<PAGE>

================================================================================

                                 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 December 31, 2000


                                      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                 No    X
                        -------            -------

     As of January 31, 2001 there were 17,853,199 shares of the Registrant's
Common Stock outstanding.

================================================================================

                                                                               3
<PAGE>

<TABLE>
<CAPTION>
NETOPIA, INC.
FORM 10-Q
TABLE OF CONTENTS                                                                                               PAGE
--------------------------------------------------------------------------------------------------------------------
<S>                                                                                                             <C>
PART I.    FINANCIAL INFORMATION

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

           Condensed consolidated balance sheets at December 31, 2000 and September 30, 2000....................   2

           Condensed consolidated statements of operations for the three months ended December 31, 2000 and
           1999.................................................................................................   3

           Condensed consolidated statements of cash flows for the three months ended December 31, 2000 and
           1999.................................................................................................   4

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

Item 2.    Management's Discussion and Analysis of Financial Condition and Results of Operations................   9

Item 3.    Quantitative and Qualitative Disclosures About Market Risk...........................................  27

PART II.   OTHER INFORMATION

Item 6.    Exhibits and Reports on Form 8-K.....................................................................  29

SIGNATURE.......................................................................................................  30
</TABLE>
<PAGE>

PART I.   FINANCIAL INFORMATION
Item 1.   Condensed Consolidated Financial Statements
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
NETOPIA, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(in thousands, except for share and per share amounts)
(unaudited)                                                               December 31,    September 30,
                                                                              2000            2000
                                                                          -----------------------------
<S>                                                                       <C>             <C>
ASSETS

Current assets:
     Cash and cash equivalents........................................... $     37,430    $      37,839
     Short-term investments..............................................       16,074           21,938
     Trade accounts receivable, less allowance for doubtful accounts and
          returns of $4,926 and $3,258 respectively......................       14,413           15,646
     Inventories, net....................................................       11,480           10,284
     Prepaid expenses and other current assets...........................        4,227            2,341
                                                                          ------------    -------------
              Total current assets.......................................       83,624           88,048
Furniture, fixtures and equipment, net...................................        5,148            4,469
Intangible assets, net...................................................       28,021           31,016
Deposits and other assets................................................        6,371            4,840
                                                                          ------------    -------------
                                                                          $    123,164    $     128,373
                                                                          ============    =============
LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
     Accounts payable.................................................... $      7,552    $       8,547
     Accrued compensation................................................        2,910            2,756
     Accrued liabilities.................................................        1,505            1,332
     Deferred revenue....................................................        3,620            2,215
     Other current liabilities...........................................        2,620              906
                                                                          ------------    -------------
              Total current liabilities..................................       18,207           15,756
Long-term liabilities....................................................          245              328
                                                                          ------------    -------------
              Total liabilities..........................................       18,452           16,084

Commitments and contingencies

Stockholders' equity:
 Common stock: $0.001 par value, 25,000,000 shares authorized;
     17,639,608 and 17,587,615 shares issued and outstanding at
     December 31, 2000 and September 30, 2000, respectively..............           18               17
     Additional paid-in capital..........................................      142,932          142,857
     Accumulated deficit.................................................      (38,238)         (30,079)
     Accumulated other comprehensive income..............................           --             (506)
                                                                          ------------    -------------
              Total stockholders' equity.................................      104,712          112,289
                                                                          ------------    -------------
                                                                          $    123,164    $     128,373
                                                                          ============    =============
</TABLE>

See accompanying notes to condensed consolidated financial statements.

                                                                               2
<PAGE>

<TABLE>
<CAPTION>
NETOPIA, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(in thousands, except for per share amounts)
(unaudited)                                                          Three months ended
                                                                         December 31,
                                                                    --------------------
                                                                      2000        1999
                                                                    --------------------
<S>                                                                 <C>         <C>
Revenues:
     Internet equipment...........................................  $ 14,845    $ 10,839
     Web platform licenses and services...........................     5,548       5,453
                                                                    --------    --------
          Total revenues..........................................    20,393      16,292

Cost of revenues:
     Internet equipment...........................................     9,795       7,609
     Web platform licenses and services...........................       201         122
                                                                    --------    --------
          Total cost of revenues..................................     9,996       7,731
                                                                    --------    --------

     Gross profit.................................................    10,397       8,561

Operating expenses:
     Research and development.....................................     3,669       2,998
     Selling and marketing........................................     7,185       5,647
     General and administrative...................................     3,143         976
     Acquired in-process research and development.................        --       5,668
     Amortization of goodwill.....................................     2,996       1,709
                                                                    --------    --------
          Total operating expenses................................    16,993      16,998
                                                                    --------    --------

          Operating loss..........................................    (6,596)     (8,437)

Other income (loss):
     Unrealized loss on impaired securities.......................      (981)         --
     Other income, net............................................       973         828
                                                                    --------    --------
          Total other income (loss)...............................        (8)        828
                                                                    --------    --------

          Loss from continuing operations before income taxes.....    (6,604)     (7,609)
Income tax provision..............................................        --          --
                                                                    --------    --------

          Loss from continuing operations.........................    (6,604)     (7,609)

Cumulative effect from adoption of Staff Accounting Bulletin 101..    (1,555)         --

Gain on sale from discontinued operations, net of taxes...........        --       1,147
                                                                    --------    --------

          Net loss................................................  $ (8,159)   $ (6,462)
                                                                    ========    ========

Comprehensive loss:
     Net loss.....................................................  $ (8,159)   $ (6,462)
     Other comprehensive income...................................        --         305
                                                                    --------    --------
          Total comprehensive loss................................  $ (8,159)   $ (6,157)
                                                                    ========    ========

Per share data, net loss:
     Basic and diluted loss per share.............................  $  (0.46)   $  (0.40)
                                                                    ========    ========
     Shares used in the per share calculations....................    17,607      16,047
                                                                    ========    ========
</TABLE>

See accompanying notes to condensed consolidated financial statements

                                                                               3
<PAGE>

<TABLE>
<CAPTION>
NETOPIA, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)                                                                              Three months ended December 31,
                                                                                      --------------------------------------
                                                                                           2000                   1999
                                                                                      --------------------------------------
<S>                                                                                   <C>                    <C>
Cash flows from operating activities:
Net loss............................................................................  $        (8,159)       $        (6,462)
Adjustments to reconcile net loss to net cash used in operating activities:
    Depreciation and amortization...................................................            3,732                  1,887
    Charge for in-process research and development..................................               --                  5,668
    Changes in allowance for doubtful accounts and returns on accounts
       receivable...................................................................            1,668                    135
    Changes in operating assets and liabilities:
       Trade accounts receivable....................................................             (435)                (2,938)
       Inventories..................................................................           (1,195)                (1,138)
       Prepaid expenses, and other current assets...................................           (1,886)                    96
       Deposits and other assets....................................................              (10)                    54
       Accounts payable and accrued liabilities.....................................             (668)                   990
       Deferred revenue.............................................................            1,344                    348
       Other liabilities............................................................            1,691                    323
                                                                                      ---------------        ---------------
           Net cash used in operating activities....................................           (3,918)                (1,037)
                                                                                      ---------------        ---------------

Cash flows from investing activities:
    Purchase of furniture, fixtures and equipment...................................           (1,200)                  (116)
    Capitalization of software development costs....................................             (211)                  (111)
    Acquisition of technology.......................................................               --                (10,855)
    Purchase of long-term investment................................................           (2,000)                    --
    Purchase of short-term investments..............................................          (12,764)               (25,635)
    Proceeds from the sale and maturity of short-term investments...................           18,628                    974
    Unrealized loss on impaired securities..........................................              981                     --
                                                                                      ---------------        ---------------
           Net cash provided by (used in) investing activities......................            3,434                (35,743)
                                                                                      ---------------        ---------------

Cash flows from financing activities:
    Proceeds from the issuance of common stock, net.................................               75                  1,540
                                                                                      ---------------        ---------------
           Net cash provided by financing activities................................               75                  1,540
                                                                                      ---------------        ---------------

Net decrease in cash and cash equivalents...........................................             (409)               (35,240)
Cash and cash equivalents, beginning of period......................................           37,839                 61,381
                                                                                      ---------------        ---------------
Cash and cash equivalents, end of period............................................  $        37,430        $        26,141
                                                                                      ===============        ===============

Supplemental disclosures of noncash investing and financing activities:
    Issuance of common stock and common stock options for acquisition of intangible
    assets..........................................................................  $            --        $        17,322
                                                                                      ===============        ===============
</TABLE>

See accompanying notes to condensed consolidated financial statements.

                                                                               4
<PAGE>

NETOPIA, INC. AND SUBSIDIARIES
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 December 31, 2000 are not necessarily indicative of the results to be
expected for any subsequent quarter or for the entire fiscal year ending
September 30, 2001.

(2)  Recent Accounting Pronouncements
     --------------------------------

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

     In December 1999, the SEC issued Staff Accounting Bulletin (SAB) 101,
Revenue Recognition in Financial Statements. SAB 101 provides guidance on
applying generally accepted accounting principles to revenue recognition issues
in financial statements. The Company adopted SAB 101 in its fiscal first quarter
of 2001 resulting in a $1.6 million charge to its condensed consolidated
statement of operations and a $1.6 million increase in deferred revenue to its
condensed consolidated balance sheet. The cumulative effect of adoption of SAB
101 reflects a change in revenue recognition for Web platform licenses that
provided for upfront nonrefundable payments. This revenue is being amortized
over the terms of the licenses, of which approximately $267,000 was recognized
during the three months ended December 31, 2000.

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

(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):

                                                 December 31,     September 30,
                                                     2000             2000
                                                 ------------     ------------

     Raw materials and work in process........        $ 7,678          $ 4,723
     Finished goods...........................          3,802            5,561
                                                 ------------     ------------
                                                      $11,480          $10,284
                                                 ============     ============

                                                                               5
<PAGE>

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


                                                    December 31,  September 30,
                                                        2000           2000
                                                    ------------  -------------

     Furniture, fixtures and equipment............  $     13,016  $      16,480
     Accumulated depreciation and amortization....
                                                          (7,868)       (12,011)
                                                    ------------  -------------
                                                    $      5,148  $       4,469
                                                    ============  =============

(5)  Net Loss Per Share
     ------------------

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

Computation of net loss per share
(in thousands, except per share amounts)

<TABLE>
<CAPTION>
                                                                 Three months ended
                                                                     December 31,
                                                           -------------------------------
                                                                2000             1999
                                                           --------------   --------------
     <S>                                                   <C>              <C>
     Computation Of Basic And Diluted Net Loss Per Share:

         Net loss........................................  $       (8,159)  $       (6,462)
                                                           ==============   ==============
         Weighted average number of common stock
         outstanding.....................................          17,607           16,047
                                                           ==============   ==============
          Basic and diluted net loss per common share....  $        (0.46)  $        (0.40)
                                                           ==============   ==============
</TABLE>

     Potentially dilutive common shares have been excluded from the computation
of diluted net loss per share for the three months ended December 31, 2000 and
1999 since their effect on net loss per share is antidilutive due to the losses
incurred in each period. Consequently, the number of shares in the computations
of basic and diluted net loss per share is the same for each period. Potentially
dilutive common shares which were excluded from the computation of diluted net
loss per share consisted of options to purchase common stock totaling 5,187,248
and 3,803,516 shares, respectively, for the three months ended December 31, 2000
and 1999, and warrants to purchase common stock totaling 5,000 and 60,000
shares, respectively, for the three months ended December 31, 2000 and 1999.

(6)  Geographic, Segment and Significant Customer Information
     --------------------------------------------------------

     Statement of Financial Accounting Standards (SFAS ) No. 131, Disclosure
about Segments of an Enterprise and Related Information establishes standards
for the reporting by public business enterprises of information about operating
segments, products and services, geographic areas, and major customers. The
methodology for determining what information is reported, is based on the
organization of operating segments and the related information that our Chief
Operating Decision Maker (CODM) uses for operational decisions and assessing
financial performance. Our Chief Executive Officer (CEO) is considered our CODM.
For purposes of making operating decisions and assessing financial performance,
our CEO reviews financial information presented on a consolidated basis
accompanied by disaggregated

                                                                               6
<PAGE>

information for revenues and gross margins by product group as well as revenues
by geographic region and by customer. Currently, operating expenses and assets
are not disaggregated by product group for purposes of making operating
decisions and assessing financial performance.

     We generate revenue from three groups of products and services.
Disaggregated financial information regarding our three operating segments for
the three months ended December 31, 2000 and 1999 is as follows (in thousands):

<TABLE>
<CAPTION>
                                                        -------------------------
                                                          Web Platform Products
                                            ---------   -------------------------   --------------
                                            Internet      Web Site/E-    Timbuktu
                                            Equipment   Store Products   Products   Total Products
                                            ---------   --------------   --------   --------------
    Three months ended December 31, 2000
    ------------------------------------
<S>                                         <C>         <C>              <C>        <C>
Revenues .....................              $ 14,845      $  2,163       $  3,385       $ 20,393
Cost of revenues .............                 9,795           145             56          9,996
                                            --------      --------       --------       --------
Gross profit .................                 5,050         2,018          3,329         10,397
Unallocated operating expenses                                                            16,993
                                                                                        --------
       Operating loss ........                                                          $ (6,596)
                                                                                        ========

<CAPTION>
                                                        -------------------------
                                                          Web Platform Products
                                            ---------   -------------------------   --------------
                                            Internet      Web Site/E-    Timbuktu
                                            Equipment   Store Products   Products   Total Products
                                            ---------   --------------   --------   --------------
    Three months ended December 31, 1999
    ------------------------------------
<S>                                         <C>         <C>              <C>        <C>
 Revenues...........................        $ 10,839      $  1,832       $  3,621       $ 16,292
 Cost of revenues...................           7,609             6            116          7,731
                                            --------      --------       --------       --------
 Gross profit..........................        3,230         1,826          3,505          8,561
 Unallocated operating expenses                                                           16,998
                                                                                        --------
        Operating loss.................                                                 $ (8,437)
                                                                                        ========
</TABLE>

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


                                             Three Months Ended
                                                December 31,
                                        -----------------------------
                                             2000            1999
                                        -------------- --------------
United States........................   $       16,817 $       12,282
Europe...............................            2,923          3,260
Asia/Pacific.........................              223            299
Canada and Other.....................              401            359
Latin America .......................               29             92
                                        -------------- --------------
     Total revenues                     $       20,393 $       16,292
                                        ============== ==============

     We do not have material operating assets outside of the United States.

     During the three months ended December 31, 2000:

                                                                               7
<PAGE>

     .    Rhythms Netconnections, a competitive local exchange carrier (CLEC),
          accounted for 17% of our total revenues and 12% of our total accounts
          receivable at December 31, 2000. All revenues derived from this
          customer were related to sales of our Internet equipment; and

     .    Network Telephone, a CLEC, accounted for 12% of our total revenues and
          16% of our total accounts receivable at December 31, 2000.
          Approximately 93% of our revenues derived from Network Telephone
          related to sales of our Internet equipment and 7% related to sales of
          our Web platform products.

     No other customers during the three months ended December 31, 2000
accounted for 10% or more of our total revenues.

     During the three months ended December 31, 1999, Northpoint Communications,
a CLEC, accounted for 12% of our total revenues and 11% of our total accounts
receivable as of December 31, 1999. All revenues derived from this customer were
related to sales of our Internet equipment. No other customer during the three
months ended December 31, 1999 accounted for 10% or more of our total revenues.
One other customer accounted for 10% of our total accounts receivable as of
December 31, 1999.

(7)  Subsequent Events
     -----------------

     On January 23, 2001, the Company announced that it had entered into a
definitive agreement pursuant to which Proxim, Inc., (Proxim) a provider of
wirefree broadband networking, will acquire the Company's stock in a
stock-for-stock merger. Under the terms of the merger agreement, each share of
the Company's common stock will be converted into 0.3 shares of Proxim common
stock, resulting in an aggregate purchase price of approximately $223 million,
based on the closing price of Proxim stock on January 23, 2001. The acquisition
is expected to be completed during the latter part of the Company's fiscal
second quarter or early fiscal third quarter of 2001. The closing of the
acquisition is subject to governmental approvals, shareholder approval, and
customary closing conditions.

                                                                               8
<PAGE>

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 investors. There may be events in the future, however, that
we are not able to predict or over which we have no control. The risk factors
listed in this Form 10-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 risks, uncertainties, or 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 develop, market and support broadband Internet equipment and e-commerce
Web platforms for small and medium size businesses. Our platforms are designed
to enable carriers and service providers to create and offer value-added,
bundled service offerings for their small and medium size business customers.
These bundled service offerings often include digital subscriber line (DSL)
service bundled with back-up, bonding, virtual private networking (VPN), and Web
site and e-store hosting.

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

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

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

     We sell our products and provide services worldwide through
telecommunication service providers and carriers, Internet service providers
(ISPs), independent distributors and dealers, value-added resellers (VARs), and
directly to end users. We sell our DSL Internet equipment primarily through
competitive local exchange carriers (CLECs). We depend upon the ability of such
competitive telecommunications service providers to successfully offer DSL
services. These competitive telecommunications service providers are competing
with traditional regional telephone companies.

                                                                               9
<PAGE>

     During the three months ended December 31, 2000:

     .    Our five largest customers, who each individually represented at least
          5% of our total revenues, accounted for 52% of our total revenues;

     .    Rhythms Netconnections, a CLEC, accounted for 17% of our total
          revenues; and

     .    Network Telephone, a CLEC, accounted for 12% of our total revenues.

        No other customers during the three months ended December 31, 2000
     accounted for 10% or more of our total revenues.

        During the three months ended December 31, 1999:

     .    Our four largest customers, who each individually represented at least
          5% of our total revenues, accounted for 33% of our total revenues; and

     .    Northpoint Communications (Northpoint), a CLEC, accounted for 12% of
          our revenues.

        No other customer during the three months ended December 31, 1999
     accounted for 10% or more of our total revenues.

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

     Historically, a significant portion of our revenues have been derived from
customers outside of the United States, and we expect this trend to continue.
For the three months ended December 31, 2000 and 1999, international revenues
accounted for 18% and 25%, respectively, of our total revenues.

     Our international revenues have historically been denominated in United
States dollars, and revenues generated by our international distributors have
historically been paid to us in United States dollars. Beginning in our fiscal
third quarter of 2000, international sales to customers located in countries
that are members of the European Union are being denominated in the Euro.

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

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

                                                                              10
<PAGE>

Results of Operations for the Three Months Ended December 31, 2000 and 1999

     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
                                                                                     ------------------------
                                                                                            December 31,
                                                                                     ------------------------
                                                                                       2000             1999
                                                                                     -------          -------
<S>                                                                                  <C>              <C>
 Revenues:
     Internet equipment ..........................................................      72.8%            66.5%
     Web platform licenses and services ..........................................      27.2%            33.5%
                                                                                     -------          -------
          Total revenues .........................................................     100.0%           100.0%

 Cost of revenues:
     Internet equipment ..........................................................      48.0%            46.7%
     Web platform licenses and services ..........................................       1.0%             0.8%
                                                                                     -------          -------
          Total cost of revenues .................................................      49.0%            47.5%
                                                                                     -------          -------

     Gross profit ................................................................      51.0%            52.5%

 Operating expenses:
     Research and development ....................................................      18.0%            18.4%
     Selling and marketing .......................................................      35.2%            34.7%
     General and administrative ..................................................      15.4%             6.0%
     Acquired in-process research and development ................................        --             34.8%
     Amortization of goodwill ....................................................      14.8%            10.5%
                                                                                     -------          -------
          Total operating expenses ...............................................      83.4%           104.3%
                                                                                     -------          -------

          Operating loss .........................................................     (32.4%)          (51.8%)

Other income (loss):
     Unrealized loss on impaired securities ......................................      (4.8%)             --

     Other income, net ...........................................................       4.8%             5.1%
                                                                                     -------          -------
          Total other income (loss) ..............................................       0.0%             5.1%
                                                                                     -------          -------

          Loss from continuing operations before income taxes.....................     (32.4%)          (46.7%)
Income tax provision .............................................................        --               --
                                                                                     -------          -------

            Loss from continuing operations ......................................     (32.4%)          (46.7%)

 Cumulative effect from adoption of Staff Accounting Bulletin 101.................      (7.6%)             --
 Gain on sale from discontinued operations, net of taxes .........................        --              7.0%
                                                                                    -------          -------

            Net loss .............................................................     (40.0%)          (39.7%)
                                                                                     =======          =======
</TABLE>

                                                                              11
<PAGE>

     Revenue. Our revenues increased 25.2% to $20.4 million in the three months
ended December 31, 2000 from $16.3 million in the three months ended December
31, 1999.

     The increase in the three months ended December 31, 2000 was primarily due
to increased sales of our DSL Internet equipment in North America. Most notably,
sales to Rhythms Netconnections, a CLEC, were $3.5 million for the three months
ended December 31, 2000. There were no sales made to Rhythms Netconnections for
the three months ended December 31, 1999. Sales to Network Telephone, a CLEC,
increased 11,517% to $2.5 million in the three months ended December 31, 2000
from $21,000 in the three months ended December 31, 1999. Both Rhythms
Netconnections and Network Telephone distribute our products to end users.

     These increases were partially offset by declining average selling prices
of our Internet equipment as a result of price competition.

     International revenues decreased 10.8% to $3.6 million in the three months
ended December 31, 2000 from $4.0 million in the three months ended December 31,
1999. International revenues decreased primarily due to decreased sales of our
Web platform products internationally. International revenues accounted for 18%
and 25% of our total revenues for the three months ended December 31, 2000 and
1999, respectively. International revenues declined as a percentage of total
revenues primarily due to increasing sales of our DSL Internet equipment and Web
platform products in the United States.

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

<TABLE>
<CAPTION>
                                                           Three months ended December 31,
                                                           -------------------------------
                                                            2000                  1999
     -------------------------------------------------------------------------------------
<S>                                                        <C>                   <C>
     Europe ......................................              14                      20%
     Pacific Rim .................................               1                       2
     Canada and Other ............................               3                       3
                                                            ------------------------------
       Subtotal international revenues............              18                      25
     United States ...............................              82                      75
                                                            ------------------------------
          Total revenues .........................             100%                    100%
                                                            ==============================
</TABLE>

     Although international revenues decreased as a percentage of total revenue
in the three months ended December 31, 2000, a substantial portion of our
revenues were derived from sales to international customers, and we expect sales
to international customers to increase in absolute dollars on an annual basis.

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

     Although our revenues in the three months ended December 31, 2000 increased
25.2% over revenues in the three months ended December 31, 1999, our revenues
decreased 13.6% sequentially from $20.4 million in the three months ended
December 31, 2000 from $23.6 million in the three months ended September 30,
2000. The sequential decrease was attributable to a 12.2% decrease in our
Internet equipment revenue which was $14.8 million in the three months ended
December 31, 2000 compared to $16.9 million in the three months ended September
30, 2000 and a 17.1% decrease in our Web platform licenses and services revenue
which was $5.5 million in the three months ended December 31, 2000 compared to
$6.7 million in the three months ended September 30, 1999. We believe the
sequential revenue decline reflects changes in the external financing
environment for the telecommunication carriers and

                                                                              12
<PAGE>

service providers that are the primary channel for our products. These
competitive telecommunications service providers have generally incurred
operating losses and negative cash flows as they establish their networks and
operations. Accordingly, these channel partners are dependent on continued
access to new sources of capital. We believe that the current external financing
environment is challenging for these competitive telecommunications service
providers. For example, we fully reserved $1.8 million of outstanding accounts
receivable owed by two customers in the three months ended December 31, 2000. Of
the $1.8 million amount, approximately $1.7 million related to outstanding
receivables from Northpoint Communications (Northpoint). As of December 31,
2000, we have discontinued shipping products to Northpoint due to concerns over
their financial condition. In January, 2001, Northpoint announced it had filed a
voluntary petition for relief under chapter 11 of title 11 of the United States
Code.

     On Wednesday, November 29, 2000, Verizon announced its intent to end merger
negotiations with Northpoint. Northpoint publicly discussed that alternative
sources of financing were in place. In addition, the Company's Chairman and
Chief Executive Officer, Alan Lefkof, was assured of alternative sources of
financing in place from direct correspondence with Northpoint. Based on the
preceding factors and the Company's long term relationship with Northpoint, the
Company determined that reasonable efforts were made to evaluate Northpoint's
collection risk and the Company shipped products to Northpoint. On January 16,
2001, Northpoint filed a voluntary petition for relief under chapter 11 of title
11 of the United States Code.

     Gross Margin. Our total gross margin decreased to 51.0% in the three months
ended December 31, 2000 from 52.5% in the three months ended December 31, 1999.
The decrease was primarily due to:

     .    The increased proportion of our Internet equipment revenue to total
          revenue in the three months ended December 31, 2000; and

     .    Increased costs related to supporting our Web platform products.

     These decreases were partially offset by declining average costs of our
Internet equipment.

     In the past, our gross margin has varied significantly and will likely vary
significantly in the future. Our gross margins depend primarily on:

     .    The mix of hardware and software products sold;

     .    Pricing strategies;

     .    Standard cost changes;

     .    New versions of existing products; and

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

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

     Research and Development. Our research and development expenses increased
22.4% to $3.7 million for the three months ended December 31, 2000 from $3.0
million for the three months ended December 31, 1999. Research and development
expenses increased primarily due to increased headcount and employee related
expenses related to our Internet equipment and Web platform products, increased
use of third party contractors, increased development expenses related to our
DSL Internet equipment as we continue to expand our DSL product line and
capabilities, and our acquisition of WebOrder in March 2000 whose operations
were not included in our research and development expenses for the three months
ended December 31, 1999.

                                                                              13
<PAGE>

     We expect to continue to devote substantial resources to product and
technological development. We expect research and development costs may increase
in absolute dollars for the remainder of fiscal 2001 and into fiscal 2002 as we
continue to expand the breadth and depth of our product offerings. We believe
our process for developing software is essentially completed concurrently with
the establishment of technological feasibility, and we have not capitalized any
internal software development costs to date. However, during the three months
ended December 31, 2000, we capitalized $211,000 of product development costs
incurred subsequent to the delivery of a working model, under a development
agreement with third parties.

     Selling and Marketing. Our selling and marketing expenses increased 27.2%
to $7.2 million for the three months ended December 31, 2000 from $5.6 million
for the three months ended December 31, 1999. Selling and marketing expenses
increased primarily due to:

     .    Increased headcount and other employee related expenses to support our
          increased sales and marketing efforts;

     .    Increased commission costs in line with higher revenue levels; and

     .    Increased travel and advertising costs related to developing new and
          supporting our existing sales and marketing channels;

     These expenses were partially offset by reduced use of external marketing
professional services and reduced participation in trade shows.

     We believe that our selling and marketing expenses will increase in
absolute dollars for the remainder of fiscal year 2001 and into fiscal 2002 as a
result of:

     .    Increased advertising and promotional campaigns related to our
          e-commerce Web platform as well as our DSL Internet equipment; and

     .    Continued expansion of our sales staff domestically and
          internationally.

     General and Administrative. Our general and administrative expenses
increased 222.0% to $3.1 million for the three months ended December 31, 2000
from $976,000 for the three months ended December 31, 1999. General and
administrative expenses increased primarily due to:

     .    A special provision for doubtful accounts related to outstanding
          accounts from two customers as addressed above; and

     .    Increased headcount and other employee related expenses.

     Acquired In-Process Research and Development. Based upon an independent
third party valuation analysis of our acquisition of StarNet, we allocated a
one-time charge of approximately $5.7 million of the purchase price to acquired
in-process research and development for the three months ended December 31,
1999.

     Amortization of Goodwill and Other Intangible Assets. For the three months
ended December 31, 2000, amortization of goodwill and other intangible assets
represents the amortization of such amounts allocated to goodwill and other
intangible assets related to our acquisitions of Serus, netOctopus, StarNet and
WebOrder.

     The amount allocated to goodwill and other intangible assets in connection
with our acquisition of WebOrder was $17.1 million. We are amortizing the
goodwill and other intangible assets over four and three years, respectively.
For the three months ended December 31, 2000, we amortized $1.1 million in
goodwill and other intangible assets related to our acquisition of WebOrder. The
amount allocated to goodwill and other intangible assets in connection with our
acquisition of StarNet was $22.4 million. We

                                                                              14
<PAGE>

are amortizing the goodwill and other intangible assets over four and three
years, respectively. For the three months ended December 31, 2000, and 1999, we
amortized we amortized $1.7 million and $1.5 million, respectively, in goodwill
and other intangible assets related to our acquisition of StarNet. The amount
allocated to goodwill and other intangible assets in connection with our
acquisition of Serus was $2.1 million. We are amortizing the goodwill and other
intangible assets over four years. For the three months ended December 31, 2000
and 1999, we amortized $134,000 and $133,000, respectively, in goodwill and
other intangible assets related to our acquisition of Serus. The amount
allocated to goodwill and other intangible assets in connection with our
acquisition of netOctopus was $700,000. We are amortizing the goodwill and other
intangible assets over four years. For the three months ended December 31, 2000
and 1999, we amortized $56,000 respectively in goodwill and other intangible
assets related to our acquisition of netOctopus.

     Other Income (loss). Other income (loss), primarily represents interest
income we earn on our cash, cash equivalents and short-term investments in
addition to both realized and unrealized gains and losses on foreign currency
transactions. Other income (loss), decreased 101.0% to ($8,000) for the three
months ended December 31, 2000 from $828,000 for the three months ended December
31, 1999. The decrease was due to an unrealized loss on impaired securities that
was recorded to reflect the other than temporary decline in the value of our
investment in Northpoint.

     Income Tax Provision. We did not record an income tax provision during the
three months ended December 31, 2000 or 1999 primarily due to continued
substantial uncertainty regarding our ability to realize our deferred tax
assets. We may begin recording a provision for income taxes in our fiscal year
2001. Based upon available objective evidence, there has been sufficient
uncertainty regarding the realizability of our deferred tax assets to warrant a
valuation allowance in our financial statements. The factors considered included
prior losses, inconsistent profits, and lack of carryback potential to realize
our deferred tax assets. Based on our economic outlook for the remainder of
fiscal year 2001, and fiscal years 2002 and beyond, we believe the uncertainty
regarding the realizability of our deferred tax assets may diminish to the point
where it is more likely than not that our deferred tax assets will be realized.
At such point, we would also reverse all or a portion of our valuation allowance
which will result in a non-recurring income tax benefit.

     Cumulative Effect From Adoption Of Staff Accounting Bulleting 101. In
December 1999, the SEC issued Staff Accounting Bulletin (SAB) 101, Revenue
Recognition in Financial Statements. SAB 101 provides guidance on applying
generally accepted accounting principles to revenue recognition issues in
financial statements. The Company adopted SAB 101 in its fiscal first quarter of
2001 and recorded a $1.6 million charge to its condensed consolidated statement
of operations and $1.6 million in deferred revenue to its condensed consolidated
balance sheet.

     Gain on Sale From Discontinued Operations. Gain on sale from discontinued
operations of $1.1 million in the three months ended December 31, 1999 primarily
represents the reversal of a liability we recorded for the excess space created
at our Alameda, California facility, in connection with the sale of our LAN
Division in August 1998, that we believed could not be subleased to third
parties.

                                                                              15
<PAGE>

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

We have recently agreed to be acquired by Proxim and will be subject to risks of
the combined company following completion of this acquisition. In the event that
we are unable to complete the acquisition or if the acquisition is delayed, our
business could be seriously harmed.

     In January 2001, we entered into an agreement to be acquired by Proxim, a
provider of wirefree broadband networking solutions. We intend to complete this
acquisition no later than June 30, 2001. In connection with this transaction,
our stockholders will receive 0.3 shares of Proxim common stock in exchange for
each share of Netopia common stock and thereafter will be subject to risks
associated with Proxim's business and the integration of Netopia's business into
Proxim.

     We expect that management will be devoting significant resources to
consummating the transaction and integrating our business with Proxim's
business. Prior to the completion of the acquisition, our customers may delay or
even cancel significant sales orders from us due to the uncertainty caused by
our proposed combination with Proxim. As a result, our sales and revenue
performance may be harmed pending completion of the acquisition, and any delays
in completing the acquisition may further harm our business. If the proposed
acquisition by Proxim is not completed for any reason, we may be unable to
regain our financial and market position due to diversion of management
attention from our day-to-day business, and the disruption of employees and our
relationships with customers and suppliers during the period leading up to the
proposed acquisition. In addition, we may be obligated to pay Proxim a
termination fee in the amount of $6.7 million, in the event of an acquisition
proposal received from a third party, under certain circumstances, and we will
be obligated to pay a portion of the legal, accounting and investment banking
fees incurred by Proxim in connection with the proposed acquisition. Our stock
price may also decline to the extent that the current market price of our stock
reflects a market assumption that the acquisition will be completed.

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

     In the United States, purchasers of our DSL Internet equipment have
primarily been emerging competitive telecommunications service carriers and
providers such as Rhythms Netconnections, Network Telephone, Covad
Communications, Northpoint Communications, and Internet service providers such
as Megapath Networks, PSINet, Onsite Access, UUnet, Verio, and XO
Communications. We depend upon the ability of such competitive
telecommunications service providers to offer DSL services successfully and
become sustainable businesses. These competitive telecommunications service
providers are competing with traditional regional telephone companies and with
each other. Traditional regional telephone companies may have a number of
competitive advantages over their new competitors, including greater resources,
name recognition and access to customers. Also, traditional regional telephone
companies may restrict, or attempt to restrict, the ability of competitive
telecommunications service providers to install DSL equipment at the regional
telephone companies' central offices. These competitive telecommunications
service providers have generally incurred operating losses and negative cash
flows as they establish their networks and operations. Accordingly, these
channel partners are dependent on continued access to new sources of capital. We
believe that the current external financing environment is challenging for these
competitive telecommunications service providers. Northpoint Communications,
which has been an important customer, filed a voluntary bankruptcy petition on
January 16, 2001.

The DSL market has experienced significant business difficulties during the
past year, which have negatively affected our business and operating results.

     Our most significant customers are competitive local exchange carriers
(CLECs) and Internet service providers (ISPs).  Since mid-2000, CLECs have
experienced significant business difficulties due to an inability to obtain
financing to continue to build out their networks.  The difficulties of these
customers have materially and adversely affected our operating results, causing
a significant decline in the price of our common stock.  Our four largest CLEC
customers in 2000, Jato Communications, Northpoint Communications, Covad
Communications and Rhythms NetConnections, have demonstrated the following
market difficulties:

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

 .  Northpoint Communications voluntarily filed for Chapter 11 bankruptcy on
   January 16, 2001;

 .  Covad Communications has reduced its breadth of network build-out and
   significantly scaled back its operations; and

 .  Rhythms NetConnections similarly announced on January 16, 2001 its intention
   to reduce the number of markets in which it offers services and significantly
   scaled back its operations.

     The financing market for CLECs has remained difficult and has been largely
closed in recent months, resulting in significantly decreased sales to CLECs and
write offs of receivables.

     Like the CLECs, ISPs have struggled in the past year.  Most ISPs have had
significant difficulties in differentiating their services from the services
provided by their competitors.  As a result, the lack of differentiation has led
to significant erosion in the prices charged to customers.  Our leading ISP
customers in 2000, PSI Net, LMKI, Flashcom Communications, Zyan Communications
and Fastpoint Technology, all have experienced significant business difficulties
and some have filed for bankruptcy or ceased operations.  The pricing pressure
for ISPs continues to date, and, accordingly, sales of our products to ISPs have
decreased and remain difficult.

     Our products are generally intended for use by small- to mid-sized
businesses.  The residential home market for ISP services is growing faster than
the business market to which our products are targeted. If we fail to
successfully address the residential home market for ISP services, our business
will be materially and adversely affected.

     With the challenging environment for CLECs and ISPs and the slow growth in
sales to businesses by ISPs, we have recently focused on attempting to penetrate
the incumbent local exchange carrier, or ILEC, market domestically and overseas.
Selling products to ILECs is challenging as there is a substantial and time-
consuming product evaluation process and a long-term contract cycle. We can
offer no assurance that we will be successful in penetrating the ILEC market.

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

     Our revenues will decline and we may incur losses if we lose one or more of
our significant customers or if our customers reduce or delay purchases of our
products. For the three months ended December 31, 2000, our top five customers
who each individually represented at least 5% of our total

                                                                              16
<PAGE>

revenues, accounted for approximately 52% of our total revenues. In this period,
sales to Rhythms Netconnections and Network Telephone represented approximately
17% and 12%, respectively, of our total revenues. These channels partners have
generally incurred operating losses and negative cash flows as they attempt to
establish their networks and operations. Accordingly, they are dependent on
continued access to new sources of capital. To the extent they are unable to
secure new sources of capital, our revenues and profitability would be harmed.
We believe that the current external financing environment is challenging for
these competitive telecommunications service providers. For example, we fully
reserved $1.8 million of outstanding accounts receivable owed by two customers
in the three months ended December 31, 2000, of which approximately $1.6 million
related to 100% of outstanding receivables from Northpoint.

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

          Our failure to significantly increase our revenues would result in
continuing losses. We incurred losses from continuing operations of $6.6 million
and $7.6 million for the three months ended December 31, 2000 and 1999,
respectively. Our operations used $3.9 million and $1.0 million of cash for the
three months ended December 31, 2000 and 1999, respectively. Even if we do
maintain profitability and positive cash flow from operations, we may not be
able to sustain or increase profitability or cash flow from operations on a
quarterly or annual basis.

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

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

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

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

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

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

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

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

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

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

                                                                              17
<PAGE>

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

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

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

     .    Our ability to attract and retain key personnel.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

          In the DSL router market, we primarily compete with 3Com, Arescom,
Cayman Systems, Cisco Systems, Efficient Networks (FlowPoint), Lucent
Technologies, Ramp Networks, Zyxel Communications

                                                                              18
<PAGE>

and several other companies. In addition to these competitors, there have been a
growing number of announcements by other companies that they intend to enter the
DSL router market. Further, some competitors offer low-cost or no-cost support
programs that are similar to our "Up & Running, Guaranteed!" program.

     In the market for Web sites and electronic commerce platforms, we primarily
compete with IBM Online, NetObjects, Verio, BigStep.com, Intershop and several
other companies. In the market for our remote control and enterprise software,
we primarily compete with Computer Associates, Intel, Microcom (Compaq),
Microsoft, Vector Networks, Stac Software, Symantec, Tivoli Systems (IBM) and
several other companies. We anticipate intense competition from some of these
companies because some of these competitors provide their products to consumers
at no cost. For example, Microsoft has available at no cost a communications and
collaboration software product that could limit the market for Timbuktu Pro.

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

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

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

Our revenues will not grow and we may incur losses if we cannot continue to
successfully introduce, market and sell our DSL Internet equipment.

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

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

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

                                                                              19
<PAGE>

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

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

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

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

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

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

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

     .    Evolving industry standards for DSL technologies; and

     .    Government regulation.

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

Other technologies for the broadband Internet equipment market compete with DSL
services.

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

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

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

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

          Substantially all of our Internet equipment includes circuit boards
that are manufactured by SMTC. Additionally, certain of our DSL routers are
assembled and packaged by SMTC. If supplies of circuit boards or DSL routers
from SMTC are interrupted for any reason, we will incur significant losses

                                                                              20
<PAGE>

until we can arrange for alternative sources. Any such interruption may
seriously harm our reputation and business.

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

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

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

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

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

     In the past, we have engaged in both acquisitions and divestitures. For
example, in December 1998, we acquired netOctopus and Serus, in October 1999, we
acquired StarNet and in March 2000, we acquired WebOrder. In addition, in August
1998, we sold our LAN Division, which developed and sold local area network
(LAN) products. In the event we do not complete the proposed combination with
Proxim, we may continue to acquire companies, technologies or products or to
sell or discontinue some of our technologies or products in future periods. In
the past, our acquisitions and divestitures have involved numerous risks,
including the use of significant amounts of our cash, diversion of the attention
of our management from our core business, loss of our key employees and
significant expenses and write-offs. Incremental acquisition related charges
including in-process research and development and amortization of goodwill and
other intangibles or divestitures of profitable technologies or products could
adversely impact our profitability. The success of these acquisitions depends
upon our ability to timely and successfully develop, manufacture and gain market
acceptance for the products we acquired. If we engage in additional

                                                                              21
<PAGE>

acquisitions or divestitures in future periods, we may not be able to address
these risks and our business may be harmed.

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

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

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

     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 and e-stores created by licensees. Accordingly, to
be successful, our Web platform must become widely used. If we are unable to
establish the widespread use of our Web platform, it is possible that competing
products could become widely used, reducing the likelihood that we will generate
significant revenues from our Web platform. In addition, some companies are
offering Web presence and enhancement products at no cost. In some instances, we
believe these companies are not charging for such products and services. If such
free products and services become widely used, the market for Netopia's Web
platform products will be limited.

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
third parties with whom we contract to maintain our servers, hardware and
software, could lead to interruption or deterioration of our Web site and
e-store hosting services. Additionally, a slowdown or failure of our systems due
to an increase in the use of the Web sites we currently host, or due to damage
or destruction of our systems for any reason, or the possibility of rolling
blackouts could also lead to interruption or deterioration of our Web site and
e-store hosting services. If there is an interruption or a deterioration of our
Web site or e-store hosting services, our reputation would be seriously harmed
and, consequently, sales of our products and services would decrease. If such
circumstances do arise in some future period, in order to retain current
customers and attract new customers, we may have to provide our Web site and
e-store hosting services at a subsidized price or even at no cost. In addition,
if our Web site and e-store hosting services are interrupted, perform poorly, or
are unreliable, we are at risk of litigation from our customers.

                                                                              22
<PAGE>

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

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

We license a substantial portion of our Web platform products to a limited
number of large customers and these licenses have a lengthy sales cycle.

     Licenses of Web platform products are typically closed in the final weeks
of the quarter and the timing of these licenses may cause our quarterly results
to vary. Our inability to get customer commitments or delays in such commitments
due to the lengthy sales cycles would reduce our revenues and adversely impact
our results.

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

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

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

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

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

     Our future performance depends on the continued service of our senior
management, product development and sales personnel, particularly Alan Lefkof,
our President and Chief Executive Officer. 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.

                                                                              23
<PAGE>

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

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

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

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

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

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

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

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

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

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

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

                                                                              24
<PAGE>

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

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

Our California facilities are located near earthquake fault lines.

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

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

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

     .    Acceptance of and demand for our products;

     .    The number and timing of acquisitions;

     .    The costs of developing new products;

     .    The costs associated with our expansion; and

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

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

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

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

     .    Variations in our quarterly operating results;

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

     .    Changes in market valuations of similar companies;

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

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

     .    Additions or departures of key personnel; and

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

                                                                              25
<PAGE>

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

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

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

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

Liquidity and Capital Resources

     We have funded our operations to date primarily through the private sale of
equity securities and the public offerings of our common stock. As of December
31, 2000, we had cash, cash equivalents and short-term investments representing
43% of total assets.

     Our operating activities used $3.9 million and $1.0 million of cash for the
three months ended December 31, 2000 and 1999, respectively. The cash used in
operating activities in the three months ended December 31, 2000 was primarily
due to supporting our regular operating activities as well as an increase in
inventories, accounts receivable, and other current assets, partially offset by
increases in deferred revenue and other liabilities.

     Cash provided by investing activities for the three months ended December
31, 2000 was primarily due to proceeds from the sale and maturity of short-term
investments, partially offset by purchases of short-term investments, our
investment in Megapath Networks, and purchases of furniture, fixtures and
equipment.

     Cash provided by our financing activities for the three months ended
December 31, 2000 and 1999 was primarily related to the exercise of employee
stock options and activities related to our Employee Stock Purchase Plan.

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

     From time to time, in the ordinary course of business, we may evaluate
potential acquisitions of businesses, products and technologies. Accordingly, a
portion of our cash may be used to acquire or invest in complementary businesses
or products, to obtain the right to use complementary technologies, to obtain
additional presence on the Internet or to support additional advertising and
promotional campaigns. In the past, our acquisitions and divestitures have
involved numerous risks, including the use of significant amounts of our cash,
diversion of the attention of our management from our core business, loss of our
key employees and significant expenses and write-offs. For example, in December
1998, we acquired netOctopus and Serus, in October 1999, we acquired StarNet
and, in March 2000, we acquired WebOrder. The success of these acquisitions
depend 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.

     During our fiscal first quarter of 2001, we purchased $2.0 million of
Series D Preferred stock in Megapath Networks Incorporated (Megapath). Megapath,
a broadband service provider, provides high-

                                                                              26
<PAGE>

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk

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

Interest Rate Risk
------------------

     The table below presents the carrying value and related weighted-average
interest rates for our investment portfolio. The carrying value approximates
fair value at December 31, 2000, and 1999. All of our investments mature in
twelve months or less.

<TABLE>
<CAPTION>
                                         -----------------------------    ---------------------------
                                                      2000                            1999
---------------------------------------  -----------------------------    ---------------------------
Principal (notional) amounts in          Carrying           Average       Carrying         Average
United States dollars:                    Amount         Interest Rate     Amount       Interest Rate
---------------------------------------  ---------       -------------    --------      -------------
                                      (in thousands)                     (in thousands)
<S>                                       <C>            <C>             <C>            <C>
Cash equivalents - fixed rate (1)         $36,355            6.41%         $ 9,150          6.00%
Short-term investments - fixed rate (2)    15,892            6.50%          32,918          5.84%
                                          -------                          -------
                                          $52,247                          $42,068
                                          =======                          =======
</TABLE>

(1)  - Cash equivalents represent the portion of our investment portfolio that
       mature in less than 90 days.

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

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


Foreign Currency Exchange Risk
------------------------------

     The table below presents the carrying value, in U.S. dollars, of our
accounts receivable denominated in Euros at December 31, 2000 and 1999. These
accounts receivable are valued at the U.S./Euro exchange rate as of December 31,
2000. The carrying value approximates fair value at December 31, 2000, and 1999.

                                                                              27
<PAGE>

<TABLE>
<CAPTION>
                                                    -----------------------------------      -----------------------------------
                                                                    2000                                     1999
                                                    -----------------------------------      -----------------------------------
Principal (notional) amounts in                       Carrying         Exchange Rate At        Carrying         Exchange Rate At
United States dollars:                                 Amount            December 31            Amount             December 31
--------------------------------------------------  --------------     ----------------      --------------     ----------------
                                                    (in thousands)                           (in thousands)
<S>                                                 <C>                 <C>                  <C>                <C>
Accounts receivable denominated in Euros...             $ 2,421            0.9424                   --                 --
</TABLE>

     The table below presents the carrying value, in U.S. dollars, of our
currency exchange forward contracts at December 31, 2000 and 1999. The carrying
value approximates fair value at December 31, 2000, and 1999.

<TABLE>
<CAPTION>
                                          --------------------------------------     -----------------------------------------
                                                            2000                                        1999
---------------------------------------   --------------------------------------     -----------------------------------------
Principal (notional) amounts in Euros:    Carrying                                   Carrying
                                           Amount      Spot Rate  Settlement Date      Amount     Spot Rate   Settlement Date
------------------------------------------------------------------------------------------------------------------------------
                                        (in thousands)                             (in thousands)
<S>                                       <C>          <C>        <C>                <C>          <C>         <C>
Currency exchange forward contract # 1    $ 729        0.8576      Jan 31,            --               --        --
                                                                   2001
Currency exchange forward contract # 2    $ 773        0.8586      Feb 28,           --               --        --
                                                                   2001
Currency exchange forward contract # 3    $ 620        0.8857      March 30,         --               --        --
                                                                   2001
</TABLE>

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

                                                                              28
<PAGE>

PART II.  OTHER INFORMATION

Item 6.   Exhibits and Reports on Form 8-K



(a)  Reports on Form 8-K

     There were no reports filed on Form 8-K during the three months ended
December 31, 2000.

                                                                              29
<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:  February 6, 2000                  NETOPIA, INC.
                                         (Registrant)



                                     By: /s/ Alan B. Lefkof
                                         -----------------------------------
                                         Alan B. Lefkof
                                         President, Chief Executive Officer,
                                         Director, and acting Chief Financial
                                         Officer

                                                                              30