<PAGE>

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


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

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

                                   FORM 10-Q

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

                 For the quarterly period ended March 31, 2001

                                      OR

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

              For the transition period from ________ to ________


                        Commission file number 0-28450

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

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


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

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

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

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

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

                         Yes _____           No   X
                                                -----

     As of April 30, 2001 there were 17,878,252 shares of the Registrant's
Common Stock outstanding.

================================================================================
<PAGE>

<TABLE>
<CAPTION>
NETOPIA, INC.
Form 10-Q
Table of Contents                                                                                  Page
-------------------------------------------------------------------------------------------------------
<S>                                                                                                <C>
PART I.   FINANCIAL INFORMATION

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

          Condensed consolidated balance sheets at March 31, 2001 and September 30, 2000..........    2

          Condensed consolidated statements of operations for the three and six months ended
          March 31, 2001 and 2000.................................................................    3

          Condensed consolidated statements of cash flows for the three and six months ended
          March 31, 2001 and 2000.................................................................    4

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

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

Item 3.   Quantitative and Qualitative Disclosures About Market Risk..............................   28

PART II.  OTHER INFORMATION

Item 2.   Changes in Securities and Use of Proceeds...............................................   29

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

Item 6.   Exhibits and Reports on Form 8-K........................................................   30

SIGNATURE.........................................................................................   31
</TABLE>
<PAGE>

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

NETOPIA, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(in thousands, except for share and per share amounts)

<TABLE>
<CAPTION>
                                                                                       March 31,
                                                                                         2001            September 30,
                                                                                      (unaudited)            2000
                                                                                     -------------       -------------
<S>                                                                                  <C>                 <C>
                                     ASSETS
Current assets:
    Cash and cash equivalents..............................................          $      36,246       $      37,839
    Short-term investments.................................................                 14,562              21,938
    Trade accounts receivable, less allowance for doubtful accounts and
       returns of $3,177 and $3,258, respectively..........................                 13,121              15,646
    Inventories, net.......................................................                 10,255              10,284
    Prepaid expenses and other current assets..............................                  1,526               2,341
                                                                                     -------------       -------------
            Total current assets...........................................                 75,710              88,048
Furniture, fixtures and equipment, net.....................................                  5,749               4,469
Intangible assets, net.....................................................                 25,125              31,016
Long-term investments......................................................                  4,000               2,493
Deposits and other assets..................................................                  2,389               2,347
                                                                                     -------------       --------------
                                                                                     $     112,973       $     128,373
                                                                                     -------------       -------------
                            LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
    Accounts payable.......................................................          $       7,567       $       8,547
    Accrued compensation...................................................                  2,422               2,756
    Accrued liabilities....................................................                  2,151               1,332
    Deferred revenue.......................................................                  3,011               2,215
    Other current liabilities..............................................                    131                 906
                                                                                     -------------       -------------
            Total current liabilities......................................                 15,282              15,756
Long-term liabilities......................................................                    188                 328
                                                                                     -------------       -------------
            Total liabilities..............................................                 15,470              16,084

Commitments and contingencies

Stockholders' equity:
 Common stock: $0.001 par value, 25,000,000 shares authorized;
    17,878,252 and 17,587,615 shares issued and outstanding at
    March 31, 2001 and September 30, 2000, respectively....................                     18                  17
    Additional paid-in capital.............................................                144,232             142,857
    Accumulated deficit....................................................                (46,747)            (30,079)
    Accumulated other comprehensive income.................................                     --                (506)
                                                                                     -------------       -------------
            Total stockholders' equity.....................................                 97,503             112,289
                                                                                     -------------       -------------
                                                                                     $     112,973       $     128,373
                                                                                     =============       =============
</TABLE>

See accompanying notes to condensed consolidated financial statements.
<PAGE>

NETOPIA, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(in thousands, except for per share amounts; unaudited)

<TABLE>
<CAPTION>
                                                                  Three months ended             Six months ended
                                                                       March 31,                     March 31,
                                                               -------------------------     -------------------------
                                                                  2001           2000           2001           2000
                                                               -------------------------     -------------------------
<S>                                                            <C>            <C>            <C>            <C>
Revenues:
   Internet equipment......................................    $   16,458     $   15,660     $   31,303     $   26,499
   Web platform licenses and services......................         4,370          6,136          9,918         11,589
                                                               -------------------------     -------------------------
       Total revenues......................................        20,828         21,796         41,221         38,088

Cost of revenues:
   Internet equipment......................................        10,845         10,879         20,640         18,488
   Web platform licenses and services......................           225            124            426            246
                                                               -------------------------     -------------------------
       Total cost of revenues..............................        11,070         11,003         21,066         18,734
                                                               -------------------------     -------------------------
   Gross profit............................................         9,758         10,793         20,155         19,354

Operating expenses:
   Research and development................................         3,263          3,143          6,932          6,141
   Selling and marketing ..................................         7,504          6,272         14,689         11,919
   General and administrative..............................         1,360          1,317          4,503          2,293
   Restructuring costs.....................................         1,073             --          1,073             --
   Terminated merger costs.................................         2,640             --          2,640             --
   Acquired in-process research and development............            --          2,990             --          8,658
   Amortization of goodwill and other intangible assets....         2,996          2,038          5,992          3,747
                                                               -------------------------     -------------------------
       Total operating expenses............................        18,836         15,760         35,829         32,758
                                                               -------------------------     -------------------------
       Operating loss......................................        (9,078)        (4,967)       (15,674)       (13,404)

Other income (loss):
   Loss on impaired securities.............................           (19)            --         (1,000)            --
   Other income, net.......................................           588            892          1,561          1,720
                                                               -------------------------     -------------------------
       Total other income..................................           569            892            561          1,720
                                                               -------------------------     -------------------------

   Loss from continuing  operations  before cumulative
   effect from adoption of Staff  Accounting  Bulletin
   101 and  before  gain on sale of  discontinued
   operations, net of taxes................................        (8,509)        (4,075)       (15,113)       (11,684)

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

Gain on sale of discontinued operation, net of taxes.......            --             --             --          1,147
                                                               -------------------------     -------------------------
            Net loss......................................     $   (8,509)    $   (4,075)    $  (16,668)    $  (10,537)
                                                               =========================     =========================

Per share data, net loss:
    Net loss per share.....................................    $    (0.48)    $    (0.25)    $    (0.94)    $    (0.65)
                                                               =========================     =========================
    Shares used in the per share calculations..............        17,819         16,564         17,712         16,304
                                                               =========================     =========================
</TABLE>

See accompanying notes to condensed consolidated financial statements.
<PAGE>

 NETOPIA, INC. AND SUBSIDIARIES
 Condensed Consolidated Statements of Cash Flows
 (in thousands; unaudited)

<TABLE>
<CAPTION>
                                                                                    Six months ended March 31,
                                                                                ---------------------------------
                                                                                    2001                2000
                                                                                ---------------------------------
<S>                                                                             <C>                 <C>
Cash flows from operating activities:
Net loss...................................................................     $    (16,668)       $    (10,537)
Adjustments to reconcile net loss to net cash provided by (used in)
 operating activities:
   Depreciation and amortization...........................................            7,560               4,762
   Charge for acquired in-process research and development.................               --               8,658
   Unrealized loss on impaired securities..................................            1,000                  --
   Changes in allowance for doubtful accounts and returns on accounts
      receivable...........................................................              (81)                135
   Changes in operating assets and liabilities:
      Trade accounts receivable............................................            2,606              (5,475)
      Inventories..........................................................               29              (2,446)
      Prepaid expenses and other current assets............................              815              (1,348)
      Deposits and other assets............................................               63                 844
      Accounts payable and accrued liabilities.............................             (495)              5,980
      Deferred revenue.....................................................              681                 393
      Other liabilities....................................................             (801)                (55)
                                                                                ------------        ------------
         Net cash provided by (used in) operating activities...............           (5,291)                911
                                                                                ------------        ------------
Cash flows from investing activities:
   Purchase of furniture, fixtures and equipment...........................           (2,390)               (868)
   Capitalization of software development costs............................             (564)               (364)
   Acquisition of technology...............................................             (100)            (12,694)
   Purchase of long-term investment........................................           (2,000)                 --
   Purchase of short-term investments......................................          (26,896)            (25,704)
   Proceeds from the sale and maturity of short-term investments...........           34,272              24,321
                                                                                ------------        ------------
         Net cash provided by (used in) investing activities...............            2,322             (15,309)
                                                                                ------------        ------------
Cash flows from financing activities:
   Proceeds from the issuance of common stock, net.........................            1,376               4,349
                                                                                ------------        ------------
         Net cash provided by financing activities.........................            1,376               4,349
                                                                                ------------        ------------
Net decrease in cash and cash equivalents..................................           (1,593)            (10,049)
Cash and cash equivalents, beginning of period.............................           37,839              61,381
                                                                                ------------        ------------
Cash and cash equivalents, end of period...................................     $     36,246        $     51,332
                                                                                ============        ============
Supplemental disclosures of noncash investing and financing activities:

  Issuance of common stock equivalents for consulting services.............     $         16        $         --
                                                                                ============        ============
   Issuance of common stock and common stock options for acquisition of
   intangible assets.......................................................     $         --        $     35,491
                                                                                ============        ============
</TABLE>

See accompanying notes to condensed consolidated financial statements.
<PAGE>

NETOPIA, INC. AND SUBSIDIARIES
Notes To Condensed Consolidated Financial Statements
--------------------------------------------------------------------------------

(1)     Basis of Presentation
        ---------------------

     The unaudited condensed consolidated financial statements included in this
Form 10-Q reflect all adjustments, consisting only of normal recurring
adjustments which in our opinion are necessary to fairly present our
consolidated financial position, results of operations and cash flows for the
periods presented. These condensed consolidated financial statements should be
read in conjunction with our consolidated financial statements included in our
Annual Report on Form 10-K and other filings with the United States Securities
and Exchange Commission. The consolidated results of operations for the period
ended March 31, 2001 are not necessarily indicative of the results to be
expected for any subsequent quarter or for the entire fiscal year ending
September 30, 2001.

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

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

     In December 1999, the SEC issued Staff Accounting Bulletin (SAB) 101,
Revenue Recognition in Financial Statements. SAB 101 provides guidance on
applying generally accepted accounting principles to revenue recognition issues
in financial statements. The Company adopted SAB 101 in its fiscal first quarter
of 2001 resulting in a $1.6 million charge to its condensed consolidated
statement of operations and a $1.6 million increase in deferred revenue to its
condensed consolidated balance sheet. The cumulative effect of adoption of SAB
101 reflects a change in revenue recognition for Web platform licenses that
provided for nonrefundable upfront payments. This revenue is being amortized
over the terms of the licenses, of which approximately $229,000 and $496,000 was
recognized during the three and six months ended March 31, 2001, respectively.
Detail of the Company's deferred revenue related to the adoption of SAB 101 is
as follows (in thousands):

<TABLE>
<CAPTION>
                                                         SAB 101
                                                         Deferred
                                                         Revenue
                                                        ---------
     <S>                                                <C>
     Charge for SAB 101 deferred revenue.............   $  1,555
     Less amounts amortized:
        Three months ended December 31, 2000.........        267
        Three months ended March 31, 2001............        229
                                                        --------
        Subtotal.....................................        496
                                                        --------
     Net SAB 101 deferred revenue....................   $  1,059
                                                        ========
</TABLE>


<PAGE>

(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,
                                                                         2001                  2000
                                                                      -------------        -------------
           <S>                                                        <C>                  <C>
           Raw materials and work in process........................  $       6,632        $       4,723
           Finished goods...........................................          3,623                5,561
                                                                      -------------        -------------
                                                                      $      10,255        $      10,284
                                                                      =============        =============
</TABLE>

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

<TABLE>
<CAPTION>
                                                                       March 31,           September 30,
                                                                         2001                  2000
                                                                      -------------        -------------
           <S>                                                        <C>                  <C>
           Furniture, fixtures and equipment........................  $      14,149        $      16,480
           Accumulated depreciation and amortization................         (8,400)             (12,011)
                                                                      -------------        -------------
                                                                      $       5,749        $       4,469
                                                                      =============        =============

</TABLE>

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

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

Computation of basic and diluted net loss per share:
(in thousands, except per share amounts)

<TABLE>
<CAPTION>
                                                                Three months ended          Six months ended
                                                                    March 31,                   March 31,
                                                             -----------------------     -----------------------
                                                                2001          2000          2001          2000
                                                             -----------------------     -----------------------
           <S>                                               <C>           <C>           <C>           <C>

           Net loss........................................  $  (8,509)    $  (4,075)    $ (16,668)    $ (10,537)
           Weighted average number of common
               stock outstanding...........................     17,819        16,564        17,712        16,304
           Basic and diluted net loss per common share.....  $   (0.48)     $  (0.25)     $  (0.94)     $  (0.65)
</TABLE>

     Potentially dilutive common shares have been excluded from the computation
of diluted net loss per share for the three and six months ended March 31, 2001
and 2000 since their effect on net loss per share is antidilutive. Consequently,
the number of shares in the computations of basic and diluted net loss per share
is the same for each period. Potentially dilutive common shares which were
excluded from the computation of diluted net loss per share consisted of options
to purchase common stock totaling 4,905,845 and 4,083,002 shares for the three
and six months ended March 31, 2001 and 2000, respectively, and a warrant to
purchase common stock totaling 5,000 shares for the three and six months ended
March 31, 2001.

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

     Segment Information
<PAGE>

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

     The Company generates revenue from two groups of products and services.
Disaggregated financial information regarding the operating segments for the
three and six months ended March 31, 2001 and 2000 is as follows (in thousands):

<TABLE>
<CAPTION>
                                                            Three months ended March 31
                                     -------------------------------------------------------------------------------
                                                    2001                                     2000
                                     --------------------------------------  ---------------------------------------
                                      Internet       Web                     Internet        Web
                                     Equipment     Platform      Total       Equipment     Platform         Total
                                    -----------  ------------  -----------  -------------  ------------  ------------

<S>                                 <C>          <C>           <C>          <C>           <C>          <C>
 Revenue...........................   $  16,458    $   4,370   $  20,828      $  15,660    $   6,136    $  21,796
 Cost of revenues..................      10,845          225      11,070         10,879          124       11,003
                                    -----------  ------------  -----------  ------------- ------------ ------------
   Gross profit....................       5,613        4,145       9,758          4,781        6,012       10,793
 Unallocated operating expenses....                               18,836                                   15,760
                                                               -----------                             ------------
   Operating loss..................                            $  (9,078)                               $  (4,967)
                                                               ===========                             ============

<CAPTION>
                                                              Six months ended March 31
                                    -------------------------------------------------------------------------------
                                                    2001                                     2000
                                    --------------------------------------  ---------------------------------------
                                        Internet       Web                      Internet       Web
                                       Equipment     Platform     Total        Equipment     Platform     Total
                                    -------------  -----------  ----------  -------------  -----------  -----------

<S>                                 <C>           <C>          <C>          <C>            <C>          <C>
 Revenue...........................    $ 31,303   $    9,918   $  41,221      $  26,499    $  11,589    $  38,088
 Cost of revenues..................      20,640          426      21,066         18,488          246       18,734
                                    -----------  ------------  -----------  ------------- ------------ ------------
   Gross profit....................      10,663        9,492      20,155          8,011       11,343       19,354
 Unallocated operating expenses....                               35,829                                   32,758
                                                               -----------                             ------------
   Operating loss..................                            $ (15,674)                               $ (13,404)
                                                               ===========                             ============
</TABLE>

     Geographic Information

     The Company sells its products and provides services worldwide through a
direct sales force, independent distributors, and value-added resellers. It
currently operates in five regions: United States, Europe, Asia Pacific, Canada
and Other, and Latin America. Revenues outside of the United States are
primarily export sales denominated in United States dollars. The Company does
not have material operating assets outside of the United States. Disaggregated
financial information regarding the Company's revenues by geographic region for
the three and six months ended March 31, 2001 and 2000 is as follows (in
thousands):

<TABLE>
<CAPTION>
                                                   Three months ended           Six months ended
                                                         March 31,                  March 31,
                                                 ------------------------- ---------------------------
                                                   2001          2000          2001          2000
                                                 ------------------------- ---------------------------

         <S>                                     <C>            <C>        <C>              <C>
         United States........................... $ 17,196      $ 18,021      $ 34,013      $ 30,303
</TABLE>

                                                                               7
<PAGE>

<TABLE>
        <S>                                       <C>           <C>           <C>           <C>
         Europe..................................    3,074         3,148         5,997         6,408
         Asia Pacific............................      290           221           513           520
         Canada and other........................      257           325           658           684
         Latin America...........................       11            81            40           173
                                                 ------------------------- ---------------------------
                                                  $ 20,828      $ 21,796      $ 41,221      $ 38,088
                                                 ========================= ===========================
</TABLE>

     Customer Information

     For the three months ended March 31, 2001 and 2000:

         .    Covad Communications, a competitive local exchange carrier (CLEC)
              that purchases the Company's Internet equipment products,
              accounted for 17.7% and 13.3%, respectively, of the Company's
              total revenues and accounted for 11.5% and 19.0%, respectively, of
              the Company's accounts receivable.

         .    Rhythms NetConnections, a CLEC that purchases the Company's
              Internet equipment products, accounted for 15.9% and 6.9%,
              respectively, of the Company's total revenues and accounted for
              12.7% and 5.9% respectively, of the Company's accounts receivable.

         .    Ingram Micro, a distributor that purchases both the Company's
              Internet equipment and Web platform products, accounted for 11.8%
              and 6.1%, respectively, of the Company's total revenues and
              accounted for 10.8% and 6.8% respectively, of the Company's
              accounts receivable.

         .    NorthPoint Communications, a CLEC that purchased the Company's
              Internet equipment products, accounted for 3.0% and 14.8%,
              respectively, of the Company's total revenues. NorthPoint
              accounted for 9.0% of the Company's accounts receivable at March
              31, 2000. During the three months ended December 31, 2000, Netopia
              fully reserved approximately $1.7 million related to NorthPoint's
              outstanding accounts receivable balance. During the three months
              ended March 31, 2001, NorthPoint prepaid for all purchases of the
              Company's Internet equipment products, and consequently NorthPoint
              accounted for no additional amounts of the Company's accounts
              receivable other than the amount previously fully reserved. As a
              result of NorthPoint filing for protection under the Bankruptcy
              Act and ceasing operations during the three months ended March 31,
              2001, the Company does not believe it will recover any amounts
              from the bankrupt estate.

     No other customers during the three months ended March 31, 2001 and 2000
accounted for 10.0% or more of the Company's total revenues or accounts
receivable.

     For the six months ended March 31, 2001 and 2000:

         .    Rhythms NetConnections accounted for 16.6% and 5.5%, respectively,
              of the Company's total revenues and accounted for 12.7% and 5.9%,
              respectively, of the Company's accounts receivable.

         .    Covad Communications accounted for 9.6% and 10.9%, respectively,
              of the Company's total revenues and accounted for 11.5% and 19.0%,
              respectively, of the Company's accounts receivable.

         .    NorthPoint Communications accounted for 5.9% and 13.7%,
              respectively, of the Company's total revenues. NorthPoint
              accounted for 9.0% of the Company's accounts receivable at March
              31, 2000. During the three months ended December 31, 2000, Netopia
              fully reserved approximately $1.7 million related to Northpoint's
              outstanding accounts receivable balance. During the three months
              ended March 31, 2001, NorthPoint prepaid for all purchases of the
              Company's Internet equipment products, and consequently NorthPoint
              accounted for no additional amounts of the Company's accounts
              receivable other than the amount previously fully reserved. As a
              result of NorthPoint filing for protection under the Bankruptcy
              Act and ceasing operations during the three months ended March 31,
              2001, the Company does not believe it will recover any amounts
              from the bankrupt estate.

                                                                               8
<PAGE>

(7)    Intangible Assets
       -----------------

     Intangible assets consist of amounts allocated to goodwill and other
intangible assets in connection with the Company's acquisitions. Detail of the
Company's intangible assets is as follows (in thousands):
<TABLE>
<CAPTION>
                                                                      Amount
                                                                    Allocated to
                                                                      Goodwill
                                                                      and Other
                                                Acquisition          Intangible      Accumulated
                                                    Date                Assets       Amortization     Net Value
                                               ------------------ --------------- --------------- --------------
         <S>                                   <C>                <C>             <C>             <C>
         WebOrder.............................       March 2000       $  17,119       $   4,669       $ 12,450
         Starnet Technologies.................     October 1999          21,165           9,929         11,236
         Serus................................    December 1998           2,161           1,199            962
         netOctopus...........................    December 1998             700             223            477
                                                                  --------------- --------------- --------------
                                                                      $  41,145       $   16,020      $ 25,125
                                                                  =============== =============== ==============
</TABLE>

     Netopia reviews its long-lived assets including furniture, fixtures and
equipment and intangible assets in accordance with SFAS No. 121, Accounting for
the Impairment of Long-lived Assets and Long-lived Assets to be Disposed of, for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. An impairment loss is
measured as the amount by which the carrying amount of the asset exceeds the
fair value of the asset. At this time, there have been no events or changes in
circumstances that would indicate the carrying values of these assets are not
recoverable. In the event the Company determines the value of any of these long-
lived assets to be unrecoverable, the asset would then be written-down to its
fair market value.

(8)    Restructuring Costs
       -------------------

     During the three months ended March 31, 2001, the Company recorded a
restructuring charge in connection with a reduction in the Company's workforce
of approximately 27 people and costs to exit certain business activities. The
charge consisted of employee severance benefits, costs related to exiting
certain Internet portal business activities and future lease costs associated
with facilities to be abandoned. Details of the restructuring charge is as
follows (in thousands):
<TABLE>
<CAPTION>
                                                                   Amounts        Non-Cash     Accrued Balance
                                                Total Charge        Paid          Charges     at March 31, 2001
                                               ---------------- --------------  ------------- -----------------
         <S>                                   <C>              <C>             <C>           <C>
         Employee severance benefits..........      $     475        $   242        $    63           $     170
         Internet portal exit costs...........            510             38            413                  59
         Facility costs.......................             88              9             --                  79
                                               ---------------- --------------  ------------- -----------------
                                                    $   1,073        $   289        $   476           $     308
                                               ================ ==============  ============= =================
</TABLE>

(9)    Terminated Merger Costs
       -----------------------

     During the three months ended March 31, 2001, the Company recorded a
non-recurring charge of $2.6 million for costs incurred in connection with the
terminated merger between the Company and Proxim, Inc. The non-recurring charge
consisted of fees for accounting and legal advisory services, initiation of
joint marketing and research and development expenses in anticipation of the
merger that we had undertaken at the direction of Proxim, certain shared merger
costs, and other related expenses. Details of the non-recurring charge is as
follows (in thousands):

<TABLE>
<CAPTION>
                                                                       Amounts       Non-Cash     Accrued Balance
                                                   Total Charge         Paid         Charges     at March 31, 2001
                                                 ----------------  -------------  -------------  -----------------
<S>                                              <C>               <C>            <C>            <C>
  Accounting and legal advisory services.......          $  1,257       $  1,169         $   --             $   88
  Joint marketing commitments..................               572            165             --                407
  Joint research and development activities....               429            229             --                200
  Shared merger costs..........................               150             --             --                150
  Other........................................               232            138             16                 78
                                                 ----------------  -------------  -------------  -----------------
                                                         $  2,640       $  1,701         $   16             $  923
                                                 ================  =============  =============  =================
</TABLE>

                                       9
<PAGE>

PART I.   FINANCIAL INFORMATION
Item 2.   Managements Discussion and Analysis of Financial Condition and Results
          of Operations
--------------------------------------------------------------------------------

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

Overview

     We develop, market and support broadband Internet equipment and Web
platforms for small and medium size enterprises. Our Internet equipment includes
digital subscriber line (DSL), T1/Frame Relay, integrated services digital
network (ISDN) and dual analog Internet routers. Our Web platform is an
integrated software system that enables organizations to successfully deploy and
manage Web-based services that provide electronic business solutions including
electronic commerce (e-commerce), system management, customer relationship
management (CRM) and broadband deployment. These technology platforms enable
carriers and service providers to create and offer value-added, bundled service
offerings for their small and medium size enterprise customers. These bundled
service offerings often include DSL service bundled with backup, bonding,
virtual private networking (VPN), voice over DSL, and eSite and eStore hosting.

     We primarily sell our Internet equipment products to: emerging competitive
telecommunications service carriers and providers such as Covad Communications
and Rhythms NetConnections; Internet service providers (ISPs) such as Megapath
Networks, UUnet, Verio and XO Communications; and distributors such as Ingram
Micro, Softway and Tech Data. We depend upon the ability of the competitive
telecommunications service providers and ISPs to offer DSL services successfully
and become sustainable businesses. These competitive telecommunications service
providers and ISPs are competing with traditional regional telephone companies
and with each other. Traditional regional telephone companies may have a number
of competitive advantages over these competitors, including greater resources,
name recognition and access to customers. Also, traditional regional telephone
companies may restrict, or attempt to restrict, the ability of competitive
telecommunications service providers to install DSL equipment at the regional
telephone companies' central offices. Competitive telecommunications service
providers and ISPs have generally incurred operating losses and negative cash
flows as they establish their networks and operations. Accordingly, these
channel partners are dependent on continued access to new sources of capital.
The current external financing and operating environment is challenging for
competitive telecommunications service providers and ISPs. For example,
NorthPoint Communications, which had been an important customer, filed a
voluntary petition under the Bankruptcy Act on January 16, 2001 and ceased
operations during the three months ended March 31, 2001; PSInet, which has been
an important customer, announced on May 1, 2001 that it will default on an
interest payment on its 11-1/2% Senior Notes due May 1, 2001, and will not make
its May equipment lease and note payments; and the auditors of Rhythms
NetConnections recently issued Rhythms a "going-concern"


                                                                              10
<PAGE>

opinion in connection with their audit for the year ended December 31, 2000 as
reported in their Form 10-K.

Results of Operations for the Three and Six Months Ended March 31, 2001 and 2000

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

<TABLE>
<CAPTION>
                                                                  Three months ended           Six months ended
                                                                       March 31,                   March 31,
                                                               --------------------------  --------------------------
                                                                  2001          2000          2001          2000
                                                               --------------------------  --------------------------
 <S>                                                           <C>              <C>        <C>              <C>
 Revenues:
   Internet equipment......................................        79.0%         71.8%         75.9%         69.6%
   Web platform licenses and services......................        21.0          28.2          24.1          30.4
                                                               --------------------------  --------------------------
      Total revenues.......................................       100.0         100.0         100.0         100.0

 Cost of revenues:
   Internet equipment......................................        52.1          49.9          50.1          48.5
   Web platform licenses and services......................         1.1           0.6           1.0           0.6
                                                               --------------------------  --------------------------
      Total cost of revenues...............................        53.1          50.5          51.1          49.1
                                                               --------------------------  --------------------------

  Gross profit.............................................        46.9          49.5          48.9          50.9

Operating expenses:
  Research and development.................................        15.7          14.4          16.8          16.1
  Selling and marketing ...................................        36.0          28.8          35.6          31.3
  General and administrative...............................         6.5           6.0          10.9           6.0
  Restructuring costs......................................         5.2            --           2.6            --
  Terminated merger costs..................................        12.7            --           6.4            --
  Acquired in-process research and development.............          --          13.7            --          22.7
  Amortization of goodwill and other intangible assets.....        14.4           9.4          14.5           9.8
                                                               --------------------------  --------------------------
      Total operating expenses.............................        90.4          72.3          86.9          86.0
                                                               --------------------------  --------------------------

      Operating loss.......................................       (43.6)        (22.8)        (38.0)        (35.2)

Other income (loss):
  Loss on impaired securities..............................        (0.1)           --          (2.4)           --
  Other income, net........................................         2.8           4.1           3.8           4.5
                                                               --------------------------  --------------------------
      Total other income...................................         2.7           4.1           1.4           4.5
                                                               --------------------------  --------------------------

  Loss from continuing operations before cumulative
  effect from adoption of Staff Accounting Bulletin 101
  and before gain on sale of discontinued operations,
  net of taxes.............................................       (40.9)        (18.7)        (36.7)        (30.7)

Cumulative effect from adoption of Staff Accounting
Bulletin 101...............................................          --            --          (3.8)           --

Gain on sale of discontinued operation, net of taxes.......          --            --            --           3.0
                                                               --------------------------  --------------------------
          Net loss.........................................       (40.9%)       (18.7%)       (40.4%)       (27.7%)
                                                               ==========================  ==========================
</TABLE>

REVENUE

     For the three months ended March 31, 2001, our revenues decreased 4.4% to
$20.8 million from $21.8 million in the three months ended March 31, 2000.
Revenue declined primarily due to decreased Web platform licenses as a result of
financial conditions and uncertainty in the channels through which we sell these
products. This decrease

                                                                              11
<PAGE>

was partially offset by increased sales of our Internet equipment products,
particularly increased sales of our DSL Internet routers in Europe and in the
United States.

     For the six months ended March 31, 2001, our revenues increased 8.2% to
$41.2 million from $38.1 million in the six months ended March 31, 2000. Revenue
increased primarily due to increased sales of our Internet equipment products,
particulary our DSL Internet routers in the United States and Europe. This
increase was partially offset by decreased Web platform licenses as a result of
financial conditions and uncertainty in the channels through which we sell these
products.

     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           Six months ended
                                                                 March 31,                   March 31,
                                                          ----------------------  ----------------------
                                                            2001          2000       2001          2000
                                                          ----------------------  ----------------------
     <S>                                                  <C>             <C>     <C>              <C>
     Europe...............................................   14.8%         14.4%      14.5%         16.8%
     Asia Pacific.........................................    1.4           1.0        1.2           1.4
     Canada, Latin America and other......................    1.3           1.9        1.8           2.2
                                                          ----------------------  ----------------------
         Subtotal international revenues..................   17.4          17.3       17.5          20.4
     United States........................................   82.6          82.7       82.5          79.6
                                                          ----------------------  ----------------------
                                                            100.0%        100.0%     100.0%        100.0%
                                                          ======================  ======================
</TABLE>

     For the three months ended March 31, 2001, international revenues decreased
3.8% to $3.6 million from $3.8 million in the three months ended March 31, 2000.
For the six months ended March 31, 2001, international revenues decreased 7.4 %
to $7.2 million from $7.8 million in the six months ended March 31, 2000.
International revenues decreased for the three and six months ended March 31,
2001 primarily due to decreased sales of our ISDN and T1/Frame Relay Internet
routers as a result of increased deployment of DSL internationally to connect to
the Internet as well as decreased sales of our Web platform products. These
decreases were partially offset by increased sales of our DSL Internet routers
internationally. Although international revenues remained relatively unchanged
as a percentage of revenue in the three and six months ended March 31, 2001, a
substantial portion of our revenues are derived from sales to international
customers, and, we expect sales to international customers to increase in
absolute dollars in future quarters.

     Beginning in the three months ended June 30, 2000, our fiscal third quarter
of 2000, sales of our Internet equipment products to most international
customers located in countries that are members of the European Union have been
denominated in Euros, and revenues generated by our international customers are
paid to us in Euros. Historically our international revenues had been
denominated in United States dollars, and revenues generated by our
international customers were paid to us in United States dollars. Foreign
currency and exchange rate fluctuations may make our dollar-denominated products
more expensive in those foreign markets where we sell our products in United
States dollars or could expose us to currency rate fluctuation risks to the
extent we do not adequately hedge these foreign currency sales.

GROSS MARGIN

     For the three months ended March 31, 2001, our gross margin decreased to
46.9% from 49.5% in the three months ended March 31, 2000. For the six months
ended March 31 2001, our gross margin decreased to 48.9% from 50.9% in the six
months ended March 31, 2000. The decreases for both the three and six months
ended March 31, 2001 are primarily due to the increased proportion of sales of
our Internet equipment products to total sales. In the three months ended March
31, 2001 and 2000, Internet equipment revenues were 79.0% and 71.8%,
respectively, of total revenue. In the six months ended March 31, 2001 and 2000,
Internet equipment revenues were 75.9% and 69.6%, respectively, of total
revenue. Our Internet equipment products have a lower average gross margin than
our Web platform products. Accordingly, to the extent we sell more Internet
equipment than Web platform products, our gross margins would be lower. These
decreases were partially offset by declining average costs of our Internet
equipment.

                                                                              12
<PAGE>

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

          .    The mix of Internet equipment and Web platform products sold;

          .    Pricing strategies;

          .    Standard cost changes;

          .    New versions of existing products; and

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

RESEARCH AND DEVELOPMENT

     For the three months ended March 31, 2001, our research and development
expenses increased 3.8% to $3.3 million from $3.1 million for the three months
ended March 31, 2000. Research and development expenses increased primarily due
to:

          .    Increased employee related expenses primarily due to our
               acquisition of WebOrder. WebOrder's operations were not included
               in our research and development expenses during the three months
               ended March 31, 2000; and

          .    Increased depreciation as a result of increased capital
               expenditures related to the purchase of development equipment for
               our Internet equipment products.

     For the six months ended March 31, 2001, our research and development
expenses increased 12.9% to $6.9 million from $6.1 million for the six months
ended March 31, 2000. Research and development expenses increased primarily due
to:

          .    Increased employee expenses;

          .    Increased use of third party contractors primarily related to
               development of our Internet equipment products; and

          .    Increased depreciation as a result of increased capital
               expenditures related to the purchase of development equipment for
               our Internet equipment products.

     We expect to continue to devote substantial resources to product and
technological development. We expect research and development costs may increase
in absolute dollars for the remainder of fiscal 2001 and into fiscal 2002 as we
continue to expand the breadth and depth of our product offerings. We believe
our process for developing software is essentially completed concurrently with
the establishment of technological feasibility, and we have not capitalized any
internal software development costs to date. However, during the three and six
months ended March 31, 2001, we capitalized $354,000 and $565,000, respectively,
of product development costs incurred subsequent to the delivery of a working
model, under a development agreement with third parties.

SELLING AND MARKETING

     For the three  months  ended March 31,  2001,  our  selling  and  marketing
expenses  increased 19.6% to $7.5 million from $6.3 million for the three months
ended March 31, 2000. Selling and marketing expenses increased  primarily due to
increased headcount and other employee related expenses to support our increased
sales and marketing  efforts.  These expenses were  partially  offset by reduced
advertising and promotion expenses.

     For the six months ended March 31, 2001, our selling and marketing expenses
increased 23.2% to $14.7 million from $11.9 million in the six months ended
March 31, 2000. Selling and marketing expense increased primarily due to:

          .    Increased headcount and employee related expenses as we increased
               the number of employees in our sales, marketing and service
               functions to support our increasing sales and product lines;

          .    Increased commission costs; and

          .    Increased travel and entertainment.

                                                                              13
<PAGE>

GENERAL AND ADMINISTRATIVE

     For the three months ended March 31, 2001, our general and administrative
expenses increased 3.3% to $1.4 million from $1.3 million for the three months
ended March 31, 2000. General and administrative expenses increased primarily
due to:

          .    Increased headcount and other employee related expenses; and

          .    Increased reserves for bad debt expense.

     These increases were partially offset by reduced information system and
telecom expenses.

     For the six months ended March 31, 2001, our general and administrative
expenses increased 96.4% to $4.5 million from $2.3 million for the six months
ended March 31, 2000. This increase was primarily due to a $1.8 million special
provision for doubtful accounts, of which approximately $1.7 million was related
to the outstanding accounts receivable of NorthPoint Communications.

RESTRUCTURING COSTS

     During the three months ended March 31, 2001, we recorded restructuring
charges of $1.1 million that consists primarily of employee severance benefits
and the costs to exit certain of our business activities and closure of a
facility. (See Note 8 of Notes to Condensed Consolidated Financial Statements.)

TERMINATED MERGER COSTS

     During the three months ended March 31, 2001, we recorded a non-recurring
charge of $2.6 million for costs incurred in connection with the terminated
merger between our company and Proxim, Inc. This charge consists primarily of
accounting and legal advisory services, initiation of joint marketing and
research and development expenses in anticipation of the merger that we had
undertaken at the direction of Proxim, certain shared merger costs, and other
related costs. (See Note 9 of Notes to Condensed Consolidated Financial
Statements.)

ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT

     For the three months ended March 31, 2000, we allocated a one-time charge
of approximately $3.0 million of the purchase price of WebOrder to acquired
in-process research and development. For the six months ended March 31, 2000, we
allocated a one-time charge of approximately $3.0 million of the purchase price
of WebOrder and $5.7 million of the purchase price of StarNet to acquired
in-process research and development. The amounts we allocated to acquired
in-process research and development were based upon an independent third party
valuation analysis of our acquisitions of WebOrder and StarNet.

AMORTIZATION OF GOODWILL AND OTHER INTANGIBLE ASSETS

     For the three and six months ended March 31, 2001 and 2000, amortization of
goodwill and other intangible assets represents the amortization of such amounts
allocated to goodwill and other intangible assets related to our acquisitions of
WebOrder, StarNet, Serus and netOctopus. (See Note 7 of Notes to Condensed
Consolidated Financial Statements.)

     For the three months ended March 31, 2001 and 2000, we amortized:

          .    $1.1 million and $99,000, respectively, in goodwill and other
               intangible assets related to our acquisition of WebOrder. We are
               amortizing the goodwill and other intangible assets over four and
               three years, respectively.

          .    $1.7 million, in each period, in goodwill and other intangible
               assets related to our acquisition of StarNet. We are amortizing
               the goodwill and other intangible assets over four and three
               years, respectively.

                                                                              14
<PAGE>

          .    $134,000, in each period, in goodwill and other intangible assets
               related to our acquisition of Serus. We are amortizing the
               goodwill and other intangible assets over four years.

          .    $56,000, in each period, in goodwill and other intangible assets
               related to our acquisition of netOctopus. We are amortizing the
               goodwill and other intangible assets over four years.

     For the six months ended March 31, 2001 and 2000, we amortized:

          .    $2.2 million and $99,000, respectively, in goodwill and other
               intangible assets related to our acquisition of WebOrder.

          .    $3.4 million and $3.2 million, respectively, in goodwill and
               other intangible assets related to our acquisition of StarNet.

          .    $268,000 and $267,000, respectively, in goodwill and other
               intangible assets related to our acquisition of Serus.

          .    $112,000, in each period, in goodwill and other intangible assets
               related to our acquisition of netOctopus. We are amortizing the
               goodwill and other intangible assets over four years.

OTHER INCOME

     Other income primarily represents interest income we earn on our cash, cash
equivalents and short-term investments in addition to both realized and
unrealized gains and losses on foreign currency transactions as well as losses
on impaired securities that we deem other than temporary.

     For the three months ended March 31, 2001, other income decreased 36.2% to
$569,000 from $892,000 for the three months ended March 31, 2000. The decrease
is primarily due our reduced cash, cash equivalents and short-term investments
combined with a reduction in interest rates from the same period in the prior
fiscal year. In addition, we wrote-off the remaining balance of our investment
in NorthPoint Communications after it filed for protection under the Bankruptcy
Act and subsequently ceased operations.

     For the six months ended March 31, 2001, other income decreased 67.4% to
$561,000 from $1.7 million for the three months ended March 31, 2000. The
decrease is primarily due to our loss on impaired securities that was recorded
to reflect the other than temporary decline in the value of our investment in
NorthPoint Communications.

PROVISION FOR INCOME TAXES

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

CUMULATIVE EFFECT FROM ADOPTION OF STAFF ACCOUNTING BULLETING 101

     In December 1999, the SEC issued Staff Accounting Bulletin (SAB) 101,
Revenue Recognition in Financial Statements. SAB 101 provides guidance on
applying generally accepted accounting principles to revenue recognition issues
in financial statements. We adopted SAB 101 in our fiscal first quarter ended
December 31, 2000 and recorded a $1.6 million charge to our condensed
consolidated statement of operations and $1.6 million in deferred revenue to our
condensed consolidated balance sheet.

GAIN ON SALE FROM DISCONTINUED OPERATIONS.


                                                                              15
<PAGE>

     The gain on sale from discontinued operations of $1.1 million in the six
months ended March 31, 2000 primarily represents the reversal of a liability we
recorded for the excess space created at our Alameda, California facility, in
connection with the sale of our LAN Division in August 1998, that we believed
could not be subleased to third parties.

Risk Factors

     In addition to other information in this Form 10-Q, the following risk
factors should be considered carefully in evaluating Netopia and its business
because such factors currently may have a significant impact on Netopia's
business, operating results and financial condition. As a result of the risk
factors set forth below and elsewhere in this Form 10-Q, and the risks discussed
in Netopia's other Security and Exchange Commission filings including our Form
10-K for our fiscal year ended September 30, 2000, actual results could differ
materially from those projected in any forward-looking statements.

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

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

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

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

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

          .    NorthPoint Communications voluntarily filed for protection under
               the Bankruptcy Act on January 16, 2001 and subsequently ceased
               operation s;

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

          .    Rhythms NetConnections announced on January 16, 2001 its
               intention to reduce the number of markets in which it offers
               services and significantly scaled back its operations, and its
               auditors recently issued Rhythms a "going-concern" opinion in
               connection with their audit for the year ended

                                                                              16
<PAGE>

               December 31, 2000 as reported in their Form 10-K.

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

     Like the CLECs, ISPs have struggled in the past year. Most ISPs have had
significant difficulties in differentiating their services from the services
provided by their competitors. As a result, the lack of differentiation has led
to significant erosion in the prices charged to customers. Our leading ISP
customers in 2000, PSI Net, LMKI, Flashcom Communications, Zyan Communications
and Fastpoint Technology, all have experienced significant business difficulties
and some have filed for bankruptcy or ceased operations. For example, PSInet,
which has been an important customer, announced on May 1, 2001 that it will
default on an interest payment on its 11-1/2% Senior Notes due May 1, 2001, and
will not make its May equipment lease and note payments. The pricing pressure
for ISPs continues to date, and, accordingly, sales of our products to ISPs have
decreased and remain difficult.

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

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

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

     Our revenues will decline and we may incur losses if we lose one or more of
our significant customers or if our customers reduce or delay purchases of our
products. For the three months ended March 31, 2001, our top four customers who
each individually represented at least 5% of our total revenues, accounted for
approximately 51.9% of our total revenues. In this period, sales to Covad
Communications, Rhythms NetConnections and Ingram Micro represented
approximately 17.7%, 15.9% and 11.8%, respectively, of our total revenues. These
channels partners have generally incurred operating losses and negative cash
flows as they attempt to establish their networks and operations. Accordingly,
they are dependent on continued access to new sources of capital. To the extent
they are unable to secure new sources of capital, our revenues and profitability
would be harmed. We believe that the current external financing environment is
challenging for these competitive telecommunications service providers.

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

     Our failure to significantly increase our revenues would result in
continuing losses. We incurred losses from continuing operations of $8.5 million
and $15.1 million for the three and six months ended March 31, 2001,
respectively. Our operations used $2.4 million and $5.3 million of cash for the
three and six months ended March 31, 2001, respectively. Even if we do maintain
profitability and positive cash flow from operations, we may not be able to
sustain or increase profitability or cash flow from operations on a quarterly or
annual basis.

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

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

                                                                              17
<PAGE>

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

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

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

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

          .    Decreases or delays in purchases by significant customers, or
               loss of such customers such as Rhythms NetConnections and Covad
               Communications.

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

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

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

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

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

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

          .    Our ability to attract and retain key personnel.

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

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

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

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

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

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

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

                                                                              18
<PAGE>

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

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

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

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

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

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

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

     In the DSL router market, we primarily compete with 3Com, Arescom, Cayman
Systems, Cisco Systems, Siemens (Efficient Networks and its FlowPoint product
line), Linksys, Lucent Technologies, Nokia, ZyXEL Communications and several
other companies. In addition to these competitors, there have been a growing
number of announcements by other companies that they intend to enter the DSL
router market. Further, some competitors offer low-cost or no-cost support
programs that are similar to our "Up & Running, Guaranteed!" program. In the
market for integrated access devices that provide voice over DSL, we primarily
compete with Polycom and Siemens (Efficient Networks and its FlowPoint product
line).

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

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

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

     Our DSL Internet equipment has a relatively short history. You should
consider our prospects in light of the difficulties we may encounter because
these products are at an early stage of development in a relatively new, rapidly
evolving and intensely competitive market. For example, we may not correctly
anticipate market


                                                                              19
<PAGE>

requirements, including requirements for performance, price, features and
compatibility with other DSL equipment. We may not be able to rapidly introduce
innovative new products that meet these market requirements. It is possible that
the market for DSL Internet equipment will develop in a manner that we do not
anticipate. Our competitors have introduced DSL products, some of which may
compete effectively against our DSL products. Such developments could render our
DSL products obsolete.

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

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

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

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

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

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

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

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

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

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

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

     .    Evolving industry standards for DSL technologies; and

     .    Government regulation.

     ILECs have been aggressively marketing DSL services principally focusing on
residential services. Historically, we have not sold meaningful quantities of
DSL hardware products to ILECs in the United States. There are barriers
associated with such sales including, but not limited to, lengthy product
evaluation cycles, the ability to dislodge competitors whose products are
currently being utilized and intense price pressures. We have committed
resources that are focused on penetrating these accounts in response to changing
market conditions. There is no guarantee we will be successful in penetrating
these accounts. In addition, ILECs currently obtain equipment from our
competitors, such as Efficient Networks, who have proven to be strong
competitors.

                                                                              20
<PAGE>

     Demand for DSL services has exceeded the ability of carriers and service
providers to deploy services in a timely manner and to provide satisfactory
customer service. We offer to carriers and service provider customers the
opportunity to bundle basic DSL connectivity with value-added features that
enable the provider to bundle differentiated services that will justify higher
recurring revenues from end users. These features include dial backup, VPNs
(Virtual Private Networks), voice over DSL and website or e-store hosting. We
can offer no assurance that our strategy of enabling bundled service offerings
will be widely accepted.

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

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

     We have announced a new line of integrated access devices, or IADs, which
are designed to allow for voice and data services over a single DSL line. A
substantial part of our future growth is dependent on the widespread deployment
of these integrated voice and data products for combined voice and data
services. To date, service providers including competitive telephone carriers
have not deployed such combined services broadly. Unless such products and
services are broadly deployed, we can offer no assurance that our integrated
voice and data products and combined services will have a meaningful commercial
impact. If such growth does not occur as anticipated, this could contribute to
significant variations in our future operating results.

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

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

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

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

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

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

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

     We do not manufacture any of the components used in our products and
perform only limited assembly on some products. All of our Internet equipment
rely on components that are supplied by independent contractors and specialized
suppliers. We generally do not have guaranteed supply arrangements with these
third parties and they could cease selling components to us at any time.
Moreover, the ability of independent contractors and specialized


                                                                              21
<PAGE>

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

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

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

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

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

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


                                                                              22
<PAGE>

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

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

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

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

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

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

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

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

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

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


                                                                              23
<PAGE>

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

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

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

     A substantial portion of our revenues is derived from sales to
international customers. We expect sales to international customers to continue
to comprise a significant portion of our revenues. In the past, our
international sales have typically been denominated in United States dollars.
Beginning in the three months ended June 30, 2000, our fiscal third quarter of
2000, sales of Internet equipment products to our European customers who are
members of the European Union are being denominated in the Euro. All other
international sales will continue to be denominated in United States dollars.
For our international sales that continue to be denominated in United States
dollars, fluctuations in currency exchange rates could cause our products and
services to become relatively more expensive to our foreign customers. This
could lead to decreased profitability of our products and services. In addition,
changes in the value of the Euro relative to the United States dollar, could
adversely affect our operating results, to the extent we do not hedge sales
denominated in the Euro.

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

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

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

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

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

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

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

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


                                                                              24
<PAGE>

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

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

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

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

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

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

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

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

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

Business interruptions could adversely affect our business.

     Our operations are vulnerable to interruption by fire, earthquake, power
loss, telecommunications failure and other events beyond our control. In
particular, our headquarters are located near earthquake fault lines and may be
susceptible to the risk of earthquakes. If there is an earthquake in the region,
our business could be seriously harmed. We do not have a detailed disaster
recovery plan. Our facilities in the State of California are currently subject
to electrical blackouts as a consequence of a shortage of available electrical
power. In the event these blackouts continue or increase in severity, they could
disrupt the operations of our affected facilities. In addition, we

                                                                              25
<PAGE>

do not carry sufficient business interruption insurance to compensate us for
losses that may occur and any losses or damages incurred by us could have a
material adverse effect on our business.

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

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

     .    Acceptance of and demand for our products;

     .    The number and timing of acquisitions;

     .    The costs of developing new products;

     .    The costs associated with our expansion; and

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

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

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

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

     .    Variations in our quarterly operating results;

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

     .    Changes in market valuations of similar companies;

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

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

     .    Additions or departures of key personnel;

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

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

     .    Decreases or delays in purchases by significant customers;

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

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

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

                                                                              26
<PAGE>

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

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

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

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

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

LIQUIDITY AND CAPITAL RESOURCES

     We have funded our operations to date primarily through the private sale of
equity securities and public offerings of our common stock. As of March 31,
2001, we had cash, cash equivalents and short-term investments representing
45.0% of our total assets.

     Our operating activities used $5.3 million of cash for the six months ended
March 31, 2001. This use of cash was primarily due to supporting our regular
operating activities, paying the expenses related to our terminated merger with
Proxim, and paying the expenses related to our restructuring. These costs were
partially offset by increased accounts receivable collections. Our operating
activities provided $911,000 of cash for the six months ended March 31, 2000
primarily due to cash generated from our normal operating activities as well as
an increase in accounts payable and accrued liabilities, partially offset by
increases in accounts receivable and inventories.

     Our investing activities provided $2.3 million of cash for the six months
ended March 31, 2001 primarily due to proceeds realized from the sale and
maturity of short-term investments, partially offset by the purchase of such
short-term investments and the purchase of capital equipment and certain
long-term investments. Our investing activities used $15.3 million of cash for
the six months ended March 31, 2000 primarily due to our acquisitions of
WebOrder and StarNet and purchases of short-term investments partially offset by
proceeds realized from the sale and maturity of short-term investments.

     Our financing activities provided $1.4 million and $4.3 million of cash for
the six months ended March 31, 2001 and 2000, respectively, primarily related to
the exercise of employee stock options and employees purchasing our stock
through our Employee Stock Purchase Plan.

     We believe that our existing cash, cash equivalents and short-term
investments will be adequate to meet our cash needs for working capital and
capital expenditures for at least the next twelve months. We may require
substantial capital to finance our future growth and fund our ongoing research
and development activities during the remainder of fiscal 2001 and beyond. If we
issue additional stock to raise capital, the percentage ownership in Netopia of
our existing shareholders would be reduced. Additional financing may not be
available when needed and, if such financing is available, it may not be
available on terms we believe favorable.

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

                                                                              27
<PAGE>

successfully develop, manufacture and gain market acceptance for the products we
acquired. If we engage in additional acquisitions or divestitures in future
periods, we may not be able to address these risks and our business may be
harmed.

     During the three months ended December 31, 2000, our fiscal first quarter
of 2001, we purchased $2.0 million of Series D Preferred stock in Megapath
Networks Incorporated (Megapath). Megapath, a broadband service provider,
provides high-speed, Internet access to small and midsize businesses. MegaPath
offers high-speed DSL access, Web-site design and development, e-commerce and
Web hosting services. During the year ended September 30, 2000, Megapath had
purchased our Internet equipment and licensed our Web site and e-commerce
platform. Although there is no public market for Megapath's stock, we believe
the market value of these shares remains at $2.0 million. As part of the
purchase, we bear the economic risk of the investment indefinitely. There is no
assurance that the purchased shares will be registered pursuant to the
Securities Act, or that an exemption from registration would be available for
any resale by us of these shares. Accordingly, we may not be able to transfer
all or any portion of the shares in the amounts or at times we would propose.

     During the three months ended September 30, 2000, our fiscal fourth quarter
of 2000, we purchased $2.0 million of Series C Preferred Stock in Everdream
Corporation (Everdream). Everdream provides outsourced IT expertise, products
and services that enable small and medium size businesses to focus on their core
competencies. In April 2000, we entered into an agreement with Everdream to host
a co-branded version of the Web e-commerce platform for Everdream's customers.
Although there is no public market for Everdream's stock, we believe that the
market value of these shares remains at $2.0 million. As part of the purchase,
we bear the economic risk of the investment indefinitely. There is no assurance
that the purchased shares will be registered pursuant to the Securities Act, or
that an exemption from registration would be available for any resale by us of
these shares. Accordingly, we may not be able to transfer all or any portion of
the shares in the amounts or at times we would propose.

     We review our long-lived assets including furniture, fixtures and equipment
and intangible assets in accordance with SFAS No. 121, Accounting for the
Impairment of Long-lived Assets and Long-lived Assets to be Disposed of, for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. An impairment loss is
measured as the amount by which the carrying amount of the asset exceeds the
fair value of the asset. At this time, there have been no events or changes in
circumstances that would indicate our carrying values of these assets are not
recoverable. In the event we determine the value of any of these long-lived
assets to be unrecoverable, we would write-down the asset to the then fair
market value of the asset.

PART I.  FINANCIAL INFORMATION
Item 3.  Quantitative and Qualitative Disclosures About Market Risk
--------------------------------------------------------------------------------

     Our exposure to market risk for changes in interest rates relates primarily
to our investment portfolio. Our exposure to foreign exchange risk relates
primarily to sales made to international customers denominated in Euros. We do
not use derivative financial instruments for speculative or trading purposes. We
place our investments in instruments that meet high credit quality standards, as
specified in our investment policy. This policy also limits the amount of credit
exposure to any one issue, issuer and type of instrument. We do not expect any
material loss with respect to our investment portfolio. Beginning in the three
months ended June 30, 2000, our fiscal third quarter of 2000, sales to European
countries that are members of the European Union are being denominated in the
Euro. In order to reduce our exposure resulting from currency fluctuations, we
have entered into currency exchange forward contracts. These contracts guarantee
a predetermined exchange rate at the time the contract is purchased. We do not
enter into currency exchange contracts for speculative or trading purposes.

Interest Rate Risk

     The table below presents the market value and related weighted-average
interest rates for our investment portfolio at March 31, 2001 and 2000. All of
our investments mature in twelve months or less.

                                                                              28
<PAGE>

<TABLE>
<CAPTION>
                                                              March 31, 2001                 March 31, 2000
                                                    ------------------------------- -------------------------------
                                                                 Fair     Average                Fair     Average
     Principal (notional) amounts in                  Cost      Market    Interest    Cost      Market    Interest
     United States dollars:                           Basis     Value       Rate      Basis     Value       Rate
     ---------------------------------------------  --------  ---------  ---------- --------  ---------  ----------
     <S>                                            <C>       <C>        <C>            <C>
     Cash equivalents - fixed rate (a)..........    $ 34,071  $  34,255     5.35%   $ 49,795  $  49,985     5.96%
     Short-term investments - fixed rate (b)....      14,304     14,389     5.24%      9,123      9,302     5.94%
                                                    --------  ---------             --------  ---------
                                                    $ 47,375  $  48,644             $ 58,918  $  59,287
                                                    ========  =========             ========  =========
</TABLE>

------------------
     (a) Cash equivalents represent the portion of our investment portfolio that
         mature in less than 90 days.
     (b) Short term investments represent the portion of our investment
         portfolio which mature in greater than or equal to 90 days.

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

Foreign Currency Exchange Risk

     The table below presents the carrying value, in United States dollars, of
our accounts receivable denominated in Euros at March 31, 2001 and 2000. These
accounts receivable are valued at the United States/Euro exchange rate as of
March 31, 2001. The carrying value approximates fair value at March 31, 2001 and
2000.

<TABLE>
<CAPTION>
                                                               March 31, 2001                 March 31, 2000
                                                       ------------------------------- ------------------------------
     Principal (notional) amounts in                     Carrying        Exchange        Carrying       Exchange
     United States dollars:                               Amount           Rate           Amount          Rate
     ------------------------------------------------- ------------- ----------------- ------------- ----------------
                                                       (in thousands)                  (in thousands)
     <S>                                               <C>           <C>               <C>           <C>
     Accounts receivable denominated in Euros.......      $  2,060         0.878               --              --
</TABLE>


     The table below presents the carrying value of our currency exchange
forward contracts, in United States dollars, at March 31, 2001 and 2000. The
carrying value approximates fair value at March 31, 2001 and 2000.

<TABLE>
<CAPTION>
                                                     March 31, 2001                         March 31, 2000
                                         ----------------------------------------  ---------------------------------
     Principal (notional) amounts in        Carrying      Spot    Settlement          Carrying    Spot   Settlement
     Euros:                                  Amount       Rate       Date              Amount     Rate      Date
     ---------------------------------   ----------------------------------------  ---------------------------------
                                         (in thousands)                            (in thousands)
     <S>                                 <C>             <C>      <C>              <C>            <C>    <C>
     Currency exchange forward
        contract # 1................         $  25       0.8811     May 2001               --        --        --
     Currency exchange forward
        contract # 2................         $ 155       0.8811     June 2001              --        --        --
     Currency exchange forward
        contract # 3................         $ 548       0.8812     July 2001              --        --        --
     Currency exchange forward
        contract # 4................         $ 418       0.8813    August 2001             --        --        --
</TABLE>

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

PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
--------------------------------------------------------------------------------
     On January 11, 2001, we issued a warrant to purchase 5,000 shares of our
common stock to Heidrick & Struggles, Inc., an executive search firm. The
exercise price of the warrant is $5.625 per share, the fair market value

                                                                              29
<PAGE>

of our common stock on the date of issue. The warrant will expire on January 11,
2003. The warrant is exempt from registration pursuant to Section 4(2) of the
Securities Act. We relied upon representations made by Heidrick & Struggles in
the warrant agreement.

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

     On January 29, 2001, we held our Annual Meeting of Stockholders in Alameda,
California.

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

<TABLE>
<CAPTION>
                                                                 Votes For:        Votes Withheld:
                                                               ---------------   --------------------
          <S>                                                  <C>               <C>
          Reese M. Jones.....................................      14,622,703           320,709
          Alan B. Lefkof.....................................      14,611,263           332,149
          David F. Marquardt.................................      14,630,903           312,509
          David C. King......................................      14,625,438           317,974
</TABLE>

     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:

     .    To approve an amendment to the Company's 1996 Stock Option Plan to
          increase the number of shares of Common Stock available for issuance
          under the plan by 500,000 shares. There were 1,689,338 votes in favor,
          4,742,422 votes opposed, 45,845 votes abstaining and 8,465,807 broker
          non-votes.

     .    To approve an amendment to the Company's Employee Stock Purchase Plan
          to increase the number of shares of Common Stock available for
          issuance under the plan by 800,000 shares. There were 5,795,061 votes
          in favor, 639,573 votes opposed, 42,971 votes abstaining and 8,465,807
          broker non-votes.

     .    To amend the Company's Amended and Restated Certificate of
          Incorporation to increase the number of authorized shares of Common
          Stock from 25 million shares to 50 million shares. There were
          14,405,500 votes in favor, 522,772 votes opposed, 15,140 votes
          abstaining and no broker non-votes.

     .    To ratify the appointment of KPMG LLP as independent auditors of the
          Company. There were 14,716,820 votes in favor, 200,629 votes opposed,
          25,963 votes abstaining and no broker non-votes.

     We announced a Special Meeting of Stockholders to be held on March 23, 2001
to consider and vote on the agreement and plan of reorganization under which we
would be acquired by Proxim, Inc. Following the mutual termination in March 2001
of the agreement and plan of reorganization, the Special Meeting was cancelled.

PART II.  OTHER INFORMATION
Item 6.   Exhibits and Reports on Form 8-K
--------------------------------------------------------------------------------

(b)   Reports on Form 8-K

      .    On January 30, 2001, we filed a Form 8-K reporting Items: 5 -Other
           Events; and 7 - Financial Statements, Pro Forma Financial Information
           and Exhibits; announcing our agreement and plan of reorganization
           under which we agreed to be acquired by Proxim, Inc. There were no
           financial statements filed with this Form 8-K.

      .    On March 23, 2001, we filed a Form 8-K reporting Items: 5 - Other
           Events; and 7 - Financial Statements, Pro Forma Financial Information
           and Exhibits; announcing the termination of the agreement and plan of
           reorganization with Proxim, Inc. There were no financial statements
           filed with this Form 8-K.

                                                                              30
<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 15, 2001                     NETOPIA, INC.
                                        (Registrant)


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

                                                                              31