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



                                    FORM 10-Q


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

                  For the quarterly period ended June 30, 1999


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

               For the transition period from ________ to ________


                         Commission file number 0-28450


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


           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 |X|check  whether the  registrant (1) has filed all reports
required to be filed by Sections 13 or 15(d) of the  Securities  Exchange Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
registrant was required to file such reports),  and (2) has been subject to such
filing requirements for the past 90 days.


                 Yes       |X|                    No
                        ---------                      ----------


         As of July 31, 1999 there were  13,093,485  shares of the  Registrant's
Common Stock outstanding.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------

<PAGE>


NETOPIA, INC.
FORM 10-Q
TABLE OF CONTENTS                                                           PAGE
--------------------------------------------------------------------------------
PART I.   FINANCIAL INFORMATION

Item 1.   Condensed Consolidated Financial Statements..........................2

          Condensed consolidated balance sheets at June 30, 1999 and
          September 30, 1998...................................................2

          Condensed consolidated statements of operations and comprehensive
          income (loss) for the three and nine months ended June 30, 1999
          and 1998.............................................................3

          Condensed consolidated statements of cash flows for the nine
          months ended June 30, 1999 and 1998..................................4

          Notes to condensed consolidated financial statements.................5

Item 2.   Management's Discussion and Analysis of Financial Condition and
          Results of Operations...............................................10

Item 3.   Quantitative and Qualitative Disclosures About Market Risk..........33

PART II.  OTHER INFORMATION

Item 5.   Other Information...................................................34

Item 6.   Exhibits and Reports on Form 8-K....................................34

SIGNATURE ....................................................................35

<PAGE>

PART I.       FINANCIAL INFORMATION
Item 1.       Condensed Consolidated Financial Statements
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>

 NETOPIA, INC. AND SUBSIDIARY
 Condensed Consolidated Balance Sheets
  (in thousands, except for share and per share amounts)
  (unaudited)                                                                      June 30,          September 30,
                                                                                     1999                 1998
---------------------------------------------------------------------------------------------------------------------
<S>                                                                               <C>                   <C>

  ASSETS

  Current assets:
      Cash and cash equivalents..............................................      $    17,924          $    19,244
      Short-term investments.................................................           14,350               22,851
      Trade accounts receivable less allowance for doubtful accounts and
           returns of $609 and $617, respectively............................            8,069                4,358
      Royalties receivable...................................................              766                  410
      Inventories, net.......................................................            3,031                1,591
      Prepaid expenses and other current assets..............................            1,298                  929
                                                                               --------------------------------------
              Total current assets...........................................           45,438               49,383
  Note receivable............................................................            1,012                  900
  Royalties receivable.......................................................              808                1,372
  Furniture, fixtures and equipment, net.....................................            2,373                2,068
  Intangible assets, net.....................................................            2,528                   --
  Long-term investment.......................................................            2,028                   --
  Deposits and other assets..................................................            3,620                2,569
                                                                               --------------------------------------
                                                                                   $    57,807          $    56,292
                                                                               ======================================
  LIABILITIES AND STOCKHOLDERS' EQUITY

  Current liabilities:
      Accounts payable.......................................................      $     7,801          $     5,440
      Accrued compensation...................................................            2,531                1,217
      Accrued liabilities....................................................            1,606                3,468
      Deferred revenue.......................................................            1,284                  807
      Other current liabilities..............................................              104                  299
                                                                               --------------------------------------
              Total current liabilities......................................           13,326               11,231
  Long-term liabilities......................................................              339                  260
                                                                               --------------------------------------
              Total liabilities..............................................           13,665               11,491

  Commitments and contingencies

  Stockholders' equity:
      Preferred stock:
         $0.001 par value, 5,000,000 shares authorized, none issued
         or outstanding......................................................              --                   --
      Common stock:
         $0.001 par value, 25,000,000 shares authorized; 12,986,134 and
         11,953,908 shares issued and outstanding at June 30, 1999 and
         September 30, 1998, respectively....................................               13                   12
      Additional paid-in capital.............................................           57,688               51,871
      Accumulated other comprehensive income.................................            1,028                   --
      Retained deficit.......................................................          (14,587)              (7,082)
                                                                               --------------------------------------
              Total stockholders' equity.....................................           44,142               44,801
                                                                               --------------------------------------
                                                                                   $    57,807          $    56,292
                                                                               ======================================
</TABLE>

See accompanying notes to condensed consolidated financial statements.

                                       2
<PAGE>


<TABLE>
<CAPTION>

 NETOPIA, INC. AND SUBSIDIARY
 Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)
 (in thousands, except for per share amounts)
 (unaudited)                                                       Three months ended           Nine months ended
                                                                        June 30,                    June 30,
                                                                 -------------------------   -------------------------
                                                                    1999         1998           1999         1998
----------------------------------------------------------------------------------------------------------------------
<S>                                                              <C>             <C>           <C>          <C>

  Revenues....................................................   $   12,220      $ 6,766       $ 30,678     $ 18,481

  Cost of revenues............................................        4,670        1,984         11,120        5,563
                                                                 -------------------------   -------------------------
      Gross profit............................................        7,550        4,782         19,558       12,918
  Operating expenses:
      Research and development................................        2,327        1,659          6,658        5,261
      Selling and marketing ..................................        5,058        3,368         14,647       10,007
      General and administrative..............................          908          823          2,589        2,419
      Acquired in-process research
           and development....................................           --           --          4,205           --
      Amortization of goodwill................................          181           --            362           --
                                                                 -------------------------   -------------------------
         Total operating expenses.............................        8,474        5,850         28,461       17,687
                                                                 -------------------------   -------------------------

         Operating loss.......................................         (924)      (1,068)        (8,903)      (4,769)
  Other income, net...........................................          398          526          1,398        1,663
                                                                 -------------------------   -------------------------
      Loss from continuing operations
         before income taxes..................................         (526)        (542)        (7,505)      (3,106)
 Income tax benefit...........................................           --         (212)            --       (1,127)
                                                                 -------------------------   -------------------------

      Loss from continuing operations.........................         (526)        (330)        (7,505)      (1,979)
  Discontinued operations, net of taxes.......................           --          334             --          585
                                                                 -------------------------   -------------------------
         Net income (loss)...................................        $  (526)     $    4       $ (7,505)    $ (1,394)
                                                                 =========================   =========================

 Per share data, continuing operations:
      Basic and diluted loss per share........................       $ (0.04)     $ (0.03)       $ (0.60)     $ (0.17)
                                                                 =========================   =========================
      Shares used in the per share calculations...............       12,907       11,716         12,560       11,617
                                                                 =========================   =========================

 Per share data, discontinued operations:
      Basic income per share..................................        $  --      $  0.03          $  --      $  0.05
                                                                 =========================   =========================
      Diluted income per share................................        $  --      $  0.03          $  --      $  0.05
                                                                 =========================   =========================
      Common shares used in the calculations of basic income
         per share............................................           --       11,716             --       11,617
                                                                 =========================   =========================
      Common and common equivalent shares used in the
         calculations of diluted income per share.............           --       13,192             --       12,717
                                                                 =========================   =========================

 Per share data, net income (loss):
      Basic net income (loss) per share.......................       $ (0.04)    $  0.00        $ (0.60)      $ (0.12)
                                                                 =========================   =========================

      Diluted net income (loss) per share.....................       $ (0.04)    $  0.00        $ (0.60)      $ (0.12)
                                                                 =========================   =========================
      Common shares used in the calculations of basic income
         (loss) per share.....................................       12,907       11,716         12,560       11,617
                                                                 =========================   =========================
      Common and common equivalent shares used in the
      calculations of diluted income  (loss) per share........       12,907       13,192         12,560       11,617
                                                                 =========================   =========================


  Comprehensive income (loss):
      Net income (loss) ......................................       $  (526)     $    4       $ (7,505)    $ (1,394)
      Other comprehensive income..............................         1,028          --          1,028           --
                                                                 -------------------------   -------------------------
         Total comprehensive income (loss) ...................        $  502      $    4       $ (6,477)    $ (1,394)
                                                                 =========================   =========================
</TABLE>

See accompanying notes to condensed consolidated financial statements.


                                       3
<PAGE>


<TABLE>
<CAPTION>

 NETOPIA, INC. AND SUBSIDIARY
 Condensed Consolidated Statements of Cash Flows
 (in thousands)
 (unaudited)                                                                        Nine months ended June 30,
                                                                               --------------------------------------
                                                                                     1999                1998
---------------------------------------------------------------------------------------------------------------------
<S>                                                                                <C>                   <C>

  Cash flows from operating activities:
  Net loss...................................................................      $    (7,505)         $    (1,394)
  Adjustments to reconcile net loss to net cash used in operating activities:
     Depreciation and amortization...........................................            2,219                  994
     Amortization of deferred compensation...................................               --                   13
     Charge for acquired in-process research and development.................            4,205                   --
     Changes in operating assets and liabilities:
        Trade accounts receivable............................................           (3,711)                 875
        Inventories..........................................................           (1,440)                  58
        Prepaid expenses, deposits and other current assets..................             (175)                (497)
        Accounts payable and accrued liabilities.............................            1,813                   82
        Deferred revenue.....................................................              441                  (68)
        Other liabilities....................................................           (1,730)                 667
                                                                               --------------------------------------
           Net cash provided by (used in) operating activities...............           (5,883)                 730
                                                                               --------------------------------------

  Cash flows from investing activities:
     Purchase of furniture, fixtures and equipment...........................           (1,285)                (767)
     Acquisition of technology...............................................           (4,283)                  --
     Acquisition of intangible assets........................................               --               (1,800)
     Capitalization of software development costs............................             (377)                (212)
     Purchase of short-term investments......................................          (14,723)             (35,974)
     Purchase of long-term investment........................................           (1,000)                  --
     Proceeds from the sale and maturity of short-term investments...........           23,224               43,238
                                                                               --------------------------------------
           Net cash provided by investing activities.........................            1,556                4,485
                                                                               --------------------------------------

  Cash flows from financing activities:
     Proceeds from the issuance of common stock..............................            3,007                  714
                                                                               --------------------------------------
           Net cash provided by financing activities.........................            3,007                  714
                                                                               --------------------------------------

  Net increase (decrease) in cash and cash equivalents.......................           (1,320)               5,929
  Cash and cash equivalents, beginning of period.............................           19,244               14,444
                                                                               --------------------------------------
  Cash and cash equivalents, end of period...................................      $    17,924          $    20,373
                                                                               ======================================

  Noncash investing and financing activities:
     Issuance of common stock for acquisition of intangible assets...........      $     2,811            $      --
                                                                               ======================================
     Issuance of common stock for consulting services........................       $      116            $      --
                                                                               ======================================
  Supplemental disclosures of cash flow information:
     Interest paid...........................................................        $      --            $       1
                                                                               ======================================
     Income taxes paid.......................................................        $      --           $      113
                                                                               ======================================
</TABLE>

See accompanying notes to condensed consolidated financial statements.

                                       4
<PAGE>

NETOPIA, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

(1)      Basis of Presentation

         The unaudited condensed  consolidated  financial statements included in
this Form 10-Q  reflect all  adjustments,  consisting  only of normal  recurring
adjustments   which  in  our  opinion  are  necessary  to  fairly   present  our
consolidated  financial  position,  results of operations and cash flows for the
periods presented.  These condensed  consolidated financial statements should be
read in conjunction with our consolidated  financial  statements included in our
Annual Report on Form 10-K and other  filings with the United States  Securities
and Exchange  Commission.  The consolidated results of operations for the period
ended June 30, 1999 are not necessarily indicative of the results to be expected
for any  subsequent  quarter or for the entire fiscal year ending  September 30,
1999.

(2)      Recent Accounting Pronouncements

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

         In  December   1998,  the  American   Institute  of  Certified   Public
Accountants' (AICPA) Accounting Standards Executive Committee (AcSEC) issued SOP
98-9 which amends  paragraphs  11 and 12 of SOP 97-2 to require  recognition  of
revenue using the "residual method" when:

         o    There is vendor-specific  objective evidence of the fair values of
              all undelivered elements in a multiple-element arrangement that is
              not accounted for using long-term contract accounting;

         o    Vendor-specific objective evidence of fair value does not exist
              for one or more of the delivered elements in the arrangement; and

         o    All  revenue  recognition  criteria  in SOP  97-2  other  than the
              requirement  for  vendor-specific  objective  evidence of the fair
              value of each delivered element of the arrangement are satisfied.

        Under the residual method, the arrangement fee is recognized as follows;

         o    The total fair value of the undelivered  elements, as indicated by
              vendor-specific  objective evidence,  is deferred and subsequently
              recognized in accordance  with the relevant  sections of SOP 97-2;
              and

         o    The difference  between the total  arrangement  fee and the amount
              deferred for the  undelivered  elements is  recognized  as revenue
              related to the delivered elements.

         We adopted  SOP 98-9 on January 1, 1999.  The  adoption of SOP 98-9 did
not have a material impact on our consolidated results of operations.

         Effective October 1, 1998, we adopted Statement of Financial Accounting
Standards  (SFAS)  No.  130,  Reporting   Comprehensive  Income.  SFAS  No.  130
establishes  standards for the reporting and disclosure of comprehensive  income


                                       5
<PAGE>

and its  components  which will be  presented  in  association  with a company's
financial  statements.  Comprehensive  income  is  defined  as the  change  in a
business enterprise's equity during the period arising from transactions, events
or  circumstances  relating  to  non-owner  sources,  such as  foreign  currency
translation  adjustments  and unrealized  gains or losses on  available-for-sale
securities. For the three months ended June 30, 1999, total comprehensive income
was $502,000.  For the nine months ended June 30, 1999, total comprehensive loss
was $6.5 million. Other comprehensive income for the three and nine months ended
June 30, 1999, was $1.0 million which consisted of unrealized gains on long-term
investments.  For  the  three  and  nine  months  ended  June  30,  1998,  total
comprehensive income (loss) did not differ from net income (loss).

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

         In June 1998,  the FASB issued SFAS No. 133,  Accounting for Derivative
Instruments  and Hedging  Activities.  SFAS No. 133  establishes  accounting and
reporting  standards for derivative  instruments,  including certain  derivative
instruments   embedded  in  other   contracts   (collectively   referred  to  as
derivatives),  and for hedging activities.  It requires that an entity recognize
all  derivatives  as either assets or  liabilities in the statement of financial
position and measure those instruments at fair value. If certain  conditions are
met, a derivative may be specifically designated and accounted for as:

         o   A firm commitment;

         o   A hedge of the exposure to variable cash flows of a forecasted
             transaction; or

         o   A hedge of the foreign currency  exposure of a net investment in a
             foreign   operation,   an   unrecognized   firm   commitment,   an
             available-for-sale  security,  or  a  foreign-currency-denominated
             forecasted transaction.

         For a derivative  not  designated as a hedging  instrument  and for the
ineffective  portion  of hedging  instruments,  changes in the fair value of the
derivative  are  recognized in earnings in the period of change.  This statement
will be effective for all annual and interim  periods for fiscal years beginning
after June 15,  2000.  We do not expect the adoption of SFAS No. 133 will have a
material effect on our financial position or results of operations.

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

(3)      Inventories

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

<TABLE>
<CAPTION>
                                                                           June 30,           September 30,
                                                                             1999                 1998
         -------------------------------------------------------------- ---------------- --- ----------------
<S>                                                                        <C>                   <C>

         Raw materials and work in process........................          $     1,559          $     1,080
         Finished goods...........................................                1,472                  511
                                                                        ---------------- --- ----------------
                                                                            $     3,031          $     1,591
                                                                        ================ === ================
</TABLE>


                                       6
<PAGE>


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

<TABLE>
<CAPTION>
                                                                           June 30,           September 30,
                                                                             1999                 1998
         -------------------------------------------------------------- ---------------- --- ----------------
<S>                                                                        <C>                  <C>

         Furniture, fixtures and equipment........................          $    13,225          $    11,940
         Accumulated depreciation and amortization................               (10,852)             (9,872)
                                                                        ================ === ================
                                                                            $     2,373          $     2,068
                                                                        ================ === ================
</TABLE>

(5)      Earnings Per Share

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

         Potential   common   shares  have  been  excluded  from  the  net  loss
computation  of diluted EPS for the three months ended June 30, 1999 and for the
nine  months  ended  June  30,  1999  and  1998  since  their  effect  on EPS is
antidilutive due to the losses incurred in each period. Consequently, the number
of shares in the computations of basic and diluted EPS is the same for the three
months  ended June 30, 1999 and for each of the nine months  ended June 30, 1999
and 1998.  Potential common shares excluded from the computations of diluted EPS
for the three and nine  months  ended  June 30,  1999,  consist  of  options  to
purchase common stock which totaled  4,020,851  shares.  Potential common shares
excluded from the computations of diluted EPS for the nine months ended June 30,
1998,  consist of options to  purchase  common  stock  which  totaled  3,465,408
shares.

<TABLE>
<CAPTION>
                                                             Three months ended        Nine months ended
                                                                  June 30,                  June 30,
                                                           -----------------------   -----------------------
                                                               1999       1998          1999       1998
         ---------------------------------------------------------------------------------------------------
                                                               (in thousands, except per share amounts)
<S>                                                          <C>           <C>         <C>         <C>

         Net income (loss)................................   $  (526)      $   4       $ (7,505)   $(1,394)
                                                           =======================   =======================

         Computation of basic net income (loss) per share:

            Weighted average number of common shares
              outstanding.................................    12,907      11,716         12,560     11,617
                                                           =======================   =======================

            Basic net income (loss) per share.............   $ (0.04)    $  0.00        $ (0.60)   $ (0.12)
                                                           =======================   =======================

         Computation of diluted net income (loss) per share:

            Weighted average number of common shares          12,907      11,716         12,560     11,617
              outstanding.................................

            Number of dilutive common stock equivalents...        --       1,476             --         --
                                                           -----------------------   -----------------------

            Shares used in per share calculation..........    12,907      13,192         12,560     11,617
                                                           =======================   =======================

            Diluted net income (loss) per share...........   $ (0.04)    $  0.00        $ (0.60)   $ (0.12)
                                                           =======================   =======================

</TABLE>

(6)      Acquisitions

         On December 17, 1998, we closed a transaction to purchase substantially
all of the assets and assume certain  liabilities and the existing operations of
Serus LLC, a Utah limited liability company (Serus).  We are continuing  Serus's


                                       7
<PAGE>

development of a Java-based Web site editing  software product which would allow
Web site  owners to modify  and edit the  appearance  of their Web site  through
their Web browser with minimal  knowledge of hypertext  markup language  (HTML).
Upon  completion of the  development of such  products,  we intend to market the
products both independently and along with our Web site and site server platform
to allow users more  flexibility in customizing  their Web sites.  In accordance
with the Serus asset purchase  agreement,  we acquired  substantially all of the
assets and assumed  certain  liabilities  of Serus and its  existing  operations
which  included  in-process  research  and  development.  The maximum  aggregate
purchase  price  of  the  Serus  transaction  was  approximately   $7.0  million
including:

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

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

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

         The excess  purchase  price over the net book value  acquired  was $6.0
million,  of which, based upon estimates we prepared in conjunction with a third
party valuation  consultant,  $3.9 million was allocated to acquired  in-process
research and  development  and $2.1 million was allocated to intangible  assets.
The amounts  allocated to  intangible  assets  include  assembled  workforces of
$100,000 and goodwill of $2.0 million.  The income approach was used to appraise
the  value of the  business  and  projects  acquired.  This  method  takes  into
consideration  the stage of completion  of the project and estimates  related to
expected future revenues, expenses and cash flows which are then discounted back
to present day amounts. Based upon these estimates, material net cash flows from
the acquired business are expected to occur during the calendar year 2001. These
cash  flows  were  discounted  using a  discount  rate of 44.0%.  Based upon the
expenses  incurred,  the  development  time invested in the product prior to the
acquisition,  and the estimated  expenses and  development  time to complete the
product,  we determined the product to be approximately 85% complete at the time
of acquisition.  We expect to complete development of the product in the fall of
1999 and to incur approximately  $400,000 of development  expenses from the date
of  acquisition  to  completion  of   development.   The  $1.0  million  earnout
opportunity  described  above shall be accounted  for when we believe that it is
probable that the earnout will be earned. We are amortizing the goodwill related
to the Serus transaction over the next four years. Goodwill amortization related
to the Serus  transaction  was  $133,000  during the three months ended June 30,
1999, and $266,000  during the nine months ended June 30, 1999. Any  significant
delay in the  completion  of the  development  of the product  would cause us to
incur  additional  unplanned  development  expenses  as well as the loss of,  or
deferral of, customer purchases either of which could harm our business.

         On December 31, 1998, we closed a transaction  to purchase from Network
Associates  substantially  all of the  assets  and  assume  certain  liabilities
related to the netOctopus systems management  software.  The netOctopus software
is  a  suite  of   administration   tools  under  development  that  allows  for
simultaneous  system support of multiple users across  computer  networks.  Upon
completion of the development of the Windows versions of the netOctopus software
products, we intend to market the products both independently and along with our
Timbuktu Pro enterprise  software.  In accordance  with the netOctopus  purchase
agreement,  we  acquired  substantially  all of the assets and  assumed  certain
liabilities related to the netOctopus software and its existing operations which
included  in-process  research and development.  The maximum aggregate  purchase
price of the netOctopus transaction was $1.1 million of cash paid on the closing
date of the transaction.  In addition,  there is a $300,000 earnout  opportunity
based upon certain criteria as set forth in the netOctopus  purchase  agreement.
The excess purchase price over the net book value acquired was $1.1 million,  of
which,  based upon  estimates  we  prepared  in  conjunction  with a third party
valuation consultant, $400,000 was allocated to acquired in-process research and
development  and  $700,000  was  allocated  to  intangible  assets.  The amounts
allocated  to  intangible  assets  include  assembled   workforces  of  $60,000,
developed  technology of $540,000 and goodwill of $100,000.  The income approach
was used to appraise  the value of the  business  and  projects  acquired.  This
method  takes into  consideration  the stage of  completion  of the  project and
estimates related to expected future revenues, expenses and cash flows which are
then  discounted  back to present  day  amounts.  Based  upon  these  estimates,
material net cash flows from the acquired  business are expected to occur during
the calendar year 2000.  These cash flows were discounted  using a discount rate
of 25.0%. Based upon the expenses incurred, the development time invested in the
product prior to the  acquisition,  and the estimated  expenses and  development
time to complete the product,  we determined the product to be approximately 70%


                                       8
<PAGE>

complete at the time of  acquisition.  We expect to complete  development of the
product during our fourth fiscal quarter and to incur approximately  $175,000 of
development  expenses from the date of acquisition to completion of development.
The $300,000 earnout opportunity above shall be accounted for when we believe it
is probable  that the earnout  will be earned.  We are  amortizing  the goodwill
related  to the  netOctopus  transaction  over the  next  four  years.  Goodwill
amortization related to the netOctopus  transaction was $48,000 during the three
months  ended June 30, 1999,  and $96,000  during the nine months ended June 30,
1999. Any significant  delay in the completion of the development of the product
would cause us to incur additional unplanned development expenses as well as the
loss of or  deferral  of  customer  purchases,  either of which  could  harm our
business.

(7)      Discontinued Operations

         In the fourth quarter of fiscal 1998, we sold our Local Area Networking
(LAN)  Division  through which we had developed and sold LAN products  primarily
for Apple  computers.  The sale of the LAN Division has been  accounted for as a
discontinued  operation in accordance  with  Accounting  Principles  Board (APB)
Opinion No. 30, and prior period  consolidated  financial  statements  have been
restated to reflect the discontinuation of the LAN Division.

         The LAN  Division's  operations,  products  and the  market in which it
competed were no longer considered core to our Internet business strategy.  As a
result, we sold the LAN Division's  products,  accounts  receivable,  inventory,
property and  equipment,  intellectual  property and other  related  assets,  to
Farallon Communications, or Farallon, an affiliate of Gores Technology Group, or
Gores.  Farallon also assumed certain accounts payable and other  liabilities of
the LAN  Division.  In  connection  with the  sale,  we  received  consideration
aggregating $4.9 million, including:

         o    $2.0 million of cash;

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

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

         o   A warrant to purchase up to 3% of the equity of Farallon.

         The  consideration  we received in connection with the sale was subject
to a purchase price adjustment.  On the effective date of the sale, we estimated
this purchase  price  adjustment and  accordingly  recorded the liability on our
balance sheet as of September 30, 1998.  We recently  reached an agreement  with
Farallon  regarding  the  purchase  price  adjustment.  We agreed to reduce  the
purchase price by $275,000,  and further agreed to amend the warrant to purchase
3% of the equity of Farallon rather than 5% as originally agreed.  These amounts
were within the estimated  adjustment recorded at the effective date of the sale
and  accordingly,  there was no impact to our operations  related to the amended
purchase price.

         At September 30, 1998, we had $2.5 million in accrued liabilities which
represented  transaction  expenses and costs incurred and accrued as a result of
the sale of the LAN  Division.  Such expenses are directly  attributable  to the
sale  transaction and are primarily  related to reserves taken against the lease
of  our  Alameda,  California  headquarters,   investment  advisory,  legal  and
accounting fees and certain  expenses  related to employees of the LAN Division.
Such accrual consisted of $1.7 million of facility costs, approximately $300,000
in employee-related  costs and other costs consisting primarily of services fees
of approximately  $500,000. At June 30, 1999, the balance in accrued liabilities
related to the sale of the LAN Division was $1.2 million, consisting of facility
costs.

(8)      Long-term Investment

         In April 1999, we purchased  $999,988 of Series D-1 preferred  stock of
NorthPoint Communications.  Upon the initial public offering of the common stock
of  NorthPoint  Communications,  which  occurred on May 5, 1999,  our Series D-1
preferred  stock  converted  into 55,555  shares of Class B common  stock.  As a
Series D-1  purchaser,  we have agreed not to transfer any Series D-1  preferred


                                      9
<PAGE>

stock or Class B common  stock to any  non-affiliated  third  party  until March
2000.  We  have  also  agreed  not  to  acquire  more  than  10%  of  NorthPoint
Communications'  voting stock without NorthPoint  Communications'  consent until
March 2002. In addition,  as a Series D-1 purchaser,  we have agreed to vote any
voting securities held by us as recommended by NorthPoint  Communications' Board
of Directors, except with respect to votes pursuant to the protective provisions
in NorthPoint Communications' Certificate of Incorporation.

         We have accounted for this investment as "available-for-sale"  and have
stated the investment at fair value.  This marketable  security had an aggregate
cost of $999,988 at June 30,  1999.  As of June 30,  1999,  the market  value of
these shares was approximately $2,027,757.

(9)      Subsequent Event

         On August 4, 1999,  we  completed  a secondary  public  offering of our
common stock.  As part of this offering,  we sold 2.0 million shares and certain
selling  shareholders  sold 200,000 shares of our common stock.  The proceeds we
expect to receive  from the sale of 2.0  million  shares of our common  stock is
approximately  $35.3 million,  net of  underwriting  discounts,  commissions and
other estimated offering  expenses.  We did not receive any of the proceeds from
the sale of shares of our  common  stock by the  selling  shareholders.  We have
granted the  underwriters  of our offering a 30-day  option to purchase up to an
additional 330,000 shares of our common stock to cover over-allotments.


Item 2.       Management's Discussion and Analysis of Financial Condition and
              Results of Operations
--------------------------------------------------------------------------------

         Some of the  information  in this  Form 10-Q  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-Q,  as well as any  cautionary  language in
this Form 10-Q,  provide  examples of risks,  uncertainties  and events that may
cause our actual results to differ materially from the expectations we described
in our  forward-looking  statements.  You should be aware that the occurrence of
any of the events  described in this Form 10-Q could seriously harm our business
and that upon the  occurrence of any of these  events,  the trading price of our
common stock could decline.

Overview

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

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

         During the three months ended June 30, 1999 and 1998:

         o    Revenues from two-tier distributors accounted for 40% and 49% of
              our total revenues, respectively;

         o    Our three largest customers, in total, accounted for 23% and 21%
              of our total revenues, respectively; and

                                       10
<PAGE>

         o    Ingram  Micro,  a worldwide  distributor  of  computer  technology
              products  and  services,  accounted  for 10% and 11% of our  total
              revenues, respectively. No other customers during the three months
              ended  June 30,  1999 and  1998  accounted  for 10% or more of our
              total revenues.

         During the nine months ended June 30, 1999 and 1998:

         o    Revenues from two-tier distributors accounted for 42% and 47% of
              our total revenues, respectively;

         o    Our three largest customers, in total, accounted for 21% of our
              total revenues; and

         o    Ingram  Micro  accounted  for 10% and 12% of our  total  revenues,
              respectively. No other customers during the nine months ended June
              30, 1999 and 1998 accounted for 10% or more of our total revenues.

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

         o   26% and 31% of our revenues for the three months ended June 30,
             1999 and 1998, respectively; and

         o   30% and 33% of our revenues for the nine months ended June 30, 1999
             and 1998, respectively.

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

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

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


Events Occurring After June 30, 1999

         On August 4, 1999,  we  completed  a secondary  public  offering of our
common stock.  As part of this offering,  we sold 2.0 million shares and certain
selling  shareholders  sold 200,000 shares of our common stock.  The proceeds we
expect to receive  from the sale of 2.0  million  shares of our common  stock is
approximately  $35.3 million,  net of  underwriting  discounts,  commissions and
other estimated offering  expenses.  We did not receive any of the proceeds from
the sale of shares of our  common  stock by the  selling  shareholders.  We have


                                       11
<PAGE>

granted the  underwriters  of our offering a 30-day  option to purchase up to an
additional 330,000 shares of our common stock to cover over-allotments.

Results of Operations

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

<TABLE>
<CAPTION>

                                                        Three months ended              Nine months ended
                                                             June 30,                        June 30,
                                                    ----------------------------    ----------------------------
                                                        1999          1998             1999           1998
         -------------------------------------------------------------------------------------------------------
<S>                                                       <C>           <C>              <C>           <C>

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

           Cost of revenues.......................        38.2           29.3             36.2           30.1
                                                    ----------------------------    ----------------------------

               Gross profit.......................        61.8           70.7             63.8           69.9

           Operating expenses:
               Research and development...........        19.0           24.5             21.7           28.5
               Selling and marketing .............        41.4           49.8             47.8           54.1
               General and administrative.........         7.5           12.2              8.4           13.1
               Acquired in-process research
                    and development...............          --             --             13.7             --
               Amortization of goodwill...........         1.5             --              1.2             --
                                                    ----------------------------    ----------------------------

                  Total operating expenses........        69.4           86.5             92.8           95.7
                                                    ----------------------------    ----------------------------

                  Operating loss..................        (7.6)         (15.8)           (29.0)         (25.8)

          Other income, net.......................         3.3            7.8              4.6            9.0
                                                    ----------------------------    ----------------------------
               Loss from continuing operations
                  before income taxes.............        (4.3)          (8.0)           (24.4)         (16.8)
          Income tax benefit......................          --           (3.1)              --           (6.1)
                                                    ----------------------------    ----------------------------

               Loss from continuing operations....        (4.3)          (4.9)           (24.4)         (10.7)

           Discontinued operations, net of taxes.           --            4.9               --            3.2
                                                    ----------------------------    ----------------------------

                  Net income (loss).............          (4.3)%          0.0%           (24.4)%         (7.5)%
                                                    ============================    ============================
</TABLE>

Three Months Ended June 30, 1999 and 1998

         Revenue.  Our revenues  increased  80.6% to $12.2  million in the three
months  ended June 30, 1999 from $6.8 million in the three months ended June 30,
1998.  This  increase  was  primarily  due to  increased  sales of our  Internet
connectivity  products  and Web  platform,  particularly  our Web  site and site
server, products.

         o    Revenue  from  our  Internet   connectivity   products   increased
              primarily due to sales of our DSL Internet  connectivity  products
              domestically.  Our DSL  Internet  connectivity  products  were not
              available  during  the  three  months  ended  June 30,  1998.  The
              increase of Internet  connectivity  products revenue was partially
              offset by continued price competition, particularly related to our
              integrated  services  digital  network  (ISDN)  and  DSL  Internet
              connectivity  products.  We expect that our Internet  connectivity
              products may experience  increasing  price  competition  from both
              domestic and foreign  manufacturers of similar products as well as
              competition  from  alternative  technologies.  Increased  price or
              technology competition could seriously harm our business.

         o   Revenue  from  our Web  platform  products increased  primarily due
             to increased license sales of the Web site and site server products
             and increased volume license sales of Timbuktu Pro and netOctopus.
             Our netOctopus product was not available  during the three months
             ended June 30, 1998.  The sale of our Web site and site server


                                       12
<PAGE>

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

         International  revenues accounted for 26% and 31% of our total revenues
for the three months ended June 30, 1999 and 1998,  respectively.  International
revenues declined as a percentage of total revenues  primarily due to increasing
sales of our  Internet  connectivity  and Web  platform  products  in the United
States.  The following table provides a breakdown of revenue by region expressed
as a percentage of total revenues for the periods presented.

<TABLE>
<CAPTION>

                                                                            Three months ended June 30,
                                                                       --------------------------------------
                                                                             1999                1998
         ----------------------------------------------------------------------------------------------------
<S>                                                                         <C>                     <C>

           Europe....................................................             21%                  24%
           Pacific Rim...............................................              3                    4
           Other.....................................................              2                    3
                                                                       --------------------------------------
             Subtotal international revenues.........................             26                   31
           United States.............................................             74                   69
                                                                       --------------------------------------
               Total revenues........................................              100%                 100%
                                                                       ======================================
</TABLE>

         Although  our  international  revenues  decreased as a percent of total
revenues,  international  revenue  increased  52.0% to $3.2 million in the three
months  ended June 30, 1999 from $2.1 million in the three months ended June 30,
1998. International revenue increased primarily due to:

         o    Increased licenses of our Web platform products, particularly  the
              Web site server; and

         o    Increased  sales of our ISDN  Internet  router  as a result of our
              relationships with France Telecom's Internet service, Wanadoo, and
              Telecom Italia's Internet service, TIN.

         Gross  Margin.  Our total gross margin  decreased to 61.8% in the three
months  ended June 30, 1999 from 70.7% in the three  months ended June 30, 1998.
The decrease is primarily due to:

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

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

         These  decreases  were partially  offset by an increased  proportion of
volume and server license sales of our Web platform  products.  In the past, our
gross margin has varied  significantly and will likely vary significantly in the
future. Our gross margins depend primarily on:

          o   The mix of hardware and software products sold;

          o   Pricing strategies;

          o   Standard cost changes;

          o   New versions of existing products; and

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

                                       13
<PAGE>

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

         Research  and  Development.   Our  research  and  development  expenses
increased  40.3% to $2.3  million for the three  months ended June 30, 1999 from
$1.7 million for the three months ended June 30, 1998.  Research and development
expenses increased primarily due to:

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

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

         We expect to continue to devote  substantial  resources  to product and
technological  development  and therefore,  research and  development  costs may
increase in absolute  dollars in fiscal  years 1999 and 2000.  Historically,  we
have believed that our process for developing software is essentially  completed
concurrently  with the establishment of technological  feasibility,  and we have
not capitalized any internal software development costs to date. However, during
the three  months  ended  June 30,  1999,  we  capitalized  $89,000  of  product
development costs incurred  subsequent to the delivery of a working model, under
a development agreement with third parties.

          Selling and Marketing.  Our selling and marketing  expenses  increased
50.2% to $5.1 million for the three months ended June 30, 1999 from $3.4 million
for the three  months  ended  June 30,  1998.  Selling  and  marketing  expenses
increased primarily due to:

         o    Increased advertising, promotional and distribution channel
              development expenses primarily related to our Web site platform;
              and

         o    Increased headcount and other employee related expenses.

         We believe  that our selling and  marketing  expenses  may  increase in
absolute  dollars  in  fiscal  years  1999  and 2000 as a  result  of  increased
advertising  and promotion  campaigns  related to our DSL Internet  connectivity
products,  the launch of our electronic commerce enabled version of our Web site
platform, the first commercial launch of the product acquired from Serus as well
as expansion of our telesales staff.

          General and  Administrative.  Our general and administrative  expenses
increased  10.3% to  $908,000  for the three  months  ended  June 30,  1999 from
$823,000 for the three months  ended June 30, 1998.  General and  administrative
expenses increased primarily due to:

          o   Increased employee related expenses; and

          o   Increased accounting and legal advisory services.

         These  increases  were  partially  offset  by  reduced   occupancy  and
information service related costs.

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

         Other Income, Net. Other income, net, primarily  represents interest we
earn on our cash,  cash  equivalents and short-term  investments.  Other income,
net,  decreased  24.3% to $398,000 for the three months ended June 30, 1999 from
$526,000 for the three months ended June 30, 1998. The decrease is primarily due
to the cash used for the  acquisitions of Serus and netOctopus and for operating


                                       14
<PAGE>

activities.  We expect interest income to increase in absolute dollars primarily
due to the proceeds we received  from our sale of the 2.0 million  shares of our
common stock on August 4, 1999.

         Income Tax Benefit.  We did not record an income tax benefit during the
three  months  ended  June  30,  1999  primarily  due to  continued  substantial
uncertainty  regarding  our ability to realize  our tax assets.  The tax benefit
recorded in the three  months ended June 30, 1998 was  primarily  related to our
net operating loss in such period.  The effective tax rate was 39% for the three
months ended June 30, 1998. This rate differed from the statutory rate primarily
due to state income taxes,  investment  income from tax advantaged  investments,
and the utilization of research and experimentation tax credits.

     Discontinued  Operations.  Income from discontinued  operations of $334,000
during the three months ended June 30, 1998 represents the operating income, net
of  taxes of the  discontinued  operations.  See  Note 7 of  Notes to  Condensed
Consolidated Financial Statements.

Nine Months Ended June 30, 1999 and 1998

         Revenue.  Our  revenues  increased  66.0% to $30.7  million in the nine
months ended June 30, 1999 from $18.5  million in the nine months ended June 30,
1998.  This  increase  was  primarily  due to  increased  sales of our  Internet
connectivity  products  and Web  platform,  particularly  our Web  site and site
server products.

     o Revenue from our Internet  connectivity  products increased primarily due
to sales  of our DSL  Internet  connectivity  products  domestically  as well as
increased  sales of our ISDN,  T1/Frame Relay and analog  Internet  connectivity
products.  Our DSL Internet  connectivity products were not available during the
nine months ended June 30, 1998. The increase of Internet  connectivity products
revenue  was  partially  offset by  continued  price  competition,  particularly
related to our ISDN and DSL Internet  connectivity  products. We expect that our
Internet  connectivity products may experience increasing price competition from
both  domestic  and  foreign  manufacturers  of  similar  products  as  well  as
competition  from  alternative  technologies.   Increased  price  or  technology
competition could seriously harm our business.

     o  Revenue  from  our Web  platform  products  increased  primarily  due to
increased  license sales of the Web site and site server  products and increased
volume license sales of Timbuktu Pro and netOctopus.  Our netOctopus product was
not  available  during the nine months ended June 30, 1998.  The sale of our Web
site and site server  products is dependent  upon our ability to leverage  these
products to generate  revenue  streams from the  licensing of the  technology to
future  customers  and  partners and accounts  based on monthly  service.  These
products have existed for only a limited period of time,  and, as a result,  are
relatively  unproven.  Growth  in  revenues  from our Web  site and site  server
products will be heavily  dependent on recurring  revenue from Web sites created
by licensees.  Our failure to retain these customers or our inability to attract
new customers or licensees would seriously harm our business.

         International  revenues accounted for 30% and 33% of our total revenues
for the nine months  ended June 30, 1999 and 1998,  respectively.  International
revenues declined as a percentage of total revenues  primarily due to increasing
sales of our  Internet  connectivity  and Web  platform  products  in the United
States.  The following table provides a breakdown of revenue by region expressed
as a percentage of total revenues for the periods presented.

<TABLE>
<CAPTION>

                                                                             Nine months ended June 30,
                                                                       --------------------------------------
                                                                             1999                1998
         ----------------------------------------------------------------------------------------------------
<S>                                                                           <C>                <C>

           Europe....................................................             24%                  25%
           Pacific Rim...............................................              3                    5
           Other.....................................................              3                    3
                                                                       --------------------------------------
             Subtotal international revenues.........................             30                   33
           United States.............................................             70                   67
                                                                       --------------------------------------
               Total revenues........................................            100%                 100%
                                                                       ======================================
</TABLE>

                                       15
<PAGE>

         Although  our  international  revenues  decreased as a percent of total
revenues,  international  revenue  increased  51.3% to $9.1  million in the nine
months  ended June 30, 1999 from $6.0  million in the nine months ended June 30,
1998. International revenue increased primarily due to:

        o    Increased  sales of our ISDN  Internet  router  as a result of our
             relationships with France Telecom's Internet service, Wanadoo, and
             Telecom Italia's Internet service, TIN; and

        o    Increased  licenses of our Web platform  products,  particularly
             the Web site server.

         Gross  Margin.  Our total gross  margin  decreased to 63.8% in the nine
months  ended June 30, 1999 from 69.9% in the nine months  ended June 30,  1998.
The decrease is primarily due to:

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

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

         These  decreases  were partially  offset by an increased  proportion of
volume and server license sales of our Web platform  products.  In the past, our
gross margin has varied  significantly and will likely vary significantly in the
future. Our gross margins depend primarily on:

         o   The mix of hardware and software products sold;

         o   Pricing strategies;

         o   Standard cost changes;

         o   New versions of existing products; and

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

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

         Research  and  Development.   Our  research  and  development  expenses
increased  26.6% to $6.7  million for the nine  months  ended June 30, 1999 from
$5.3 million for the nine months ended June 30, 1998.  Research and  development
expenses increased primarily due to:

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

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

         We expect to continue to devote  substantial  resources  to product and
technological  development  and therefore,  research and  development  costs may
increase in absolute  dollars in fiscal  years 1999 and 2000.  Historically,  we
have believed that our process for developing software is essentially  completed
concurrently  with the establishment of technological  feasibility,  and we have
not capitalized any internal software development costs to date. However, during
the nine  months  ended  June 30,  1999,  we  capitalized  $377,000  of  product
development costs incurred  subsequent to the delivery of a working model, under
a development agreement with third parties.

          Selling and Marketing.  Our selling and marketing  expenses  increased
46.4% to $14.6  million  for the nine  months  ended  June 30,  1999 from  $10.0
million for the nine months ended June 30, 1998.  Selling and marketing expenses
increased primarily due to:

                                       16
<PAGE>

          o   Increased headcount and other employee related expenses;

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

          o    Increased use of third party contractors.

         We believe  that our selling and  marketing  expenses  may  increase in
absolute  dollars  in  fiscal  years  1999  and 2000 as a  result  of  increased
advertising  and promotion  campaigns  related to our DSL Internet  connectivity
products,  the launch of our electronic commerce enabled version of our Web site
platform, the first commercial launch of the product acquired from Serus as well
as expansion of our telesales staff.

          General and  Administrative.  Our general and administrative  expenses
increased 7.0% to $2.6 million for the nine months ended June 30, 1999 from $2.4
million  for the nine months  ended June 30,  1998.  General and  administrative
expenses increased primarily due to:

          o   Increased employee related expenses; and

          o   Increased accounting and legal advisory services.

         These  increases  were  partially  offset  by  reduced   occupancy  and
information service related costs.

     Acquired In-Process Research and Development.  Represents amounts allocated
to in-process  research and development related to our acquisitions of Serus and
netOctopus  in December,  1998.  See Note 6 of Notes to  Condensed  Consolidated
Financial Statements.

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

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

         Other Income, Net. Other income, net, primarily  represents interest we
earn on our cash,  cash  equivalents and short-term  investments.  Other income,
net,  decreased  15.9% to $1.4  million for the nine months  ended June 30, 1999
from $1.7  million  for the nine months  ended June 30,  1998.  The  decrease is
primarily due to the cash used for the  acquisitions of Serus and netOctopus and
for  operating  activities.  We expect  interest  income to increase in absolute
dollars  primarily  due to the  proceeds  we  received  from our sale of the 2.0
million shares of our common stock on August 4, 1999.

         Income Tax Benefit.  We did not record an income tax benefit during the
three  months  ended  June  30,  1999  primarily  due to  continued  substantial
uncertainty  regarding  our ability to realize  our tax assets.  The tax benefit
recorded in the nine months ended June 30, 1998 was primarily related to our net
operating  loss in such  period.  The  effective  tax  rate was 36% for the nine
months ended June 30, 1998. This rate differed from the statutory rate primarily
due to state income taxes,  investment  income from tax advantaged  investments,
and the utilization of research and experimentation tax credits.

     Discontinued  Operations.  Income from discontinued  operations of $585,000
during the nine months ended June 30, 1998 represents the operating income,  net
of  taxes of the  discontinued  operations.  See  Note 7 of  Notes to  Condensed
Consolidated Financial Statements.

                                       17
<PAGE>

Year 2000 Readiness Disclosure

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

         Through  testing,  we have  determined  that our Internet  connectivity
products,  our Web site and site server  products  (Site server  version 2.3 and
later and all client software versions 2.2.4 and later), and our Windows, Mac OS
and Enterprise  versions of Timbuktu Pro (versions 1.5 and later), are Year 2000
compliant.  Upon  completion of the  development  of the products  acquired as a
result of our Serus and netOctopus  acquisitions,  we expect these products will
meet Year 2000 readiness requirements. Although the majority of our products are
Year 2000  compliant,  we believe that the purchasing  patterns of customers and
potential  customers  may be affected by Year 2000  issues as  companies  expend
significant  resources to correct or patch their  current  software  systems for
Year 2000 compliance.  These  expenditures may result in reduced funds available
to purchase our products which would  seriously harm our business.  In addition,
even if our products are Year 2000 compliant,  other systems or software used by
our customers may not be Year 2000 compliant.  The failure of such non-compliant
third-party  software or systems could affect the perceived  performance  of our
products which could seriously harm our business.

         Our internal  systems include  information  technology  systems such as
financial,  order entry,  inventory,  shipping and  customer  database  computer
systems, desktop computer systems and non-information technology systems such as
telephones  and  facilities.  We have  conducted a  comprehensive  review of our
internal  information  technology  systems  such  as  financial,   order  entry,
inventory,  shipping and customer  database computer systems to determine if any
actions  need to be  taken  regarding  Year  2000  date-related  effects.  These
underlying systems are based on a relational  database language which identifies
dates based on four digit numbers rather than two digit numbers and therefore we
have determined that the Year 2000 issue will not pose  significant  operational
problems for these computer systems. We have initiated a comprehensive inventory
and  evaluation  of all desktop  systems and expect to complete this process and
upgrade such  non-compliant  desktop  systems to Year 2000 compliant  systems by
September  1999.  The  additional  costs of  remediation  are not expected to be
material.  However,  if implementation  of replacement  systems is delayed or if
significant  new  non-compliance  issues are  identified,  our business could be
seriously harmed.

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

         To date,  we have not incurred  material  expenses  related to our Year
2000 compliance effort other than the investment of employee time and resources.
We have currently  identified  certain facilities related items that we estimate
will cost  approximately  $60,000 to upgrade to Year 2000  compliance.  While we
have  dedicated and will  continue to dedicate a substantial  amount of time and
internal resources towards attaining Year 2000 compliance,  we cannot assure you
that our Year 2000  compliance  program will be completed on a timely basis.  In
addition,  we  cannot  assure  you that  there  will not be an  interruption  of
operations  or other  limitations  of system  functionality  or that we will not
incur substantial  costs to avoid such  limitations.  Any failure to effectively
monitor,  implement  or  improve  our  operational,  financial,  management  and
technical  support  systems could seriously harm our business.  Furthermore,  we
believe that the purchasing patterns of customers and potential customers may be
affected  by Year 2000  issues as  companies  expend  significant  resources  to
correct or patch their current software systems for Year 2000 compliance.  These
expenditures may result in reduced funds available to purchase software products
such as those  offered  by us,  which  could  seriously  harm our  business.  In


                                       18
<PAGE>

addition,  even if our  products  are Year  2000  compliant,  other  systems  or
software used by our customers  may not be Year 2000  compliant.  The failure of
such  non-compliant  third-party  software or systems could affect the perceived
performance of our products,  which could seriously harm our business.  The most
likely worst case scenarios  would include  hardware  failure and the failure of
infrastructure  services provided by government agencies and other third parties
(for  example,  electricity,  telephone  service,  water  transport and internet
services).  In such worst case  scenarios,  we would lose  customers and revenue
which would seriously harm our business. We are in the process of developing our
contingency planning and plan to have these plans in place by September 1999. We
expect  our   contingency   plans  to  include,   among  other  things,   manual
"work-arounds"  for software and hardware  failures,  as well as substitution of
systems, if necessary.

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

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

         Our failure to  significantly  increase  our  revenues  would result in
continuing  losses.  We incurred losses from  continuing  operations of $526,000
million in the three  months ended June 30,  1999,  and we incurred  losses from
continuing operations of $7.5 million in the nine months ended June 30, 1999. We
expect to incur net losses in the future,  and these losses may be  substantial.
Further,  we  expect  to incur  negative  cash flow in the  future.  Because  of
continuing  substantial  capital  expenditures and product  development,  sales,
marketing  and  administrative  expenses,  we will need to generate  significant
revenues to achieve  profitability and positive cash flow. Even if we do achieve
profitability  and positive cash flow, we may not be able to sustain or increase
profitability or cash flow on a quarterly or annual basis.

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

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

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

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

o             Variations in the timing and size of orders for our Internet
              connectivity products, particularly our DSL Internet connectivity
              products;

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

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

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

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

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

                                       19
<PAGE>

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

o        Our ability to attract and retain key personnel.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

         In the  market  for Web sites and  electronic  commerce  platforms,  we
encounter  competition  primarily from America Online,  Homestead  Technologies,
IBM,  Inc.  Online,  Site  Architects,   Sitematic,  Yahoo!  and  several  other
companies.  In the market for our remote  control and  enterprise  software,  we
primarily  encounter  competition from Computer  Associates,  Contigo  Software,
Lotus, Microcom (Compaq), Microsoft,  PlaceWare, Stac Software, Symantec, Tivoli


                                       20
<PAGE>

Systems (IBM) and several other  companies.  We anticipate  intense  competition
from some of these  companies  because some of these  competitors  provide their
products to consumers at no cost.  For example,  Microsoft  has  available at no
cost a communications  and  collaboration  software product that could limit the
market for Timbuktu Pro.

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

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

         We  compete  in  markets  characterized  by  continuing   technological
advancement,  changes in customer  requirements and evolving industry standards.
To compete successfully,  we must design,  develop,  manufacture and sell new or
enhanced  products that provide  increasingly  higher levels of performance  and
reliability.  For example,  we anticipate  that voice over DSL  technology  will
become an  important  feature  of future DSL router  products.  As a result,  we
believe we will need to  successfully  develop,  introduce and market voice over
DSL functionality in our products.  However,  we may not be able to successfully
develop,  introduce  or market these or other  products  necessary to our future
success. In addition, any delay in developing, introducing or marketing these or
other products would seriously harm our business.

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

         In the past, we have engaged in both acquisitions and divestitures. For
example,  in August 1998,  we sold our LAN  Division,  which  developed and sold
local area network products. We may continue to acquire companies,  technologies
or products or to sell or discontinue  some of our  technologies  or products in
future periods.  In the past, our acquisitions  and  divestitures  have involved
numerous risks,  including the use of significant amounts of our cash, diversion
of the  attention  of our  management  from our core  business,  loss of our key
employees and  significant  expenses and  write-offs.  For example,  in December
1998,  we  acquired  netOctopus  and Serus.  The  success of these  acquisitions
depends upon our ability to timely and  successfully  develop,  manufacture  and
gain market acceptance for the products we acquired.  If we engage in additional
acquisitions or  divestitures  in future periods,  we may not be able to address
these risks and our business may be harmed.

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

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

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

         Our revenues  will decline and our losses will  increase if we lose one
or more of our significant  distributors or customers or if our key distributors


                                       21
<PAGE>

or customers reduce or delay purchases of our products. In the nine months ended
June 30, 1999, our top three customers and  distributors  who each  individually
represented at least 4% of our total revenues accounted for approximately 21% of
our total revenues as a group. In this period, sales to Ingram Micro represented
10% of our total  revenues.  We do not have purchase  contracts with any of our
customers  that  obligate  them to continue to purchase  our  products and these
customers could cease purchasing our products at any time.

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

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

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

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

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

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

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

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

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

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

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

                                       22
<PAGE>

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

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

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

o        Evolving industry standards for DSL technologies; and

o        Government regulation.

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

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

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

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

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

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

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

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

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


                                       23
<PAGE>


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

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

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

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

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

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

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

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

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

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

                                       24
<PAGE>

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

         Many Web presence  products are based on a programming  language called
hypertext markup language (HTML). Because this language is widely accepted as an
industry  standard,  Web sites that are created  with it may be easier to modify
than Web sites that are created with proprietary languages.  Our Web platform is
based on a proprietary  version of hypertext markup  language.  Our products may
not be successful if customers  prefer Web sites created with industry  standard
hypertext  markup language to Web sites created with our  proprietary  hypertext
markup language.



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

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

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

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

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

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

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

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


                                       25
<PAGE>


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

         We  believe   through  the  nine  months  ended  June  30,  1999,  that
approximately 21% of Web platform revenue, and approximately 10-20% of our total
revenue, was derived from sales to users of the Apple Mac OS family of products.
Accordingly,  a decrease in the sales or market acceptance of Mac OS may cause a
loss of revenue and harm our business.

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

         In  connection  with the sale of our LAN  Division  in  August  1998 to
Farallon Communications, or Farallon, an affiliate of Gores Technology Group, or
Gores,  we received  consideration  which  included  (i) a two year $1.0 million
promissory  note from  Farallon,  guaranteed  by Gores,  and (ii)  royalties  on
Farallon's  revenues for a period of five years which are currently  recorded on
our balance sheet as an amount receivable of $1.6 million. Because a substantial
portion of Farallon's products are designed for products sold by Apple Computer,
or Apple,  the ability of the buyer to make these payments depends in large part
upon the market for Apple's products.

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

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

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

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

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



                                       26
<PAGE>



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

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

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

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

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

         The risks posed by Year 2000 issues could adversely affect our business
in a number of  significant  ways.  Based on our  testing,  we believe  that our
internally  developed  systems and technology  (including  our financial,  order
entry,  inventory,  shipping  and  customer  database  systems)  are  Year  2000
compliant.   Nevertheless,   our   information   technology   systems  could  be
substantially  impaired  or cease  to  operate  due to Year  2000  problems.  In
addition,  products  currently  under  development are being designed to be Year
2000 compliant.  We are in the process of developing our  contingency  plans and
plan to have these plans in place by September  1999. We expect our  contingency
plans to include,  among other things,  manual  "work-arounds"  for software and
hardware failures,  as well as substitution of systems, if necessary.  We cannot
assure you that our Year 2000  compliance  program will be completed on a timely
basis. In addition,  we cannot assure you that there will not be an interruption
of operations or other  limitations of system  functionality or that we will not
incur substantial  costs to avoid such  limitations.  Any failure to effectively
monitor,  implement or improve our internal support systems could seriously harm
our business.

         Additionally,  we rely on  information  technology  supplied  by  third
parties,  and many of our customers,  vendors,  strategic partners and suppliers
are also heavily  dependent on information  technology  systems and on their own
third party  information  technology.  We are in the process of identifying  and
prioritizing  critical third-party vendors,  strategic partners and suppliers of
non-information  related  products  and  services  concerning  their  plans  and
progress in addressing the Year 2000 issues.  Year 2000 problems  experienced by
any of these third parties could seriously harm our business.  Additionally, the
Internet could face serious disruptions arising from the Year 2000 problem.

         Many of our customers and potential customers have implemented policies
that  prohibit or  strongly  discourage  making  changes or  additions  to their
internal  computer systems until after January 1, 2000. We will experience fewer
sales if  potential  customers  who might  otherwise  purchase  our products and
services delay such purchases and implementations until after January 1, 2000 in
an effort to stabilize their internal  computer  systems,  to cope with the Year
2000 problem or because their information  technology budgets have been diverted
to address Year 2000 problems.  If our customers and potential  customers  delay
purchasing or implementing our products and services in preparation for the Year
2000 problem, our business would be seriously harmed.

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

                                       27
<PAGE>

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

         We have a limited number of  stockholders  that hold a large portion of
our common stock. To the extent our large stockholders sell substantial  amounts
of our common stock in the public  market,  the market price of our common stock
could fall.
Our industry may become subject to changes in tariffs and regulations.

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

Our California facilities are located near major earthquake fault lines.

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

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

         We may require  substantial  capital to finance  our future  growth and
fund our ongoing  research and development  activities  beyond 1999. Our capital
requirements will depend on many factors, including:

o        Acceptance of and demand for our products;

o        The number and timing of acquisitions;

o        The costs of developing new products;

o        The costs associated with our expansion; and

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

         To the extent  that the  proceeds we raised from the sale of our common
stock, our existing  sources of cash and cash flow from operations,  if any, are
insufficient to fund our activities,  we may need to raise additional  funds. If
we issue additional stock to raise capital, your percentage ownership in Netopia
would be reduced.  Additional financing may not be available when needed and, if
such financing is available, it may not be available on terms favorable to us.

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:

o        Variations in our quarterly operating results;

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

o        Changes in market valuations of similar companies;

                                       28
<PAGE>

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

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

o        Additions or departures of key personnel; and

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

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

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

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

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

Liquidity and Capital Resources

         We have funded our  operations  to date  primarily  through the private
sale of equity  securities and the initial public  offering of our common stock.
As of June 30, 1999, we had cash, cash  equivalents  and short-term  investments
representing 56% of total assets.

          Our operating activities used cash of $5.9 million for the nine months
ended June 30, 1999 and  generated  cash of $730,000  for the nine months  ended
June  30,  1998.  The cash  used in the  nine  months  ended  June 30,  1999 was
primarily due to supporting our operating  activities as well as the increase in
accounts  receivable  and  inventories  and the  reduction  accrued  liabilities
related  to the  sale  of the LAN  Division.  The  cash  provided  by  operating
activities  during the nine months ended June 30, 1998 was  primarily due to the
reduction  of  accounts  receivable,  depreciation  and  amortization  and other
liabilities primarily  representing accrued benefits and deferred rent offset by
the net loss.

         Our investing activities provided cash of $1.6 million and $4.5 million
in the nine months ended June 30, 1999 and 1998, respectively.  Cash provided by
investing activities in the nine months ended June 30, 1999 was primarily due to
proceeds from the sale and maturity of short-term  investments  partially offset
by:

o        The purchases of short-term investments;

o        The acquisitions of Serus and netOctopus;

o        Purchases of capital equipment; and

o Our  long-term  investment  in the common stock of  Northpoint  Communications
Group, Inc.

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


                                       29
<PAGE>

the market value of these shares was approximately  $2,027,757. As of August 13,
1999, the market value of these shares was approximately $1,416,653.

         Cash provided by investing activities during the nine months ended June
30, 1998 was primarily  due to proceeds from the sale of short-term  investments
partially offset by:

o        Purchases of short-term investments;

o        The acquisition of a trademark license related to the Netscape Internet
         portal for our Web site platform; and

o        Purchases of capital equipment

         Capital  equipment  expenditures were $1.3 million and $767,000 for the
nine months ended June 30, 1999 and 1998,  respectively,  representing purchases
of computer  equipment used in product  development.  We expect that our capital
expenditures will increase in future periods to support new product  development
and production.

         Our  financing  activities  in the nine months  ended June 30, 1999 and
1998 were  primarily  related to the  exercise of stock  options and  activities
related to our Employee Stock Purchase Plan.

         Our cash balances will increase during the three months ended September
30, 1999 as a result of the proceeds from our sale of 2.0 million  shares of our
common stock on August 4, 1999.  The  proceeds we received  from the sale of our
common stock was  approximately  $35.3 million,  net of underwriting  discounts,
commissions and other estimated offering expenses.  We believe that our existing
cash, cash  equivalents and short-term  investments will be adequate to meet our
cash needs for working capital, capital expenditures and earnouts related to our
acquisitions  for at least  the  next  twelve  months.  If cash  generated  from
operations is insufficient to satisfy our liquidity requirements, we may seek to
sell  additional  equity or  convertible  debt  securities or obtain  additional
credit  facilities.  We  cannot  assure  you  that  such  additional  equity  or
convertible debt financing or additional  credit facilities will be available on
acceptable  terms, if at all. The sale of additional  equity or convertible debt
securities could result in additional dilution to our stockholders. From time to
time, in the ordinary course of business, we evaluate potential  acquisitions of
businesses, products and technologies. Accordingly, a portion of our cash may be
used to acquire or invest in complementary businesses or products, to obtain the
right to use complementary  technologies,  to obtain additional  presence on the
Internet or to support additional advertising and promotional campaigns.


Item 3.       Qualitative and Quantitative Disclosures About Market Risk
--------------------------------------------------------------------------------
          Our  exposure to market risk for  changes in  interest  rates  relates
primarily  to our  investment  portfolio.  We do not  use  derivative  financial
instruments  for  speculative or trading  purposes.  We place our investments in
instruments  that  meet high  credit  quality  standards,  as  specified  in our
investment policy.  This policy also limits the amount of credit exposure to any
one issue,  issuer and type of  instrument.  We do not expect any material  loss
with respect to our investment portfolio.

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

<TABLE>
<CAPTION>

                                                                           Carrying                Average
          Principal (notional) amounts in United States dollars:            Amount              Interest Rate
         ------------------------------------------------------------------------------------------------------
                                                                        (in thousands)
<S>                                                                        <C>                          <C>
          Cash equivalents - fixed rate.............................        $    13,051                 4.65%
          Short-term investments - fixed rate.......................                                    5.61%
                                                                                 12,999
                                                                       -----------------

                                                                            $    26,050
                                                                       =================

</TABLE>



                                       30
<PAGE>




PART II.      OTHER INFORMATION
Item 5.       Other Information
--------------------------------------------------------------------------------

     On August 4, 1999, we completed a secondary  public  offering of our common
stock. As part of this offering,  we sold 2.0 million shares and certain selling
shareholders  sold 200,000 shares of our common stock. The proceeds we expect to
receive from the sale of 2.0 million shares of our common stock is approximately
$35.3 million,  net of underwriting  discounts,  commissions and other estimated
offering  expenses.  We did not  receive  any of the  proceeds  from the sale of
shares of our common  stock by the  selling  shareholders.  We have  granted the
underwriters  of our  offering a 30-day  option to purchase up to an  additional
330,000 shares of our common stock to cover over-allotments.



Item 6.       Exhibits and Reports on Form 8-K
--------------------------------------------------------------------------------

(a)      Exhibits

         27.1     Financial Data Schedule

(b)      Reports on Form 8-K

         There were no reports  filed on Form 8-K during the three  months ended
         June 30, 1999.





                                       31
<PAGE>




SIGNATURE
--------------------------------------------------------------------------------
         Pursuant to the  requirements  of the Securities  Exchange Act of 1934,
the  registrant  has duly  caused  this report to be signed on its behalf by the
undersigned thereunto duly authorized.


Date:  August 16, 1998           NETOPIA, INC.

                                 (Registrant)



                                 By:  /s/ James A. Clark

                                 James A. Clark

                                Vice President and Chief Financial Officer
                                (Duly Authorized Officer and Principal Financial
                                Officer)




                                       32
<PAGE>