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

                                  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, 1998


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

               For the transition period from ________ to ________


                         Commission file number 0-28450


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


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


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


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


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


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


         As of January 31, 1999 there were 12,584,313 shares of the Registrant's
Common Stock outstanding.


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

<PAGE>


                                  NETOPIA, INC.

                                    FORM 10-Q

                                TABLE OF CONTENTS


                                                                            PAGE



PART I.        FINANCIAL INFORMATION

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

               Condensed consolidated balance sheets at December 31, 1998 and
               September 30, 1998...........................................   2

               Condensed consolidated statements of operations for the three
               months ended December 31, 1998 and December 31, 1997.........   3

               Condensed consolidated statements of cash flows for the three 
               months ended December 31, 1998 and December 31, 1997.........   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...  26

PART II.       OTHER INFORMATION

Item 2.        Changes in Securities and Use of Proceeds....................  27

Item 6.        Exhibits and Reports on Form 8-K.............................  27

SIGNATURES     .............................................................  28




<PAGE>


                
PART I.           FINANCIAL INFORMATION

Item 1.  Condensed Consolidated Financial Statements

<TABLE>
<CAPTION>

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

                                                                                 December 31,        September 30,
                                                                                     1998                 1998
                                                                               -----------------    -----------------
<S>                                                                            <C>                  <C>   
                                     ASSETS
  Current assets:
      Cash and cash equivalents..............................................      $    16,447          $    19,244
      Short-term investments.................................................           18,393               22,851
      Trade accounts receivable less allowance for doubtful accounts and
           returns of $615 and $617, respectively............................            5,551                4,358
      Royalties receivable...................................................              410                  410
      Inventories, net.......................................................            1,401                1,591
      Prepaid expenses and other current assets..............................              694                  929
                                                                               -----------------    -----------------
              Total current assets...........................................           42,896               49,383
  Note receivable............................................................              944                  900
  Royalties receivable.......................................................            1,372                1,372
  Furniture, fixtures and equipment, net.....................................            1,923                2,068
  Intangible assets..........................................................            2,891                   --
  Deposits and other assets..................................................            2,253                2,569
                                                                               =================    =================
                                                                                   $    52,279          $    56,292
                                                                               =================    =================

                      LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities:
      Accounts payable.......................................................      $     4,467          $     5,440
      Accrued compensation...................................................            1,634                1,217
      Accrued liabilities....................................................            2,596                3,468
      Deferred revenue.......................................................            1,021                  807
      Other current liabilities..............................................              277                  299
                                                                               -----------------    -----------------
              Total current liabilities......................................            9,995               11,231
  Long-term liabilities......................................................              124                  260
                                                                               -----------------    -----------------
              Total liabilities..............................................           10,119               11,491

  Commitments and contingencies

  Stockholders' equity:
      Preferred stock:
      $0.001 par value, 5,000,000 shares authorized, none issued
           or outstanding....................................................               --                   --
      Common stock:
      $0.001 par value, 25,000,000 shares authorized; 12,461,748 and
           11,953,908 shares issued and outstanding at December 31, 1998 and
         September 30, 1998, respectively...................................                12                   12
      Additional paid-in capital.............................................           55,276               51,871
      Retained deficit.......................................................          (13,128)              (7,082)
                                                                               -----------------    -----------------
              Total stockholders' equity.....................................           42,160               44,801
                                                                               -----------------    -----------------
                                                                                   $    52,279          $    56,292
                                                                               =================    =================
</TABLE>

     See accompanying notes to condensed consolidated financial statements.




                                       2
<PAGE>


<TABLE>
<CAPTION>

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

                                                                                 Three months ended December 31,
                                                                              ---------------------------------------
                                                                                    1998                 1997
                                                                              ------------------   ------------------
<S>                                                                           <C>                  <C>

  Revenues..................................................................       $     7,923          $     5,463

  Cost of revenues..........................................................             2,806                1,721
                                                                              ------------------   ------------------

      Gross profit..........................................................             5,117                3,742
                                                                              ------------------   ------------------

  Operating expenses:
      Research and development..............................................             1,985                1,891
      Selling and marketing ................................................             4,761                3,526
      General and administrative............................................               782                  791
      Acquired in-process research and development..........................             4,205                   --
                                                                              ------------------   ------------------
         Total operating expenses...........................................            11,733                6,208
                                                                              ------------------   ------------------

         Operating loss.....................................................             (6,616)              (2,466)

 Other income, net..........................................................               570                  573
                                                                              ------------------   ------------------
      Loss from continuing operations
         before income taxes................................................             (6,046)              (1,893)
 Income tax benefit.........................................................                --                 (674)
                                                                              ------------------   ------------------

      Loss from continuing operations.......................................             (6,046)              (1,219)

  Discontinued operations, net of taxes.....................................                --                  164
                                                                              ------------------   ------------------

         Net loss..........................................................        $     (6,046)        $    (1,055)
                                                                              ==================   ==================

 Per share data, continuing operations:
      Basic and diluted loss per share......................................        $     (0.50)         $     (0.11)
                                                                              ==================   ==================
      Shares used in the per share calculations.............................            12,159               11,511
                                                                              ==================   ==================

 Per share data, discontinued operations:
      Basic income per share................................................         $      --           $     0.01
                                                                              ==================   ==================
      Diluted income per share..............................................         $      --           $     0.01
                                                                              ==================   ==================
      Common shares used in the calculations of basic income per share......                --               11,511
                                                                              ==================   ==================
      Common and common equivalent shares used in the calculations of
        diluted income per share............................................                --               12,696
                                                                              ==================   ==================

 Per share data, net loss:
      Basic and diluted net loss per share..................................        $     (0.50)        $     (0.09)
                                                                              ==================   ==================
      Shares used in the per share calculations.............................            12,159               11,511
                                                                              ==================   ==================

</TABLE>








     See accompanying notes to condensed consolidated financial statements.
                          


                                       3
<PAGE>



<TABLE>
<CAPTION>

                          NETOPIA, INC. AND SUBSIDIARY
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (in thousands)
                                   (unaudited)

                                                                                 Three months ended December 31,
                                                                               --------------------------------------
                                                                                     1998                1997
                                                                               -----------------    -----------------
<S>                                                                            <C>                  <C>
 
  Cash flows from operating activities:
  Net loss...................................................................      $    (6,046)         $    (1,055)
  Adjustments to reconcile net loss to net cash used in operating activities:
     Depreciation and amortization...........................................              604                  415
     Amortization of deferred compensation...................................               --                    5
     Charge for acquired in-process research and development.................            4,205                   --
     Changes in operating assets and liabilities:
        Trade accounts receivable............................................           (1,195)               1,444
        Inventories..........................................................              190                 (567)
        Prepaid expenses, deposits and other current assets..................              222                   34
        Accounts payable and accrued liabilities.............................           (1,551)                (468)
        Deferred revenue.....................................................               82                 (111)
        Other liabilities....................................................              (26)                 134
                                                                               -----------------    -----------------
           Net cash used in operating activities.............................           (3,515)                (169)
                                                                               -----------------    -----------------

  Cash flows from investing activities:
     Purchase of furniture, fixtures and equipment...........................             (173)                (177)
     Acquisition of technology...............................................           (4,161)                  --
     Capitalization of software development costs............................               --                  (30)
     Purchase of short-term investments......................................           (6,885)             (13,566)
     Proceeds from the sale of short-term investments........................           11,343               13,190
                                                                               -----------------    -----------------
           Net cash provided by (used in) investing activities...............              124                 (583)
                                                                               -----------------    -----------------

  Cash flows from financing activities:
     Proceeds from the issuance of common stock, net.........................              594                   42
                                                                               -----------------    -----------------
           Net cash provided by financing activities.........................              594                   42
                                                                               -----------------    -----------------

  Net decrease in cash and cash equivalents..................................           (2,797)                (710)
  Cash and cash equivalents, beginning of period.............................           19,244               14,444
                                                                               -----------------    -----------------
  Cash and cash equivalents, end of period...................................      $    16,447          $    13,734
                                                                               =================    =================

  Supplemental disclosures of noncash investing and
     financing activities:
     Issuance of common stock for acquisition of intangible assets...........      $     2,811             $     --
                                                                               =================    =================

</TABLE>

     See accompanying notes to condensed consolidated financial statements.

<

                                       4
<PAGE>



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

(1)      Basis of Presentation

         The unaudited  condensed  consolidated  financial  statements  included
herein reflect all adjustments,  consisting only of normal recurring adjustments
which in the opinion of management are necessary to fairly present the Company's
consolidated financial position,  results of operations,  and cash flows for the
periods presented.  These condensed  consolidated financial statements should be
read  in  conjunction  with  the  Company's  consolidated  financial  statements
included in the Company's  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, 1998 are not necessarily indicative
of the  results  to be  expected  for any  subsequent  quarter or for the entire
fiscal year ending September 30, 1999.

(2)      Recent Accounting Pronouncements    

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

         In  December   1998,  the  American   Institute  of  Certified   Public
Accountants  ("AICPA") Accounting Standards Executive Committee ("AcSEC") issued
SOP 98-9 which amends paragraphs 11 and 12 of SOP 97-2 to require recognition of
revenue using the "residual method" when (i) there is vendor-specific  objective
evidence of the fair values of all  undelivered  elements in a  multiple-element
arrangement that is not accounted for using long-term contract accounting,  (ii)
vendor-specific  objective evidence of fair value does not exist for one or more
of the delivered elements in the arrangement,  and (iii) all revenue-recognition
criteria in SOP 97-2 other than the  requirement for  vendor-specific  objective
evidence  of the fair value of each  delivered  element of the  arrangement  are
satisfied.  Under the residual  method,  the  arrangement  fee is  recognized as
follows; (a) the total fair value of the undelivered  elements,  as indicated by
vendor-specific  objective evidence, is deferred and subsequently  recognized in
accordance  with the  relevant  sections  of SOP  97-2,  and (b) the  difference
between the total  arrangement  fee and the amount  deferred for the undelivered
elements is recognized as revenue  related to the delivered  elements.  SOP 98-9
will be adopted by the Company  effective  January 1, 1999. The Company does not
expect the  adoption  of SOP 98-9 will have a material  impact on the  Company's
consolidated results of operations.

         Effective  October 1, 1998, the Company adopted  Statement of Financial
Accounting Standards ("SFAS") No. 130, Reporting  Comprehensive Income. SFAS No.
130  establishes  standards for the reporting  and  disclosure of  comprehensive
income  and  its  components  which  will be  presented  in  association  with a
company's financial statements. Comprehensive income is defined as the change in
a business  enterprise's  equity  during the period  arising from  transactions,
events or circumstances  relating to non-owner sources, such as foreign currency
translation  adjustments  and unrealized  gains or losses on  available-for-sale
securities.   There  were  no   material   differences   between  net  loss  and
comprehensive  income (loss) during the three months ended December 31, 1998 and
1997.

         In June 1997, the Financial  Accounting Standards Board ("FASB") issued
SFAS  No.  131,   Disclosures  About  Segments  of  an  Enterprise  and  Related
Information.  SFAS No. 131 establishes  annual and interim  reporting  standards


                                       5
<PAGE>

relating to the  disclosure  of an  enterprise's  business  segments,  products,
services, geographic areas and major customers. Adoption of this standard is not
expected  to have a  material  effect on the  Company's  consolidated  financial
position or results of operations.

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

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

(3)      Inventories

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

<TABLE>
<CAPTION>

                                                                                 December 31,         September 30,
                                                                                     1998                 1998
                                                                                ----------------     ----------------
<S>                                                                             <C>                  <C>    

Raw materials and work in process..........................................          $      790          $     1,080
Finished goods.............................................................                 611                  511
                                                                                ================     ================
                                                                                    $     1,401          $     1,591
                                                                                ================     ================
</TABLE>

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

<TABLE>
<CAPTION>

                                                                                 December 31,         September 30,
                                                                                     1998                 1998
                                                                                ----------------     ----------------
<S>                                                                             <C>                  <C>

Furniture, fixtures and equipment..........................................         $    12,113          $    11,940
Accumulated depreciation and amortization..................................             (10,190)              (9,872)
                                                                                ----------------     ----------------
                                                                                    $     1,923          $     2,068
                                                                                ================     ================
</TABLE>

(5)      Earnings Per Share

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

                                       6
<PAGE>

         Potential   common   shares  have  been  excluded  from  the  net  loss
computation of diluted EPS for the three months ended December 31, 1998 and 1997
since their  effect on EPS is  antidilutive  due to the losses  incurred in each
period.  Consequently,  the  number of shares in the  computations  of basic and
diluted EPS is the same for each period.  Potential  common shares excluded from
the  computations  of diluted EPS consist of options to  purchase  common  stock
which totaled  3,534,527  shares and 2,722,099 shares for the three months ended
December 31, 1998 and 1997, respectively.

<TABLE>
<CAPTION>
                                                                                 Three months ended December 31,
                                                                              ---------------------------------------
                                                                                    1998                 1997   
                                                                              ------------------   ------------------
                                                                                 (in thousands, except per share
                                                                                             amounts)
<S>                                                                           <C>                  <C>

Computation of basic net loss per share:

    Net loss................................................................       $    (6,046)         $    (1,055)
                                                                              ==================   ==================
                                                                                                   
    Weighted average number of common shares outstanding....................            12,159               11,511
                                                                              ==================   ==================

       Basic net loss per share.............................................       $     (0.50)         $     (0.09)
                                                                              ==================   ==================
Computation of diluted net loss per share:

    Net loss................................................................       $    (6,046)         $    (1,055)
                                                                              ==================   ==================

    Weighted average number of common shares outstanding....................            12,159               11,511

    Number of dilutive common stock equivalents.............................                --                   --
                                                                              ------------------   ------------------
                                                                              
    Shares used in per share calculation....................................            12,159               11,511
                                                                              ==================   ==================
       Diluted net loss per share...........................................       $     (0.50)         $     (0.09)
                                                                              ==================   ==================
</TABLE>

(6)      Acquisitions

         On December  17, 1998,  the Company  closed a  transaction  to purchase
substantially all of the assets and assume certain  liabilities and the existing
operations of Serus LLC ("Serus"),  a Utah limited liability  company.  Serus is
developing a java-based web site editing  software product which would allow web
site owners to modify and edit the  appearance  of their web site through  their
web browser with minimal knowledge of Hypertext Markup Language  ("HTML").  Upon
completion of the  development of such products,  Netopia  intends to market the
products both  independently  and along with its Netopia Virtual Office software
platform to allow users more  flexibility  in  customizing  their web sites.  In
accordance   with  the  Serus  Asset  Purchase   Agreement,   Netopia   acquired
substantially all of the assets and assumed certain liabilities of Serus and its
existing  operations which included  in-process  research and  development.  The
maximum aggregate  purchase price of the Serus transaction is approximately $7.0
million  including  (i) $3.0  million  of cash paid on the  closing  date of the
transaction,  (ii) 409,556  shares of the  Company's  Common Stock issued on the
closing date, and (iii) a $1.0 million  earnout  opportunity  based upon certain
criteria as set forth in the Serus Purchase Agreement. The excess purchase price
over the net book value  acquired  was $6.0  million,  of which,  based upon the
Company's  estimates  prepared  in  conjunction  with a  third  party  valuation
consultant,  $3.9  million was  allocated  to acquired  in-process  research and
development  and $2.1 million was  allocated to intangible  assets.  The amounts
allocated to  intangible  assets  include  assembled  workforces of $100,000 and
goodwill of $2.0 million.  The Company used the income  approach to appraise the
value  of  the  business  and   projects   acquired.   Such  method  takes  into
consideration  the stage of completion  of the project and estimates  related to
expected future revenues, expenses and cash flows which are then discounted back
to present day amounts. Based upon these estimates, material net cash flows from
the acquired business are expected to occur during the calendar year 2001. These
cash  flows  were  discounted  using a  discount  rate of 44.0%.  Based upon the
expenses  incurred and the development time invested in the product prior to the
acquisition  and the  estimated  expenses and  development  time to complete the
product,  the Company determined the product to be approximately 85% complete at
the time of  acquisition.  The Company  expects to complete  development  of the
product in mid-April  1999 and to incur  approximately  $170,000 of  development
expenses from the date of  acquisition  to completion of  development.  The $1.0
million  earnout  opportunity  in (iii) above shall be accounted  for when it is
deemed  probable that the earnout will be earned.  The Company will amortize the
goodwill  related  to the  Serus  transaction  quarterly  over the next four (4)
years. Any delay in the completion of the development of the product would cause
the Company to incur additional  un-planned  development expenses as well as the
loss of or deferral of customer  purchases either of which would have a material
adverse effect on the Company's business, operating and financial condition.


                                       7
<PAGE>

         On December 31, 1998, the Company closed a transaction to purchase from
Network  Associates'   substantially  all  of  the  assets  and  assume  certain
liabilities    related   to   the   netOctopus   systems   management   software
("netOctopus"). The netOctopus software is a suite of administration tools under
development that allows for simultaneous system support of multiple users across
MacOS  computer  networks.  Upon  completion of the  development  of the Windows
versions of the  netOctopus  software  products,  Netopia  intends to market the
products  both  independently  and along  with its  Timbuktu  Pro  software.  In
accordance   with  the   netOctopus   Purchase   Agreement,   Netopia   acquired
substantially all of the assets and assumed certain  liabilities  related to the
netOctopus  software  and its  existing  operations  which  included  in-process
research and development. The maximum aggregate purchase price of the netOctopus
transaction  was  $1.1  million  of  cash  paid  on  the  closing  date  of  the
transaction.  In addition,  there is a $300,000 earnout  opportunity  based upon
certain criteria as set forth in the netOctopus Purchase  Agreement.  The excess
purchase  price over the net book value  acquired  was $1.1  million,  of which,
based upon the Company's  estimates  prepared in conjunction  with a third party
valuation consultant, $400,000 was allocated to acquired in-process research and
development  and  $700,000  was  allocated  to  intangible  assets.  The amounts
allocated  to  intangible  assets  include  assembled   workforces  of  $60,000,
developed technology of $540,000 and goodwill of $100,000.  The Company used the
income  approach to appraise the value of the  business  and projects  acquired.
Such method takes into  consideration the stage of completion of the project and
estimates related to expected future revenues, expenses and cash flows which are
then  discounted  back to present  day  amounts.  Based  upon  these  estimates,
material net cash flows from the acquired  business are expected to occur during
the calendar year 2000.  These cash flows were discounted  using a discount rate
of 25.0%.  Based upon the expenses incurred and the development time invested in
the product prior to the acquisition and the estimated  expenses and development
time  to  complete  the  product,  the  Company  determined  the  product  to be
approximately  70% complete at the time of  acquisition.  The Company expects to
complete development of the product during the Company's third fiscal quarter of
fiscal 1999 and to incur approximately  $75,000 of development expenses from the
date  of  acquisition  to  completion  of  development.   The  $300,000  earnout
opportunity  above shall be accounted  for when it is deemed  probable  that the
earnout will be earned.  The Company will  amortize the goodwill  related to the
netOctopus  transaction quarterly over the next four (4) years. Any delay in the
completion  of the  development  of the product would cause the Company to incur
additional un-planned development expenses as well as the loss of or deferral of
customer  purchases  either of which would have a material adverse effect on the
Company's business, operating and financial condition.

(7)      Discontinued Operations

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

         The  disposition  of the  LAN  Division  has  been  accounted  for as a
discontinued  operation in accordance with Accounting  Principles  Board ("APB")
Opinion No. 30, and prior period  consolidated  financial  statements  have been
restated to reflect the LAN Division's  operations as a discontinued  operation.
Revenue from discontinued operations was $5.0 million for the three months ended
December 31, 1997. The income from  discontinued  operations of $164,000 for the
three months ended December 31, 1997, represents operating income, net of taxes,
of the  discontinued  operation.  At September  30,  1998,  the Company had $2.5
million in accrued liabilities which represented  transaction expenses and costs
incurred and accrued as a result of the sale of the LAN Division.  Such expenses
are directly  attributable to the sale transaction and are primarily  related to
reserves  taken  against  the  lease  of  the  Company's   Alameda,   California
headquarters,  investment  advisory,  legal  and  accounting  fees  and  certain
expenses  related to employees of the LAN  Division.  Such accrual  consisted of
$1.7 million of facility costs, approximately $300,000 in employee-related costs
and other costs consisting primarily of services fees of approximately $500,000.
At December 31, 1998, the balance in accrued  liabilities related to the sale of
the LAN Division was $2.0 million  consisting of $1.6 million of facility costs,
approximately  $60,000  in  employee-related  costs and other  costs  consisting
primarily of services fees of approximately $340,000.



                                       8
<PAGE>



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

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

RESULTS OF OPERATIONS

Three Months Ended December 31, 1998 and 1997

         Revenues.  The Company's revenues are derived from the sale of hardware
and  software  products  and include  license  revenues for its Timbuktu Pro and
Netopia Virtual Office ("NVO")  software,  sales of its Netopia  Internet router
products  and  fees  for  related  services.  Revenue  relating  to the sale and
licensing of hardware and software  products is recognized  upon shipment of the
products by the Company and service revenue is recognized  ratably over the term
of the  contract.  Certain of the  Company's  sales are made to customers  under
agreements  permitting  limited  rights of return  for stock  balancing  or with
protection for future price  decreases.  Revenue is recorded net of an estimated
allowance  for  returns  and price  protection.  Any  product  returns  or price
decreases  in the future that exceed the  Company's  allowances  may  materially
adversely  affect  the  Company's  business,  operating  results  and  financial
condition.

         Revenues  increased  45.0% to $7.9  million in the three  months  ended
December 31, 1998 from $5.5 million in the three months ended December 31, 1997.
The  increase was  primarily  due to increased  sales of the  Company's  Netopia
Internet router products, Timbuktu Pro and NVO software. Netopia Internet router
products revenue  increased  primarily due to the first full quarter of sales of
the Netopia Symmetric Digital  Subscriber Line ("SDSL") Internet router in North
America,  which was not  available  during the three months  ended  December 31,
1997, and increased  sales of the Netopia  Integrated  Service  Digital  Network
("ISDN") Internet router internationally  primarily as a result of the Company's
relationship  with  the  France  Telecom  WANadoo  service  ("WANadoo").   These
increases  were  partially  offset by  declining  volumes  and  continued  price
competition  related to the Netopia ISDN Internet  router.  The Company  expects
that its Internet router products may experience  increasing  price  competition
from both  domestic  and foreign  manufacturers  of similar  products as well as
competition from newer  technologies such as Digital Subscriber Line ("DSL") and
cable  Internet  router  products.  Any such increased  price and/or  technology
competition could materially adversely effect the Company's business,  operating
results and financial condition. Timbuktu Pro revenue increased primarily due to
increased sales of the Windows version of Timbuktu Pro  collaboration  software,
particularly  volume site licenses,  partially  offset by decreased sales of the
MacOS  version of Timbuktu  Pro  collaboration  software.  The  Company  expects
revenue  from the MacOS  version  of  Timbuktu  Pro to  continue  to  decline in
absolute dollars and as a percent of revenue.  NVO software increased  primarily
due to server  licensing  (there  were no server  license  revenues in the three
months  ended  December  31,  1997).   Although  the  Company  has   experienced
significant  revenue  growth rates,  there can be no assurance  that the Company
will be able to sustain or increase revenue growth rates.

         International revenues accounted for 36% and 34% of the Company's total
revenues for the three months  ended  December 31, 1998 and 1997,  respectively.
The  following  table  provides a breakdown of revenue by region  expressed as a
percentage of total revenues for the periods presented:





                                       9
<PAGE>




<TABLE>
<CAPTION>

                                                                                  Three months ended December 31,
                                                                               --------------------------------------
                                                                                     1998                1997
                                                                               -----------------    -----------------
<S>                                                                            <C>                  <C>
  Europe.....................................................................               29%                  25%
  Pacific Rim................................................................                3                    6
  Other......................................................................                4                    3
                                                                               -----------------    -----------------
    Subtotal international revenues..........................................               36                   34
  United States..............................................................               64                   66
                                                                               =================    =================
      Total revenues.........................................................              100%                 100%
                                                                               =================    =================
</TABLE>

         International  revenues  increased  52.3% to $2.8  million in the three
months  ended  December  31, 1998 from $1.9  million in the three  months  ended
December 31, 1997.  International  revenue increased  primarily due to increased
sales of the Company's Netopia Internet  routers,  particularly the Netopia ISDN
Internet router as a result of the WANadoo service,  and was partially offset by
decreased sales of the MacOS version of Timbuktu Pro collaboration software.

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

          The Company  expects  that  international  revenues  will  continue to
represent a significant  portion of its total revenues.  Any significant decline
in international demand for the Company's products would have a material adverse
effect on the Company's business, operating results and financial condition. The
Company believes that in order to increase sales opportunities and profitability
it will be  required  to expand its  international  operations.  The Company has
committed and continues to commit significant management attention and financial
resources to developing international sales and support channels. However, there
can be no  assurance  that the  Company  will be able to  maintain  or  increase
international market demand for its products.  To the extent that the Company is
unable to  maintain  or  increase  international  demand for its  products,  the
Company's  international  sales will be  limited,  and the  Company's  business,
operating  results and financial  condition  would be  materially  and adversely
affected.

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

         The Company  sells its  products and related  maintenance,  support and
other services through distributors,  Internet Service Providers ("ISPs"), Value
Added Resellers ("VARs"), directly by the Company to corporate accounts and over
the Internet. The Company's revenues from distributors accounted for 44% and 46%


                                       10
<PAGE>

of the Company's total revenues for the three months ended December 31, 1998 and
1997,  respectively.  The  Company's  three  largest  customers,  in  aggregate,
accounted for 25% and 22% of the Company's  total  revenues for the three months
ended  December 31, 1998 and 1997,  respectively.  During the three months ended
December 31, 1998 and 1997,  revenue from Ingram Micro, a worldwide  distributor
of computer  technology  products and services,  accounted for 9% and 13% of the
Company's  total revenues,  respectively.  No other customers have accounted for
10% or more of the  Company's  total  revenues  during  the three  months  ended
December 31, 1998 and 1997.

         The  distribution  of products such as those offered by the Company has
been characterized by rapid change, including industry consolidations, financial
difficulties  of  distributors  and the  emergence of  alternative  distribution
channels.  There can be no assurance that current  distributors will continue to
serve as distributors  for the Company since the Company does not currently have
a written agreement regarding price or quantity  commitments with these or other
distributors  which  operate on a purchase  order basis.  Due to the sale of the
Company's  former  Farallon  Local Area  Networking  ("LAN")  Division (the "LAN
Division"),  which historically sold significant  volumes of product through the
Company's distributors, the Company is in the process of updating its agreements
with its  distributors  to reflect the  distribution  of the  Company's  current
products. There can be no assurance that the Company's current distributors will
continue to market the Company's  products or that the Company's channel expense
levels will not  increase.  The loss of, or a  significant  reduction in revenue
from any one of the Company's  distributors could have a material adverse effect
on the  Company's  business,  operating  results and  financial  condition.  The
Company's  distributors generally offer products of several different companies,
including products that are competitive with the Company's  products.  There can
be no assurance that future sales by the Company's distributors will continue at
current levels, that the Company will be able to retain its current distributors
in the future on terms which are  acceptable to the Company,  that the Company's
current  distributors will choose to or be able to market the Company's products
effectively,  that  economic  conditions  or industry  demand will not adversely
affect  these or other  distributors,  that these  distributors  will not devote
greater  resources to  marketing  products of other  companies or that  internal
staffing changes or other changes at the Company's distributors will not disrupt
historical  purchasing  or  payment  patterns.  Accordingly,  the loss of,  or a
significant reduction in revenue from, any of the Company's distributors,  could
have a material adverse effect on the Company's business,  operating results and
financial condition.

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

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

         The  Company's  Netopia  Internet  router  products  and  NVO  software
platform  are  often  distributed  through  partnerships  with  ISPs,  VARs  and
telecommunications  carriers.  These  partnerships often involve lengthy testing
and certification  studies,  detailed agreements and financial  commitments from
the  prospective  partner.  As a result,  partnerships  with ISPs,  VARs  and/or
telecommunications  carriers to  distribute  the  Company's  products  involve a
significant  commitment  of management  attention  and resources by  prospective
partners.  Accordingly,  the Company's  business  development  process for these


                                       11
<PAGE>

distribution  channels is often subject to delays  associated with long approval
processes that  typically  accompany  significant  partnership  development  and
capital  expenditures.  For these and other  reasons,  the business  development
process  associated with the  partnerships is often lengthy and historically has
been subject to a number of significant delays over which the Company has little
or no control. Additionally,  credit risks related to the financial viability of
newly organized ISPs or VARs are often more significant than for other partners.
There can be no  assurance  that the Company  will not  experience  these and/or
additional  delays or  financial  risks in the  future  related  to  partnership
development.

         The Company's  business  model for NVO is dependent  upon the Company's
ability to leverage  this  software  platform to generate  revenue  streams from
monthly  subscription-based  accounts  and the  licensing of the  technology  to
future customers and partners. The potential profitability of the business model
is  unproven,  and, to be  successful,  the Company  must,  among other  things,
develop  and market  solutions  that  achieve  broad  market  acceptance  by its
subscribers,  partners  and  Internet  users.  This model has existed for only a
limited period of time and, as a result, is relatively unproven. There can be no
assurance  that the Company  will be able to retain its current  subscribers  or
that it will be able to attract new  subscribers or licensees.  Accordingly,  no
assurance  can be  given  that  the  Company's  business  model  for NVO will be
successful or that it can generate revenue growth or significant profits.

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

         Gross Margin.  The Company's  total gross margin  decreased to 64.6% in
the three  months  ended  December 31, 1998 from 68.5% in the three months ended
December 31, 1997.  The decrease is primarily due to the increased  sales of the
Company's Netopia Internet router products, which have a lower gross margin than
the Company's software products,  as well as declining average selling prices as
a  result  of  price   competition.   The  Company's  gross  margin  has  varied
significantly  in the past and will  likely  vary  significantly  in the  future
depending  primarily  on the  mix of  products  sold  by  the  Company,  pricing
strategies, royalties paid to third parties, standard cost changes, new versions
of existing products and external market factors, including, but not limited to,
price  competition.  The Company's Timbuktu Pro and NVO software products have a
higher average gross margin than the Company's Netopia Internet router products.
Accordingly, to the extent the product mix for any particular quarter includes a
substantial  proportion  of lower  margin  products,  there  would be a material
adverse  effect on the  Company's  business,  operating  results  and  financial
condition.

         Research and Development.  Research and development  expenses increased
5.0% to $2.0  million for the three  months  ended  December  31, 1998 from $1.9
million for the three months ended December 31, 1997.  Research and  development
expenses increased  primarily due to increased employee and development  related
expenses but were partially  offset by reduced software  localization  expenses.
Research and development  expenses represented 25.1% and 34.6% of total revenues
for the three months ended December 31, 1998 and 1997, respectively. The Company
believes  that it will continue to devote  substantial  resources to product and
technological  development and that research and development costs will increase
in absolute  dollars in fiscal 1999 as a result of the  Company's  December 1998
acquisitions of Serus LLC and the netOctopus  systems  management  software from
Network  Associates.  Historically,  the  Company has  believed  its process for
developing software is essentially completed concurrently with the establishment
of  technological  feasibility,   and  no  internal  software  costs  have  been
capitalized  to date.  During the three  months  ended  December  31,  1998,  no
external product development costs were capitalized.

         Selling and Marketing.  Selling and marketing  expenses increased 35.0%
to $4.8 million for the three  months ended  December 31, 1998 from $3.5 million
for the three months ended  December 31, 1997.  Selling and  marketing  expenses
increased  primarily  due to  increased  advertising,  promotional  and  channel
development  expenses related to the introduction of new products  including the
hosted version of NVO and the Netopia Dual Analog and SDSL routers and increased
headcount.  Selling and marketing expenses  represented 60.1% and 64.5% of total
revenues for the three months  ended  December 31, 1998 and 1997,  respectively.
The  Company  believes  that  selling and  marketing  expenses  may  increase in
absolute  dollars  in  fiscal  1999 as a result  of  increased  advertising  and
promotion campaigns as well as expansion of its telesales staff.

                                       12
<PAGE>

         General  and  Administrative.   General  and  administrative   expenses
remained  relatively  unchanged for the three months ended December 31, 1998 and
1997.  General and  administrative  expenses  were $782,000 and $791,000 for the
three  months  ended  December  31,  1998 and 1997,  respectively.  General  and
administrative  expenses  represented  9.9% and 14.5% of total  revenues for the
three months ended December 31, 1998 and 1997, respectively.

         Acquired In-Process Research and Development. On December 17, 1998, the
Company  closed a transaction  to purchase  substantially  all of the assets and
assume certain liabilities and the existing operations of Serus LLC ("Serus"), a
Utah limited  liability  company.  Serus is  developing  a  java-based  web site
editing  software  product  which would allow web site owners to modify and edit
the  appearance  of their  web site  through  their  web  browser  with  minimal
knowledge  of  Hypertext  Markup  Language  ("HTML").  Upon  completion  of  the
development  of such  products,  Netopia  intends  to market the  products  both
independently  and along with its Netopia  Virtual Office  software  platform to
allow users more flexibility in customizing  their web sites. In accordance with
the Serus Asset Purchase  Agreement,  Netopia acquired  substantially all of the
assets and assumed  certain  liabilities  of Serus and its  existing  operations
which  included  in-process  research  and  development.  The maximum  aggregate
purchase price of the Serus transaction is approximately  $7.0 million including
(i) $3.0  million  of cash paid on the  closing  date of the  transaction,  (ii)
409,556  shares of the Company's  Common Stock issued on the closing  date,  and
(iii) a $1.0 million  earnout  opportunity  based upon  certain  criteria as set
forth in the Serus Purchase  Agreement.  The excess  purchase price over the net
book  value  acquired  was $6.0  million,  of which,  based  upon the  Company's
estimates prepared in conjunction with a third party valuation consultant,  $3.9
million was allocated to acquired  in-process  research and development and $2.1
million was allocated to intangible  assets. The amounts allocated to intangible
assets  include  assembled  workforces of $100,000 and goodwill of $2.0 million.
The Company  used the income  approach to appraise the value of the business and
projects acquired.  Such method takes into consideration the stage of completion
of the project and estimates  related to expected future revenues,  expenses and
cash flows which are then  discounted  back to present day  amounts.  Based upon
these estimates, material net cash flows from the acquired business are expected
to occur during the calendar year 2001. These cash flows were discounted using a
discount  rate of 44.0%.  Based upon the expenses  incurred and the  development
time invested in the product prior to the acquisition and the estimated expenses
and development time to complete the product, the Company determined the product
to be approximately 85% complete at the time of acquisition. The Company expects
to  complete  development  of  the  product  in  mid-April  1999  and  to  incur
approximately  $170,000 of development  expenses from the date of acquisition to
completion of development.  The $1.0 million earnout  opportunity in (iii) above
shall be  accounted  for when it is deemed  probable  that the  earnout  will be
earned.  The Company will amortize the goodwill related to the Serus transaction
quarterly  over the next  four (4)  years.  Any delay in the  completion  of the
development  of  the  product  would  cause  the  Company  to  incur  additional
un-planned  development  expenses as well as the loss of or deferral of customer
purchases  either of which would have a material adverse effect on the Company's
business, operating and financial condition.

         On December 31, 1998, the Company closed a transaction to purchase from
Network  Associates'   substantially  all  of  the  assets  and  assume  certain
liabilities    related   to   the   netOctopus   systems   management   software
("netOctopus"). The netOctopus software is a suite of administration tools under
development that allows for simultaneous system support of multiple users across
MacOS  computer  networks.  Upon  completion of the  development  of the Windows
versions of the  netOctopus  software  products,  Netopia  intends to market the
products  both  independently  and along  with its  Timbuktu  Pro  software.  In
accordance   with  the   netOctopus   Purchase   Agreement,   Netopia   acquired
substantially all of the assets and assumed certain  liabilities  related to the
netOctopus  software  and its  existing  operations  which  included  in-process
research and development. The maximum aggregate purchase price of the netOctopus
transaction  was  $1.1  million  of  cash  paid  on  the  closing  date  of  the
transaction.  In addition,  there is a $300,000 earnout  opportunity  based upon
certain criteria as set forth in the netOctopus Purchase  Agreement.  The excess
purchase  price over the net book value  acquired  was $1.1  million,  of which,
based upon the Company's  estimates  prepared in conjunction  with a third party
valuation consultant, $400,000 was allocated to acquired in-process research and
development  and  $700,000  was  allocated  to  intangible  assets.  The amounts
allocated  to  intangible  assets  include  assembled   workforces  of  $60,000,
developed technology of $540,000 and goodwill of $100,000.  The Company used the
income  approach to appraise the value of the  business  and projects  acquired.
Such method takes into  consideration the stage of completion of the project and
estimates related to expected future revenues, expenses and cash flows which are
then  discounted  back to present  day  amounts.  Based  upon  these  estimates,


                                       13
<PAGE>

material net cash flows from the acquired  business are expected to occur during
the calendar year 2000.  These cash flows were discounted  using a discount rate
of 25.0%.  Based upon the expenses incurred and the development time invested in
the product prior to the acquisition and the estimated  expenses and development
time  to  complete  the  product,  the  Company  determined  the  product  to be
approximately  70% complete at the time of  acquisition.  The Company expects to
complete  development of the product  during the Company's  third fiscal quarter
and to incur  approximately  $75,000 of  development  expenses  from the date of
acquisition to completion of development. The $300,000 earnout opportunity above
shall be  accounted  for when it is deemed  probable  that the  earnout  will be
earned.  The  Company  will  amortize  the  goodwill  related to the  netOctopus
transaction  quarterly over the next four (4) years. Any delay in the completion
of the  development  of the product would cause the Company to incur  additional
un-planned  development  expenses as well as the loss of or deferral of customer
purchases  either of which would have a material adverse effect on the Company's
business, operating and financial condition.

         The  Company is aware that the SEC is  reviewing  the  assumptions  and
methodologies   heretofore  commonly  used  by  companies  in  calculating  such
in-process  research and development  charges.  The Company believes it followed
recent guidance  disseminated by the SEC in its valuation of the assets acquired
and  liabilities  assumed and, in  particular,  in the  valuation of  in-process
research and development.  However,  in the event that it is determined that the
Company did not properly value such assets and liabilities, the Company may have
to  re-state  the  charges  to  operations   taken  in   connection   with  such
transactions.

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

         Other Income,  Net. Other income,  net, primarily  represents  interest
earned by the Company on its cash, cash equivalents and short-term  investments.
Other  income  remained  relatively  unchanged  at $570,000 and $573,000 for the
three months ended December 31, 1998 and 1997, respectively. The Company expects
its  interest  income to  decrease in absolute  dollars and as a  percentage  of
revenues  primarily  due to the  cash  used  for  its  recent  acquisitions  and
operating activities.

         Income Tax  Benefit.  The  Company did not record an income tax benefit
during the three  months  ended  December  31, 1998  primarily  due to continued
substantial  uncertainty  regarding  the  Company's  ability to realize  its tax
assets. The tax benefit recorded in the three months ended December 31, 1997 was
primarily  related to the  Company's  net  operating  loss in such  period.  The
effective  tax rate was 35% for the three months ended  December 31, 1997.  This
rate  differed  from the  statutory  rate  primarily  due to state income taxes,
investment  income  from tax  advantaged  investments,  and the  utilization  of
research and experimentation tax credits.

         Discontinued  Operations.  In the fourth  quarter of fiscal  1998,  the
Company  sold  its LAN  Division  through  which it had  developed  and sold LAN
products  primarily for Apple  computers.  The sale of the LAN Division has been
accounted  for  as  a  discontinued  operation  and  prior  period  consolidated
financial  statements have been restated to reflect the  discontinuation  of the
LAN Division.  Income from discontinued  operations of $164,000 during the three
months ended December 31, 1997 represents the operating income,  net of taxes of
the discontinued  operations.  The LAN Division's  operations,  products and the
market in which it  competed  were no longer  considered  core to the  Company's
business strategy.  As a result,  the Company sold the LAN Division's  products,
accounts receivable,  inventory,  property and equipment,  intellectual property
and  other  related  assets,  to  Farallon  Communications,  Inc.  ("Farallon"),
formerly known as Farallon Networking Corporation, a Delaware corporation and an
affiliate of Gores  Technology  Group  ("Gores").  Farallon also assumed certain


                                       14
<PAGE>

accounts payable and other  liabilities of the LAN Division.  In connection with
such  sale,  the  Company  received  consideration   aggregating  $4.9  million,
including (i) $2.0 million of cash, (ii) royalties on Farallon's  revenues for a
period of five years to the extent that Farallon achieves revenues from the sale
of its LAN  products of at least $15.0  million per year,  (iii) a two year $1.0
million  promissory note from Farallon,  guaranteed by Gores, and (iv) a warrant
to purchase up to 5% of the equity of Farallon.  There can be no assurance  that
the business of Farallon will be sufficiently successful to allow the Company to
realize the value of the receivables,  note and warrant described in (ii), (iii)
and (iv) above. See "Other Risks Associated with the Sale of the LAN Division."

Other Factors That May Affect Future Operating Results

         The Company operates in a rapidly changing  environment that involves a
number of risks, many of which are beyond the Company's  control.  The following
discussion  highlights some of these risks.  The Company's  actual results could
differ  materially  from those  discussed  herein.  Factors  that could cause or
contribute to such differences  include, but are not limited to, those discussed
in this section and  elsewhere in this  Report,  and the risks  discussed in the
Company's other United States Securities and Exchange Commission filings.

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


                                       15
<PAGE>

Company's business also has experienced  seasonality in the past, largely due to
customer buying patterns,  such as budgeting cycles of educational  institutions
that  purchase the Company's  products and the summer  slowdown in most European
markets. There can be no assurance that the Company's operating results will not
be affected by seasonality in the future or that such  seasonality will occur in
a manner consistent with prior periods.

         The Company's expense levels are based in large part on expectations as
to future revenues and, as a result,  are relatively fixed in the short term. If
revenues  are below  expectations  in any given  quarter,  net income or loss is
likely to be disproportionately  affected.  Due to all of the foregoing factors,
and other  factors  discussed  herein,  revenues  and net income or loss for any
future  period are not  predictable  with any  significant  degree of certainty.
Accordingly,  the Company  believes  that  period-to-period  comparisons  of its
results of operations  are not  necessarily  meaningful and should not be relied
upon as indicators  of future  performance.  There can be no assurance  that the
Company's  business  strategies  will be  successful or that the Company will be
able to return to or sustain profitability on a quarterly or annual basis in the
future. It is likely that in some future quarter the Company's operating results
will be below the expectations of public market analysts and investors.  In such
event,  the price of the Company's  Common Stock would likely be materially  and
adversely affected.

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

         Through  testing,  the Company has determined that its Netopia Internet
router  products;  its Netopia  Virtual Office software (the Netopia Site Server
version 2.3 and later and all client software versions 2.2.4 and later); and its
Windows, MacOS and Enterprise versions of Timbuktu Pro (versions 1.5 and later),
are Year 2000  Compliant.  The Company is  currently  testing its  Timbuktu  Web
Seminar software to determine its Year 2000  Compliance.  The Company expects to
complete  its testing of this  product by March  1999.  Upon  completion  of the
development  of the  products  acquired  as a result  the Serus  and  netOctopus
acquisitions,  the Company  expects these  products to meet Year 2000  readiness
requirements.  Although  the  majority of the  Company's  products are Year 2000
compliant,  the Company  believes that the purchasing  patterns of customers and
potential  customers  may be affected by Year 2000  issues as  companies  expend
significant  resources to correct or patch their  current  software  systems for
Year 2000 compliance.  These  expenditures may result in reduced funds available
to purchase  products such as those  offered by the Company,  which could have a
material  adverse  effect  on the  Company's  business,  operating  results  and
financial condition.  In addition,  even if the Company's products are Year 2000
compliant,  other systems or software used by the Company's customers may not be
Year 2000 compliant.  The failure of such non-compliant  third-party software or
systems could affect the perceived performance of the Company's products,  which
could  have a  material  adverse  effect on the  Company's  business,  operating
results and financial condition.

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

                                       16
<PAGE>

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

         To date, the Company has not incurred  material expenses related to its
Year 2000  compliance  effort  other than the  investment  of employee  time and
resources. The Company has currently identified certain facilities related items
that the Company  estimates will cost  approximately  $60,000 to upgrade to Year
2000 compliance. While the Company has dedicated and will continue to dedicate a
substantial  amount of time and internal  resources  towards attaining Year 2000
compliance,  there can be no assurance that the Company's  Year 2000  compliance
program  will be  completed  on a timely  basis.  In  addition,  there can be no
assurance  that  there  will  not be an  interruption  of  operations  or  other
limitations  of  system  functionality  or  that  the  Company  will  not  incur
substantial costs to avoid such limitations. Any failure to effectively monitor,
implement  or improve  the  Company's  operational,  financial,  management  and
technical  support systems could have a material adverse effect on the Company's
business,  financial  condition  and  results of  operations.  Furthermore,  the
Company  believes  that the  purchasing  patterns  of  customers  and  potential
customers  may be affected by Year 2000 issues as companies  expend  significant
resources  to correct or patch  their  current  software  systems  for Year 2000
compliance. These expenditures may result in reduced funds available to purchase
software  products  such as those  offered by the  Company,  which  could have a
material  adverse  effect on the  Company's  business,  financial  condition and
results of operations. In addition, even if the Company's products are Year 2000
compliant,  other systems or software used by the Company's customers may not be
Year 2000 compliant.  The failure of such non-compliant  third-party software or
systems could affect the perceived performance of the Company's products,  which
could  have a  material  adverse  effect on the  Company's  business,  financial
condition and results of operations.  The most likely worst case scenarios would
include hardware failure and the failure of infrastructure  services provided by
government  agencies  and other  third  parties  (e.g.,  electricity,  telephone
service, water transport,  internet services, etc.). In such worst case scenario
the Company would lose customers and revenue which would have a material adverse
effect on the Company's business, financial condition and results of operations.
The Company is in the process of completing  its  contingency  planning for high
risk areas at this time and is  scheduled to commence  contingency  planning for
medium to low risk areas by June 1999. The Company expects its contingency plans
to include,  among other things, manual "work-arounds" for software and hardware
failures, as well as substitution of systems, if necessary.

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

         The markets for the Company's  products,  services and  subscribers are
intensely  competitive,  highly fragmented and characterized by rapidly changing
technology,  evolving  industry  standards,  price  competition and frequent new
product  introductions.  A number of companies  offer products that compete with
one or more of the Company's  products.  The Company's  current and  prospective
competitors  include OEM product  manufacturers  of Internet  access  equipment,
manufacturers  of Internet  presence  and web site  software and  developers  of
remote control and  collaboration  software.  In the Internet  access  equipment
market, the Company competes primarily with Ascend, Cisco,  3Com/U.S.  Robotics,
Ramp Networks,  Intel,  Flowpoint and several other  companies.  In the Internet
presence and web site  software  market,  the Company  competes  with IBM,  Inc.
Online,  The Globe, AOL,  Netscape,  Yahoo!,  GeoCities,  SiteMatic,  HotOffice,
Homestead, Lycos, Zyworld and several other companies. In the remote control and
collaboration  software markets,  the Company competes  primarily with Symantec,
Microsoft,  Tivoli (IBM),  Lotus (IBM),  Stac  Electronics,  Microcom  (Compaq),
Computer Associates, Contigo, PlaceWare and several other companies. The Company
has experienced and expects to continue to experience increased competition from
current  and  potential  competitors,  many of whom have  substantially  greater
financial,  technical,  sales, marketing and other resources, as well as greater
name recognition and a larger customer base than the Company.  Accordingly, such
competitors or future  competitors may be able to respond more quickly to new or
emerging  technologies  and changes in customer  requirements  or devote greater
resources to the  development,  promotion  and sales of their  products than the


                                       17
<PAGE>

Company.  Other companies in the personal computer or Internet industry may seek
to expand  their  product  offerings  by designing  and selling  products  using
competitive technology that could render the Company's products obsolete or have
a material  adverse effect on the Company's  sales.  For example,  Microsoft has
available  for  free,   via  download  on  the  Internet,   communications   and
collaboration  software  compatible with the Microsoft Internet Explorer and has
publicly stated that they are committed to integrating  Internet technology into
existing  products at no additional  cost to customers.  This software  product,
which enables  real-time  communication  within a workgroup,  as well as similar
future product  offerings from Microsoft,  could undermine the Company's ability
to market its Timbuktu  Pro and/or NVO  software.  Accordingly,  there can be no
assurance  that the Company can  continue  to market its  collaboration  and web
office software, which would have a material and adverse effect on the Company's
business, operating results and financial condition. In addition, several of the
Company's  current  competitors  have  introduced  free and/or  paid  guaranteed
service and support  programs  that appear to be similar to the  Company's "Up &
Running,  Guaranteed!"  program. As a result, there can be no assurance that the
Company can  continue to charge a fee for this support  program.  The markets in
which the Company  currently  competes are subject to intense price  competition
and the  Company  expects  additional  price and  product  competition  as other
established  and  emerging  companies  enter these  markets and new products and
technologies are introduced.  Consolidations  in the computer and  communication
industries  continue to create companies with  substantially  greater financial,
technical,  sales,  marketing and other  resources than the Company,  as well as
greater  name  recognition  and a  significantly  larger  customer  base.  These
companies  may be able to respond more  quickly to new or emerging  technologies
and changes in  customer  requirements  or to devote  greater  resources  to the
development,  promotion and sales of its  products.  Increased  competition  may
result in the loss of market share,  further price  reductions and reduced gross
margins,  any of which  could  materially  and  adversely  affect the  Company's
business,  operating results and financial condition.  There can be no assurance
that the Company will be able to compete successfully against current and future
competitors,  or that  competitive  factors faced by the Company will not have a
material  adverse  effect  on the  Company's  business,  operating  results  and
financial condition.

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

         Dependence on Strategic Alliances; Dependence on Contract Manufacturers
and  Limited  Source  Suppliers.  The  Company  relies on a number of  strategic
relationships to help achieve market acceptance of the Company's products and to
leverage the Company's development,  sales and marketing resources. Although the
Company views these  relationships  as important  factors in the development and
marketing of the Company's  products and  services,  a majority of the Company's
agreements  with its  strategic  partners or  customers  do not  require  future
minimum  commitments to purchase the Company's  products,  are not exclusive and
generally may be terminated at the convenience of either party.  There can be no


                                       18
<PAGE>

assurance that the Company's  strategic  partners regard their relationship with
the Company as strategic to their own respective businesses and operations, that
they will not reassess  their  commitment  to the Company or its products at any
time in the  future,  that  they  will  not  develop  and/or  market  their  own
competitive  technology,  or that they will not be acquired and thereby reassess
their relationship with the Company.

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

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

         Complex  products  such as those  offered by the  Company  may  contain
undetected  or unresolved  defects when first  introduced or as new versions are
released.  There can be no  assurance  that,  despite  testing  by the  Company,


                                       19
<PAGE>

defects will not be found in new products or new versions of products  following
commercial  release,  resulting  in loss of  market  share,  delay in or loss of
market  acceptance or product recall.  Any such occurrence could have a material
adverse  effect upon the  Company's  business,  operating  results or  financial
condition.

         The Company  believes that its future  business and  operating  results
depend in part on its ability to continue to enhance existing products,  develop
new products and improve the price and  performance  of its products in a timely
manner.  The Company  continuously  evaluates  the  emerging  needs,  developing
standards and emerging technologies of its target markets to identify new market
or product  opportunities.  Netopia is focusing its  development  efforts on its
Internet Routers through high-speed digital services, including ISDN, T-1, Frame
Relay,  DSL,  56K  analog  technologies  and  software  enhancements  to its NVO
software platform and Timbuktu Pro products,  further international localization
of its products and cost-reducing design improvements.  In addition, the Company
has relied and will continue to rely on external development resources,  such as
OEM  suppliers,  for the  development  of certain of its  products  and  related
components.  The Company may in the future acquire  products or  technologies to
complement  current research and development  efforts.  Research and development
expenses were $2.0 million and $1.9 million for the three months ended  December
31, 1998 and 1997, respectively.

         As of  February  1, 1999,  Netopia's  research  and  development  staff
consisted of 69 employees.  The Company  believes  that its future  success will
depend in large  part upon its  ability to  attract  and  retain  highly-skilled
engineering personnel.  Competition for such personnel is intense, and there can
be no assurance  that the Company will be successful in attracting and retaining
such personnel, the failure of which could have a material adverse effect on the
Company's business, operating results and financial condition.

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

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

                                       20
<PAGE>

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

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

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

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

         Risks  Associated  with Potential  Acquisitions  or  Divestitures.  The
Company  may  acquire or invest in  companies,  technologies  or  products  that
complement the Company's  business or its product  offerings.  In addition,  the
Company  continues to evaluate the  performance  of all its products and product
lines and may sell or  discontinue  current  technologies,  products  or product
lines.  Any  acquisitions  or  divestitures  may  result  in the  use  of  cash,
potentially  dilutive issuance of equity  securities,  the write-off of software
development  costs or other  assets,  incurrance of severance  liabilities,  the
amortization of expenses related to goodwill and other intangible  assets and/or


                                       21
<PAGE>

the incurrance of debt, any of which could have a material adverse effect on the
Company's business,  financial condition,  cash flows and results of operations.
Acquisitions or divestitures  would involve numerous  additional risks including
difficulties in the assimilation or separation of operations, services, products
and  personnel,  the diversion of  management's  attention  from other  business
concerns,  the disruption of the Company's  business,  the entry into markets in
which the Company has little or no direct prior  experience,  the potential loss
of key  employees  and  the  potential  loss  of  key  distributor  or  supplier
relationships.  In addition,  potential  acquisition  candidates targeted by the
Company  may  not  have  audited  financial   statements,   detailed   financial
information or any degree of internal  controls.  There can be no assurance that
an audit  subsequent to any  successful  completion of an  acquisition  will not
reveal matters of  significance,  including with respect to revenues,  expenses,
liabilities, contingent or otherwise, and intellectual property. There can be no
assurance that the Company would be successful in overcoming  these or any other
significant  risks  encountered  and the  failure to do so could have a material
adverse  effect upon the  Company's  business,  operating  results and financial
condition.

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

         The Company  entered into an  eight-month  web-hosting  agreement  with
Exodus  Communications,  Inc. ("Exodus")  effective June 1998. This agreement is
automatically renewed for subsequent one-year terms unless either party provides
notice at least 60 days prior to the  expiration  of any term.  Pursuant  to the
agreement,  Exodus  provides  and  manages  power  and  environmentals  for  the
Company's   networking   and  server   equipment.   Exodus  also  provides  site
connectivity  to  the  Internet  via  multiple  DS-3  and  OC-3  links  on  a 24
hour-a-day,  seven-days-per week basis. Under the terms of the agreement, Exodus
does  not,  however,  guarantee  that  the  Company's  Internet  access  will be
uninterrupted,  error-free or completely  secure. The Company has decided not to
renew its web-hosting  agreement with Exodus and has provided Exodus notice that
the Company will terminate its use of the Exodus  web-hosting  services on March
31,  1999.  As a result,  the  Company has  entered  into a similar  web-hosting
agreement  to host its  Netopia  Virtual  Offices  from a  similar  third  party
web-hosting  vendor (the  "Vendor").  Any  extended  disruption  in the Internet
access provided by Exodus or the Company's new Vendor or any extended failure of
the Company's server and networking  systems to handle current or higher volumes
of traffic or any extended  disruption of Internet  access during the transition
to the  Company's  new  Vendor  could  have a  material  adverse  effect  on the
Company's business, operating results and financial condition.

         An  increase  in the use of the  Company's  hosted NVO web sites  could
strain the capacity of its systems,  which could lead to slower response time or
system  failures.  Slowdowns or system failures  adversely  affect the speed and
responsiveness  of the  Company's  hosted  web  sites  and  would  diminish  the
experience  for the  Company's  subscribers  and  visitors.  The  ability of the
Company to provide  effective  Internet  connections or of its systems to manage
substantially  larger numbers of customers at higher  transmission  speeds is as
yet unknown, and, as a result, the Company faces risks related to its ability to
scale up to its expected customer levels while maintaining superior performance.
If usage of  bandwidth  increases,  Netopia  will  need to  purchase  additional
servers and  networking  equipment and rely more heavily on its equipment and on
Exodus and the future  Vendor  and their  services  to  maintain  adequate  data
transmission  speeds,  the  availability  of which may be limited or the cost of
which may be significant.

         The successful  delivery of the Company's services is also dependent in
substantial  part upon the  ability  of Exodus  and the  future  Vendor  and the
Company to protect Netopia's servers and network  infrastructure  against damage
from human error, fire, flood, power loss, telecommunications failure, sabotage,
intentional acts of vandalism and similar events. In addition, substantially all
of the  Company's  servers  and network  infrastructure  are located in Northern
California,  an area particularly  susceptible to earthquakes,  which also could
cause system outages or failures if one should occur.  Despite precautions taken
by, and planned to be taken by, the  Company  and Exodus and the future  Vendor,
the  occurrence of other natural  disasters or other  unanticipated  problems at


                                       22
<PAGE>

their  respective  facilities  could  result  in  interruption  in the  services
provided  by the  Company  or  significant  damage to the  Company's  equipment.
Despite the  implementation  of network  security  measures by the Company,  its
servers are vulnerable to computer viruses,  break-ins,  and similar disruptions
from unauthorized tampering.  The occurrence of any of these events could result
in interruptions,  delays or cessations in service,  which could have a material
adverse  effect on the  Company's  business,  operating  results  and  financial
condition.  In addition,  the  Company's  reputation  and the Netopia brand name
could be materially and adversely affected.

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

         Due to the increasing  popularity and use of the Internet,  a number of
legislative and regulatory proposals are under consideration by federal,  state,
local and foreign governmental  organizations,  and it is possible that a number
of laws or regulations  may be adopted with respect to the Internet  relating to
such issues as user privacy, user screening to prevent inappropriate uses of the
Internet by, for example, minors or convicted criminals, taxation, infringement,
pricing,  content regulation,  quality of products and services and intellectual
property  ownership  and  infringement.   The  adoption  of  any  such  laws  or
regulations  may decrease the growth in the use of the Internet,  which could in
turn decrease the demand for the Company's products, increase the Company's cost
of doing business,  or otherwise have a material adverse effect on the Company's
business,   results  of  operations  and  financial  condition.   Moreover,  the
applicability to the Internet of existing laws governing issues such as property
ownership,  copyright,  trademark,  trade secret, obscenity,  libel and personal
privacy is uncertain and  developing.  Any new  legislation  or  regulation,  or
application or  interpretation  of existing laws,  could have a material adverse
effect on the Company's business, operating results and financial condition. For
example,  although it was held  unconstitutional,  the Telecommunications Act of
1996  prohibited  the  transmission  over  the  Internet  of  certain  types  of
information and content. Other nations,  including Germany and China, have taken
actions to restrict  the free flow of material on the World Wide Web (the "web")
deemed to be objectionable.  In addition,  although  substantial portions of the
Communications  Decency Act (the "CDA") were held to be unconstitutional,  there
can be no assurance that similar  legislation will not be enacted in the future,
and it is possible that such legislation could expose the Company to substantial
liability.  Legislation  like the CDA could also dampen the growth in use of the
web generally and decrease the  acceptance  of the web as a  communications  and
commercial  medium,  and could,  thereby,  have a material adverse effect on the
Company's  business,  operating  results  and  financial  condition.  It is also
possible that the use of "cookies" to track  demographic  information  and users
may become  subject to laws limiting or  prohibiting  their use. A "cookie" is a
bit of  information  keyed to a  specific  server,  file  pathway  or  directory
location  that is stored on a user's  hard  drive,  possibly  without the user's
knowledge. A user is generally able to remove cookies. Germany, for example, has
imposed laws limiting the use of cookies, and a number of Internet commentators,
advocates and governmental  bodies in the United States and other countries have
urged the passage of laws limiting or abolishing the use of cookies. Limitations
on the Company's  potential use of cookies could limit the  effectiveness of the
Company's  tracking user data, which could have a material adverse effect on the
Company's business,  operating results and financial  condition.  In addition, a
number of legislative  proposals have been made at the federal,  state and local
level that would impose  additional taxes on the sale of goods and services over
the  Internet  and certain  states have taken  measures to tax  Internet-related
activities.  Moreover,  it is likely that, once such moratorium is lifted,  some


                                       23
<PAGE>

type of federal and/or state taxes will be imposed upon Internet  commerce,  and
there can be no assurance that such  legislation or other attempts at regulating
commerce over the Internet will not substantially  impair the growth of commerce
on the Internet and, as a result,  adversely affect the Company's opportunity to
derive  financial  benefit from such  activities.  In addition to the  foregoing
areas of recent legislative activities,  several telecommunications carriers are
currently seeking to have  telecommunications  over the web regulated by the FCC
in the same manner as other telecommunications  services. For example, America's
Carriers  Telecommunications  Association  has filed a petition with the FCC for
this purpose.  In addition,  because the growing  popularity  and use of the web
have burdened the existing telecommunications infrastructure and many areas with
high web use have begun to  experience  interruptions  in phone  service,  local
telephone  carriers have petitioned the FCC to regulate ISPs in a manner similar
to  long-distance  telephone  carriers and to impose access fees on the ISPs. If
either of these petitions is granted,  or the relief sought therein is otherwise
granted,  the costs of  communicating  on the web could increase  substantially,
potentially  slowing  growth  in use of the web,  which  could in turn  decrease
demand for the  Company's  services  or  increase  the  Company's  cost of doing
business.

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

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

         Liability for Information Retrieved From the Web. Because materials may
be downloaded by subscribers  and other users of the Company's NVO web sites and
subsequently  distributed  to others,  there is a potential  that claims will be
made  against the Company for  defamation,  negligence,  copyright  or trademark
infringement,  personal  injury or other theories based on the nature,  content,
publication and  distribution of such materials.  Such claims have been brought,
and sometimes  successfully  pressed,  in the past.  In addition,  the increased
attention  focused  upon  liability  issues  as a result of these  lawsuits  and
legislative  proposals  could  impact the overall  growth of Internet  use.  The
Company  could also be exposed to  liability  with  respect to the  offering  of
third-party  content that may be accessible  through  content and materials that
may be posted by subscribers on their personal web sites or chat sessions.  Such
claims might include,  among others,  that by directly or indirectly hosting the
personal  web sites of third  parties,  the Company is liable for  copyright  or
trademark  infringement or other wrongful  actions by such third parties through
such web sites.  The  Company  also offers  e-mail  services,  which  expose the
Company  to  potential  risk,  such as  liabilities  or  claims  resulting  from
unsolicited  e-mail  (spamming),   lost  or  misdirected  messages,  illegal  or
fraudulent use of e-mail or interruptions  or delays in e-mail service.  Even to
the extent  that such  claims do not result in  liability  to the  Company,  the
Company could incur  significant  costs in investigating  and defending  against
such  claims.  The  imposition  on  the  Company  of  potential   liability  for
information  carried on or  disseminated  through its systems  could require the
Company to implement  measures to reduce its exposure to such  liability,  which
may  require  the   expenditure   of   substantial   resources   and  limit  the
attractiveness  of the Company's  services to its subscribers which would have a
material  adverse  effect  on the  Company's  business,  operating  results  and
financial condition.

         Dependence on Apple. The Company believes that approximately 25% to 30%
of its  revenues are derived from  customers  purchasing  products for the Apple
MacOS environment. Accordingly, the Company is dependent on the market for MacOS
computers  and the  development  and sale of new Apple  computers,  particularly
sales of such  computers into business  environments.  There can be no assurance
that  competitive  personal  computers  will not displace the MacOS  products or
reduce sales of MacOS products. Sales of the Company's products in the past have


                                       24
<PAGE>

been adversely  affected by the  announcement  by Apple of new products with the
potential to replace existing products, customer order deferrals in anticipation
of new MacOS  product  offerings  and the  elimination  of a number of Macintosh
cloning  licenses  issued  by Apple  and  potential  limitations  on the  retail
distribution of Apple products.  The inability of Apple to successfully develop,
manufacture,  market  or sell new  products,  and any  decrease  in the sales or
market  acceptance  of the MacOS  family of  computers,  would  have a  material
adverse  effect on the  Company's  business,  operating  results  and  financial
condition.  For  example,  during  fiscal 1997 and 1998,  the  Company  believes
revenues  were  adversely  affected by declining  sales of MacOS  computers  and
Apple's loss of market share. In addition,  sales of the Company's  products are
dependent upon the international  demand for Apple products.  To the extent that
the  Company is unable to  maintain  or  increase  international  demand for its
products,  or that  international  demand for Apple  products  does not meet the
Company's expectations,  the Company's international sales would be limited, and
the  Company's  business,  operating  results and financial  condition  would be
materially and adversely affected.

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

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

         California Headquarters;  Subleased Facilities. The Company's corporate
headquarters  and a large portion of its research and development  facilities as
well as other critical business  operations are located in Northern  California,
near major earthquake faults. The Company's  business,  financial  condition and
operating results could be materially adversely affected in the event of a major
earthquake.  As a result of the sale of the LAN Division and per the  Separation
Agreement by and between  Netopia,  Inc. and Farallon,  Netopia is to assign the
lease of its  warehouse  facility to Farallon.  The  assignment of such lease is
expected to occur in fiscal 1999.  After the lease is assigned to Farallon,  the
Company  will  continue  to utilize a portion  of the  warehouse  space  under a
sublease  with  Farallon.  The term of the sublease  will begin on the effective
date of the lease assignment and terminate on December 31, 2002. Upon completion
of the sublease,  Farallon will become responsible for the payment of applicable
rent  and  utilities  related  to  the  warehouse  facility.   Under  Farallon's
management  the warehouse  facility  could be exposed to closure or  interrupted
utility  services which would not be controllable by the Company and which could
have a material adverse effect on the Company's business,  operating results and
financial condition.

         Volatility  of Stock  Price.  The  market  price of the  shares  of the
Company's Common Stock is highly volatile and may be  significantly  affected by
factors such as actual or anticipated  fluctuations in the Company's  results of
operations, announcements of technological innovations, announcements of product
distribution  agreements,  introduction  of new  products  by the Company or its
competitors,  developments  with respect to patents,  copyrights or  proprietary
rights,  conditions and trends in the Internet and other technology  industries,
changes in or failure by the Company to meet securities analysts'  expectations,
large  volume sales of the  Company's  Common  Stock and  activities  related to
acquisitions  or  divestitures,   semi-professional  and  amateur  day  traders,
postings on Internet  message and chat boards,  general  market  conditions  and
other factors.  In addition,  the stock market has from time to time experienced
significant price and volume  fluctuations  that have particularly  affected the
market  prices for the common  stocks of Internet  technology  companies.  These
broad market fluctuations may adversely affect the market price of the Company's
Common Stock. In the past,  following  periods of volatility in the market price
of a particular  company's  securities,  securities class action  litigation has
often been brought  against that  company.  There can be no assurance  that such
litigation  will not occur in the  future  with  respect  to the  Company.  Such


                                       25
<PAGE>

litigation  could result in  substantial  costs and a diversion of  management's
attention and  resources,  which could have a material  adverse  effect upon the
Company's  business,  operating  results and  financial  condition.  The Company
currently  anticipates that it will retain all future earnings,  if any, for use
in its business and does not anticipate  paying any cash dividends on its Common
Stock in the  foreseeable  future.  The closing price per share of the Company's
Common  Stock as reported on the Nasdaq  Stock  Market on February  12, 1999 was
$7.000.

Liquidity and Capital Resources

         The Company has funded its  operations  to date  primarily  through the
private sale of equity securities and the Initial Public Offering (the "IPO") of
the  Company's  Common  Stock.  Since  inception,  the Company has raised  $19.4
million  from the private  sale of equity  securities  and  approximately  $24.8
million,  net of offering  expenses,  from the  Company's  IPO completed in June
1996.  As of December  31,  1998,  the Company had cash,  cash  equivalents  and
short-term investments representing 67% of total assets.

         The Company's  operating  activities used $3.5 million and $169,000 for
the three months ended December 31, 1998 and 1997,  respectively.  The cash used
by operations  in the three months ended  December 31, 1998 was primarily due to
supporting  the  Company's  operating  activities  as  well as the  increase  in
accounts  receivable and the reduction of accounts  payable and the reduction of
accrued  liabilities  related to the sale of the LAN Division.  The cash used by
operations in the three months ended  December 31, 1997 was primarily due to the
net loss of $1.1 million and an increase of $567,000 in  inventories,  partially
offset by the reduction of accounts receivable of $1.4 million.

         Cash  provided  by  investing  activities  in the  three  months  ended
December  31, 1998 was  primarily  due to proceeds  from the sale of  short-term
investments partially offset by the purchases of such investments as well as the
acquisitions of Serus and netOctopus.  The cash used in investing  activities in
the three months ended  December 31, 1997 was primarily  related to the purchase
of short-term  investments  partially offset by the sale of such investments and
purchases of capital equipment. Expenditures for capital equipment were $173,000
and  $177,000   for  the  three  months  ended   December  31,  1998  and  1997,
respectively.  The  Company's  financing  activities  in the three  months ended
December 31, 1998 were primarily  related to the exercise of stock options.  The
Company's financing  activities in the three months ended December 31, 1997 were
primarily related to the exercise of stock options and activities related to the
Company's Employee Stock Purchase Plan.

         Although  the Company  believes  that its  existing  cash  balance will
decrease moderately during the remainder of fiscal 1999 as a result of increased
operating   expenses,   the  Company  believes  that  its  existing  cash,  cash
equivalents and short-term  investments  will be adequate to meet its cash needs
for  working  capital,   capital   expenditures  and  earnouts  related  to  its
acquisitions for at least the next 12 months.  If cash generated from operations
is insufficient to satisfy the Company's liquidity requirements, the Company may
seek  to sell  additional  equity  or  convertible  debt  securities  or  obtain
additional  credit  facilities.  However,  there can be no  assurance  that such
additional  equity or convertible debt financing or additional credit facilities
will be available  on terms  acceptable  to the Company,  if at all. The sale of
additional  equity or  convertible  debt  securities  could result in additional
dilution  to the  Company's  stockholders.  From time to time,  in the  ordinary
course of business,  the Company evaluates potential acquisitions of businesses,
products and technologies.  Accordingly,  a portion of the Company's cash may be
used to acquire or invest in complementary businesses or products, to obtain the
right to use complementary  technologies,  to obtain additional  presence on the
Internet or to support additional advertising and promotional campaigns.

Item 3.  Qualitative and Quantitative Disclosures About Market Risk

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

                                       26
<PAGE>

         The table  below  presents  the  carrying  value and  related  weighted
average  interest  rates for the Company's  investment  portfolio.  The carrying
value   approximates  fair  value  at  December  31,  1998.  All  the  Company's
investments mature in twelve months or less.

<TABLE>
<CAPTION>

                                                                                Carrying               Average
          Principal (notional) amounts in United States dollars:                 Amount             Interest Rate
                                                                           ------------------     ------------------
                                                                             (in thousands)
<S>                                                                        <C>                    <C>

          Cash equivalents - fixed rate.................................         $    11,550                  4.93%
          Short-term investments - fixed rate...........................              17,979                  5.62%
                                                                           ------------------
                                                                                 $    29,529
                                                                           ==================
</TABLE>

PART II.          OTHER INFORMATION

Item 2.  Changes in Securities and Use of Proceeds

         On  December  17,  1998,  the  Company  issued  409,556  shares  of the
Company's  Common  Stock (the  "Common  Shares") to Serus,  a limited  liability
company,  as partial  consideration  for the acquisition of substantially all of
the assets, including the existing operations, and certain of the liabilities of
Serus. In addition to the issuance of the Common Shares,  the consideration paid
by the Company to Serus  included  (i) $3.0  million of cash paid on the closing
date of the transaction and (ii) a $1.0 million earnout  opportunity  based upon
certain  criteria as set forth in the Serus  Purchase  Agreement.  The offer and
sale of the Common Shares was exempt from the  registration  requirements of the
Securities  Act of  1933,  as  amended  (the  "Act"),  pursuant  to Rule  505 of
Regulation D thereunder.  The Company relied on the following facts to make such
exemption  available:  (a) the maximum  offering  price of the Common Shares was
approximately  $3.1 million based on the closing  price of the Company's  Common
Stock on the closing date of the Serus  transaction,  (b) the Common Shares were
offered and sold to a single  purchaser,  Serus,  who represented that it had no
intention  to  distribute  any of the  Common  Shares  at any  time  during  the
following twelve (12) months,  and (c) the Company  otherwise  complied with the
information and other requirements under Rules 501 and 502 of Regulation D under
the Act.

Item 6.  Exhibits and Reports on Form 8-K

(a)               Exhibits

27.1     Financial Data Schedule

(b)      Reports on Form 8-K

         On October 19, 1998,  the Company filed a Form 8-K/A (Item 7) reporting
the pro forma financial statements and exhibits related to the Company's sale of
its Farallon LAN Division.  The pro forma financial statements included: (i) the
unaudited pro forma condensed  consolidated balance sheet at June 30, 1998; (ii)
the unaudited pro forma condensed  consolidated  statement of operations for the
nine months ended June 30, 1998,  and;  (iii) the unaudited pro forma  condensed
consolidated  statement of  operations  for the fiscal year ended  September 30,
1997.

         On December 1, 1998,  the Company  filed a Form 8-K/A (Item 7) amending
the Form  8-K/A as filed by the  Company  on October  19,  1998.  The Form 8-K/A
reported  the  pro  forma  financial  statements  and  exhibits  related  to the
Company's sale of its Farallon LAN Division.  The pro forma financial statements
included:  (i) the unaudited pro forma condensed  consolidated  balance sheet at
June 30, 1998; (ii) the unaudited pro forma condensed  consolidated statement of
operations for the nine months ended June 30, 1998, and; (iii) the unaudited pro
forma condensed  consolidated  statement of operations for the fiscal year ended
September 30, 1997.

         On December 3, 1998,  the Company  filed a Form 8-K (Item 5)  reporting
its  current  and  historical  Year 2000  Readiness  Disclosures.  There were no
financial statements or exhibits included in this Form 8-K.





                                       27
<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 16, 1998              NETOPIA, INC.

                                      (Registrant)



                                      By:  /s/ James A. Clark                  
                                      James A. Clark
                                      Vice President and Chief Financial Officer
                                      (Duly Authorized Officer and Principal 
                                      Financial Officer)



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<PAGE>