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 March 31, 1999

                                       OR

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

               For the transition period from ________ to ________


                         Commission file number 0-28450


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


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


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


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



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


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


         As of April 30, 1999 there were 12,784,174  shares of the  Registrant's
Common Stock outstanding.



<PAGE>



                                  NETOPIA, INC.

                                    FORM 10-Q

                                TABLE OF CONTENTS


   



PART I.  FINANCIAL INFORMATION

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

         Condensed consolidated balance sheets at March 31, 1999 and September
         30, 1998...........................................................   2

         Condensed consolidated statements of operations for the three and six 
         months ended March 31, 1999 and 1998...............................   3

         Condensed consolidated statements of cash flows for the six months 
         ended March 31, 1999 and 1998......................................   4

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

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

Item 3.  Quantitative and Qualitative Disclosures About Market Risk.........  30

PART II. OTHER INFORMATION

Item 4.  Submission of Matters to a Vote of Security Holders................  30

Item 6.  Exhibits and Reports on Form 8-K...................................  31

SIGNATURE...................................................................  32





                                       1
<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)

                                                                                  March 31,          September 30,
                                                                                     1999                 1998
                                                                               -----------------    -----------------
<S>                                                                            <C>                  <C>

                                     ASSETS
  Current assets:
      Cash and cash equivalents..............................................      $    16,706          $    19,244
      Short-term investments.................................................           15,246               22,851
      Trade accounts receivable less allowance for doubtful accounts and
           returns of $629 and $617, respectively............................            8,253                4,358
      Royalties receivable...................................................              410                  410
      Inventories, net.......................................................            1,527                1,591
      Prepaid expenses and other current assets..............................              901                  929
                                                                               -----------------    -----------------
              Total current assets...........................................           43,043               49,383
  Note receivable............................................................              978                  900
  Royalties receivable.......................................................            1,372                1,372
  Furniture, fixtures and equipment, net.....................................            2,163                2,068
  Intangible assets..........................................................            2,725                   --
  Deposits and other assets..................................................            2,220                2,569
                                                                               =================    =================
                                                                                   $    52,501          $    56,292
                                                                               =================    =================

                      LIABILITIES AND STOCKHOLDERS' EQUITY 
  Current liabilities:
      Accounts payable.......................................................      $     5,080          $     5,440
      Accrued compensation...................................................            1,730                1,217
      Accrued liabilities....................................................            2,013                3,468
      Deferred revenue.......................................................            1,183                  807
      Other current liabilities..............................................              104                  299
                                                                               -----------------    -----------------
              Total current liabilities......................................           10,110               11,231
  Long-term liabilities......................................................              371                  260
                                                                               -----------------    -----------------
              Total liabilities..............................................           10,481               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; 12,641,439 and
           11,953,908 shares issued and outstanding at March 31, 1999 and
         September 30, 1998, respectively...................................                13                   12
      Additional paid-in capital.............................................           56,068               51,871
      Retained deficit.......................................................          (14,061)              (7,082)
                                                                               -----------------    -----------------
              Total stockholders' equity.....................................           42,020               44,801
                                                                               -----------------    -----------------
                                                                                   $    52,501          $    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               Six months ended
                                                                  March 31,                      March 31,
                                                         -----------------------------   ----------------------------
                                                             1999           1998            1999           1998
                                                         -------------- --------------   -------------  -------------
<S>                                                      <C>            <C>              <C>            <C>    
  Revenues.............................................     $  10,535       $  6,252       $  18,458      $  11,715
                                                               
  Cost of revenues.....................................         3,644          1,858           6,450          3,579
                                                         -------------- --------------   -------------  -------------
      Gross profit.....................................         6,891          4,394          12,008          8,136

  Operating expenses:
      Research and development.........................         2,346          1,711           4,331          3,602
      Selling and marketing ...........................         4,828          3,113           9,589          6,639
      General and administrative.......................           899            805           1,681          1,596
      Acquired in-process research
           and development.............................            --             --           4,205             --
      Amortization of goodwill.........................           181             --             181             --
                                                         -------------- --------------   -------------  -------------
         Total operating expenses......................         8,254          5,629          19,987         11,837
                                                         -------------- --------------   -------------  -------------

         Operating loss................................        (1,363)        (1,235)         (7,979)        (3,701)

 Other income, net.....................................           430            564           1,000          1,137
                                                         -------------- --------------   -------------  -------------
      Loss from continuing operations
         before income taxes...........................          (933)          (671)         (6,979)        (2,564)
 Income tax benefit....................................            --           (241)             --           (915)
                                                         -------------- --------------   -------------  -------------

      Loss from continuing operations..................          (933)          (430)         (6,979)        (1,649)

  Discontinued operations, net of taxes................            --             87              --            251
                                                         -------------- --------------   -------------  -------------

         Net loss.....................................        $   (933)     $   (343)      $  (6,979)     $  (1,398)
                                                         ============== ==============   =============  =============

 Per share data, continuing operations:
      Basic and diluted loss per share.................      $   (0.07)     $   (0.04)      $   (0.56)     $   (0.14)
                                                         ============== ==============   =============  =============
      Shares used in the per share calculations........         12,613         11,623          12,386         11,567
                                                         ============== ==============   =============  =============

 Per share data, discontinued operations:
      Basic income per share...........................        $   --       $   0.01          $   --       $   0.02         
                                                         ============== ==============   =============  =============
      Diluted income per share.........................        $   --       $   0.01          $   --       $   0.02
                                                         ============== ==============   =============  =============
      Common shares used in the calculations of basic                                     
        income per share...............................            --         11,623              --         11,567
                                                         ============== ==============   =============  ============= 
      Common and common equivalent shares used in the
        calculations of diluted income per share.......            --         12,409              --         12,619
                                                         ============== ==============   =============  =============

 Per share data, net loss:
      Basic and diluted net loss per share.............      $   (0.07)    $   (0.03)      $   (0.56)      $   (0.12)
                                                         ============== ==============   =============  =============      
      Shares used in the per share calculations........        12,613         11,623          12,386         11,567
                                                         ============== ==============   =============  =============
</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)

                                                                                    Six months ended March 31,
                                                                               --------------------------------------
                                                                                     1999                1998
                                                                               -----------------    -----------------
<S>                                                                            <C>                  <C>    
  Cash flows from operating activities:
  Net loss...................................................................      $    (6,979)         $    (1,398)
  Adjustments to reconcile net loss to net cash used in operating activities:
     Depreciation and amortization...........................................            1,393                  736
     Amortization of deferred compensation...................................               --                    9
     Charge for acquired in-process research and development.................            4,205                   --
     Changes in operating assets and liabilities:
        Trade accounts receivable............................................           (3,895)               1,079
        Inventories..........................................................               64                 (334)
        Prepaid expenses, deposits and other current assets..................               16                  (27)
        Accounts payable and accrued liabilities.............................           (1,302)              (1,324)
        Deferred revenue.....................................................              346                  (68)
        Other liabilities....................................................              (54)                 361
                                                                               -----------------    -----------------
           Net cash used in operating activities.............................           (6,206)                (966)
                                                                               -----------------    -----------------

  Cash flows from investing activities:
     Purchase of furniture, fixtures and equipment...........................             (736)                (489)
     Acquisition of technology...............................................           (4,299)                  --
     Capitalization of software development costs............................             (288)                (241)
     Purchase of short-term investments......................................          (12,666)             (24,262)
     Proceeds from the sale and maturity of short-term investments...........           20,271               27,004
                                                                               -----------------    -----------------
           Net cash provided by investing activities.........................            2,282                2,012
                                                                               -----------------    -----------------

  Cash flows from financing activities:
     Proceeds from the issuance of common stock..............................            1,386                  380
                                                                               -----------------    -----------------
           Net cash provided by financing activities.........................            1,386                  380
                                                                               -----------------    -----------------

  Net increase (decrease) in cash and cash equivalents.......................           (2,538)               1,426
  Cash and cash equivalents, beginning of period.............................           19,244               14,444
                                                                               -----------------    -----------------
  Cash and cash equivalents, end of period...................................      $    16,706          $    15,870
                                                                               =================    =================

  Supplemental disclosures of noncash investing and
     financing activities:
     Issuance of common stock for acquisition of intangible assets...........      $     2,811            $      --
                                                                               =================    =================
     Issuance of common stock for consulting services........................       $       92            $      --
                                                                               =================    =================
</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 March 31, 1999 are not necessarily indicative of
the results to be expected for any  subsequent  quarter or for the entire fiscal
year ending September 30, 1999.

(2)      Recent Accounting Pronouncements    

         During the first quarter of fiscal 1999, 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
was adopted by the Company  effective  January 1, 1999. The adoption of SOP 98-9
did  not  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 and six months ended March 31, 1999
and 1998.

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

                                       5
<PAGE>

         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  or results of
operations of the Company.

         In March, 1998, the AICPA issued SOP 98-1,  Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use. SOP 98-1 requires that
certain costs related to the development or purchase of internal-use software be
capitalized  and amortized over the estimated  useful life of the software.  SOP
98-1 is effective for  financial  statements  issued for fiscal years  beginning
after  December 15,  1998.  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>
                                                                                   March 31,          September 30,
                                                                                     1999                 1998
                                                                                ----------------     ----------------
<S>                                                                             <C>                  <C>

Raw materials and work in process..........................................          $      674          $     1,080
Finished goods.............................................................                 853                  511
                                                                                ================     ================
                                                                                    $     1,527          $     1,591
                                                                                ================     ================
</TABLE>
                                         
(4) Furniture, Fixtures and Equipment, net (in thousands):

<TABLE>
<CAPTION>

                                                                                   March 31,          September 30,
                                                                                     1999                 1998
                                                                                ----------------     ----------------
<S>                                                                             <C>                  <C>

Furniture, fixtures and equipment..........................................         $    12,676          $    11,940
Accumulated depreciation and amortization..................................             (10,513)              (9,872)
                                                                                ----------------     ----------------
                                                                                    $     2,163          $     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 and six months ended March 31, 1999 and
1998 since their  effect on EPS is  antidilutive  due to the losses  incurred in
each period. Consequently, the number of shares in the computations of basic and
diluted EPS is the same for each period.  Potential  common shares excluded from
the  computations  of diluted EPS consist of options to  purchase  common  stock
which totaled 4,010,813 shares and 3,007,306 shares for the three and six months
ended March 31, 1999 and 1998, respectively.

<TABLE>
<CAPTION>


                                                                    Three months ended          Six months ended
                                                                         March 31,                 March 31,
                                                                  ------------------------   -----------------------
                                                                      1999        1998          1999       1998   
                                                                  ------------ -----------   ----------- -----------
                                                                      (in thousands, except per share amounts)
<S>                                                               <C>          <C>           <C>         <C>

Computation of basic net loss per share:

    Net loss.....................................................    $  (933)    $  (343)     $ (6,979)    $(1,398)
                                                                  ============ ===========   =========== ===========
    Weighted average number of common shares outstanding.........     12,613      11,623        12,386      11,567
                                                                  ============ ===========   =========== ===========

       Basic net loss per share..................................    $ (0.07)    $ (0.03)      $ (0.56)    $ (0.12)
                                                                  ============ ===========   =========== ===========

Computation of diluted net loss per share:

    Net loss.....................................................    $  (933)    $  (343)     $ (6,979)    $(1,398)
                                                                  ============ ===========   =========== ===========

    Weighted average number of common shares outstanding.........     12,613      11,623        12,386      11,567

    Number of dilutive common stock equivalents..................         --          --            --          --
                                                                  ------------ -----------   ----------- -----------
                                                                  
    Shares used in per share calculation.........................     12,613      11,623        12,386      11,567
                                                                  ============ ===========   =========== ===========
                                                                                                         
       Diluted net loss per share................................    $ (0.07)    $ (0.03)      $ (0.56)    $ (0.12)
                                                                  ============ ===========   =========== ===========
</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 web site
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 the summer of 1999 and to incur approximately $400,000 of development
expenses from the date of  acquisition  to completion of  development.  The $1.0
million  earnout  opportunity  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. During the six months ended March 31, 1999, goodwill amortization related
to the  Serus  transaction  was  $133,000.  Any delay in the  completion  of the
development of the product would cause the Company to incur additional unplanned
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 results 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 enterprise 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.  During the six
months ended March 31, 1999,  goodwill  amortization  related to the  netOctopus
transaction  was $48,000.  Any delay in the completion of the development of the
product  would  cause the  Company  to incur  additional  unplanned  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
results 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 $5.1 million and $10.1 million for the
three and six  months  ended  March  31,  1998,  repectively.  The  income  from
discontinued  operations  of $87,000 and  $251,000  for the three and six months
ended March 31, 1998,  respectively,  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 March 31, 1999, the balance in accrued liabilities related to the sale of the
LAN Division was $1.7 million  consisting of $1.4 million of facility  costs and
approximately  $300,000 related to purchase price  adjustments.  Pursuant to the
Agreement  of  Purchase  and Sale of  Assets  by and  between  the  Company  and
Farallon,  the purchase price of the LAN Division is subject to a purchase price


                                       8
<PAGE>

adjustment.  Such adjustment is based upon the difference  between the unaudited
balance sheet of the LAN Division as of the  effective  date of the sale and the
estimated book value of the LAN Division at March 31, 1998.

(8)      Subsequent Events

         In April 1999, the Company  purchased  $999,988 of Series D-1 preferred
stock of Northpoint Communications Group, Inc. ("Northpoint").  Upon the initial
public offering ("IPO") of the common stock of Northpoint,  which occured on May
5, 1999, the Company's  Series D-1 preferred  stock converted into 55,555 shares
of Class B common stock.  As a Series D-1 purchaser,  the Company has agreed not
to  transfer  any  Series  D-1  preferred  stock or Class B common  stock to any
non-affiliated  third party until March 2000. The Company has also agreed not to
acquire more than 10% of Northpoint's voting stock without  Northpoint's consent
until March 2002. In addition, as a Series D-1 purchaser, the Company has agreed
to vote any voting  securities it holds as recommended by Northpoint's  board of
directors, except with respect to votes pursuant to the protective provisions in
Northpoint's certificate of incorporation.

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 March 31, 1999 and 1998

         Revenues.  The Company's revenues are derived from the sale of hardware
and software  products  and include  license  revenues  for its Netopia  Virtual
Office ("NVO") web site software platform and Timbuktu Pro enterprise  software,
sales of its Netopia Internet router products and fees for related services. The
Company  recognizes revenue from sales of its hardware products upon shipment of
the product.  The Company recognizes revenues from licenses of computer software
provided that a firm purchase order has been received,  the software and related
documentation  have been  shipped,  collection  of the  resulting  receivable is
deemed probable, and no other significant vendor obligations exist.  Maintenance
and  service  revenues  are  recognized  over the period in which  services  are
provided.  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  68.5% to $10.5  million in the three  months ended
March 31, 1999 from $6.3 million in the three  months ended March 31, 1998.  The
increase was primarily due to increased sales of the Company's  Netopia Internet
router products, NVO web site platform and Timbuktu Pro enterprise software.

         Netopia  Internet router products  revenue  increased  primarily due to
sales  of  the  Netopia  Digital   Subscriber  Line  ("DSL")   Internet  routers
domestically,  which were not available  during the three months ended March 31,
1998, and increased sales of Netopia Integrated Service Digital Network ("ISDN")
Internet  routers  internationally  primarily  as  a  result  of  the  Company's
relationship  with  France  Telecom's  Internet  service,  WANadoo,  and Telecom
Italia's  Internet  service,  Telecom Italia Net ("TIN").  These  increases were
partially offset by continued price competition  related to the Netopia Internet
routers.  The Company  expects that its Internet  router products may experience

                                       9
<PAGE>

increasing  price  competition  from both domestic and foreign  manufacturers of
similar products as well as competition from alternative technologies.  Any such
increased price and/or technology  competition could materially adversely affect
the Company's business, operating results and financial condition.

         NVO web site platform revenue  increased  primarily due to licensing of
the server platform. The sale of the NVO web site platform is dependent upon the
Company's ability to leverage this software platform to generate revenue streams
from the  licensing  of the  technology  to future  customers  and  partners and
monthly subscription based accounts. This product has existed for only a limited
period  of time,  and,  as a result,  is  relatively  unproven.  There can be no
assurance  that the Company  will be able to retain its  subscribers  or that it
will be able to attract new subscribers or licensees. The failure to do so would
materially  adversely  affect the  Company's  business,  operating  results  and
financial condition.

         Timbuktu Pro enterprise  software  revenue  increased  primarily due to
increased volume license sales of the Windows version of Timbuktu Pro and volume
license  sales of the  netOctopus  systems  management  software  ("netOctopus,"
acquired from Network  Associates in December 1998). This increase was partially
offset by  decreased  sales of the MacOS  version  of  Timbuktu  Pro  enterprise
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.

         International revenues accounted for 29% and 33% of the Company's total
revenues  for the three  months  ended  March 31,  1999 and 1998,  respectively.
International  revenues declined as a percentage of total revenues primarily due
to  increasing  sales  of  Netopia  DSL  Internet  routers  and the NVO web site
platform in the United  States.  The  following  table  provides a breakdown  of
revenue by region  expressed as a percentage  of total  revenues for the periods
presented:

<TABLE>
<CAPTION>

                                                                                    Three months ended March 31,
                                                                               --------------------------------------
                                                                                     1999                1998
                                                                               -----------------    -----------------
<S>                                                                            <C>                  <C>

  Europe.....................................................................               24%                  25%
  Pacific Rim................................................................                2                    6
  Other......................................................................                3                    2
                                                                               -----------------    -----------------
    Subtotal international revenues..........................................               29                   33
  United States..............................................................               71                   67
                                                                               =================    =================
      Total revenues.........................................................              100%                 100%
                                                                               =================    =================
</TABLE>

         Although  international  revenues  decreased  as  a  percent  of  total
revenues,  international  revenues  increased 49.6% to $3.1 million in the three
months  ended March 31, 1999 from $2.1  million in the three  months ended March
31, 1998.  International  revenues increased primarily due to increased sales of
the  Company's  Netopia  ISDN  Internet  routers  as a result  of the  Company's
relationships  with WANadoo and TIN, and was partially offset by decreased sales
of the MacOS version of Timbuktu Pro enterprise 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, 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. However, the Company also
expects  seasonality will cause  international  revenues,  in the near-term,  to
decrease  as a percent  of total  revenue  as the  European  market  enters  its
traditional summer slowdown. 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

                                       10
<PAGE>

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,  seasonality 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"),   Competitive  Local  Exchange  Carriers  ("CLECs"),
directly  by the  Company  to  corporate  accounts  and over the  Internet.  The
Company's revenues from distributors  accounted for 43% and 45% of the Company's
total revenues for the three months ended March 31, 1999 and 1998, respectively.
The Company's three largest customers,  in aggregate,  accounted for 24% and 25%
of the  Company's  total  revenues for the three months ended March 31, 1999 and
1998,  respectively.  During the three  months  ended  March 31,  1999 and 1998,
revenue  from Ingram  Micro,  a  worldwide  distributor  of computer  technology
products  and  services,  accounted  for  11%  and  12% of the  Company's  total
revenues, respectively. No other customers have accounted for 10% or more of the
Company's total revenues during the three months ended March 31, 1999 and 1998.

         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 August 1998
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  was  required to update its
agreements with its  distributors  to reflect the  distribution of the Company's
current products. Currently, the Company has updated its distribution agreements
with its significant  distributors  such as Ingram Micro, Tech Data and Merisel.
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 limited

                                       11
<PAGE>

warranty on its Timbuktu Pro and netOctopus software products and a one (1) year
limited  warranty  on its  Internet  router  products,  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 web site platform is provided on an "as
is" basis; therefore, the Company does not generally offer a warranty on its NVO
web site  platform.  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 and netOctopus  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  web  site
platform  are  often  distributed  through  partnerships  with  ISPs,  VARs  and
telecommunications  carriers.  These  partnerships often involve lengthy testing
and certification  studies,  detailed agreements and financial  commitments from
the  prospective  partner.  As a result,  partnerships  with ISPs,  VARs  and/or
telecommunications  carriers to  distribute  the  Company's  products  involve a
significant  commitment  of management  attention  and resources by  prospective
partners.  Accordingly,  the Company's  business  development  process for these
distribution  channels is often subject to delays  associated with long approval
processes that  typically  accompany  significant  partnership  development  and
capital  expenditures.  For these and other  reasons,  the business  development
process  associated with the  partnerships is often lengthy and historically has
been subject to a number of significant delays over which the Company has little
or no control. Additionally,  credit risks related to the financial viability of
newly organized 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 web site  platform to generate  revenue  streams  from
monthly  subscription-based  accounts  and the  licensing of the  technology  to
future customers and partners. The licensing of NVO often involves a significant
commitment of  management  attention  and  resources by  prospective  customers.
Accordingly,  the  Company's  sales  process for NVO is often  subject to delays
associated  with long approval  processes that typically  accompany  significant
expenditures.  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 65.4% in
the three months ended March 31, 1999 from 70.3% in the three months ended March
31, 1998. 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,  partially  offset by an increased  proportion  of
volume  and  server  license  sales  of the  Company's  software  products.  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

                                       12
<PAGE>

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
37.1% to $2.3  million  for the three  months  ended  March  31,  1999 from $1.7
million for the three  months ended March 31,  1998.  Research  and  development
expenses increased  primarily due to increased employee and development  related
expenses as a result of the Company's acquisitions in December 1998 of Serus LLC
("Serus") and netOctopus as well as increased  development  expenses  related to
the  Company's  Internet  router  products.  Research and  development  expenses
represented  22.3% and 27.4% of total  revenues for the three months ended March
31, 1999 and 1998,  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.
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 March 31,  1999,  $288,000 of product  development
costs were capitalized.

         Selling and Marketing.  Selling and marketing  expenses increased 55.1%
to $4.8  million for the three months ended March 31, 1999 from $3.1 million for
the three months ended March 31, 1998.  Selling and marketing expenses increased
primarily  due to increased  advertising,  promotional  and channel  development
expenses related to NVO and DSL Internet routers,  increased headcount and other
employee related expenses as a result of the Company's  acquisitions in December
1998 of Serus and netOctopus.  Selling and marketing expenses  represented 45.8%
and 49.8% of total  revenues for the three months ended March 31, 1999 and 1998,
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 related to the launch of an e-commerce  enabled version
of NVO and the  initial  launch of the  product  acquired  from Serus as well as
expansion of its Timbuktu Pro and NVO telesales staff.

         General  and  Administrative.   General  and  administrative   expenses
increased  11.7% to  $899,000  for the three  months  ended  March 31, 1999 from
$805,000 for the three months ended March 31, 1998.  General and  administrative
expenses  increased  primarily due to increased  employee  related  expenses and
increased  expenses  related to the  solicitation  of proxies for the  Company's
annual stockholder meeting. General and administrative expenses represented 8.5%
and 12.9% of total  revenues for the three months ended March 31, 1999 and 1998,
respectively.

         Amortization  of  Goodwill.  Amortization  of goodwill  represents  the
amortization  of such amounts  allocated  to  intangible  assets  related to the
Company's acquisitions of Serus and netOctopus,  both of which were completed in
December  1998. The amount  allocated to intangible  assets related to the Serus
transaction  was $2.1 million,  and the amount  allocated to  intangible  assets
related to the netOctopus  transaction  was $700,000.  The Company is amortizing
the intangible assets related to these transactions over four (4) years.

         Other Income,  Net. Other income,  net, primarily  represents  interest
earned by the Company on its cash, cash equivalents and short-term  investments.
Other  income  decreased  23.8% to $430,000 for the three months ended March 31,
1999 from  $564,000 for the three  months ended March 31, 1998.  The decrease is
primarily due to decreased cash and short-term  investment  balances as a result
of the cash used for the  Company's  acquisitions  of Serus and  netOctopus  and
operating  activities.  The Company expects that interest income may decrease in
absolute dollars and as a percentage of revenues  primarily due to the cash used
for operating activities.

         Income Tax  Benefit.  The  Company did not record an income tax benefit
during  the  three  months  ended  March 31,  1999  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 March 31, 1998 was
primarily  related to the  Company's  net  operating  loss in such  period.  The
effective tax rate was 36% for the three months ended March 31, 1998.  This rate
differed from the statutory rate primarily due to state income taxes, investment
income from tax  advantaged  investments,  and the  utilization  of research and
experimentation tax credits.

                                       13
<PAGE>

         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 $87,000 during the three
months ended March 31, 1998 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 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."

Six Months Ended March 31, 1999 and 1998

         Revenue.  Revenues  increased  57.6% to $18.5 million in the six months
ended March 31, 1999 from $11.7  million in the six months ended March 31, 1998.
The  increase was  primarily  due to increased  sales of the  Company's  Netopia
Internet  router  products,  NVO web site  platform and Timbuktu Pro  enterprise
software.

         Netopia  Internet router products  revenue  increased  primarily due to
sales of the Netopia DSL Internet routers domestically, which were not available
during the six months ended March 31, 1998,  and increased  sales of the Netopia
ISDN  Internet  router  internationally  primarily as a result of the  Company's
relationship  with WANadoo and TIN. These  increases  were  partially  offset by
continued price competition related to the Netopia Internet routers. 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  alternative  technologies.  Any such increased  price
and/or technology  competition  could materially  adversely affect the Company's
business, operating results and financial condition.

         NVO web site platform revenue  increased  primarily due to licensing of
the server  platform.  The sale of NVO web site  software is dependent  upon the
Company's ability to leverage this software platform to generate revenue streams
from the  licensing  of the  technology  to future  customers  and  partners and
monthly subscription based accounts. This product has existed for only a limited
period  of time,  and,  as a result,  is  relatively  unproven.  There can be no
assurance  that the Company  will be able to retain its  subscribers  or that it
will be able to attract new subscribers or licensees. The failure to do so would
materially  adversely  affect the  Company's  business,  operating  results  and
financial condition.

         Timbuktu Pro enterprise  software  revenue  increased  primarily due to
increased volume license sales of the Windows version of Timbuktu Pro and volume
license sales of netOctopus systems  management  software (acquired from Network
Associates' in December 1998).  This increase was partially  offset by decreased
sales of the MacOS  version of Timbuktu  Pro  enterprise  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.

         International revenues accounted for 32% and 34% of the Company's total
revenues  for the six  months  ended  March  31,  1999 and  1998,  respectively.
International  revenues declined as a percentage of total revenues primarily due
to  increasing  sales of the  Netopia DSL  Internet  router and the NVO web site
platform in the United  States.  The  following  table  provides a breakdown  of
revenue by region  expressed as a percentage  of total  revenues for the periods
presented:

                                     14
<PAGE>

<TABLE>
<CAPTION>

                                                                                     Six months ended March 31,
                                                                               --------------------------------------
                                                                                     1999                1998
                                                                               -----------------    -----------------
<S>                                                                            <C>                  <C>

  Europe.....................................................................               26%                  25%
  Pacific Rim................................................................                3                    6
  Other......................................................................                3                    3
                                                                               -----------------    -----------------
    Subtotal international revenues..........................................               32                   34
  United States..............................................................               68                   66
                                                                               =================    =================
      Total revenues.........................................................              100%                 100%
                                                                               =================    =================
</TABLE>

         Although  international  revenues  decreased  as  a  percent  of  total
revenues,  international  revenue  increased  50.9% to $5.9  million  in the six
months  ended March 31, 1999 from $3.9 million in the six months ended March 31,
1998.  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 Company's  relationships with WANadoo and TIN, and was
partially  offset  by  decreased  sales of the MacOS  version  of  Timbuktu  Pro
enterprise software.

         The Company's  revenues from distributors  accounted for 43% and 46% of
the Company's  total  revenues for the six months ended March 31, 1999 and 1998,
respectively. The Company's three largest customers, in aggregate, accounted for
23% and 22% of the Company's  total  revenues for the six months ended March 31,
1999 and 1998,  respectively.  During the six months  ended  March 31,  1999 and
1998, revenue from Ingram Micro, a worldwide  distributor of computer technology
products  and  services,  accounted  for  10%  and  12% of the  Company's  total
revenues, respectively. No other customers have accounted for 10% or more of the
Company's total revenues during the six months ended March 31, 1999 and 1998.

         Gross Margin.  The Company's  total gross margin  decreased to 65.1% in
the six months ended March 31, 1999 from 69.4% in the six months ended March 31,
1998.  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,  partially  offset by an increased  proportion  of
volume  and  server  license  sales  of the  Company's  software  products.  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
20.2% to $4.3  million for the six months ended March 31, 1999 from $3.6 million
for the six months  ended March 31,  1998.  Research  and  development  expenses
increased  primarily due to increased employee and development  related expenses
as a result of the Company's  acquisitions  of Serus and  netOctopus in December
1998 as well as increased development expenses related to the Company's Internet
router  products.  This  increase  was  partially  offset  by  reduced  software
localization  expenses.  Research and development expenses represented 23.5% and
30.7% of total  revenues  for the six  months  ended  March  31,  1999 and 1998,
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.
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 six months  ended March 31,  1999,  $288,000  of product  development
costs were capitalized.

         Selling and Marketing.  Selling and marketing  expenses increased 44.4%
to $9.6  million for the six months  ended March 31, 1999 from $6.6  million for
the six months ended March 31, 1998.  Selling and marketing  expenses  increased
primarily  due to increased  advertising,  promotional  and channel  development
expenses related to NVO and DSL Internet routers,  increased headcount and other
employee related expenses as a result of the Company's  acquisitions in December

                                       15
<PAGE>

1998 of Serus and netOctopus.  Selling and marketing expenses  represented 52.0%
and 56.7% of total  revenues  for the six months  ended March 31, 1999 and 1998,
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 related to the launch of an e-commerce  enabled version
of NVO and the first  commercial  launch of the product  acquired  from Serus as
well as expansion of its Timbuktu Pro and NVO telesales staff.

         General  and  Administrative.   General  and  administrative   expenses
increased 5.3% to $1.7 million for the six months ended March 31, 1999 from $1.6
million for the six months  ended  March 31,  1998.  General and  administrative
expenses increased primarily due to increased employee related expenses. General
and administrative expenses represented 9.1% and 13.6% of total revenues for the
six months ended March 31, 1999 and 1998, 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, 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 NVO
web site  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 the summer of 1999 and to incur approximately $400,000 of development
expenses from the date of  acquisition  to completion of  development.  The $1.0
million  earnout  opportunity  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. During the six months ended March 31, 1999, goodwill amortization related
to the  Serus  transaction  was  $133,000.  Any delay in the  completion  of the
development of the product would cause the Company to incur additional unplanned
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.   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 enterprise 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

                                       16
<PAGE>

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  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.
During the six months ended March 31, 1999, goodwill amortization related to the
netOctopus  transaction  was  $48,000.  Any  delay  in  the  completion  of  the
development of the product would cause the Company to incur additional unplanned
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  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.

         Amortization  of  Goodwill.  Amortization  of goodwill  represents  the
amortization  of such amounts  allocated  to  intangible  assets  related to the
Company's acquisitions of Serus and netOctopus,  both of which were completed in
December  1998. The amount  allocated to intangible  assets related to the Serus
transaction  was $2.1  million and the amount  allocated  to  intangible  assets
related to the netOctopus  transaction  was $700,000.  The Company is amortizing
the intangible assets related to these transactions over four (4) years.

         Other Income,  Net. Other income,  net, primarily  represents  interest
earned by the Company on its cash, cash equivalents and short-term  investments.
Other income  decreased 12.0% to $1.0 million for the six months ended March 31,
1999 from $1.1 million for the six months ended March 31, 1998.  The decrease is
primarily  due to the cash  used for the  Company's  acquisitions  of Serus  and
netOctopus and operating activities.  The Company expects its interest income to
decrease in absolute  dollars and as a percentage  of revenues  primarily due to
the cash used for operating activities.

         Income Tax  Benefit.  The  Company did not record an income tax benefit
during  the  six  months  ended  March  31,  1999  primarily  due  to  continued
substantial  uncertainty  regarding  the  Company's  ability to realize  its tax

                                       17
<PAGE>

assets.  The tax  benefit  recorded  in the six months  ended March 31, 1998 was
primarily  related to the  Company's  net  operating  loss in such  period.  The
effective  tax rate was 36% for the six months ended March 31,  1998.  This rate
differed from the statutory rate primarily due to state income taxes, investment
income from tax  advantaged  investments,  and the  utilization  of research and
experimentation tax credits.

         Discontinued  Operations.  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 $251,000  during the six
months ended March 31, 1998 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,  formerly known as Farallon Networking Corporation,
a Delaware corporation and an affiliate of Gores.  Farallon also assumed certain
accounts payable and other  liabilities of the LAN Division.  In connection with
such  sale,  the  Company  received  consideration   aggregating  $4.9  million,
including (i) $2.0 million of cash, (ii) royalties on Farallon's  revenues for a
period of five years to the extent that Farallon achieves revenues from the sale
of its LAN  products of at least $15.0  million per year,  (iii) a two year $1.0
million  promissory note from Farallon,  guaranteed by Gores, and (iv) a warrant
to purchase up to 5% of the equity of Farallon.  There can be no assurance  that
the business of Farallon will be sufficiently successful to allow the Company to
realize the value of the receivables,  note and warrant described in (ii), (iii)
and (iv) above. See "Other Risks Associated with the Sale of the LAN Division."

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.  As a result of the sale of
the LAN Division,  the Company's future operating results are dependent upon the
market  acceptance of its Netopia  Internet  router  products,  the NVO web site
platform and Timbuktu Pro enterprise  software products (the  "Internet/Intranet
products") and enhancements thereto. To the extent that revenue from the sale of
the  Company's  Internet/Intranet  products  does not  increase,  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  increased  use of the  Internet,  changes  in  networking  and
communications  technologies,  price and product  competition  developments  and
changes in the Internet market, 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

                                       18
<PAGE>

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  operating  history in the  Internet  market and the  dynamic
market  environment in which the Company  competes make the prediction of future
operating  results  difficult,  if not  impossible.  Sales orders are  typically
shipped shortly after receipt and, consequently,  order backlog at the beginning
of any  quarter  has in the  past  represented  only a  small  portion  of  that
quarter's revenues.  Accordingly,  the Company's net revenues in any quarter are
substantially  dependent  on orders  booked and  shipped  during  that  quarter.
Historically, the Company has often shipped and recognized a significant portion
of its revenues in the last weeks, or even days, of a quarter.  As a result, the
magnitude of quarterly  fluctuations  may not become  evident  until late in, or
after the close of a  particular  quarter.  The  Company  typically  experiences
significant  volumes of shipments at the end of the quarter which may be exposed
to  delays  caused by  shipping  halts or other  factors  beyond  the  Company's
control.  In addition,  the Company  recognizes revenue on products sold through
distributors,  ISPs and VARs  upon  shipment  to the  distributor,  ISP and VAR.
Although  the  Company  maintains  reserves  for  projected  returns  and  price
decreases,  there can be no assurance  that such reserves will be adequate.  The
Company's business also has experienced  seasonality in the past, largely due to
customer buying patterns,  such as budgeting cycles of educational  institutions
that  purchase the Company's  products and the summer  slowdown in most European
markets. There can be no assurance that the Company's operating results will not
be affected by seasonality in the future or that such  seasonality will occur in
a manner consistent with prior periods.

         The Company's expense levels are based in large part on expectations as
to future revenues and, as a result,  are relatively fixed in the short term. If
revenues are below expectations or if the Company implements  marketing programs
designed to capture additional market share 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  nine months,  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 NVO web site platform (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. 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.

                                       19
<PAGE>

         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  has  initiated a  comprehensive  inventory  and
evaluation  of all desktop  systems and  expects to  complete  this  process and
upgrade such  non-compliant  desktop  systems to Year 2000 compliant  systems by
June 1999. The additional  costs of remediation  are not expected to be material
to the  Company's  financial  condition or results of  operations.  However,  if
implementation  of  replacement   systems  is  delayed  or  if  significant  new
non-compliance  issues  are  identified,   the  Company's  business,   financial
condition and results of operations could be materially adversely affected.

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

         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  developing  its  contingency  planning at this
time and is  scheduled  to have  these  plans in place by  September  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

                                       20
<PAGE>

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,  Lucent,  Cisco, 3Com, Ramp
Networks,  Flowpoint (a division of Cabletron) and several other  companies.  In
the Internet  presence and web site software  market,  the Company competes with
IBM, Inc. Online, The Globe, AOL, Yahoo!, SiteMatic, HotOffice, Homestead, Hiway
(a  division  of Verio),  Zyworld and  several  other  companies.  In the remote
control and enterprise  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 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 enterprise
and web site  software,  and the  failure  to do so 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.  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.  Additionally,  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.

                                       21
<PAGE>

         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
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 has  relationships  with several CLECs for the  development
and  sale  of  the  Company's  DSL  Internet  routers.  Currently,  these  CLECs
predominantly  use copper  telephone  lines  controlled by the  incumbent  local
exchange carriers ("ILECs") to provide DSL connections to customers. These CLECs
also depend on the ILECs for  collocation  of  equipment  and for a  substantial
portion of the  transmission  facilities  used to connect the CLECs equipment in
ILEC central  offices to the CLECs Metro  Service  Centers.  In addition,  CLECs
depend on the ILECs to test and  maintain  the quality of the copper  lines that
are used for providing DSL service.  Additionally,  CLECs have not established a
history of obtaining  access to collocation  and  transmission  facilities  from
ILECs in large volumes.  In many cases,  CLECs may be unable to obtain access to
collocation  and  transmission  facilities  from the ILECs, or to gain access at
acceptable  rates,  terms  and  conditions,  including  timeliness.  CLECs  have
experienced,  and will likely  continue  to  experience  in the future,  lengthy
periods  between  the request for and the actual  provision  of the  collocation
space and telephone  lines.  The  inability of the CLECs to obtain  adequate and
timely  access to  collocation  space or  transmission  facilities on acceptable
terms and  conditions  from ILECs could hinder the  distribution  of DSL service
offered  by these  CLECs  which  would  have a  material  adverse  effect on the
Company's business, operating results and financial condition.  Additionally, if
the CLECs  deployment  of  broadband  communication  technologies,  such as DSL,
experiences  increasingly rapid demand, the CLEC  infrastructure may not be able
to  adequately  address such demand and could cause delays in deployment of such
technologies  which  would  have a  material  adverse  effect  on the  Company's
business, operating results and financial condition.

          Because  CLECs  compete with ILECs in the DSL  communications  market,
ILECs may be reluctant to cooperate with the CLECs. The ILECs may experience, or
claim to experience,  a shortage of collocation space or transmission  capacity.
If this  occurs,  CLECs may not have  alternate  means of  connecting  their DSL
equipment with the copper lines or connecting their equipment in central offices
to Metro Service  Centers.  CLECs have  experienced  rejections  of  collocation
applications  on the  grounds  that no space is  available.  CLECs  may  receive
additional  rejections  in the future.  The number of other  CLECs that  request
collocation  space will also affect the  availability  of collocation  space and
transmission  capacity.  If the CLECs which the Company has  partnered  with are
unable to obtain physical  collocation  space or transmission  capacity from the
targeted ILECs,  these CLECs may face delays,  additional costs or the inability
to  provide  services  in  certain  locations.  In many  cases  where  the CLECs
application for physical  collocation is rejected,  the CLECs expect to have the
option of adjacent location where the CLECs equipment is installed in a building
that is very close to the ILECs central office, or virtual collocation where the
ILEC manages and operates the CLECs  equipment.  While CLECs have used  adjacent
and virtual  collocation in their network,  these alternatives  reduce the CLECs
control over their equipment,  and therefore may reduce the level of quality and
service.  Delays in obtaining access to collocation space and telephone lines or
the rejection of applications  for CLEC  collocation  could result in delays in,
and increased  expenses  associated with, the rollout of DSL services,  which in
turn  could  have a  material  and  adverse  effect on the  Company's  business,
operating results and financial condition.

         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

                                       22
<PAGE>

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 Internet
market 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 Routers currently operate over ISDN, Fractional T1/T1
(domestically),  Fractional E1/E1  (international),  Frame Relay, SDSL, ISDN DSL
("IDSL"),   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,
packetized voice 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 the
telecommunications  technologies  currently  supported 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, IDSL,  Ethernet or 56K technologies by  telecommunications  service
providers,  the Company's  business,  operating results and financial  condition
would be materially and adversely affected.  The Company has in the past and may
in the future  experience  delays in new  product  development.  There can be no
assurance  that the Company  will be  successful  in  developing  and  marketing
product  enhancements  or new  products  that respond to  technological  change,
evolving industry standards and changing customer requirements, that the Company
will not  experience  difficulties  that could delay or prevent  the  successful
development,   introduction   and   marketing  of  these   products  or  product
enhancements,  or that its new products and product enhancements will adequately
meet the  requirements of the marketplace and achieve any significant  degree of
market acceptance.  Failure of the Company,  for technological or other reasons,
to develop and introduce new products and product  enhancements  in a timely and
cost-effective  manner  would have a material  adverse  effect on the  Company's
business,  operating results and financial  condition.  In addition,  the future
introduction  or even  announcement of products by the Company or one or more of
its competitors  embodying new technologies or changes in industry  standards or
customer requirements could render the Company's then existing products obsolete
or unmarketable. There can be no assurance that the introduction or announcement
of new product  offerings by the Company or one or more of its competitors  will
not cause customers to defer purchases of existing  Company  products.  Any such
deferral of  purchases  could have a material  adverse  effect on the  Company's
business, operating results or financial condition.

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

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

                                       23
<PAGE>

efforts.  Research and  development  expenses were $2.3 million and $1.7 million
for the three  months  ended  March 31,  1999 and 1998,  respectively,  and $4.3
million  and $3.6  million  for the six months  ended  March 31,  1999 and 1998,
respectively.

         As  of  April  30,  1999,  Netopia's  research  and  development  staff
consisted of 67 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  often  relies 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.

         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,  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 this  difference and
accordingly  recorded  the  liability  on  the  Company's  Balance  Sheet  as of
September  30,  1998.  The Company has  recently  received  correspondence  from

                                       24
<PAGE>

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 it'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  were  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.  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.
The Company may experience an 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
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

                                       25
<PAGE>

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 offers 10Mb of disk space to each NVO web site hosted on the
Company's  servers and additional disk space provided in 10Mb  increments.  Disk
storage is configured to survive drive failures  without risk of data loss using
RAID  striping and  mirroring  as well as tape backup.  Although the Company has
taken steps to  minimize  the risk of data loss there can be no  assurance  that
data would not be lost in the event of a catastrophic drive failure.

         The Company is currently  operating under a month-to-month  web-hosting
agreement with Exodus Communications, Inc. ("Exodus") for the hosting of NVO web
sites.  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 to
terminate  its use of the Exodus  web-hosting  services  and has entered  into a
similar  web-hosting  agreement  to host its NVO web sites from a similar  third
party web-hosting vendor (the "Vendor").  The Company currently anticipates that
it will  transition  its NVO web  sites  to the new  Vendor  in July  1999.  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
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

                                       26
<PAGE>

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
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.

                                       27
<PAGE>

         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 20% to 25%
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.  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.

         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.

                                       28
<PAGE>

         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 and Farallon dated August 5, 1998,  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
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 May 14, 1999 was $25.875.

 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 March  31,  1999,  the  Company  had  cash,  cash  equivalents  and
short-term investments representing 61% of total assets.

         The  Company's  operating  activities  used  cash of $6.3  million  and
$966,000  for the six months  ended March 31, 1999 and 1998,  respectively.  The
cash used by operations in the six months ended March 31, 1999 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  accrued
liabilities related to the sale of the LAN Division. The cash used by operations
in the six months ended March 31, 1998 was primarily due to the net loss of $1.4
million  and a  decrease  of  $1.3  million  in  accounts  payable  and  accrued
liabilities,  partially  offset by the reduction of accounts  receivable of $1.1
million.

         Cash provided by investing activities in the six months ended March 31,
1999 was  primarily  due to proceeds  from the sale and  maturity of  short-term
investments partially offset by the purchases of such investments as well as the
acquisitions  of Serus and  netOctopus and purchases of capital  equipment.  The
cash provided by investing activities in the six months ended March 31, 1998 was
primarily related to the sale and maturity of short-term  investments  partially

                                       29
<PAGE>

offset by the purchase of such  investments and purchases of capital  equipment.
Expenditures for capital equipment were $736,000 and $489,000 for the six months
ended March 31, 1999 and 1998, respectively.  The Company's financing activities
in the six months  ended March 31, 1999 and 1998 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  strategic
equity  investments  and  operating  activities,  the Company  believes that its
existing cash, cash  equivalents and short-term  investments will be adequate to
meet its cash needs for  working  capital,  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.

         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 March 31, 1999. 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.................................         $    13,946                 4.62%
          Short-term investments - fixed rate...........................                                     5.66%
                                                                                      14,985
                                                                           ------------------
                                                                                 $    28,931
                                                                           ==================
</TABLE>

PART II.          OTHER INFORMATION

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

         On February 18, 1999, the Annual Meeting of Stockholders of Netopia, 
         Inc. was held in Alameda, California.

         An election of directors was held, with the following individuals being
elected to the Board of Directors of the Company:

<TABLE>
<CAPTION>
                                                                               Votes For:        Votes Withheld:
                                                                           ------------------   --------------------
<S>                                                                        <C>                  <C> 
          Reese M. Jones................................................          11,200,375                377,308
          Alan B. Lefkof................................................          11,199,414                378,269
          David F. Marquardt............................................          11,200,547                377,136
          James R. Swartz...............................................          11,200,547                377,136

</TABLE>


                                       30
<PAGE>

         Other matters  voted upon at the meeting and the number of  affirmative
and negative votes cast with respect to each such matter were as follows:

1.       To  approve  amendments  to  the  Company's  1996  Stock  Option  Plan,
         including a 500,000  share  increase to the number of shares  available
         under the 1996 Stock Option Plan.  (5,796,412  votes in favor,  938,681
         votes  opposed,   435,180  votes   abstaining   and  4,407,410   broker
         non-votes).

2.       To approve an amendment to the Company's  Employee  Stock Purchase Plan
         to  increase  the  number  of  shares  of the  Company's  Common  Stock
         available for issuance by 150,000  shares.  (6,309,170  votes in favor,
         439,516 votes opposed,  421,587 votes  abstaining and 4,407,410  broker
         non-votes).

3.       To ratify the appointment of  KPMG LLP as  independent  auditors of the
         Company. (11,069,978 votes in  favor, 69,585 votes opposed  and 438,120
         votes abstaining).

Item 6.  Exhibits and Reports on Form 8-K

(a)      Exhibits

         27.1     Financial Data Schedule

(b)      Reports on Form 8-K

         There were no reports  filed on Form 8-K during the three  months ended
         March 31, 1999.
     
                                       31
<PAGE>


                                    SIGNATURE



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



Date:  May 17, 1998             NETOPIA, INC.
                                (Registrant)


                                 By:  /s/ James A. Clark                       

                                 James A. Clark
                                 Vice President and Chief Financial Officer
                                 (Duly Authorized Officer and Principal
                                 Financial Officer)





                                       32
<PAGE>