>

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

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

Events Occurring After September 30, 2001

   In October 2001, we acquired Cayman, a privately held developer and supplier
of business class broadband gateways consisting primarily of ADSL and Cable
Ethernet routers. The Cayman acquisition expanded our customer base to include
Cayman's existing base of ILEC customers such as SBC and BellSouth, and
Comcast, a leading cable provider. Pursuant to the Merger Agreement, we paid an
aggregate of $15.1 million consisting of: $6.0 million in exchange for all of
Cayman's outstanding equity, including in-the-money stock options; $4.2 million
in exchange for all of Cayman's outstanding convertible debt; $2.3 million in
respect of an outstanding credit line of Cayman; $0.8 million in fees to
Cayman's investment bankers, attorneys and accountants; $0.7 million in
severance benefits to Cayman employees that were not retained; and $1.1 million
of transaction costs we incurred which included accounting, legal and other
professional services. These payments were made out of our general working
capital. We also assumed certain other liabilities of Cayman. The acquisition
will be accounted for under the purchase method and is expected to result in a
one-time charge for acquired in-process research and development of
approximately $2.2 million. (See Note 2 of Notes to Consolidated Financial
Statements.)

   The Cayman acquisition has involved numerous risks, including the use of
significant amounts of our cash, diversion of the attention of our management
from our core business and significant expenses and write-offs. Incremental
acquisition related charges including in-process research and development will
adversely impact our profitability. If we are unable to retain the customers
and/or employees acquired, maintain the quality of the products we acquired and
timely and successfully develop, manufacture and gain market acceptance of the
products which were under development at the time of the acquisition our
business will be seriously harmed. Additionally, we will be at risk of having
to record additional acquisition related charges, including the impairment of
goodwill, which will adversely impact our profitability.

Overview

   We develop, market and support broadband Internet equipment and Web platform
software solutions. Our platforms are designed to enable our telecommunications
carrier, distributor and ISP customers create and offer expanded broadband
service offerings focused on the needs of distributed enterprises, small and
medium size businesses, small office/home office professionals, and multi-PC
households. These service offerings often include DSL service bundled with
back-up, bonding, VPN, voice over DSL, and eSite and eStore hosting.

   Our broadband Internet equipment products consist principally of DSL routers
and IADs which enable the transmission of data and/or voice over DSL networks
as well as Cable Ethernet, T1/Frame Relay, ISDN and dual analog routers. Our
Web platform software products consist principally of the eSite, eStore and
eCare products, sold through our telecommunications carrier partners that
provide Web sites and eCommerce enabled Web sites

                                      24

<PAGE>

as well as eCRM and system management software, and Timbuktu Pro products,
primarily sold to enterprise and distribution customers that provide help desk
and systems management applications.

   We primarily sell our products to:

    .  ILECs, such as SBC, BellSouth and Verizon, and CLECs, such as Covad and
       McLeodUSA Inc. (McLeod);

    .  Distributors, such as Ingram Micro, Inc. (Ingram Micro), Groupe Softway
       (Softway) and Tech Data Corporation (Tech Data);

    .  ISPs, such as Business Telecommunications, Inc. (Business
       Telecommunications) and Onsite Access; and

    .  Directly to end-users.

   We have historically depended upon the ability of CLECs and ISPs to offer
broadband services successfully and become sustainable businesses. Several of
our CLEC and ISP customers have incurred operating losses and negative cash
flows as they establish their networks and operations. Most notably, Covad,
which currently is our largest customer, filed a voluntary petition under the
Bankruptcy Act in August 2001 as part of a capital restructuring plan. On
November 13, 2001, Covad announced that it had secured an agreement with SBC to
provide Covad with $150 million in funding. Covad announced on December 13,
2001 that it received approval of its reorganization plan from the Bankruptcy
Court, and that it expects to emerge from bankruptcy around December 20, 2001.
The SBC funding would take place at that time, subject to normal closing
conditions. Additionally, Covad has announced that this funding is expected to
provide the cash that it believes will allow it to become cash flow positive by
the latter half of 2003.

   As a result of the financial difficulties experienced by our CLEC and ISP
customers, we have increased our efforts to expand our customer base to include
ILEC customers. Our acquisition of Cayman, and the ADSL router products that
Cayman has been selling to existing ILEC customers, has enabled us to continue
to expand into this channel. We intend to continue to try and expand our ILEC
customer base and as such, expect that an increasing portion of our broadband
Internet equipment revenue will be derived from a relatively small number of
ILECs. We expect that in order to compete effectively within the small number
of ILEC customers, we may be forced to lower the selling prices for our
broadband Internet equipment which would adversely effect our revenues and
gross margins.

                                      25

<PAGE>

Results of Operations for Fiscal Years Ended September 30, 2001, 2000 and 1999

   The following table sets forth for the periods indicated, certain statement
of operations data, such data expressed as a percentage of revenues as well as
the change from the prior year.
<TABLE>
<CAPTION>
                                                                                         Increase
                                                                                        (Decrease)
                                                                                           From
                                                        September 30,                   Prior Year
                                        --------------------------------------------   ------------
                                             2001            2000            1999      2001   2000
                                        -------------   -------------   ------------   ----   -----
                                                       ($ in thousands)
<S>                                     <C>       <C>   <C>       <C>   <C>      <C>   <C>    <C>
Revenues:
    Internet equipment................. $ 58,861   76%  $ 65,546   73%  $24,460   55%   (10%)   168%
    Web platform licenses and
     services..........................   18,457   24%    24,660   27%   19,691   45%   (25%)    25%
                                        --------  ---   --------  ---   -------  ---   ----   -----
       Total revenues..................   77,318  100%    90,206  100%   44,151  100%   (14%)   104%
Cost of revenues:
    Internet equipment.................   39,165   51%    46,582   52%   15,597   35%   (16%)   199%
    Web platform licenses and
     services..........................      795    1%       697    1%      646    2%    14%      8%
                                        --------  ---   --------  ---   -------  ---   ----   -----
       Total cost of revenues..........   39,960   52%    47,279   53%   16,243   37%   (15%)   191%
                                        --------  ---   --------  ---   -------  ---   ----   -----
          Gross profit.................   37,358   48%    42,927   47%   27,908   63%   (13%)    54%
Operating expenses:
    Research and development...........   13,836   18%    13,324   15%    9,211   21%     4%     45%
    Selling and marketing..............   27,144   35%    25,842   28%   20,221   46%     5%     28%
    General and administrative.........    7,528   10%     6,554    7%    3,654    8%    15%     79%
    Acquired in-process research and
     development.......................       --   --%     8,658   10%    4,205   10%  (100%)   106%
    Amortization of goodwill and
     other intangible assets...........   11,984   15%     9,746   11%      543    1%    23%  1,695%
    Impairment of goodwill and other
     intangible assets.................   16,375   21%        --   --%       --   --%    --%     --%
    Restructuring costs................    1,073    1%        --   --%       --   --%    --%     --%
    Terminated merger costs............    2,640    4%        --   --%       --   --%    --%     --%
    Total operating expenses              80,580  104%    64,124   71%   37,834   86%    26%     69%
                                        --------  ---   --------  ---   -------  ---   ----   -----
          Operating loss...............  (43,222) (56%)  (21,197) (24%)  (9,926) (23%)  104%    114%
Other income, net......................    1,510    2%     3,579    4%    2,066    5%   (58%)    73%
                                        --------  ---   --------  ---   -------  ---   ----   -----
    Loss from continuing operations
     before cumulative effect from
     adoption of SAB 101 and before
     gain on sale of discontinued
     operations, net of taxes..........  (41,712) (54%)  (17,618) (20%)  (7,860) (18%)  137%    124%
    Cumulative effect from adoption
     of SAB 101........................   (1,555)  (2%)       --   --%       --   --%    --%     --%
Discontinued operations, net of taxes..      156    0%     2,481    3%       --   --%   (94%)    --%
                                        --------  ---   --------  ---   -------  ---   ----   -----
          Net loss..................... $(43,111) (56%) $(15,137) (17%) $(7,860) (18%)  185%     93%
                                        ========  ===   ========  ===   =======  ===   ====   =====
</TABLE>

Revenues

   Total revenue for fiscal year 2001 decreased from fiscal year 2000 primarily
due to decreased revenue from our broadband Internet equipment and Web platform
products.

    .  Broadband Internet equipment revenue decreased primarily due to
       declining average selling prices of our broadband Internet equipment,
       particularly our DSL routers, worldwide as a result of price competition
       and pricing strategies as we enter new markets and channels; decreased
       sales of our

                                      26

<PAGE>

       broadband Internet equipment products, particularly our DSL routers in
       the United States, primarily as a result of the financial and
       operational difficulties encountered by our CLEC customers such as
       Covad, Northpoint Communications, Inc. (Northpoint) and Rhythms ; and,
       decreased sales of our ISDN routers in Europe primarily as a result of
       growing demand for DSL Internet services that are replacing the use of
       ISDN Internet services in the European markets in which we distribute
       our broadband Internet equipment products. These decreases were
       partially offset by increased sales of our DSL routers in Europe.

 .  Web platform revenue decreased primarily due to reduced license sales of our
       eSite and eStore products and reduced sales of Timbuktu Pro, our system
       management software, partially offset by increased recurring revenue
       from the hosting of our eSite and eStore products. Sales of our Web
       platform products decreased as a result of companies reducing their IT
       spending as a result of the current macro-economic environment and as a
       result of the financial difficulties encountered by the ".com" customers
       to whom we licensed our eSite and eStore products.

   Total revenue for fiscal year 2000 increased from fiscal year 1999 primarily
due to increased revenue from our broadband Internet equipment and Web platform
products.

 .  Broadband Internet equipment revenue increased primarily due to increased
             sales of our DSL routers in the United States, most notably to
             CLECs such as Covad and Northpoint as they began rolling out their
             DSL networks, partially offset by declining average selling
             prices. In addition, broadband Internet equipment revenue in
             fiscal year 2000 included sales of our DSL routers that are
             interoperable with Nokia's central office equipment which were not
             available during fiscal year 1999. These increases were partially
             offset by decreased sales of our ISDN Internet routers in the
             United States as demand for DSL products increased.

 .  Web platform revenue increased primarily due to increased license sales of
       our eSite and eStore products as a result of increased spending by
       ".com" customers who were attempting to establish their businesses.

   Historically, we have sold our products primarily to CLECs, distributors,
ILECs, ISPs and directly to end-users. The following table sets forth for the
periods indicated, our customers who have represented greater than 10% of our
revenues in such period, along with such data expressed as a percentage of
total revenues as well as the change from the prior year:

<TABLE>
<CAPTION>
                                                  Increase (Decrease)
                         September 30,              From Prior Year
               ---------------------------------  ------------------
                  2001        2000        1999      2001       2000
               ----------  ----------  ---------  ----        ----
                        ($ in thousands)
<S>            <C>     <C> <C>     <C> <C>    <C> <C>         <C>
Covad [a]..... $12,565 16% $14,812 16% $   -- --% (15%)        --%
Ingram Micro..   8,380 11%   6,162  7%  4,349 10%  36%         42%
Rhythms [b]...   8,204 11%   5,181  6%    751  2%  58%        590%
Northpoint [c]   2,415  3%  10,608 12%  2,469  6% (77%)       330%
</TABLE>
--------
[a] Covad filed a voluntary petition under the Bankruptcy Act in August 2001 as
    part of a capital restructuring plan. On November 13, 2001, Covad announced
    that it had secured an agreement with SBC to provide Covad with $150
    million in funding. Covad announced on December 13, 2001 that it received
    approval of its reorganization plan from the Bankruptcy Court, and that it
    expects to emerge from bankruptcy around December 20, 2001. The SBC funding
    would take place at that time, subject to normal closing conditions.
    Additionally, Covad has announced that this funding is expected to provide
    the cash that it believes will allow it to become cash flow positive by the
    latter half of 2003.

[b] Rhythms received Bankruptcy Court approval and completed the sale of a
    substantial portion of its assets to Worldcom in December 2001.

[c] Northpoint ceased operations during March 2001.

                                      27

<PAGE>

   No other customers for fiscal years 2001, 2000 and 1999 accounted for 10% or
more of our total revenues. For fiscal year 2001, there were three customers
who each individually represented at least 5% of our revenues and in the
aggregate, accounted for 38% of our total revenues. For fiscal year 2000, there
were five customers who each individually represented at least 5% of our total
revenues and in aggregate, accounted for 46% of our total revenues. For fiscal
year 1999, there were two customers who each individually represented at least
5% of our total revenues and in aggregate accounted for 15% of our total
revenues.

   The following table sets forth for the periods indicated, revenues by region
in such period along with such data expressed as a percentage of total revenues
as well as the change from the prior year:

<TABLE>
<CAPTION>
                                                                          Increase (Decrease)
                                               September 30,                From Prior Year
                                   -------------------------------------  ------------------
                                       2001         2000         1999       2001       2000
                                   -----------  -----------  -----------  ----        ----
                                              ($ in thousands)
<S>                                <C>     <C>  <C>     <C>  <C>     <C>  <C>         <C>
Europe............................ $ 9,378  12% $13,558  15% $ 9,820  22% (31%)        38%
Canada............................   1,168   2%   1,689   2%   1,222   3% (31%)        38%
Asia Pacific and other............   1,030   1%   1,215   1%   1,164   3% (15%)         4%
                                   ------- ---  ------- ---  ------- ---  ---         ---
   Subtotal international revenue.  11,576  15%  16,462  18%  12,206  28% (30%)        35%
United States.....................  65,742  85%  73,744  82%  31,945  72% (11%)       131%
                                   ------- ---  ------- ---  ------- ---  ---         ---
       Total revenues............. $77,318 100% $90,206 100% $44,151 100% (14%)       104%
                                   ======= ===  ======= ===  ======= ===  ===         ===
</TABLE>

   International revenues decreased for fiscal year 2001 from fiscal year 2000
primarily due to decreased sales of our ISDN routers in Europe primarily as a
result of growing demand for DSL Internet services that are replacing the use
of ISDN Internet services in the European markets in which we distribute our
broadband Internet equipment products as well as decreased sales of our Web
platform products. These decreases were partially offset by increased sales of
our DSL routers in Europe. International revenues increased for fiscal year
2000 from fiscal year 1999 primarily due to increased sales of our DSL routers.
Although international revenues have been decreasing as a percentage of revenue
for the past two fiscal years, a substantial portion of our revenues are
derived from sales to international customers, and, we expect sales to
international customers to increase in absolute dollars in future quarters.

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

Cost of Revenues

   Cost of revenues consist primarily of material costs related to our contract
manufacturing organization and manufacturing variances. Total cost of revenues
decreased for fiscal year 2001 from fiscal year 2000 primarily as a result of
declining sales of our broadband Internet equipment products, reduced
manufacturing variances as well as our ability to obtain cost reductions from
our contract manufacturers. Our total gross margin increased to 48% for fiscal
year 2001 from 47% for fiscal year 2000. Broadband Internet equipment gross
margin increased to 33% for fiscal year 2001 from 29% for fiscal year 2000.
Broadband Internet equipment gross margins were adversely affected in fiscal
year 2000 due to a $1.1 million inventory charge we recorded in fiscal year
2000 related to the discontinuation of certain non-DSL products (excluding this
charge, broadband Internet equipment gross margins in fiscal year 2000 were
31%). Web platform gross margin decreased to 96% for fiscal year 2001 from 97%
for fiscal year 2000. Excluding the charge we recorded in fiscal year 2000,
broadband Internet

                                      28

<PAGE>

equipment gross margins increased to 33% for fiscal year 2001 from 31% for
fiscal year 2000 primarily due to our ability to obtain cost reductions from
our contract manufacturers who build our products. This improvement in
broadband Internet equipment gross margin was partially offset by declining
average selling prices of our broadband Internet equipment worldwide as a
result of price competition and pricing strategies as we enter new markets and
channels. Web platform gross margin decreased year over year primarily due to
reduced volume license sales of our Web platform products and increased costs
related to supporting our hosting of eSite and eStore products.

   Total cost of revenues increased for fiscal year 2000 from fiscal year 1999
primarily as a result of increased sales of our broadband Internet equipment
products, particularly our DSL routers, increased costs of flash memory chips,
capacitors and other components used in our DSL routers, as well as increased
manufacturing variances. Our manufacturing variances increased primarily as a
result of an inventory charge of $1.1 million related to the discontinuation of
certain non-DSL products. Our total gross margin decreased to 47% for fiscal
year 2000 from 63% for fiscal year 1999. Broadband Internet equipment gross
margin decreased to 29% in fiscal year 2000 from 36% for fiscal year 1999. Web
platform gross margin remained unchanged at 97% for fiscal years 2000 and 1999.
Total gross margin decreased year over year primarily due to the increased
sales of our broadband Internet equipment products which carry a lower gross
margin than our software products. Broadband Internet equipment gross margin
decreased year over year primarily due to:

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

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

  . An inventory charge of $1.1 million taken related to the discontinuation of
       certain non-DSL products.

   We expect to face pricing pressures related to our broadband Internet
equipment products, particularly related to our ADSL routers in the ILEC
channel. Currently, our ADSL routers and the ADSL router products we acquired
in connection with the Cayman acquisition, carry a lower gross margin than our
other broadband Internet equipment products. To the extent the portion of
revenue derived from ILEC customers increases, we expect that our gross margins
would decrease.

Research and Development

   Research and development expenses consist primarily of employee related
expenses, depreciation and amortization, development related expenses such as
product prototyping, design and testing, and overhead allocations. Research and
development expenses increased for fiscal year 2001 from fiscal year 2000
primarily due to:

 . Increased development expenses and use of third party contractors primarily
            related to development of new DSL IAD and router products;

 . Increased telecom, facility and overhead costs; and

 . Increased employee related expenses.

   Research and development expenses increased for fiscal year 2000 from fiscal
year 1999 primarily due to:

 . Increased headcount and employee related expenses related to our broadband
            Internet equipment and Web platform products in connection with our
            acquisitions of StarNet in October 1999 and WebOrder in March 2000;
            and

 . Increased development expenses related to the DSL IAD technology acquired in
            connection with the StarNet acquisition and Web platform products
            acquired in connection with the WebOrder acquisition.

   We expect to continue to devote substantial resources to product and
technological development. We expect research and development costs will
increase in absolute dollars in fiscal 2002 primarily as a result of the

                                      29

<PAGE>

Cayman acquisition and the integration of the people, products and operations
acquired into our research and development organization. We believe our process
for developing software is essentially completed concurrently with the
establishment of technological feasibility, and we have not capitalized any
internal software development costs to date. However, during fiscal year 2001,
the Company capitalized $1.1 million and during each of fiscal years 2000 and
1999, the Company capitalized $0.7 million of product development costs
incurred subsequent to delivery of a working model, under a development
agreement with a third party.

Selling and Marketing

   Selling and marketing expenses consist primarily of salary and commission
expense for our sales force, travel and entertainment, advertising and
promotional expenses, product marketing, customer service and support costs.
Selling and marketing expenses increased for fiscal year 2001 from 2000
primarily due to increased headcount and employee related expenses as a result
of our efforts to expand the number of channels through which we sell our
products. These increases were partially offset by reduced advertising and
promotional expenses.

   Selling and marketing expenses increased for fiscal year 2000 from fiscal
year 1999 primarily due to increased hiring of additional selling, marketing
and customer support personnel and their related expenses, including
commissions and travel and entertainment, related to developing the sales and
marketing channels through which we sell our product.

   We expect selling and marketing costs will increase in absolute dollars in
fiscal 2002 primarily as a result of the Cayman acquisition and the integration
of the people, products and operations acquired into our sales and marketing
organization.

General and Administrative

   General and administrative expenses consist primarily of employee related
expenses, provisions for doubtful accounts and legal, accounting and insurance
costs. General and administrative expenses increased for fiscal year 2001 from
fiscal year 2000 primarily due to incremental provisions for doubtful accounts
for outstanding accounts receivable owed by our CLEC customers who filed
voluntary petitions under the Bankruptcy Act and many of which ceased
operations during our fiscal year 2001 as well as increased employee related
expenses and insurance costs. Our incremental provisions for doubtful accounts
increased $1.0 million to $2.9 million for fiscal year 2001 from $1.9 million
for fiscal year 2000.

   General and administrative expenses increased for fiscal year 2000 from
fiscal year 1999 primarily due to recording an incremental provision for
doubtful accounts for outstanding accounts receivable owed by Jato
Communications, Inc. (Jato), a CLEC customer that ceased operations and
transferred its assets to secured creditors; increased occupancy costs related
to our Alameda facility, including increased telecom expenses; and increased
headcount and other employee related expenses including employee recruitment
costs.

   During fiscal year 2001, we recorded $2.9 million in incremental provisions
for doubtful accounts, of which approximately $1.7 million was related to the
outstanding accounts receivable of Northpoint.

   During fiscal year 2000, we recorded $1.9 million in incremental provisions
for doubtful accounts related to the outstanding accounts receivable of Jato.

Acquired in-process Research and Development

   Acquired in process research and development represents research and
development assets acquired in connection with our acquisitions of WebOrder,
StarNet, Serus and netOctopus that were not technologically feasible at the
time of acquisition and had no alternative future use, and as such were
expensed at the time of the transaction.

                                      30

<PAGE>

   For fiscal year 2000, we allocated a charge of approximately $3.0 million of
the purchase price of WebOrder and approximately $5.7 million of the purchase
price of StarNet to acquired in-process research and development. For fiscal
year 1999, we allocated a charge of approximately $3.9 million of the purchase
price of Serus and approximately $0.4 million of the purchase price of
netOctopus to acquired in-process research and development. Each of the amounts
we allocated to acquired in-process research and development in connection with
these acquisitions were based upon an independent third party valuation
analysis. (See Note 2 of Notes to Consolidated Financial Statements.)

   In connection with our acquisition of Cayman in October 2001, during our
fiscal first quarter of 2002, we have allocated to acquired in-process research
and development approximately $2.2 million of the purchase price of Cayman.
This amount is based upon an independent third party valuation analysis and
will have an adverse affect upon our profitability during the fiscal first
quarter and fiscal year 2002. (See Note 2 of Notes to Consolidated Financial
Statements.)

Amortization of Goodwill and Other Intangible Assets

   Amortization of goodwill and other intangible assets represents the
amortization of such amounts allocated to goodwill and other intangible assets
related to our acquisitions of WebOrder, StarNet, Serus and netOctopus. (See
Note 2 of Notes to Consolidated Financial Statements.)

   In July 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other
Intangible Assets. This statement:

 . Establishes a new accounting standard for goodwill acquired singly, as part
              of a group, or in a business combination. SFAS No. 142 continues
              to require recognition of goodwill as an asset but would not
              permit amortization of goodwill as currently required by
              Accounting Principles Board (APB) Opinion No. 17, Intangible
              Assets.

 . Establishes a new method of testing goodwill for impairment. It requires that
              goodwill be separately tested for impairment using a
              fair-value-basis approach. Goodwill should be tested for
              impairment at a level referred to as a reporting unit, generally
              a level lower than that of the total entity.

 . Requires that goodwill of a reporting unit would be tested for impairment on
           a regular basis and appropriate charges be recorded if found to be
           impaired.

   We will adopt the provisions of SFAS No. 142 on October 1, 2001, and as
such, will no longer amortize the amounts allocated to goodwill and other
intangible assets with undeterminable lives related to our acquisitions of
WebOrder, StarNet, Serus and netOctopus, nor will we amortize the amounts
allocated to goodwill and other intangible assets with undeterminable lives
related to our acquisition of Cayman.

Impairment of Goodwill and Other Intangible Assets

   Represents the impairment of goodwill and other intangible assets related to
our acquisitions of WebOrder, StarNet and Serus. As provided under SFAS No.
121, given the slower than anticipated growth in the market for IAD products
(the technology for which we acquired from StarNet) and the uncertainties in
the ".com" market to which we marketed and licensed certain of our Web platform
products (including technology which we acquired from WebOrder and Serus) in
addition to the slower than anticipated revenue growth in the market for such
products, we determined the net carrying value of the goodwill and other
intangible assets related to these acquisitions will not be fully recovered.
Accordingly, we recorded a charge of $16.4 million based on the difference of
the carrying value and the estimated discounted future operating cash flows of
the goodwill and other intangible assets related to these acquisitions. We will
adopt the provisions of SFAS No. 142 on October 1, 2001, and as such, we will
test the remaining net book value of the goodwill and other intangible assets
on a regular basis and will record the appropriate charges if such assets are
found to be impaired. (See Note 2 of Notes to Consolidated Financial
Statements.)

                                      31

<PAGE>

Restructuring Costs

   Restructuring costs consist primarily of employee severance benefits and the
costs to exit certain of our business activities and closure of a facility.
(See Note 11 of Notes to Consolidated Financial Statements.)

   In connection with our acquisition of Cayman in October 2001, during our
fiscal first quarter of 2002 we will record an additional charge of
approximately $0.4 million for restructuring costs primarily related to
employee severance benefits for employees that were not retained after the
integration of Cayman's operations.

Terminated Merger Costs

   We recorded this non-recurring charge for costs incurred in connection with
the terminated merger between our company and Proxim. This charge consists
primarily of accounting and legal advisory services, initiation of joint
marketing and research and development expenses in anticipation of the merger
that we had undertaken at the direction of Proxim, certain shared merger costs,
and other related costs. (See Note 12 of Notes to Consolidated Financial
Statements.)

Other Income, Net

   Other income, net primarily consists of interest income we earn on our cash,
cash equivalents and short-term investments in addition to both realized and
unrealized gains and losses on foreign currency transactions as well as losses
on impaired securities that we deem other than temporary. Other income, net
decreased for fiscal year 2001 from fiscal year 2000 primarily due to our loss
on impaired securities that we recorded to reflect the other than temporary
decline in the value of our investment in Northpoint as well as our reduced
cash, cash equivalents and short-term investments combined with a reduction in
interest rates from the prior fiscal year.

   Other income, net increased for fiscal year 2000 from fiscal year 1999
primarily due to higher interest rates we earned on our cash balances as well
as net foreign currency gains on our foreign currency denominated accounts
receivable and related hedge contracts.

Provision for Income Taxes

   We have not recorded an income tax benefit for fiscal years 2001, 2000 and
1999 primarily due to continued substantial uncertainty regarding our ability
to realize our deferred tax assets. Based upon available objective evidence,
there has been sufficient uncertainty regarding the realizability of our
deferred tax assets to warrant a valuation allowance in our financial
statements. The factors considered included prior losses, inconsistent profits,
and lack of carryback potential to realize our deferred tax assets. Based on
our outlook for fiscal year 2002 and beyond, we believe the uncertainty
regarding the realizability of our deferred tax assets may diminish to the
point where it is more likely than not that our deferred tax assets will be
realized. At such point, we would also reverse all or a portion of our
valuation allowance which will result in an income tax benefit.

Cumulative Effect From Adoption of SAB 101

   In December 1999, the United States Securities and Exchange Commission (SEC)
issued SAB 101, Revenue Recognition in Financial Statements. SAB 101 provides
guidance on applying generally accepted accounting principles to revenue
recognition issues in financial statements. We adopted SAB 101 in our fiscal
first quarter of 2001 and recorded this charge to our condensed consolidated
statement of operations and recorded a $1.6 million increase in deferred
revenue to our consolidated balance sheet.

                                      32

<PAGE>

Discontinued Operations

   Represents the gain on sale of our sale of the Farallon LAN Division (the
LAN Division), which we sold in August 1998. For fiscal year 2001, the gain on
sale of discontinued operation is primarily related to accounts receivable that
were collected above amounts agreed upon in the sale transaction. For fiscal
year 2000, the gain on sale of discontinued operation primarily consists of:
$1.3 million for Farallon's buy-out of its royalty obligation for an amount in
excess of the receivable on our balance sheet; the reversal of a $1.2 million
liability we recorded for the excess space created at our Alameda, California
facility, in connection with the sale of the LAN Division, that we believed
could not be subleased to third parties; and the exercise and sale of our
warrant in Farallon that we received as consideration for the sale in August
1998. (See Note 3 of Notes to Consolidated Financial Statements.)

Liquidity and Capital Resources

   We have funded our operations to date primarily through the public offerings
of our Common Stock. As of September 30, 2001, our principle source of
liquidity included cash and cash equivalents of $35.7 million and short-term
investments of $13.3 million. We currently do not have a line of credit
facility. In connection with our acquisition of Cayman in October 2001, we used
approximately $15.1 million of cash. As a result, our cash and cash equivalents
balance at December 31, 2001 will be less than the balance at September 30,
2001.

Operating Activities

   Our operating activities used $5.8 million of cash for fiscal year 2001.
This use of cash was primarily due to:

 . Funding the loss related to our regular operating activities;

 . Uncollected accounts receivable related to our write-offs of outstanding
              accounts receivable owed by certain of our CLEC customers who
              filed voluntary petitions under the Bankruptcy Act and many of
              which subsequently ceased operations during our fiscal year 2001;

 . Paying the expenses related to our terminated merger with Proxim;

 . Paying severance benefits in connection with the restructuring charge we
         recorded in our fiscal second quarter of 2001; and

 . Reducing our accounts payable and other liabilities.

   These uses were offset by increased collections of outstanding accounts
receivable and decreased inventory balances as well as non-cash expenses such
as depreciation and amortization and charges for the impairment of goodwill and
other intangible assets.

   Our operating activities provided $0.1 million of cash for fiscal year 2000
and used $8.4 million of cash for fiscal year 1999. Cash provided by operating
activities for fiscal year 2000 was primarily due to increases in revenues,
gross profits, accounts payable and accrued liabilities and decreases in
deposits and other assets, partially offset by increases in operating expenses,
accounts receivable and inventory levels. Cash used in fiscal 1999 was
primarily due to supporting our operating activities as well as the increase in
accounts receivable and inventory levels, and the reduction of accounts payable
and accrued liabilities related to the sale of the LAN Division.

Investing Activities

   Our investing activities provided $1.7 million of cash for fiscal year 2001
primarily due to proceeds realized from the sale and maturity of short-term
investments, partially offset by the purchase of such short-term investments,
the purchase of capital equipment and our long-term investment equity
investment in MegaPath.

                                      33

<PAGE>

   Our investing activities used $31.1 million of cash for fiscal year 2000
primarily due to purchases of short-term investments; our acquisitions of
WebOrder and StarNet; our long-term equity investment in Everdream; and
purchases of furniture, fixtures and equipment. The cash used in investing
activities was partially offset by proceeds from the sale and maturity of
short-term investments.

   Our investing activities provided $5.5 million of cash for fiscal year 1999
primarily due to proceeds from the sale and maturity of short-term investments
partially offset by the purchase of short-term investments; our acquisitions of
Serus and netOctopus; the purchase of furniture, fixtures and equipment; and
our equity investment in Northpoint.

   During our fiscal first quarter of 2001, we purchased $2.0 million of Series
D Preferred Stock in MegaPath. MegaPath offers high-speed DSL access and
eCommerce and Web hosting services to small and medium size businesses. During
our fiscal year 2000, MegaPath had purchased our broadband Internet equipment
and licensed certain of our Web platform products. Although there is no public
market for MegaPath's stock, we believe the market value of these shares is not
less than $2.0 million as MegaPath has not needed to seek additional rounds of
financing. As part of the purchase, we bear the economic risk of the investment
indefinitely. There is no assurance that the purchased shares will be
registered pursuant to the Securities Act, or that an exemption from
registration would be available for any resale by us of these shares.
Accordingly, we may not be able to transfer all or any portion of the shares in
the amounts or at times we would propose.

   During our fiscal fourth quarter of 2000, we purchased $2.0 million of
Series C Preferred Stock in Everdream. Everdream provides outsourced IT
expertise, products and services that enable small and medium size businesses
to focus on their core competencies. In April 2000, we entered into an
agreement with Everdream to host a co-branded version of our eStore platform
for Everdream's customers. Although there is no public market for Everdream's
stock, we believe that the market value of these shares is not less than $2.0
million as Everdream is experiencing continued revenue growth and they have not
needed to seek additional rounds of financing. As part of the purchase, we bear
the economic risk of the investment indefinitely. There is no assurance that
the purchased shares will be registered pursuant to the Securities Act, or that
an exemption from registration would be available for any resale by us of these
shares. Accordingly, we may not be able to transfer all or any portion of the
shares in the amounts or at times we would propose.

Financing Activities

   Our financing activities provided $2.0 million, $7.5 million and $45.0
million of cash for the fiscal years 2001, 2000 and 1999, respectively. Cash
provided by financing activities for fiscal years 2001 and 2000 is primarily
related to the exercise of employee stock options and employees purchasing our
stock through our Employee Stock Purchase Plan. Cash provided by financing
activities for fiscal year 1999 is primarily related to the secondary public
offering of our Common Stock.

   We believe that our existing cash, cash equivalents and short-term
investments will be adequate to meet our cash needs for working capital and
capital expenditures for the next twelve months. We may require substantial
capital to finance our future growth and fund our ongoing research and
development activities during fiscal 2002 and beyond. If we issue additional
stock to raise capital, the percentage ownership in Netopia of our existing
stockholders would be reduced. Additional financing may not be available when
needed and, if such financing is available, it may not be available on terms we
believe favorable.

   From time to time, in the ordinary course of business, we may evaluate
potential acquisitions of businesses, products and technologies. Accordingly, a
portion of our cash may be used to acquire or invest in complementary
businesses or products, to obtain the right to use complementary technologies,
to obtain additional presence on the Internet or to support additional
advertising and promotional campaigns. In the past, our acquisitions and
divestitures have involved numerous risks, including the use of significant
amounts of our cash, diversion of the attention of our management from our core
business, loss of our key employees and significant expenses and

                                      34

<PAGE>

write-offs. For example, in December 1998, we acquired netOctopus and Serus, in
October 1999, we acquired StarNet, in March 2000, we acquired WebOrder and in
October 2001, we acquired Cayman. The success of these acquisitions depend upon
our ability to retain the customers and employees acquired and timely and
successfully develop, manufacture and gain market acceptance for the products
acquired. If we engage in additional acquisitions or divestitures in future
periods, we may not be able to adequately address these risks and our business
may be harmed.

Recent Accounting Pronouncements

   In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative and
Hedging Activities. SFAS No. 133 establishes accounting and reporting standards
for derivative instruments (including derivative instruments embedded in other
contracts) and for hedging activities. SFAS No. 133, as amended by SFAS No.
137, is effective for all fiscal quarters of fiscal years beginning after June
15, 2000. The Company adopted SFAS No. 133 in its fiscal first quarter of 2001
which did not have a material effect on its consolidated balance sheet or
consolidated statement of operations.

   In December 1999, the SEC issued SAB 101, Revenue Recognition in Financial
Statements. SAB 101 provides guidance on applying generally accepted accounting
principles to revenue recognition issues in financial statements. The Company
adopted SAB 101 in its fiscal first quarter of 2001 resulting in a $1.6 million
charge to its consolidated statement of operations and a $1.6 million increase
in deferred revenue to its consolidated balance sheet.

   In July 2001, the FASB issued SFAS No. 141, Business Combinations. SFAS No.
141 requires that all business combinations be accounted for under the purchase
method. The use of the pooling-of-interests method is no longer permitted. SFAS
No. 141 requires that the purchase method be used for business combinations
initiated after June 30, 2001. The Company adopted the provisions of SFAS No.
141 commencing July 1, 2001. To date, the Company has accounted for all of its
business combinations as purchases and the adoption of SFAS No. 141 is not
expected to have a significant impact on the Company's financial position or
results of operations.

   In July 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible
Assets. SFAS No. 142 requires that goodwill resulting from a business
combination will no longer be amortized to earnings, but instead be reviewed
for impairment. The Company will adopt SFAS No. 142 on October 1, 2001. For
goodwill resulting from business combinations prior to July 1, 2001,
amortization of such goodwill will continue through September 30, 2001, but
will cease commencing October 1, 2001. For business combinations occurring on
or after July 1, 2001, the associated goodwill will not be amortized. Upon
adoption of SFAS No. 142 on October 1, 2001, the Company is required to perform
a transitional impairment test for all recorded goodwill within six months and,
if necessary, determine the amount of an impairment loss by September 30, 2002.

Risk Factors

   In addition to other information in this Form 10-K, the following risk
factors should be considered carefully in evaluating our business because such
factors currently may have a significant impact on our business, operating
results and financial condition. As a result of the risk factors set forth
below and elsewhere in this Form 10-K, and the risks discussed in our other
filings with the SEC, actual results could differ materially from those
projected in any forward-looking statements.

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

   The success of our broadband Internet equipment depends upon whether
telecommunications carriers deploy DSL and other broadband technologies and
upon the timing of the deployment of such technologies. Factors that will
impact such deployment include:

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

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

    .  The ability of our CLEC customers to obtain required capital resources;

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

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

    .  Evolving industry standards for DSL and other broadband technologies; and

    .  Government regulation.

   Demand for DSL services has exceeded the ability of telecommunications
carriers and ISPs to deploy services in a timely manner and to provide
satisfactory customer service. We offer to carriers and service provider
customers the opportunity to bundle basic DSL connectivity with value-added
features that enable the provider to bundle differentiated services that will
justify higher recurring revenues from end users. These features include dial
backup, VPN, voice over DSL and eSite or eStore hosting. We can offer no
assurance that our strategy of enabling bundled service offerings will be
widely accepted. If telecommunications carriers do not expand their deployment
of DSL and other broadband services, or if additional telecommunications
carriers do not offer DSL and other broadband services on a timely basis, then
our business, financial condition and results of operations will be seriously
harmed.

We expect our revenues to become increasingly dependent on our ability to sell
our broadband gateway products to ILECs, and we may incur losses if we cannot
continue to successfully market and sell our products through ILEC channels.

   ILECs have been aggressively marketing DSL services principally focusing on
residential services. Historically, we have not sold meaningful quantities of
our broadband Internet equipment to ILECs in the United States. As a result of
our acquisition of Cayman, we have expanded the channels through which we sell
our products to include ILEC customers, such as SBC and BellSouth and Comcast,
a cable provider, and have committed resources that are focused on expanding
our presence in the ILEC channel both domestically and internationally in
response to changing market conditions. There continue to be barriers
associated with such sales including, but not limited to, lengthy product
evaluation cycles, the ability to dislodge competitors whose products are
currently being utilized, a long-term contract cycle and intense price
pressures. ILECs currently obtain equipment from our competitors, such as
Siemens (Efficient Networks and its FlowPoint product line), ZyXEL and 2Wire,
who have proven to be strong competitors. There is no guarantee we will be
successful in retaining the customers acquired in connection with our
acquisition of Cayman or our ability to successfully expand our presence in the
ILEC market. If we fail to retain the customers acquired in connection with our
acquisition of Cayman or fail to successfully penetrate the ILEC market for our
products and services, our business may be materially and adversely affected.

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<PAGE>

The DSL market, and the channel through which we historically have sold our DSL
products, has experienced significant business difficulties during the past
year, which have negatively affected our business and operating results.

   Prior to our acquisition of Cayman in October 2001, our most significant
customers have been CLECs and ISPs. Since the middle of calendar year 2000,
CLECs have experienced significant business difficulties due to an inability to
obtain financing to continue to build out their networks. The difficulties of
these customers have materially and adversely affected our operating results,
causing a significant decline in the price of our Common Stock. During the last
twelve months, four of our CLEC customers, Covad, Rhythms, Northpoint, and
Jato, have demonstrated the following market difficulties:

    .  Covad, our largest customer in fiscal year 2001, has reduced its breadth
       of network build-out and significantly scaled back its operations. In
       addition, Covad filed a voluntary petition under the Bankruptcy Act in
       August 2001 as part of a capital restructuring plan. On November 13,
       2001, Covad announced that it had secured an agreement with SBC to
       provide Covad with $150 million in funding. Covad announced on December
       13, 2001 that it received approval of its reorganization plan from the
       Bankruptcy Court, and that it expects to emerge from bankruptcy around
       December 20, 2001. The SBC funding would take place at that time,
       subject to normal closing conditions. Additionally, Covad has announced
       that this funding is expected to provide the cash that it believes will
       allow it to become cash flow positive by the latter half of 2003;

    .  Rhythms announced in January 2001 its intention to reduce the number of
       markets in which it offers services and significantly scaled back its
       operations. In addition, Rhythms filed a voluntary petition under the
       Bankruptcy Act in August 2001, and ceased normal operations during
       September 2001. In December 2001, WorldCom purchased Rhythms' key DSL
       assets. As a result, WorldCom will be able to deliver uninterrupted
       service to existing Rhythms customers served by the portion of the
       network that WorldCom is acquiring. However, there is no certainty that
       WorldCom will continue to purchase our equipment for deployment on the
       Rhythms network;

    .  Northpoint voluntarily filed for protection under the Bankruptcy Act in
       January 2001 and subsequently ceased operations during March 2001; and

    .  Jato ceased operations in December 2000 and voluntarily transferred its
       assets to its secured creditors.

   Like the CLECs, ISPs also have struggled in the past year. Most ISPs have
had significant difficulties in differentiating their services from the
services provided by their competitors. As a result, the lack of
differentiation has led to significant erosion in the prices charged to
customers. Many of our ISP customers such as Mpower Communications, Inc.
(Mpower), PSINet, Inc. (PSINet), Onsite Access and Business Telecommunications,
have all experienced business difficulties and some have filed for bankruptcy
or ceased operations. PSINet, which had been one of our key ISP customers for
the past three years, filed a voluntary petition under the Bankruptcy Act in
June 2001, and most of its Canadian subsidiaries filed for protection under
similar Canadian statutes. The pricing pressure for ISPs continues to date,
and, accordingly, sales of our products to ISPs remain difficult. The financing
market for CLECs and ISPs has remained difficult and has been largely closed in
calendar year 2001, resulting in significantly decreased sales to CLECs and
ISPs and write-offs of outstanding accounts receivable.

If we are unable to retain the customers and/or employees and complete the
projects acquired in connection with our acquisition of Cayman, our business
would be seriously harmed.

   We have attempted to expand the channels through which and markets to which
we sell our products through our acquisition of Cayman, a privately held
developer and supplier of business class broadband gateways consisting
primarily of ADSL and cable Ethernet routers. Previously, we had focused on
serving the small and medium size business market primarily through the CLEC
channels through which we have historically derived a substantial portion of
our revenue. The Cayman acquisition expanded our customer base to include
Cayman's existing base of ILEC customers, such as SBC and BellSouth, and
Comcast, a leading cable provider. If we are

                                      37

<PAGE>

unable to retain the customers and/or employees acquired, maintain the quality
of the products we acquired and timely and successfully develop, manufacture
and gain market acceptance of the products which were under development at the
time of the acquisition our business will be seriously harmed. The Cayman
acquisition has involved numerous risks, including the use of significant
amounts of our cash, diversion of the attention of our management from our core
business and significant expenses and write-offs. Incremental acquisition
related charges including in-process research and development will adversely
impact our profitability. Additionally, we may have to record additional
acquisition related charges, including the impairment of goodwill, which would
adversely impact our profitability. (See Note 2 of Notes to Consolidated
Financial Statements.)

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

   Our revenues will decline and we may incur losses if we lose one or more of
our significant customers or if our customers reduce or delay purchases of our
products. For fiscal year 2001, our top three customers who each individually
represented at least 5% of our total revenues, accounted for approximately 38%
of our total revenues. In this period, sales to Covad, Ingram Micro and Rhythms
represented approximately 16%, 11% and 11%, respectively, of our total
revenues. Covad has incurred operating losses and negative cash flows as it
establishes its network and operations. Accordingly, Covad is dependent on
continued access to new sources of capital. As a result, Covad filed a
voluntary petition under the Bankruptcy Act in August 2001 as part of a capital
restructuring plan. On November 13, 2001, Covad announced that it had secured
an agreement with SBC to provide Covad with $150 million in funding. Covad
announced on December 13, 2001 that it received approval of its reorganization
plan from the Bankruptcy Court, and that it expects to emerge from bankruptcy
around December 20, 2001. The SBC funding would take place at that time,
subject to normal closing conditions. Additionally, Covad has announced that
this funding is expected to provide the cash that it believes will allow it to
become cash flow positive by the latter half of 2003. To the extent Covad is
unable to emerge successfully from the bankruptcy proceedings and close its
funding agreements with SBC, our revenues and profitability may be materially
and adversely affected. Additionally, Rhythms, which had been an important
customer, filed a voluntary petition under the Bankruptcy Act in August 2001,
and ceased normal operations during September 2001. In December 2001, WorldCom
purchased Rhythms' key DSL assets. As a result, WorldCom will be able to
deliver uninterrupted service to existing Rhythms customers served by the
portion of the network that WorldCom is acquiring. However, there is no
certainty that WorldCom will continue to purchase our equipment for deployment
on the Rhythms network.

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<PAGE>

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

   Our failure to significantly increase our revenues or sufficiently reduce
our operating expenses will result in continuing losses. We incurred losses
from continuing operations of $41.7 million, $17.6 million and $7.9 million for
fiscal years 2001, 2000 and 1999, respectively. Our operations have used $5.8
million of cash for fiscal year 2001, provided $0.1 million of cash for fiscal
year 2000 and used $8.4 million of cash for fiscal 1999. Even if we reach
profitability and maintain positive cash flow from operations, we may not be
able to sustain or increase profitability or cash flow from operations on a
quarterly or annual basis.

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

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

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

   It is likely that in some future quarter or quarters our operating results
will be below the expectations of securities analysts or investors. In such
event, the market price of our Common Stock may decline significantly.
Variations in our operating results will likely be caused by factors related to
the operation of our business, including:

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

    .  Decreases or delays in purchases by significant customers, or loss of
       customers such as Covad, Ingram Micro, SBC, BellSouth or Comcast;

    .  Increased price competition for our broadband Internet equipment
       products;

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

    .  The growth rate in the number of eSites and eStores that are built using
       our Web platform products from which we derive revenues;

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

    .  Shifts in the channel fulfilling demand from small, medium and
       distributed enterprises for DSL services to entities with whom we do not
       have historical relationships;

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

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

    .  Our ability to attract and retain key personnel.

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<PAGE>

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

    .  The ability of CLECs to obtain required capital resources;

    .  The timing, rate and ability of telecommunications service providers to
       deploy DSL and other broadband services;

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

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

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

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

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

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

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

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

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

Because the markets for our products and services are intensely competitive and
some of our competitors are larger and better established, we may not be able
to compete successfully against current and future competitors.

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

   In the market for broadband Internet equipment, we primarily compete with
Cisco, Siemens (Efficient Networks and its FlowPoint product line), Lucent,
Linksys, 2Wire, Polycom (in the IAD market), and ZyXEL.

   In the market for our Web platform products, we primarily compete with
Trellix, Web Site Pros, Big Step, Nextron, Computer Associates, Intel,
Microsoft, Vector Networks, Stac Software, Symantec, and Tivoli Systems (IBM).
We anticipate intense competition from some of these companies because some of
these competitors provide their products to consumers at no cost. For example,
Microsoft has available at no cost a communications and collaboration software
product that could limit the market for our Timbuktu Pro product.

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<PAGE>

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

Our limited operating history in broadband gateways makes it difficult to
evaluate our prospects.

   Our broadband Internet equipment products are relatively new. These products
are at an early stage of development in a relatively new, rapidly evolving and
intensely competitive market. We may not correctly anticipate market
requirements, including requirements for performance, price, features and
compatibility with other broadband equipment. We may not be able to rapidly
introduce innovative new products that meet these market requirements. It is
possible that the market for broadband Internet equipment products will develop
in a manner that we do not anticipate. Our competitors have already introduced
broadband products, some of which may compete effectively against our broadband
Internet equipment products. Such developments could render our broadband
Internet equipment products obsolete.

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

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

The market for integrated voice and data products and combined services may not
grow as anticipated.

   We have released a new line of IADs designed to allow for voice and data
services over a single DSL line. Our future growth is substantially dependent
on the widespread deployment of these integrated voice and data products for
combined voice and data services. To date, service providers, including ILECs
and CLECs, have not deployed such combined services broadly and the market has
grown more slowly than anticipated. Unless such products and services are
broadly deployed, our integrated voice and data products and combined services
may not have a meaningful commercial impact, which could result in significant
variations in our future operating results.

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

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

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<PAGE>

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

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

Substantially all of our circuit boards are manufactured by a limited number of
contract manufacturers.

   Substantially all of our broadband Internet equipment includes circuit
boards that are manufactured by a limited number of contract manufacturers.
Additionally, certain of our broadband Internet equipment products are
assembled and packaged by these contract manufacturers. If supplies of circuit
boards or broadband Internet equipment products from these contract
manufacturers are interrupted for any reason, we will incur significant losses
until we can arrange for alternative sources. Any such interruption may
seriously harm our reputation and business.

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

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

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

   We compete in markets characterized by continuing technological advancement,
changes in customer requirements and evolving industry standards. To compete
successfully, we must design, develop, manufacture and sell new or enhanced
products that provide increasingly higher levels of performance, reliability
and compatibility. We will need to continue to integrate our DSL router
technology with the architectures of leading central office equipment providers
in order to enhance the reliability, ease-of-use and management functions of
each of our DSL products. Currently, our router products are fully integrated
with Copper Mountain central office access concentrators and are interoperable
with Alcatel, Cisco, Ericsson, Lucent Technologies, Nortel, Nokia, Orckit,
Paradyne, Siemens, and Zhone central office access concentrators. However, we
may not be able to successfully develop, introduce, enhance or market these or
other products necessary to our future success. In addition, any delay in
developing, introducing or marketing these or other products would seriously
harm our business.

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<PAGE>

   Many of our broadband Internet equipment products are relatively new. You
should consider our prospects in light of the difficulties we may encounter
because these products are at an early stage of development in a relatively
new, rapidly evolving and intensely competitive market. For example, we may not
correctly anticipate market requirements, including requirements for
performance, price, features and compatibility with other DSL equipment. We may
not be able to introduce rapidly innovative new products that meet these market
requirements. It is possible that the market for broadband Internet equipment
will develop in a manner that we do not anticipate.

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

   In the past, we have engaged in both acquisitions and divestitures. For
example, in December 1998, we acquired netOctopus and Serus, in October 1999,
we acquired StarNet, in March 2000, we acquired WebOrder, and in October 2001,
we acquired Cayman. We also entered into an agreement and plan of
reorganization in January 2001 under which we agreed to be acquired by Proxim.
This agreement was mutually terminated in March 2001. In addition, in August
1998, we sold our LAN Division. We may continue to acquire companies,
technologies or products or to sell or discontinue some of our technologies or
products in future periods. In the past, our acquisitions and divestitures have
involved numerous risks, including the use of significant amounts of our cash,
diversion of the attention of our management from our core business, loss of
our key employees and significant expenses and write-offs. In September 2001,
for example, we recorded a $16.4 million charge for impairment of goodwill and
other intangible assets related to our acquisitions of WebOrder, StarNet and
Serus. Incremental acquisition related charges including in-process research
and development and amortization of goodwill and other intangibles or
divestitures of profitable technologies or products could adversely impact our
profitability. The success of these acquisitions depends upon our ability to
retain the customers and employees and timely and successfully develop,
manufacture and gain market acceptance for the products we acquired. If we
engage in additional acquisitions or divestitures in future periods, we may not
be able to address these risks and our business may be harmed.

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

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

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

   Growth in revenues from our Web platform will be heavily dependent on
recurring fees from eSites and eStores created by licensees. Accordingly, to be
successful, our Web platform must become widely used. If we are unable to
expand our sales and distribution channels to establish the widespread use of
our Web platform, it is possible that competing products could become widely
used, reducing the likelihood that we will generate significant revenues from
our Web platform. In addition, some companies are offering Web presence and
enhancement products at no cost. In some instances, we believe these companies
are not charging for such products and services. If such free products and
services become widely used, the market for our Web platform products will be
limited.

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<PAGE>

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

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

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

   We expect that sales of our broadband Internet equipment may account for a
larger percentage of our total revenues in future periods. Because these
products are generally sold at lower gross margins than our Web platform
products, this will likely result in a decrease in our overall gross margins.
Further, we expect that the market for broadband Internet equipment, in
particular DSL products, will become increasingly competitive and that we will
be forced to lower the prices we charge for our broadband Internet equipment in
the future. As the average selling price of our routers declines, our gross
margins related to such products, as well as our overall gross margins, are
likely to decline.

We derive a substantial portion of the recurring revenues from our Web platform
products from a small number of large customers.

   We derive a substantial portion of the recurring revenues from our Web
platform products from a small dumber of large customers. If these customers
were to choose a competitive platform or are unable to market the platform
successfully to their customers, this could lead to reduced revenues and
adversely impact our results.

Our Web platform products have a lengthy sales cycle.

   We derive a substantial portion of our Web platform revenue from a small
number of customers, and the sales cycle for licenses of Web platform products
may be long. Licenses of Web platform products are typically closed in the
final weeks of the quarter and the timing of these licenses may cause our
quarterly results to vary. Our inability to obtain customer commitments or
delays in such commitments due to the lengthy sales cycles would reduce our
revenues and adversely impact our results.

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

   A substantial portion of our revenues is derived from sales to European and
other international customers. We expect sales to international customers to
continue to comprise a significant portion of our revenues. In the past, our
international sales have typically been denominated in United States dollars.
Beginning in our fiscal third quarter of 2000, sales of broadband Internet
equipment products to our European customers who are members of the European
Union have been denominated in the Euro. All other international sales will
continue to be denominated in United States dollars. For our international
sales that continue to be denominated in United States dollars, fluctuations in
currency exchange rates could cause our products and services to become
relatively more expensive to our foreign customers. This could lead to
decreased profitability of our products and services.

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<PAGE>

In addition, changes in the value of the Euro relative to the United States
dollar could adversely affect our operating results to the extent we do not
hedge sales denominated in the Euro.

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

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

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

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

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

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

   Despite our efforts to protect our proprietary rights, unauthorized parties
may attempt to copy aspects of our products or obtain and use information that
we regard as proprietary. Policing unauthorized use of our products is
difficult, and there is no guarantee that the safeguards that we employ will
protect our intellectual property and other valuable competitive information.

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

We may not be able to license necessary software, firmware and hardware designs
from third parties.

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

                                      45

<PAGE>

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

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

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

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

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

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

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

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

Business interruptions could adversely affect our business.

   Our operations are vulnerable to interruption by fire, earthquake, power
loss, telecommunications failure and other events beyond our control. In
particular, our headquarters are located near earthquake fault lines in the San
Francisco Bay area and may be susceptible to the risk of earthquakes. If there
is an earthquake in the region, our business could be seriously harmed. We do
not have a detailed disaster recovery plan. In addition, we do not carry
sufficient business interruption insurance to compensate us for losses that may
occur and any losses or damages incurred by us could have a material adverse
effect on our business.

                                      46

<PAGE>

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

   We may require substantial capital to finance our future growth and fund our
ongoing research and development activities. Our capital requirements will
depend on many factors, including:

    .  Acceptance of and demand for our products;

    .  The number and timing of acquisitions;

    .  The costs of developing new products;

    .  The costs associated with expansion; and

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

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

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

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

    .  Variations in our quarterly operating results;

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

    .  Changes in market valuations of similar companies;

    .  Announcements by us or our competitors of technological innovations, new
       products or enhancements, significant contracts, acquisitions, strategic
       partnerships, joint ventures or capital commitments;

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

    .  Additions or departures of key personnel;

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

    .  General conditions in the broadband communications industry, in
       particular the DSL market, or the domestic and worldwide economies;

    .  Decreases or delays in purchases by significant customers;

    .  A shortfall in revenue or earnings from securities analysts'
       expectations or other announcements by securities analysts;

    .  Our ability to protect and exploit our intellectual property or defend
       against the intellectual property rights of others; and

    .  Developments in our relationships with customers, distributors and
       suppliers.

   In recent years the stock market in general, and the market for shares of
high technology stocks in particular, have experienced extreme price
fluctuations, which often have been unrelated to the operating performance of
affected companies. There can be no assurance that the market price of our
Common Stock will not experience significant fluctuations in the future,
including fluctuations that are unrelated to our performance.

                                      47

<PAGE>

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

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

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

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

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

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

Interest Rate Risk

   The table below presents the market value and related weighted-average
interest rates for our investment portfolio at September 30, 2001 and 2000. All
of our investments mature in twelve months or less.

<TABLE>
<CAPTION>
                                                          September 30, 2001       September 30, 2000
-                                                      -----------------------  -----------------------
                                                                Fair   Average           Fair   Average
                                                        Cost   Market  Interest  Cost   Market  Interest
Principal (notional) amounts in United States dollars:  Basis  Value     Rate    Basis  Value     Rate
------------------------------------------------------ ------- ------- -------- ------- ------- --------
                                                            (in thousands)           (in thousands)
<S>                                                    <C>     <C>     <C>      <C>     <C>     <C>
       Cash equivalents -fixed rate [a]............... $34,387 $34,482   3.31%  $37,620 $37,720   6.49%
       Short-term investments - fixed rate [b]........  13,112  13,219   3.67%   21,532  21,841   6.51%
                                                       ------- -------          ------- -------
                                                       $47,499 $47,701          $59,152 $59,561
                                                       ======= =======          ======= =======
</TABLE>
--------
[a] Cash equivalents represent the portion of our investment portfolio that
    mature in less than 90 days.

[b] Short-term investments represent the portion of our investment portfolio
    which mature in greater than or equal to 90 days.

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

                                      48

<PAGE>

Foreign Currency Exchange Risk

   The table below presents the carrying value, in United States dollars, of
our accounts receivable denominated in Euros at September 30, 2001 and 2000.
These accounts receivable are valued at the United States/Euro exchange rate as
of September 30, 2001. The carrying value approximates fair value at September
30, 2001 and 2000.

<TABLE>
<CAPTION>
                                                             September 30, 2001 September 30, 2000
                                                             ------------------ ------------------
                                                             Carrying  Exchange Carrying  Exchange
   Principal (notional) amounts in United States dollars:     Amount     Rate    Amount     Rate
   ------------------------------------------------------    --------  -------- --------  --------
                                                               (in thousands)     (in thousands)
<S>                                                          <C>       <C>      <C>       <C>
       Accounts receivable denominated in Euros.............  $1,321    0.9115   $2,007    0.8837
</TABLE>

   The table below presents the carrying value of our currency exchange forward
contracts, in United States dollars, at September 30, 2001 and 2000. The
carrying value approximates fair value at September 30, 2001 and 2000.

<TABLE>
<CAPTION>
                                                 September 30, 2001         September 30, 2000
                                             -------------------------- --------------------------
                                             Carrying  Spot  Settlement Carrying  Spot  Settlement
   Principal (notional) amounts in Euros:     Amount   Rate     Date     Amount   Rate     Date
   --------------------------------------    -------- ------ ---------- -------- ------ ----------
                                                   (in thousands)             (in thousands)
<S>                                          <C>      <C>    <C>        <C>      <C>    <C>
      Currency exchange forward                               October                    October
       contract # 1.........................   $407   0.8351    2001      $675   0.9107    2000
      Currency exchange forward                               November                   November
       contract # 2.........................   $134   0.8963    2001      $250   0.9122    2000
</TABLE>

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

                                      49

<PAGE>

ITEM 8.  Consolidated Financial Statements and Supplementary Data

Index to Consolidated Financial Statements

   Our following consolidated financial statements are filed as part of this
Report on Form 10-K:

<TABLE>
<CAPTION>
                                                                                                        Page
                                                                                                        ----
<S>                                                                                                     <C>
Consolidated Financial Statements:
Independent Auditors' Report...........................................................................  51
Consolidated Balance Sheets at September 30, 2001 and 2000.............................................  52
Consolidated Statements of Operations for the fiscal years ended September 30, 2001, 2000 and 1999.....  53
Consolidated Statements of Stockholders' Equity for the fiscal years ended September 30, 2001, 2000 and
  1999.................................................................................................  54
Consolidated Statements of Cash Flows for the fiscal years ended September 30, 2001, 2000 and 1999.....  55
Notes to Consolidated Financial Statements.............................................................  56
Financial Statement Schedule:
Valuation and Qualifying Accounts......................................................................  78
</TABLE>

                                      50

<PAGE>

                         Independent Auditors' Report

The Board of Directors
Netopia, Inc. and subsidiaries:

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

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

   In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Netopia,
Inc. and subsidiaries as of September 30, 2001 and 2000 and the results of
their operations and their cash flows for each of the years in the three-year
period ended September 30, 2001 in conformity with accounting principles
generally accepted in the United States of America. Also in our opinion, the
related financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, present fairly, in all
material respects, the information set forth herein.

   As discussed in Note 1 to the consolidated financial statements, effective
October 1, 2000, the Company changed its method of accounting for revenue
recognition in accordance with guidance provided in SEC Staff Accounting
Bulletin No. 101, "Revenue Recognition in Financial Statements."

                                          KPMG LLP

San Francisco, California
October 31, 2001


                                      51

<PAGE>

                        NETOPIA, INC. AND SUBSIDIARIES

                          CONSOLIDATED BALANCE SHEETS



<TABLE>
<CAPTION>
                                                                                          September 30,
                                                                                       ------------------
                                                                                         2001      2000
                                                                                       --------  --------
                                                                                         (in thousands)
<S>                                                                                    <C>       <C>
                                       Assets
Current assets:
   Cash and cash equivalents.......................................................... $ 35,703  $ 37,839
   Short-term investments.............................................................   13,293    21,938
   Trade accounts receivable less allowance for doubtful accounts and returns of $641
     and $3,258, respectively.........................................................    9,550    15,646
   Inventories, net...................................................................    7,156    10,284
   Prepaid expenses and other current assets..........................................    1,634     2,341
                                                                                       --------  --------
       Total current assets...........................................................   67,336    88,048
Furniture, fixtures and equipment, net................................................    5,770     4,469
Intangible assets, net................................................................    2,758    31,016
Long-term investments.................................................................    4,000     2,493
Deposits and other assets.............................................................    2,848     2,347
                                                                                       --------  --------
                                                                                       $ 82,712  $128,373
                                                                                       ========  ========
                        Liabilities and Stockholders' Equity
Current liabilities:
   Accounts payable................................................................... $  4,713  $  8,547
   Accrued compensation...............................................................    2,148     2,756
   Accrued liabilities................................................................    1,116     1,332
   Deferred revenue...................................................................    2,589     2,215
   Other current liabilities..........................................................      177       906
                                                                                       --------  --------
       Total current liabilities......................................................   10,743    15,756
Long-term liabilities.................................................................      256       328
                                                                                       --------  --------
       Total liabilities..............................................................   10,999    16,084

Commitments and contingencies
Stockholders' equity:
   Common Stock: $0.001 par value, 50,000,000 shares authorized; 18,076,812 and
     17,587,615 shares issued and outstanding at September 30, 2001 and 2000,
     respectively.....................................................................       17        17
   Additional paid-in capital.........................................................  144,886   142,857
   Accumulated deficit................................................................  (73,190)  (30,079)
   Accumulated other comprehensive income (loss)......................................       --      (506)
                                                                                       --------  --------
       Total stockholders' equity.....................................................   71,713   112,289
                                                                                       --------  --------
                                                                                       $ 82,712  $128,373
                                                                                       ========  ========
</TABLE>


         See accompanying notes to consolidated financial statements.


                                      52

<PAGE>

                        NETOPIA, INC. AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF OPERATIONS



<TABLE>
<CAPTION>
                                                                                 Fiscal years ended September 30,
                                                                                 -------------------------------
                                                                                    2001         2000      1999
                                                                                  --------     --------  -------
                                                                                    (in thousands, except for
                                                                                        per share amounts)
<S>                                                                              <C>           <C>       <C>
Revenues:
   Internet equipment........................................................... $ 58,861      $ 65,546  $24,460
   Web platform licenses and services...........................................   18,457        24,660   19,691
                                                                                  --------     --------  -------
       Total revenues...........................................................   77,318        90,206   44,151
Cost of revenues:
   Internet equipment...........................................................   39,165        46,582   15,597
   Web platform licenses and services...........................................      795           697      646
                                                                                  --------     --------  -------
       Total cost of revenues...................................................   39,960        47,279   16,243
                                                                                  --------     --------  -------
   Gross profit.................................................................   37,358        42,927   27,908
Operating expenses:
   Research and development.....................................................   13,836        13,324    9,211
   Selling and marketing........................................................   27,144        25,842   20,221
   General and administrative...................................................    7,528         6,554    3,654
   Acquired in-process research and development.................................       --         8,658    4,205
   Amortization of goodwill and other intangible assets.........................   11,984         9,746      543
   Impairment of goodwill and other intangible assets...........................   16,375            --       --
   Restructuring costs..........................................................    1,073            --       --
   Terminated merger costs......................................................    2,640            --       --
                                                                                  --------     --------  -------
       Total operating expenses.................................................   80,580        64,124   37,834
                                                                                  --------     --------  -------
   Operating loss...............................................................  (43,222)      (21,197)  (9,926)
Other income, net...............................................................    1,510         3,579    2,066
                                                                                  --------     --------  -------
   Loss from continuing operations before cumulative effect from
   adoption of Staff Accounting Bulletin (SAB) 101 and before gain on sale of
   discontinued operations, net of taxes........................................  (41,712)      (17,618)  (7,860)
Cumulative effect from adoption of SAB 101......................................   (1,555)           --       --
Gain on sale of discontinued operations, net of taxes...........................      156         2,481       --
                                                                                  --------     --------  -------
       Net loss................................................................. $(43,111)     $(15,137) $(7,860)
                                                                                  ========     ========  =======
Comprehensive loss:.............................................................
Net loss........................................................................ $(43,111)     $(15,137) $(7,860)
Other comprehensive income (loss)...............................................      506          (534)      28
                                                                                  --------     --------  -------
   Total comprehensive loss..................................................... $(42,605)     $(15,671) $(7,832)
                                                                                  ========     ========  =======
Per share data, continuing operations:
   Basic and diluted loss per share............................................. $  (2.33)     $  (1.05) $ (0.60)
                                                                                  ========     ========  =======
   Common shares used in the per share calculations.............................   17,902        16,830   13,092
                                                                                  ========     ========  =======
Per share data, net loss:.......................................................
   Basic and diluted net loss per share......................................... $  (2.41)     $  (0.90) $ (0.60)
                                                                                  ========     ========  =======
   Common shares used in the per share calculations.............................   17,902        16,830   13,092
                                                                                  ========     ========  =======
</TABLE>

         See accompanying notes to consolidated financial statements.

                                      53

<PAGE>

                        NETOPIA, INC. AND SUBSIDIARIES

                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY


<TABLE>
<CAPTION>


                                                                 Accumulated
                                     Common Stock    Additional     other                     Total
                                   -----------------  paid-in   comprehensive Accumulated stockholders'
                                     Shares   Amount  capital   income (loss)   deficit      equity
                                   ---------- ------ ---------- ------------- ----------- -------------
                                                   (in thousands, except share amounts)
<S>                                <C>        <C>    <C>        <C>           <C>         <C>
Balances, September 30, 1998...... 11,953,908  $12    $ 51,871      $  --      $ (7,082)    $ 44,801
Exercise of stock options.........    626,013    1       2,834         --            --        2,835
Acceleration and extension of
  stock options...................         --   --         176         --            --          176
Issuance of Common Stock under
  secondary offering (net of share
  issuance costs of $3.0 million).  2,330,000    2      41,315         --            --       41,317
Net unrealized investment income..         --   --          --         28            --           28
Issuance of Common Stock for
  acquisitions....................    409,556   --       2,811         --            --        2,811
Issuance of Common Stock under
  Employee Stock Purchase Plan....    199,721   --         855         --            --          855
Issuance of non-employee stock
  options.........................         --   --         116         --            --          116
Net loss..........................         --   --          --         --        (7,860)      (7,860)
                                   ----------  ---    --------      -----      --------     --------
Balances, September 30, 1999...... 15,519,198   15      99,978         28       (14,942)      85,079
Exercise of stock options.........  1,203,369    1       5,794         --            --        5,795
Issuance of Common Stock under
  Employee Stock Purchase Plan....    130,306   --       1,738         --            --        1,738
Issuance of Common Stock for
  acquisitions....................    677,848    1      35,386         --            --       35,387
Exercise of stock warrants........     56,875   --          --         --            --           --
Costs related to issuance of
  Common Stock under secondary
  offering........................         --   --         (39)        --            --          (39)
Net unrealized investment loss....         --   --          --       (534)           --         (534)
Net loss..........................         --   --          --         --       (15,137)     (15,137)
                                   ----------  ---    --------      -----      --------     --------
Balances, September 30, 2000...... 17,587,615   17     142,857       (506)      (30,079)     112,289
Exercise of stock options.........    239,042   --         785         --            --          785
Issuance of Common Stock under
  Employee Stock Purchase Plan....    250,155   --       1,231         --            --        1,231
Issuance of Common Stock
  warrants........................         --   --          16         --            --           16
Costs related to issuance of
  Common Stock under secondary
  offering........................         --   --          (3)        --            --           (3)
Net unrealized investment income..         --   --          --        506            --          506
Net loss..........................         --   --          --         --       (43,111)     (43,111)
                                   ----------  ---    --------      -----      --------     --------
Balances, September 30, 2001...... 18,076,812  $17    $144,886      $  --      $(73,190)    $ 71,713
                                   ==========  ===    ========      =====      ========     ========
</TABLE>

         See accompanying notes to consolidated financial statements.

                                      54

<PAGE>

                        NETOPIA, INC. AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF CASH FLOWS


<TABLE>
<CAPTION>
                                                                                Fiscal years ended September 30,
                                                                                -------------------------------
                                                                                  2001         2000      1999
                                                                                --------     --------  --------
                                                                                         (in thousands)
<S>                                                                             <C>          <C>       <C>
Cash flows from operating activities:
Net loss....................................................................... $(43,111)    $(15,137) $ (7,860)
Adjustments to reconcile net loss to net cash provided by (used in) operating
  activities:
   Depreciation and amortization...............................................   15,351       12,324     2,990
   Non-cash compensation for services..........................................       --           --       292
   Unrealized loss on impaired securities......................................    1,000           --        --
   Charge for in-process research and development..............................       --        8,658     4,205
   Charge for impairment of goodwill and other intangible assets...............   16,375           --        --
   Changes in allowance for doubtful accounts and returns on accounts
     receivable................................................................   (2,616)       2,462       179
   Changes in operating assets and liabilities, net of effects of acquisition:
       Trade accounts receivable...............................................    8,713       (8,255)   (5,673)
       Inventories.............................................................    3,128       (6,603)   (2,090)
       Prepaid expenses and other current assets...............................      357          383      (470)
       Deposits and other assets...............................................       (7)       1,035       637
       Accounts payable and accrued liabilities................................   (4,658)       3,643    (1,133)
       Deferred revenue........................................................      394          748       627
       Other liabilities.......................................................     (757)         803       (94)
                                                                                --------     --------  --------
          Net cash provided by (used in) operating activities..................   (5,831)          61    (8,390)
                                                                                --------     --------  --------
Cash flows from investing activities:
   Purchase of short-term investments..........................................  (50,799)     (62,025)  (19,472)
   Proceeds from the sale of short-term investments............................   59,445       48,190    34,221
   Purchase of furniture, fixtures and equipment...............................   (3,750)      (2,914)   (1,625)
   Acquisition of long term investment.........................................   (2,000)      (2,000)   (1,000)
   Capitalization of software development costs................................   (1,130)        (679)     (656)
   Acquisition of technology...................................................     (100)     (11,669)   (4,298)
   Purchase of intangibles.....................................................       --           --    (1,650)
                                                                                --------     --------  --------
          Net cash provided by (used in) investing activities..................    1,666      (31,097)    5,520
                                                                                --------     --------  --------
Cash flows from financing activities:
   Proceeds from the issuance of Common Stock, net.............................    2,029        7,494    45,007
          Net cash provided by financing activities............................    2,029        7,494    45,007
Net increase (decrease) in cash and cash equivalents...........................   (2,136)     (23,542)   42,137
Cash and cash equivalents, beginning of year...................................   37,839       61,381    19,244
                                                                                --------     --------  --------
Cash and cash equivalents, end of year......................................... $ 35,703     $ 37,839  $ 61,381
                                                                                ========     ========  ========
Supplemental disclosures of cash flow activities:
   Income taxes paid........................................................... $      6     $     --  $     --
                                                                                ========     ========  ========
Supplemental disclosures of non-cash investing and financing activities:
   Issuance of Common Stock for acquisition of intangible assets............... $     --     $ 35,387  $  2,811
                                                                                ========     ========  ========
   Issuance of Common Stock equivalents for consulting services................ $     16     $     --  $     --
                                                                                ========     ========  ========
</TABLE>

         See accompanying notes to consolidated financial statements.

                                      55

<PAGE>

                        NETOPIA, INC. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


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

  Nature of Business

   Netopia (the "Company") develops, markets and supports broadband gateways
and Web platform software designed for distributed enterprises, small and
medium size businesses, small office/home office professionals, and multi-PC
households.

  Principles of Consolidation

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

  Cash Equivalents and Short-Term Investments

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

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

   Cash equivalents and short-term investments classified as available-for-sale
as of September 30, 2001 and 2000, consisted of the following:

<TABLE>
<CAPTION>
                    September 30,
                   ---------------
                    2001    2000
                   ------- -------
                   (in thousands)
<S>                <C>     <C>
Money market funds $ 1,039 $   478
Corporate debt....  20,127  22,370
Commercial paper..  26,535  36,713
                   ------- -------
                   $47,701 $59,561
                   ======= =======
</TABLE>

   The available-for-sale securities as of September 30, 2001 and 2000 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 product revenue when persuasive evidence of an
arrangement exists, delivery has occurred, the fees are fixed or determinable,
and collectibility is probable.

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

                                      56

<PAGE>

                        NETOPIA, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

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

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

  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 one financial institution.
Management believes the financial risks associated with such deposits are
minimal.

   The Company sells its products primarily through distributors and resellers.
Sales are generally not collateralized, credit evaluations are performed as
appropriate, and allowances are provided for estimated credit losses. Prior to
fiscal year 2000, the Company had not experienced significant losses on trade
receivables from any particular customer, industry, or geographic region.
However, during fiscal year 2001 and 2000, the Company fully reserved $2.9
million and $1.9 million, respectively, of outstanding accounts receivable
primarily owed by certain competitive local exchange carrier (CLEC) customers.

  Inventories

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

  Furniture, Fixtures, and Equipment

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

  Impairment of Long-Lived Assets, Including Goodwill and Identifiable
  Intangibles

   The Company evaluates long-lived assets, including goodwill and identifiable
intangibles for impairment whenever events or changes in circumstances indicate
that the carrying amount of the asset may not be recoverable. Recoverability of
assets to be held and used is measured by a comparison of the carrying amount
of an asset to future net cash flows expected to be generated by the asset. If
such assets are considered to be

                                      57

<PAGE>

                        NETOPIA, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

impaired, the impairment to be recognized is measured by the amount by which
the carrying amount exceeds the fair value of the assets. Assets to be disposed
of are reported at the lower of carrying values or fair values, less costs of
disposal.

   Intangible assets consist of developed and core technology, assembled
workforce and non-competition agreements related to the Company's acquisitions
of WebOrder, StarNet Technologies, Inc. (StarNet), Serus LLC (Serus) and
netOctopus. As provided under Statement of Financial Accounting Standards
(SFAS) No. 121, given the slower than anticipated growth in the market for
integrated access device (IAD) products (the technology for which the Company
acquired from StarNet) and the uncertainties in the ".com" market to which the
Company marketed and licensed certain of its Web platform products (including
technology which the Company acquired from WebOrder and Serus) in addition to
the slower than anticipated revenue growth in the market for such products, the
Company determined the net carrying value of the goodwill and other intangible
assets related to these acquisitions will not be fully recovered. Accordingly,
the Company recorded a charge of $16.4 million based on the difference of the
carrying value and the estimated discounted future operating cash flows of the
goodwill and other intangible assets related to these acquisitions.

  Software Development Costs

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

   Amortization of capitalized product development costs begins when the
products are available for general release to customers, and is computed on a
product-by-product basis as the greater of: (i) the ratio of current gross
revenue for a product to the total of current and anticipated future gross
revenues for the product; or (ii) the straight-line method over the remaining
estimated economic life of the product, which is generally two years. All other
research and development expenditures are charged to research and development
expense in the period incurred. During fiscal year 2001, the Company
capitalized $1.1 million and during each of fiscal years 2000 and 1999, the
Company capitalized $0.7 million of product development costs incurred
subsequent to delivery of a working model, under a development agreement with a
third party.

  Advertising Costs

   The Company expenses advertising costs as incurred. Advertising expense was
$1.0 million, $0.7 million and $1.7 million for fiscal years 2001, 2000 and
1999, 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.

                                      58

<PAGE>

                        NETOPIA, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


  Long-Term Investments

   The Company has equity securities in two privately held companies. These
investments are carried at cost which approximates fair value. It is the policy
of the Company to regularly review the assumptions underlying the operating
performance and cash flow forecasts in assessing the carrying values of these
securities. The Company identifies and records impairment losses on investments
when events and circumstances indicate that such decline in fair value is other
than temporary.

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

  Per Share Calculations

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

   Potentially dilutive common equivalent shares have been excluded from the
computation of diluted EPS for fiscal years 2001, 2000 and 1999 since their
effect on EPS is antidilutive due to the losses incurred in each period.
Potentially dilutive common equivalent shares which were excluded from the
computation of diluted EPS consisted of options to purchase Common Stock
totaling 3,267,654 shares in fiscal year 2001; 4,019,480 shares in fiscal year
2000; 4,040,520 shares in fiscal 1999; and warrants to purchase Common Stock
totaling 5,000 shares in fiscal year 2001 and 60,000 shares in fiscal year 1999.

  Comprehensive Income (Loss)

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

                                      59

<PAGE>

                        NETOPIA, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


  Recent Accounting Pronouncements

   In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
No. 133, Accounting for Derivative and Hedging Activities. SFAS No. 133
establishes accounting and reporting standards for derivative instruments
(including derivative instruments embedded in other contracts) and for hedging
activities. SFAS No. 133, as amended by SFAS No. 137, is effective for all
fiscal quarters of fiscal years beginning after June 15, 2000. The Company
adopted SFAS No. 133 in its fiscal first quarter of 2001 which did not have a
material effect on its balance sheet or statement of operations.

   In December 1999, the United States Securities and Exchange Commission (SEC)
issued SAB 101, Revenue Recognition in Financial Statements. SAB 101 provides
guidance on applying generally accepted accounting principles to revenue
recognition issues in financial statements. The Company adopted SAB 101 in its
fiscal first quarter of 2001 resulting in a change in the accounting for
certain revenue contracts that include nonrefundable upfront payments from
customers. As a result of the adoption of SAB 101, the Company recorded a $1.6
million charge to its statement of operations and a $1.6 million increase in
deferred revenue to its consolidated balance sheet.

<TABLE>
<CAPTION>
                                                             SAB 101
                                                             Deferred
                                                             Revenue
                                                          --------------
                                                          (in thousands)
<S>                                                       <C>
Charge for SAB 101 deferred revenue......................     $1,555
Less amounts amortized:
   Three months ended December 31, 2000..................        267
   Three months ended March 31, 2001.....................        229
   Three months ended June 30, 2001......................        201
   Three months ended September 30, 2001.................        201
                                                              ------
       Subtotal..........................................        898
                                                              ------
   Net SAB 101 deferred revenue as of September 30, 2001.     $  657
                                                              ======
</TABLE>

   In July 2001, the FASB issued SFAS No. 141, Business Combinations. SFAS No.
141 requires that all business combinations be accounted for under the purchase
method. The use of the pooling-of-interests method is no longer permitted. SFAS
No. 141 requires that the purchase method be used for business combinations
initiated after June 30, 2001. The Company adopted the provisions of SFAS No.
141 commencing July 1, 2001. To date, the Company has accounted for all of its
business combinations as purchases and the adoption of SFAS No. 141 is not
expected to have a significant impact on the Company's financial position or
results of operations.

   In July 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible
Assets. SFAS No. 142 requires that goodwill resulting from a business
combination will no longer be amortized to earnings, but instead be reviewed
for impairment. The Company has elected to early adopt SFAS No. 142 as of
October 1, 2001. For goodwill resulting from business combinations prior to
July 1, 2001, amortization of such goodwill will continue through September 30,
2001, but will cease commencing October 1, 2001. For business combinations
occurring on or after July 1, 2001, the associated goodwill will not be
amortized. Upon adoption of SFAS No. 142 on October 1, 2001, the Company is
required to perform a transitional impairment test for all recorded goodwill
within six months and, if necessary, determine the amount of an impairment loss
by September 30, 2002. The effects of adopting SFAS No. 142 are currently being
determined.

   In August 2001 the FASB issued SFAS 144, Accounting for the Impairment or
Disposal of Long-Lived Asset". SFAS No. 144 serves to clarify and further
define the provisions of SFAS No. 121 Accounting for the

                                      60

<PAGE>

                        NETOPIA, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of.
SFAS No. 144 does not apply to goodwill and other intangible assets that are
not amortized. SFAS No. 144 is effective for fiscal years beginning after
December 15, 2001. The Company expects to adopt SFAS No. 144 effective October
1, 2002. The effect of adopting this statement is not expected to have a
material effect on the Company's consolidated financial position or results of
operations.

(2)  Acquisitions

  WebOrder

   In March 2000, the Company acquired all the outstanding common and Preferred
Stock of WebOrder, a California corporation, in a merger transaction in which
WebOrder merged into WO Merger Corporation, a wholly owned subsidiary formed in
connection with the transaction. WebOrder was a developer of eCommerce
infrastructure for small and medium size businesses that offered eCommerce
solutions to on-line businesses including the ability to manage order
processing, and the ability to maintain records of customer transactions
flowing through a merchant's on-line store.

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

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

    .  233,119 shares of the Company's Common Stock issued on the closing date;

    .  A series of potential earnout payments paid in cash and Common Stock
       after the closing date if certain revenue milestones are achieved. These
       earnout opportunities will be added to and included in the purchase
       price for accounting purposes when the earnouts have been achieved and
       additional consideration is distributable. At September 30, 2001, no
       milestones had been achieved;

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

    .  Transaction costs of approximately $1.0 million which included legal
       fees, accounting fees, and fees for other related professional services.

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

   Approximately 15,695 shares of the Company's Common Stock were held in
escrow for one year after the closing to satisfy WebOrder's indemnification
obligations under the definitive acquisition agreements. During fiscal year
2001, WebOrder's indemnification obligations were satisfied and all shares were
released from escrow to WebOrder's former stockholders.

   The excess purchase price over the net book value of the assets acquired was
approximately $20.1 million of which, based upon the Company's estimates
prepared in conjunction with a third party valuation consultant, the Company
allocated approximately $17.1 million to goodwill and other intangible assets,
which was being amortized over four and three years, respectively, and recorded
a charge for acquired in-process research and development of approximately $3.0
million. Both cost and income approaches were used to appraise the value of

                                      61

<PAGE>

                        NETOPIA, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

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

   Given the uncertainties in the ".com" market to which the Company marketed
and licensed certain of its Web platform products, including technology which
the Company acquired from WebOrder, in addition to the slower than anticipated
revenue growth in the market for such products, the Company determined the net
carrying value of the goodwill and other intangible assets related to the
WebOrder acquisition will not be fully recovered. Accordingly, the Company
recorded a charge of $9.6 million for impairment of goodwill and other
intangible assets related to its acquisition of WebOrder based on the
difference of the carrying value and the estimated discounted future operating
cash flows of the goodwill and other intangible assets related to this
acquisition.

  StarNet

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

   The Company accounted for the transaction under the purchase method. The
aggregate purchase price of the transaction was approximately $27.5 million,
based upon the consideration paid at closing. The final purchase price is
dependent upon potential earnout payments that could aggregate to an additional
$4.9 million. The aggregate consideration included:

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

    .  447,852 shares of our Common Stock issued on the closing date;

    .  A series of potential cash earnout payments aggregating up to
       approximately $5.9 million at various times after the closing date if
       certain technical and revenue milestones are achieved. These earnout
       opportunities will be included in the purchase price for accounting
       purposes when the milestones are achieved and additional consideration
       is distributable. At the acquisition date, we had deemed probable and
       recorded approximately $1.0 million in earnout payments. During the
       fiscal third quarter of 2000, the Company determined that the milestones
       for the $1.0 million potential earnout payment would not be met and
       accordingly, reduced the purchase price and amortization of goodwill
       relating to the purchase of StarNet by such amount. As of September 30,
       2001, no earnouts have been achieved.

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

    .  Transaction costs of approximately $0.8 million which included legal
       fees, accounting fees, fees paid for an independent fairness opinion,
       and fees for other services.

                                      62

<PAGE>

                        NETOPIA, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


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

   Approximately 30,673 shares of Common Stock were held in escrow for a period
of time after the closing to satisfy StarNet's indemnification obligations
under the definitive acquisition agreements. During the fiscal third quarter of
2000, a portion of these shares were released from the escrow to Netopia to
satisfy Netopia's indemnification claims, and the remaining shares were
released from escrow to StarNet's former stockholders.

   The excess purchase price over the net book value of the assets acquired was
approximately $28.1 million of which, based upon the Company's estimates
prepared in conjunction with a third party valuation consultant, the Company
allocated approximately $22.4 million to goodwill and other intangible assets,
which was being amortized over four and three years, respectively, and recorded
a charge for acquired in-process research and development of $5.7 million. The
Company used the income approach to appraise the value of the business and
projects acquired. Such method takes into consideration the stage of completion
of the projects and estimates related to expected future revenues, expenses and
cash flows which are then discounted back to present day amounts. Based upon
these estimates, material net cash flows from the acquired business were
expected to occur during the fiscal fourth quarter of 2000. These cash flows
were discounted using a weighted average discount rate of 20%. Based upon the
expenses incurred and the development time invested in the products prior to
the acquisition and the estimated expenses and development time to complete the
products, the Company determined the products purchased in aggregate, including
products under development and completed products, to be approximately 73%
complete at the time of acquisition. The Company completed the in-process
research and development in the fiscal third quarter of 2001.

   Given the slower than anticipated growth in the market for IAD products, the
technology for which the Company acquired from StarNet, the Company determined
the net carrying value of the goodwill and other intangible assets related to
the StarNet acquisition will not be fully recovered. Accordingly, the Company
recorded a charge of $6.1 million for impairment of goodwill and other
intangible assets related to its acquisition of StarNet based on the difference
of the carrying value and the estimated discounted future operating cash flows
of the goodwill and other intangible assets related to this acquisition.

  netOctopus

   In December 1998, the Company purchased from Network Associates'
substantially all of the assets and assumed certain liabilities related to the
netOctopus systems management software (netOctopus). The netOctopus software is
a suite of administration tools under development that allows for simultaneous
system support of multiple users across MacOS computer networks. In accordance
with the netOctopus Purchase Agreement, Netopia acquired substantially all of
the assets and assumed certain liabilities related to the netOctopus software
and its existing operations which included in-process research and development.

   The Company accounted for the transaction under the purchase method. The
aggregate purchase price of the transaction was approximately $1.1 million,
based on the consideration paid at closing. The final purchase price is
dependent on potential earnout payments. The aggregate purchase price includes:

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

  .  A series of potential earnout payments totaling $0.3 million if certain
       revenue and technical milestones are achieved. These earnout
       opportunities will be added to and included in the purchase price for
       accounting purposes when the milestones have been achieved and
       additional consideration is distributable. In each of fiscal years 2001
       and 2000, the Company made earnout payments of $0.1 million which was
       recorded as part of the purchase price of the transaction.

                                      63

<PAGE>

                        NETOPIA, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   The excess purchase price over the net book value acquired was $1.1 million,
of which, based upon the Company's estimates prepared in conjunction with a
third party valuation consultant, approximately $0.4 million was allocated to
acquired in-process research and development and $0.7 million was allocated to
goodwill and other intangible assets. The Company was amortizing goodwill and
other intangible assets related to the netOctopus transaction over four years.
The Company used the income approach to appraise the value of the business and
projects acquired. Such method takes into consideration the stage of completion
of the project and estimates related to expected future revenues, expenses and
cash flows which are then discounted back to present day amounts. Based upon
these estimates, material net cash flows from the acquired business were
expected to begin in the calendar year 2000. These cash flows were discounted
using a discount rate of 25.0%. Based upon the expenses incurred and the
development time invested in the product prior to the acquisition and the
estimated expenses and development time to complete the product, the Company
determined the product to be approximately 70% complete at the time of
acquisition. In fiscal year 1999, the Company completed the development of the
Windows versions of the product.

  Serus

   In December 1998, the Company purchased substantially all of the assets and
assumed certain liabilities and the existing operations of Serus, a Utah
limited liability company. Serus was developing a java-based Web site editing
software product which would allow Web site owners to modify and edit the
appearance of their Web site through their Web browser with minimal knowledge
of Hypertext Markup Language (HTML). In accordance with the Serus Asset
Purchase Agreement, Netopia acquired substantially all of the assets and
assumed certain liabilities of Serus and its existing operations which included
in-process research and development.

   The Company accounted for the transaction under the purchase method. The
aggregate purchase price of the transaction was approximately $7.0 million,
based on the consideration paid at closing. The final purchase price is
dependent on potential earnout payments. The aggregate purchase price includes:

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

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

  .  A $1.0 million earnout opportunity based upon certain revenue and
       technical milestones achieved. As of September 30, 2000 the earnout
       period had expired and no milestones had been achieved.

   The excess purchase price over the net book value acquired was $6.0 million,
of which, based upon the Company's estimates prepared in conjunction with a
third party valuation consultant, $3.9 million was allocated to acquired
in-process research and development and $2.1 million was allocated to
intangible assets. The Company was amortizing goodwill and other intangible
assets related to the Serus transaction over four years. The Company used the
income approach to appraise the value of the business and projects acquired.

   Such method takes into consideration the stage of completion of the project
and estimates related to expected future revenues, expenses and cash flows
which are then discounted back to present day amounts. Based upon these
estimates, material net cash flows from the acquired business were expected to
begin in the calendar year 2001. These cash flows were discounted using a
discount rate of 44.0%. Based upon the expenses incurred and the development
time invested in the product prior to the acquisition and the estimated
expenses and development time to complete the product, the Company determined
the product to be approximately 85% complete at the time of acquisition. In
fiscal year 2000, the Company completed the development of the in-process
research and development acquired.

                                      64

<PAGE>

                        NETOPIA, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   Given the uncertainties in the ".com" market to which the Company marketed
and licensed certain of its Web platform products, including technology which
the Company acquired from Serus, in addition to the slower than anticipated
revenue growth in the market for such products, the Company determined the net
carrying value of the goodwill and other intangible assets related to the Serus
acquisition will not be fully recovered. Accordingly, the Company recorded a
charge of $0.7 million for impairment of goodwill and other intangible assets
related to its acquisition of Serus based on the difference of the carrying
value and the estimated discounted future operating cash flows of the goodwill
and other intangible assets related to this acquisition.

   The following table summarizes the amounts allocated to goodwill and other
intangible assets for the acquisitions of WebOrder, StarNet, netOctopus and
Serus along with the amortization of such amounts as well as the impairment
charges and remaining balances for the fiscal years indicated.

<TABLE>
<CAPTION>


                              Amount
                            Allocated
                                to
                             Goodwill                                  Net
                               and     Amortization of Goodwill and  Carrying                 Net
                              Other      Other Intangible Assets      Value                Carrying
                            Intangible ----------------------------   Before   Impairment Value After
           Acquisition Date   Assets      2001      2000     1999   Impairment   Charge   Impairment
           ---------------- ----------  -------    ------   ------  ---------- ---------- -----------
                                                         (in thousands)
<S>        <C>              <C>        <C>        <C>      <C>      <C>        <C>        <C>
WebOrder..   March 2000      $17,119   $ 4,571    $2,384     $ --    $10,164    $ 9,592     $  572
StarNet...  October 1999      21,165     6,652     6,603       --      7,910      6,089      1,821
netOctopus  December 1998        961       226       226      144        365         --        365
Serus.....  December 1998      2,161       535       533      399        694        694         --
                             $41,406   $11,984    $9,746     $543    $19,133    $16,375     $2,758
</TABLE>

  Cayman Systems, Inc.

   On October 11, 2001, the Company and Cayman Systems, Inc. (Cayman), a
Massachusetts corporation, consummated a merger (the Merger) whereby Amazon
Merger Corporation, a Delaware corporation and a wholly-owned subsidiary of
Netopia (Merger Sub), was merged with and into Cayman pursuant to an Agreement
and Plan of Merger and Reorganization (the Merger Agreement) dated as of
September 19, 2001, as amended. Cayman, a developer and supplier of business
class broadband gateways, has survived the Merger as a wholly-owned subsidiary
of Netopia.

   The Company will account for the transaction under the purchase method. The
aggregate purchase price of the transaction was approximately $15.1 million,
based on the consideration paid at closing. The aggregate purchase price
included:

    .  $6.0 million in cash in exchange for all of Cayman's outstanding equity,
       including in-the-money stock options;

    .  $4.2 million in cash in exchange for all of Cayman's outstanding
       convertible debt;

    .  $2.3 million in cash in respect of an outstanding credit line of Cayman;

    .  $0.8 million in cash in fees to Cayman's investment bankers, attorneys
       and accountants;

    .  $1.1 million in cash for the Company's transaction costs including
       legal, accounting and other professional services; and

    .  $0.7 million cash in severance benefits to Cayman employees that were
       not retained.

                                      65

<PAGE>

                        NETOPIA, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   The Company also assumed certain other liabilities of Cayman.

   Approximately $1.7 million is being held in escrow to satisfy Cayman's
indemnification obligations under the Merger Agreement. Upon the satisfaction
of Cayman's indemnification obligations, certain amounts are be released from
escrow on the one year anniversary date of the close of the transaction and any
remaining amounts are to be released from escrow on the two year anniversary
date of the close of the transaction.

   The excess purchase price over the net book value of the assets acquired was
approximately $23.5 million of which, based upon the Company's estimates
prepared in conjunction with a third party valuation consultant, the Company
intends to allocate approximately $6.8 million to goodwill and other intangible
assets, and record a charge for acquired in-process research and development of
approximately $2.2 million. Both cost and income approaches were used to
appraise the value of the business and projects acquired. Such methods take
into consideration replacement costs of assets acquired, the stage of
completion of the projects and estimates related to expected future revenues,
expenses and cash flows which are then discounted back to present day amounts.
Based upon these estimates, material net cash flows from the acquired business
were expected to occur during the Company's fiscal year 2004. These cash flows
were discounted using a weighted average discount rate of 28%. Based upon the
expenses incurred and the development time invested in the products prior to
the acquisition and the estimated expenses and development time to complete the
products, the products purchased in aggregate, including products under
development and completed products, to be approximately 65% complete at the
time of acquisition.

(3) Discontinued Operations

   In August 1998, the Company sold its local area network (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.
The consideration the Company received for the sale of the LAN Division
consisted of the following (in thousands):

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

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

   The royalties receivable were based upon Farallon's total annual revenues
over each of the next five fiscal years ending on July 31, 2003. If total
annual revenues of at least $15.0 million were reached, the royalty rate
applies to total revenues, including the first $15.0 million. The value of the
royalties accrued at the close of the transaction was based upon the present
value of the Company's assumptions as to the projected future revenue of the
LAN Division. Royalties accrued, however, were not recorded to the extent that
total consideration on the transaction exceeded the net asset value of the LAN
Division assets being sold.

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

                                      66

<PAGE>

                        NETOPIA, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


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

   For fiscal year 2001, the gain on sale of discontinued operation is
primarily related to accounts receivable that were collected above amounts
agreed upon in the sale transaction.

(4) Inventories

   Inventories consisted of the following:

<TABLE>
<CAPTION>
                                         September 30,
                                         --------------
                                          2001   2000
                                         ------ -------
                                         (in thousands)
                         <S>             <C>    <C>
                         Raw materials.. $3,530 $ 4,673
                         Work in process    927      50
                         Finished goods.  2,699   5,561
                                         ------ -------
                                         $7,156 $10,284
                                         ====== =======
</TABLE>

(5) Furniture, Fixtures, and Equipment

   Furniture, fixtures, and equipment consisted of the following:

<TABLE>
<CAPTION>
                                                      September 30,
                                                    -----------------
                                                     2001      2000
                                                    -------  --------
                                                      (in thousands)
          <S>                                       <C>      <C>
          Office equipment......................... $ 4,506  $  3,568
          Furniture and fixtures...................   2,455     2,198
          Computers................................   8,164    10,505
          Leasehold improvements...................     382       209
                                                    -------  --------
                                                     15,507    16,480
          Accumulated depreciation and amortization  (9,737)  (12,011)
                                                    -------  --------
                                                    $ 5,770  $  4,469
                                                    =======  ========
</TABLE>

(6) Income Taxes

   Total income tax expense (benefit) for fiscal years 2001, 2000, and 1999 is
allocated as follows:

<TABLE>
<CAPTION>
                         September 30,
                        ----------------
                        2001 2000   1999
                        ---- -----  ----
                         (in thousands)
<S>                     <C>  <C>    <C>
Continuing operations.. $ -- $  --  $ --
Discontinued operations   --  (397)   --
                        ---- -----  ----
                        $ -- $(397) $ --
                        ==== =====  ====
</TABLE>

                                      67

<PAGE>

                        NETOPIA, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


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

<TABLE>
<CAPTION>
                                                  September 30,
                                           --------------------------
                                             2001     2000     1999
                                           --------  -------  -------
                                                 (in thousands)
<S>                                        <C>       <C>      <C>
Computed ''expected'' tax (benefit) of 34% $(14,182) $(5,990) $(2,672)
Net operating loss not benefited..........    9,405    1,853    2,772
Research credits..........................       --       --     (100)
Amortization of goodwill..................    4,777    4,073       --
State tax and other, net..................       --       64       --
                                           --------  -------  -------
                                           $     --  $    --  $    --
                                           ========  =======  =======
</TABLE>

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

<TABLE>
<CAPTION>
                                                           September 30,
                                                        ------------------
                                                          2001      2000
                                                        --------  --------
                                                          (in thousands)
     <S>                                                <C>       <C>
     Deferred tax assets:
        Reserves and accruals not currently deductible. $  1,163  $  3,096
        Deferred rent..................................       --        49
        Research and other credits.....................    3,712     2,950
        Tangible and intangible assets.................      616        --
        Net operating losses...........................   18,254    11,689
            Gross deferred assets......................   23,745    17,784
        Less valuation allowance.......................  (23,745)  (13,710)
            Total deferred tax assets..................       --     4,074
     Deferred tax liabilities:
        Tangible and intangible assets.................       --    (4,074)
     Total deferred tax liabilities....................       --    (4,074)
                                                        --------  --------
     Net deferred tax liabilities...................... $     --  $     --
                                                        ========  ========
</TABLE>

   The net change in the total valuation allowance for fiscal years 2001 and
2000 was increases of $10.0 million and $4.3 million, respectively.

   At September 30, 2001 and 2000, the Company believed that based upon
available objective evidence, there was sufficient uncertainty regarding the
realizability of its deferred tax assets to warrant a full valuation allowance.
The factors considered included the relative shorter life cycles in the high
technology industry and the uncertainty of longer-term taxable income
estimates. Included in the valuation allowance is a tax benefit attributable to
noncompensatory stock options of $7.7 million which, when realized, will be
credited to additional paid in capital.

   At September 30, 2001, the Company had net operating loss carryforwards of
approximately $48.7 million for federal tax purposes and $28.8 million for
state tax purposes. If not utilized, the federal net operating loss
carryforwards will expire in various years beginning in 2019 through 2021 and
the state net operating loss carryforwards will expire in various years
beginning 2003 through 2011.

                                      68

<PAGE>

                        NETOPIA, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   At September 30, 2001, the Company had research credit carryforwards of
approximately $2.6 million for federal tax purposes and $1.2 million for state
tax purposes. If not earlier utilized, the federal research credit
carryforwards will expire in various years beginning 2006 through 2020. The
state research credits carry forward indefinitely until utilized. The Company
has California manufacturing credit carryforwards of approximately $0.1 million
which expire in various years beginning 2006 through 2009.

   At September 30, 2001, the Company also had minimum tax credit carryforwards
of approximately $149,000 for federal tax purposes and $169,000 for state tax
purposes. These credits carryforward indefinitely until utilized.

   Federal and California state tax laws impose substantial restrictions on the
utilization of net operating loss carryforwards in the event of an "ownership
change" for tax purposes, as defined in section 382 of the Internal Revenue
Code. The Company has not yet determined if an ownership change has occurred.
If such ownership change has occurred, utilization of the net operating losses
will be subject to annual limitations in future years.

(7)  Stockholders' Equity and Stock Option Plans

   On April 23, 1996, the Company was reincorporated in the State of Delaware.
The Company's authorized capital consists of 50,000,000 shares of $0.001 par
value Common Stock and 5,000,000 shares of $0.001 par value Preferred Stock.
There was no Preferred Stock issued or outstanding at September 30, 2001.

  Common Stock

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

  Common Stock Warrants

   Warrants to purchase 5,000 shares of Common Stock were issued in fiscal year
2001 for consulting services provided. The exercise price of the warrants was
$5.625. The Company recognized an expense of $16,000 for the estimated fair
value, as determined by the Black-Scholes option valuation model, of the
warrants issued.

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

  Stock Option Plans

   On April 16, 1996, the Company adopted the 1996 Stock Option Plan (the 1996
Plan) providing for the issuance of incentive or non-statutory options to
directors, employees, and non-employee consultants. Options are granted at the
discretion of the Board of Directors. Incentive stock may be granted at not
less than 100% of

                                      69

<PAGE>

                        NETOPIA, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

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

   Included in the 1996 Plan is a provision for the automatic grant of
non-statutory options to non-employee Board of Director members of 25,000
shares on the effective date of the Company's initial public offering at the
initial offering price. These options were granted to two non-employee Board of
Director members, of which one currently remains on the Company's Board of
Directors. Thereafter, each new director will be granted an option to purchase
25,000 shares of Common Stock on the date they become a Board member of the
Company at the then current fair market value. Initial options issued to Board
members after January 13, 2000 will become exercisable in four successive and
equal annual installments over the non-employee Board member's period of
continued service as a Board member, beginning one year from the grant date of
the option. In addition, each non-employee Board member who is serving on the
date of the Annual Stockholders Meeting is granted on the date of the meeting a
non-statutory option to purchase 6,000 shares of Common Stock. The annual
options become exercisable in full upon completion of one year's Board service
measured from the option grant date. In July 1996, the Board of Directors
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.

   On October 18, 2000, the Company adopted the 2000 Stock Incentive Plan (the
2000 Plan) providing for issuance of non-statutory options and restricted stock
to employees, officers, directors, consultants, independent contractors and
advisors of the Company or any subsidiary of the Company. Options and
restricted stock awards granted under the 2000 Plan are granted at the
discretion of the Board of Directors or the Compensation Committee of the Board
of Directors. The 2000 Plan is not a stockholder approved stock option plan and
is intended to comply with the exception for broadly based option plans in
which a majority of the participants are rank and file employees not officers
or directors, and a majority of the grants are made to such employees. Only
nonqualified stock options that do not qualify as incentive stock options
within the meaning of Section 422(b) of the Code may be granted under this
Plan. The exercise price of an option will be determined by the Compensation
Committee when the option is granted and may be not less than the par value of
the shares on the date of grant. A restricted stock award is an offer by the
Company to sell to an eligible person shares that are subject to restrictions.
The purchase price of shares sold pursuant to a restricted stock award will be
determined by the compensation committee on the date the restricted stock award
is granted and may be not less than the par value of the shares on the date of
grant. Restricted stock awards shall be subject to such restrictions as the
Compensation Committee may impose. As of September 30, 2001, there were no
restricted stock awards granted under the 2000 plan.

   As of September 30, 2001, the Company had 3,267,654 shares subject to
outstanding options and 3,556,702 shares available for grant.

                                      70

<PAGE>

                        NETOPIA, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   The following table summarizes activity under the Company's stock option
plans:

<TABLE>
<CAPTION>
                                            Stock Options
                                     ---------------------------
                                                     Weighted
                                     Shares Under    Average
                                       Options    Exercise Price
                                     ------------ --------------
<S>                                  <C>          <C>
Outstanding as of September 30, 1998   3,520,899      $ 4.90
Options granted.....................   1,413,900       11.87
Options exercised...................    (626,013)       4.55
Options cancelled...................    (268,266)       6.89
                                      ----------
Outstanding as of September 30, 1999   4,040,520        7.26
Options granted.....................   1,564,823       41.13
Options exercised...................  (1,203,369)       4.81
Options cancelled...................    (382,494)      20.34
                                      ----------
Outstanding as of September 30, 2000   4,019,480       19.94
Options granted.....................   3,529,000        5.93
Options exercised...................    (239,042)       3.22
Options cancelled...................  (4,041,784)      20.02
                                      ----------
Outstanding as of September 30, 2001   3,267,654        5.92
                                      ----------
Exercisable.........................   1,751,525      $ 6.18
                                      ==========
</TABLE>

   The following table summarizes information about the Company's stock options
outstanding at September 30, 2001:

<TABLE>
<CAPTION>
                                  Options Outstanding             Options Exercisable
                         ------------------------------------- -------------------------
                           Number of    Weighted--                 Number
                          outstanding     average   Weighted-- exercisable as Weighted--
                         shares as of   remaining     average        of         average
                         September 30, contractual   exercise  September 30,   exercise
Range of exercise prices     2001      life (years)   price         2001        price
------------------------ ------------- ------------ ---------- -------------- ----------
<S>                      <C>           <C>          <C>        <C>            <C>
    $0.6105--$3.6100....     380,760       8.20      $ 2.5717       99,122     $ 1.4512
    3.8438-- 4.0000.....     111,423       6.37        3.9331       70,600       3.9712
    4.2500-- 4.2500.....   1,064,226       9.15        4.2500      349,702       4.2500
    4.3750-- 5.2500.....     515,452       6.42        4.8473      428,552       4.8781
    5.3125-- 5.6900.....     446,519       6.87        5.6318      292,179       5.6494
    5.7500-- 6.7500.....     439,768       6.49        6.6060      319,916       6.5521
    6.8125--34.6250.....     264,618       7.21       12.6351      174,539      12.9840
    40.2500--48.0000....      44,888       8.35       47.9420       16,915      47.8972
                           ---------       ----      --------    ---------     --------
                           3,267,654       7.68      $ 5.9230    1,751,525     $ 6.1798
                           =========       ====      ========    =========     ========
</TABLE>

  1996 Employee Stock Purchase Plan

   In April 1996, the Board of Directors 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 1,300,000 shares
have been approved for issuance under the Purchase Plan. Employees may purchase
shares of Common Stock at a price per share that is 85% of the lesser of the
fair market value as of the beginning or the end of the semi-annual option
period.

                                      71

<PAGE>

                        NETOPIA, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   Shares issued under the Purchase Plan totaled 250,155 in fiscal year 2001;
130,306 in fiscal year 2000; and, 199,721 in fiscal year 1999. As of September
30, 2001, 911,575 shares have been issued under the Purchase Plan and 688,425
shares were reserved for future issuances under the plan.

  Option Exchange Offer

   In April 2001, the Company's Board of Directors approved an offer by the
Company to its employees who regularly work more than 30 hours per week, and to
its directors, an offer to exchange (the Offer to Exchange) all options to
purchase shares of the Company's Common Stock that are outstanding under the
1996 Plan with an exercise price above $10.00 per share, for new options to
purchase shares of Common Stock to be granted by the Company under the Plan.
The key features of the new options are as follows:

 .  The number of shares subject to the new option will equal the number of
       shares subject to cancelled options, subject to adjustments for any
       stock splits, stock dividends and similar events.

 .  The exercise price of the new option will equal the closing sale price of
       the Company's Common Stock as reported on the Nasdaq National Market on
       the replacement grant date which shall be no sooner than six months and
       one day from the date of the exchange.

 .  The new option will vest and become exercisable on the same dates with
       respect to the same number of shares as the cancelled options.

 .  The new option will be an incentive stock option to the extent possible
       under applicable tax laws.

 .  The new option will have other terms and conditions that are substantially
       the same as those of the cancelled option.

   Pursuant to the Offer to Exchange, on June 4, 2001 the Company accepted for
exchange options to purchase an aggregate of 1,509,911 shares of the Company's
Common Stock, representing approximately 86.5% of the shares subject to options
that were eligible to be exchanged under the Offer to Exchange.

  Pro Forma Disclosure -- Compensatory Stock Arrangements

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

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

<TABLE>
<CAPTION>
                                                                September 30,
-                                                  ---------------------------------------
                                                       2001           2000        1999
-                                                    --------       --------    --------
                                                   (in thousands, except per share amounts
<S>                                                <C>            <C>          <C>
Net income (loss) -- as reported.................. $(43,111)      $(15,137)    $ (7,860)
Net income (loss) -- pro forma.................... $(54,313)      $(28,892)    $(12,143)
Basic and diluted net loss pershare -- as reported $  (2.41)      $  (0.90)    $  (0.60)
Basic and diluted net loss per share -- pro forma. $  (3.03)      $  (1.72)    $  (0.93)
</TABLE>

                                      72

<PAGE>

                        NETOPIA, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


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

   The effect of applying SFAS No. 123 for disclosing compensation costs may
not be representative of the effects on reported net loss for the future years
because pro forma net loss reflects compensation costs only for stock options
granted beginning in fiscal year 1997. The weighted average fair value of
employee stock options granted during fiscal years 2001, 2000 and 1999was
$4.40, $31.22and $8.08, respectively.

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

<TABLE>
<CAPTION>
                        Years ended September 30,
                        ------------------------
                         2001       2000    1999
                         -----      -----  ----
<S>                     <C>        <C>     <C>
Expected volatility.... 108.0%     103.5%  95.0%
Risk-free interest rate  4.12%      5.77%  4.59%
Expected dividend yield    --         --     --
</TABLE>

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

(8)  Commitments and Contingencies

  Leases

   The Company conducts its operations in leased facilities and with equipment
under operating lease agreements expiring at various dates through 2005. The
following is a schedule of future minimum rental payments required under these
leases that have initial or remaining non-cancelable lease terms in excess of
one year (in thousands):

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

2002.................................... $1,745
2003....................................    455
2004....................................    216
2005....................................     57
thereafter..............................     --
                                         ------
       Total minimum lease payments..... $2,473
                                         ======
</TABLE>

   Total rental expense for all operating leases amounted to $1.9 million, $1.7
million and $1.1 million for fiscal years 2001, 2000 and 1999, 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.

                                      73

<PAGE>

                        NETOPIA, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


  Plan for Savings and Investments

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

(9)  Geographic, Segment and Significant Customer Information

  Segment Information

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

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

<TABLE>
<CAPTION>
                           September 30, 2001           September 30, 2000          September 30, 1999
                      ---------------------------  ---------------------------  --------------------------
                      Internet    Web              Internet    Web              Internet    Web
                      Equipment Platform  Total    Equipment Platform  Total    Equipment Platform  Total
                      --------- -------- --------  --------- -------- --------  --------- -------- -------
                                                         (in thousands)
<S>                   <C>       <C>      <C>       <C>       <C>      <C>       <C>       <C>      <C>
Revenue..............  $58,861  $18,457  $ 77,318   $65,546  $24,660  $ 90,206   $24,460  $19,691  $44,151
Cost of revenues.....   39,165      795    39,960    46,582      697    47,279    15,597      646   16,243
   Gross profit......   19,696   17,662    37,358    18,946   23,963    42,927     8,863   19,045   27,908
   Gross margin......       33%      96%       48%       29%      97%       48%       36%      97%      63%
Unallocated operating
  expenses...........                      80,580                       64,124                      37,834
   Operating loss....                    $(43,222)                    $(21,197)                    $(9,926)
</TABLE>

                                      74

<PAGE>

                        NETOPIA, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


  Geographic Information

   The Company sells its products and provides services worldwide through a
direct sales force, independent distributors, and value-added resellers. It
currently operates in four regions: United States, Europe, Canada, and Asia
Pacific and other. Revenues outside of the United States are primarily export
sales denominated in United States dollars. The Company does not have material
operating assets outside of the United States. Disaggregated financial
information regarding the Company's revenues by geographic region for the
fiscal years 2001, 2000and 1999 is as follows:

<TABLE>
<CAPTION>
                                               September 30,
                                   -------------------------------------
                                       2001         2000         1999
                                   -----------  -----------  -----------
                                              ($ in thousands)
<S>                                <C>     <C>  <C>     <C>  <C>     <C>
Europe............................ $ 9,378  12% $13,558  15% $ 9,820  22%
Canada............................   1,168   2%   1,689   2%   1,222   3%
       Asia Pacific and other.....   1,030   1%   1,215   1%   1,164   3%
                                   ------- ---  ------- ---  ------- ---
Subtotal international revenue....  11,576  15%  16,462  18%  12,206  28%
United States.....................  65,742  85%  73,744  82%  31,945  72%
                                   ------- ---  ------- ---  ------- ---
       Total revenues............. $77,318 100% $90,206 100% $44,151 100%
                                   ======= ===  ======= ===  ======= ===
</TABLE>

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

  Customer Information

   Historically, the Company has sold its products to CLECs, distributors,
ILECs, ISPs and directly to end-users. Disaggregated financial information
regarding the Company's revenues by customer for the fiscal years 2001, 2000
and 1999 is as follows:

<TABLE>
<CAPTION>
                         September 30,
               ---------------------------------
                  2001        2000        1999
               ----------  ----------  ---------
                        ($ in thousands)
<S>            <C>     <C> <C>     <C> <C>    <C>
Covad [a]..... $12,565 16% $14,812 16% $   -- --%
Ingram Micro..   8,380 11%   6,162  7%  4,349 10%
Rhythms [b]...   8,204 11%   5,181  6%    751  2%
Northpoint [c]   2,415  3%  10,608 12%  2,469  6%
</TABLE>
--------
[a] Covad filed a voluntary petition under the Bankruptcy Act in August 2001 as
    part of a capital restructuring plan. On November 13, 2001, Covad announced
    that it had secured an agreement with SBC to provide Covad with $150
    million in funding. Covad announced on December 13, 2001 that it received
    approval of its reorganization plan from the Bankruptcy Court, and that it
    expects to emerge from bankruptcy around December 20, 2001. The SBC funding
    would take place at that time, subject to normal closing conditions.
    Additionally, Covad has announced that this funding is expected to provide
    the cash that it believes will allow it to become cash flow positive by the
    latter half of 2003.

[b] Rhythms received Bankruptcy Court approval and completed the sale of a
    substantial portion of its assets to Worldcom in December 2001.

[c] Northpoint ceased operations during March 2001.

   No other customers during the fiscal years ended September 30, 2001, 2000
and 1999 accounted for 10% or more of the Company's total revenues. For fiscal
year 2001, there were three customers who each individually

                                      75

<PAGE>

                        NETOPIA, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

represented at least 5% of the Company's revenues and in the aggregate,
accounted for 38% of the Company's total revenues. For fiscal year 2000, there
were five customers who each individually represented at least 5% of the
Company's total revenues and in aggregate, accounted for 46% of the Company's
total revenues. For fiscal year 1999, there were two customers who each
individually represented at least 5% of the Company's total revenues and in
aggregate accounted for 15% of the Company's total revenues.

   The following table sets forth the accounts receivable balance for the
customers identified above along with such data expressed as a percentage of
total accounts receivable:

<TABLE>
<CAPTION>
                        September 30,
               -------------------------------
                  2001       2000       1999
               ---------  ---------  ---------
                       ($ in thousands)
<S>            <C>    <C> <C>    <C> <C>    <C>
Covad [a]..... $1,649 17% $1,054  7% $   -- --%
Ingram Micro..  1,881 20%  1,688 11%  1,357 14%
Rhythms [b]...     -- --%    912  6%    108  1%
Northpoint [c]     -- --%  1,680 11%    549  6%
</TABLE>
--------
[a] Covad filed a voluntary petition under the Bankruptcy Act in August 2001 as
    part of a capital restructuring plan. On November 13, 2001, Covad announced
    that it had secured an agreement with SBC to provide Covad with $150
    million in funding. Covad announced on December 13, 2001 that it received
    approval of its reorganization plan from the Bankruptcy Court, and that it
    expects to emerge from bankruptcy around December 20, 2001. The SBC funding
    would take place at that time, subject to normal closing conditions.
    Additionally, Covad has announced that this funding is expected to provide
    the cash that it believes will allow it to become cash flow positive by the
    latter half of 2003.

[b] Rhythms received Bankruptcy Court approval and completed the sale of a
    substantial portion of its assets to Worldcom in December 2001. Beginning
    June 2001, Rhythms prepaid for all purchases of our broadband Internet
    equipment products, and consequently accounted for no additional amounts of
    our accounts receivable.

[c] Northpoint ceased operations during March 2001. During the three months
    ended December 31, 2000, we fully reserved approximately $1.7 million
    related to Northpoint's outstanding accounts receivable balance. Beginning
    January 2001, Northpoint prepaid for all purchases of our broadband
    Internet equipment products, and consequently accounted for no additional
    amounts of our accounts receivable other than the amount previously fully
    reserved. As a result of Northpoint filing for protection under the
    Bankruptcy Act and ceasing operations during March 2001, we do not believe
    we will recover any amounts from the bankruptcy estate.

(10)  Long-Term Investments

   During the fiscal first quarter of 2001, the Company purchased $2.0 million
of Series D Preferred stock in MegaPath. MegaPath offers high-speed DSL access
and eCommerce and Web hosting services to small and medium size businesses.
During fiscal year 2000, MegaPath had purchased the Company's broadband
Internet equipment and licensed certain of our Web platform products. Although
there is no public market for MegaPath's stock, the Company believes the market
value of these shares is not less than $2.0 million.

   During the fiscal fourth quarter of 2000, the Company purchased $2.0 million
of Series C Preferred Stock in Everdream. Everdream provides outsourced IT
expertise, products and services that enable small and medium size businesses
to focus on their core competencies. In April 2000, the Company entered into an
agreement with

                                      76

<PAGE>

                        NETOPIA, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Everdream to host a co-branded version of the Company's eStore platform for
Everdream's customers. Although there is no public market for Everdream's
stock, the Company believes that the market value of these shares is not less
than $2.0 million.

   In April 1999, the Company purchased $1.0 million of Series D-1 Preferred
Stock of Northpoint. Upon the initial public offering of the Common Stock of
Northpoint in May 1999, the Company's Series D-1 Preferred Stock converted into
55,555 shares of Class B Common Stock. During fiscal year 2001, the Company
recorded an unrealized loss on impaired securities to reflect the other than
temporary decline in the investment in Northpoint.

(11) Restructuring Costs

   During the fiscal second quarter of 2001, the Company recorded a
restructuring charge in connection with a reduction in the Company's workforce
of approximately 27 people and costs to exit certain business activities. The
charge consisted of employee severance benefits, costs related to exiting
certain Internet portal business activities and future lease costs associated
with facilities to be abandoned. Details of the restructuring charge is as
follows:

<TABLE>
<CAPTION>
                                        Employee   Internet
                                        severance   portal   Facility
                                        benefits  exit costs  costs   Total
                                        --------- ---------- -------- ------
                                                   (in thousands)
<S>                                     <C>       <C>        <C>      <C>
Total charge...........................   $475       $510      $88    $1,073
Less:
   Amounts paid........................    320         97       47       464
   Non-cash charges....................     63        413       --       476
                                          ----       ----      ---    ------
Balance at September 30, 2001..........   $ 92       $ --      $41    $  133
                                          ====       ====      ===    ======
</TABLE>

(12) Terminated Merger Costs

   During the fiscal second quarter of 2001, the Company recorded a
non-recurring charge of $2.6 million for costs incurred in connection with the
terminated merger between the Company and Proxim. The non-recurring charge
consisted of fees for accounting and legal advisory services, initiation of
joint marketing and research and development expenses in anticipation of the
merger that we had undertaken at the direction of Proxim, certain shared merger
costs, and other related expenses. Details of the non-recurring charge is as
follows:

<TABLE>
<CAPTION>
                                        Accounting                 Joint research
                                        and legal                       and       Shared
                                         advisory  Joint marketing  development   merger
                                         services    commitments       costs      costs  Other Total
                                        ---------- --------------- -------------- ------ ----- ------
                                                               (in thousands)
<S>                                     <C>        <C>             <C>            <C>    <C>   <C>
Total charge...........................   $1,257        $572            $429       $150  $232  $2,640
Less:
   Amounts paid........................    1,257         560             429        117   216   2,579
   Non-cash charges....................       --          --              --         --    16      16
                                          ------        ----            ----       ----  ----  ------
Balance at March 31, 2001..............   $   --        $ 12            $ --       $ 33  $ --  $   45
                                          ======        ====            ====       ====  ====  ======
</TABLE>


                                      77

<PAGE>

   Schedule--Valuation and Qualifying Accounts

<TABLE>
<CAPTION>
                                                        Charged
                                          Balance at   (credited)              Balance
                                         beginning of to costs and            at end of
Description                                 period      expenses   Deductions  period
-----------                              ------------ ------------ ---------- ---------
                                                         (in thousands)
<S>                                      <C>          <C>          <C>        <C>
Allowance for doubtful accounts:
   Fiscal year ended September 30, 2001.    $2,817       $3,052      $5,356    $  513
   Fiscal year ended September 30, 2000.       579        2,832         594     2,817
   Fiscal year ended September 30, 1999.       400          534         355       579
Allowance for returns and rebates:
   Fiscal year ended September 30, 2001.    $  441       $   --      $  313    $  128
   Fiscal year ended September 30, 2000.       217          336         112       441
   Fiscal year ended September 30, 1999.       217           --          --       217
</TABLE>

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 Item 10 of Form 10-K regarding our directors is
incorporated by reference to the information contained in the section captioned
"Proposal No. 1 - Election of Directors" in our Proxy Statement to be filed
with the United States Securities and Exchange Commission within 120 days after
the end of the fiscal year ended September 30, 2001. The information required
by Item 10 of Form 10-K regarding our executive officers is set forth in the
section entitled "Executive Officers of the Registrant" in Part I, Item 4A of
this Form 10-K.

Item 11. Executive Compensation

   The information required by Item 11 of Form 10-K is incorporated by
reference to the information contained in the section captioned "Executive
Compensation and Other Matters" in our Proxy Statement to be filed with the
United States Securities and Exchange Commission within 120 days after the end
of the fiscal year ended September 30, 2001.

Item 12. Security Ownership of Certain Beneficial Owners and Management

   The information required by Item 12 is incorporated by reference to the
information contained in the section captioned "Security Ownership of Certain
Beneficial Owners and Management" in our Proxy Statement to be filed with the
United States Securities and Exchange Commission within 120 days after the end
of the fiscal year ended September 30, 2001.

Item 13. Certain Relationships and Related Transactions

   The information required by Item 13 is incorporated by reference to the
information contained in the section captioned "Certain Relationships and
Related Transactions" in our Proxy Statement to be filed with the United States
Securities and Exchange Commission within 120 days after the end of the fiscal
year ended September 30, 2001.

                                      78

<PAGE>

                                   PART IV.

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

[a] See Item 8 for an index to the consolidated financial statements and
    supplementary financial information.

[b] For the three months ended September 30, 2001, we filed the following Forms
    8-K:

 .  On July 24, 2001, we filed a Form 8-K reporting: Item 5 - Other Events
       announcing the appointment of William D. Baker as our new Senior Vice
       President and Chief Financial Officer; and Item 7 - Financial Statements
       and Exhibits which included as an exhibit, the press release dated July
       24, 2001 announcing Mr. Bakers appointment. There were no financial
       statements filed as part of this Form 8-K.

    .  On September 20, 2001, we filed a Form 8-K reporting: Item 5 - Other
       Events announcing that we had entered into an Agreement and Plan of
       Merger and Reorganization with Cayman, a privately-held Massachusetts
       corporation; and Item 7 - Financial Statements and Exhibits which
       included as an exhibit, the press release dated September 19, 2001
       announcing the acquisition. There were no financial statements filed as
       part of this Form 8-K.

   In addition, related to the Form 8-K filed on September 20, 2001, on October
17, 2001, we filed a Form 8-K reporting: Item 2 - Acquisition of Disposition of
Assets; and Item 7 - Financial Statements and Exhibits, announcing the
completion of the Cayman acquisition. Although there were no financial
statements filed as part of this Form 8-K, we stated that we would provide the
financial statements and pro forma financial information required by Item 7 of
Form 8-K within 60 days of the date that the Form 8-K is required to be filed
with the United States Securities and Exchange Commission.

[c] Exhibits have been filed separately with the United States Securities and
    Exchange Commission in connection with the Annual Report on Form 10-K or
    have been incorporated into the report by reference. You may obtain copies
    of such exhibits directly from us upon request.

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

3.2[a]  Restated and Amended Bylaws of the Registrant

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

4.1     Reference is made to Exhibits 3.1, 3.2 and 3.3

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

10.1[a] Form of Indemnification Agreement entered into between the Registrant and it Directors and
        Officers

10.2[a] 1996 Stock Option Plan and forms of agreements thereunder

10.3[a] Employee Stock Purchase Plan

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

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

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

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

                                      79

<PAGE>

<TABLE>
<CAPTION>
 Exhibit
 Number   Description
 ------   -----------
<C>       <S>

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

10.9[f]   Agreement and Plan of Reorganization, dated February 22, 2000 by and among Netopia, Inc., a
          Delaware corporation, WO Merger Corporation, a Delaware corporation and wholly-owned
          subsidiary of Netopia (Sub) and WebOrder, a California corporation
10.10[g]  2000 Stock Incentive Plan and forms of agreements thereunder

10.11[h]. Agreement and Plan of Merger and Reorganization among Netopia, Inc., Amazon Merger
          Corporation, Cayman Systems, Inc., Certain Holders of Convertible Subordinated Promissory
          Notes and Richard Burnes, as Security Holders' Representative, dated as of September 19, 2001

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

21.1[i,j] Subsidiaries of the Registrant

23.1      Consent of Independent Auditors

24.1      Power of Attorney (see Signature page)
</TABLE>
--------
[a] Incorporated by reference to our Registration Statement on Form S-1 (No.
    333-3868).

[b] Incorporated by reference to our Form 10-K for the fiscal year ended
    September 30, 1997.

[c] Incorporated by reference to our Form 8-K as filed on August 20, 1998.

[d] Incorporated by reference to our form 10-K for the fiscal year ended
    September 30, 1998.

[e] Incorporated by reference to our Form 8-K as filed on October 28, 1999.

[f] Incorporated by reference to our Form 8-K as filed on April 7, 2000.

[g] Incorporated by reference to our Form S-8 as filed on December 8, 2000.

[h] Incorporated by reference to our Form 8-K as filed on October 17, 2001.

[i] Incorporated by reference to our Registration Statement on Form S-1 (No.
    333-3868) for our Subsidiary in France.

[j] Updated for our new subsidiaries in the United States.

                                      80

<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 21st day of December, 2001.

                                          NETOPIA, INC.

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

Dated: December 21, 2001

                                      81

<PAGE>

                               POWER OF ATTORNEY

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

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

        Signature                       Title                      Date
        ---------                       -----                      ----

    /s/ ALAN B. LEFKOF   President, Chief Executive Officer  December 21, 2001
  ----------------------   and Director (Principal Executive
      Alan B. Lefkof       Officer)

   /s/ WILLIAM D. BAKER  Senior Vice President and Chief     December 21, 2001
  ----------------------   Financial Officer (Principal
     William D. Baker      Financial and Accounting
                           Officer)

    /s/ REESE M. JONES   Chairman of the Board of Directors  December 21, 2001
  ----------------------
      Reese M. Jones

  /s/ DAVID F. MARQUARDT Director                            December 21, 2001
  ----------------------
    David F. Marquardt

      /s/ ROBERT LEE     Director                            December 21, 2001
  ----------------------
        Robert Lee

   /s/ HAROLD S. WILLS   Director                            December 21, 2001
  ----------------------
     Harold S. Wills

                                      82