<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 June 30, 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 June 30, 2001 there were 17,907,763 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 June 30, 2001 (unaudited)
          and September 30, 2000 (audited).............................................................   2

          Unaudited condensed consolidated statements of operations for the three and nine
          months ended June 30, 2001 and 2000..........................................................   3

          Unaudited condensed consolidated statements of cash flows for the nine months ended
          June 30, 2001 and 2000.......................................................................   4

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

Item 2.   Management's Discussion and Analysis of Financial Condition and Results of Operations........  11

Item 3.   Quantitative and Qualitative Disclosures About Market Risk...................................  29

PART II.  OTHER INFORMATION

Item 5.   Other Information............................................................................  31

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

SIGNATURE..............................................................................................  32
</TABLE>

                                                                               1
<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>
                                                                                   June 30,
                                                                                     2001           September 30,
                                                                                  (unaudited)            2000
                                                                               ----------------   -----------------
<S>                                                                            <C>                <C>
                                    ASSETS

Current assets:
    Cash and cash equivalents..............................................    $         36,788   $          37,839
    Short-term investments.................................................              15,035              21,938
    Trade accounts receivable, less allowance for doubtful accounts and
       returns of $4,009 and $3,258, respectively..........................               8,592              15,646
    Inventories, net.......................................................               9,646              10,284
    Prepaid expenses and other current assets..............................               1,035               2,341
                                                                               ----------------   -----------------
            Total current assets...........................................              71,096              88,048
Furniture, fixtures and equipment, net.....................................               5,802               4,469
Intangible assets, net.....................................................              22,129              31,016
Long-term investments......................................................               4,000               2,493
Deposits and other assets..................................................               2,504               2,347
                                                                               ----------------   -----------------
                                                                               $        105,531   $         128,373
                                                                               ================   =================
                     LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
    Accounts payable.......................................................    $          6,794   $           8,547
    Accrued compensation...................................................               2,248               2,756
    Accrued liabilities....................................................               1,110               1,332
    Deferred revenue.......................................................               2,858               2,215
    Other current liabilities..............................................                 112                 906
                                                                               ----------------   -----------------
            Total current liabilities......................................              13,122              15,756
Long-term liabilities......................................................                 173                 328
                                                                               ----------------   -----------------
            Total liabilities..............................................              13,295              16,084

Commitments and contingencies

Stockholders' equity:
 Common stock: $0.001 par value, 25,000,000 shares authorized;
    17,907,763 and 17,587,615 shares issued and outstanding at
    June 30, 2001 and September 30, 2000, respectively.....................                  18                  17
    Additional paid-in capital.............................................             144,357             142,857
    Accumulated deficit....................................................             (52,139)            (30,079)
    Accumulated other comprehensive loss...................................                  --                (506)
                                                                               ----------------   -----------------
            Total stockholders' equity.....................................              92,236             112,289
                                                                               ----------------   -----------------
                                                                               $        105,531   $         128,373
                                                                               ================   =================
</TABLE>

See accompanying notes to condensed consolidated financial statements.

                                                                               2
<PAGE>

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

<TABLE>
<CAPTION>
                                                                     Three months ended              Nine months ended
                                                                          June 30,                        June 30,
                                                               -----------------------------    ----------------------------
                                                                    2001            2000            2001            2000
                                                               -------------    ------------    ------------    ------------
                                                                         (in thousands, except for per share amounts)
<S>                                                            <C>             <C>             <C>             <C>
Revenues:
   Internet equipment......................................    $     14,478    $     22,134    $     45,781    $     48,633
   Web platform licenses and services......................           4,483           6,381          14,401          17,970
                                                               ------------    ------------    ------------    ------------
       Total revenues......................................          18,961          28,515          60,182          66,603

Cost of revenues:
   Internet equipment......................................           9,653          15,461          30,293          33,949
   Web platform licenses and services......................             182             222             608             468
                                                               ------------    ------------    ------------    ------------
       Total cost of revenues..............................           9,835          15,683          30,901          34,417
                                                               ------------    ------------    ------------    ------------

   Gross profit............................................           9,126          12,832          29,281          32,186

Operating expenses:
   Research and development................................           3,444           3,499          10,376           9,640
   Selling and marketing ..................................           6,577           6,886          21,266          18,805
   General and administrative..............................           2,010           1,065           6,513           3,358
   Restructuring costs.....................................              --              --           1,073              --
   Terminated merger costs.................................              --              --           2,640              --
   Acquired in-process research and development............              --              --              --           8,658
   Amortization of goodwill and other intangible assets....           2,996           3,003           8,988           6,750
                                                               ------------    ------------    ------------    ------------
       Total operating expenses............................          15,027          14,453          50,856          47,211
                                                               ------------    ------------    ------------    ------------

       Operating loss......................................          (5,901)         (1,621)        (21,575)        (15,025)

Other income (loss):
   Loss on impaired securities.............................              --              --         (1,000)              --
   Other income, net.......................................             509             943            2070           2,663
                                                               ------------    ------------    ------------    ------------
       Total other income..................................             509             943           1,070           2,663
                                                               ------------    ------------    ------------    ------------

   Loss from continuing operations before cumulative
   effect from adoption of Staff Accounting Bulletin 101...          (5,392)           (678)        (20,505)        (12,362)

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

Gain on sale of discontinued operation, net of taxes.......              --           1,334              --           2,481
                                                               ------------    ------------    ------------    ------------

            Net income (loss).............................     $     (5,392)   $        656    $    (22,060)   $     (9,881)
                                                               ============    ============    ============    ============

Per share data, net income (loss):
     Net income (loss) per share............................   $      (0.30)   $       0.04    $      (1.24)   $      (0.59)
                                                               ============    ============    ============    ============
     Shares used in the per share calculations..............         17,882          17,239          17,769          16,612
                                                               ============    ============    ============    ============
</TABLE>

See accompanying notes to condensed consolidated financial statements.

                                                                               3
<PAGE>

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

<TABLE>
<CAPTION>
                                                                                      Nine months ended June 30,
                                                                                -------------------------------------
                                                                                     2001                2000
                                                                                -------------------------------------
<S>                                                                             <C>                  <C>
Cash flows from operating activities:
Net loss...................................................................     $    (22,060)         $    (9,881)
Adjustments to reconcile net loss to net cash provided by (used in)
  operating activities:
   Depreciation and amortization...........................................           11,473                8,623
   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..................................................              752                  138
   Changes in operating assets and liabilities:
      Trade accounts receivable............................................            6,303               (8,874)
      Inventories..........................................................              638               (3,394)
      Prepaid expenses and other current assets............................            1,306                 (470)
      Deposits and other assets............................................               61                1,038
      Accounts payable and accrued liabilities.............................           (2,483)               4,381
      Deferred revenue.....................................................              546                  496
      Other liabilities....................................................             (852)                 510
                                                                             ---------------      ---------------
         Net cash provided by (used in) operating activities...............           (3,316)               1,225
                                                                             ---------------      ---------------

Cash flows from investing activities:
   Purchase of furniture, fixtures and equipment...........................           (3,128)              (2,080)
   Capitalization of software development costs............................             (909)                (532)
   Acquisition of technology...............................................             (100)             (11,642)
   Purchase of long-term investment........................................           (2,000)                  --
   Purchase of short-term investments......................................          (39,708)             (45,358)
   Proceeds from the sale and maturity of short-term investments...........           46,610               33,444
                                                                             ---------------      ---------------
         Net cash provided by (used in) investing activities...............              765              (26,168)
                                                                             ---------------      ---------------

Cash flows from financing activities:
   Proceeds from the issuance of common stock, net.........................            1,500                5,423
                                                                             ---------------      ---------------
         Net cash provided by financing activities.........................            1,500                5,423
                                                                             ---------------      ---------------

Net decrease in cash and cash equivalents..................................           (1,051)             (19,520)
Cash and cash equivalents, beginning of period.............................           37,839               61,381
                                                                             ---------------      ---------------
Cash and cash equivalents, end of period...................................           36,788          $    41,861
                                                                             ===============      ===============

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

                                                                               4
<PAGE>

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

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

     The unaudited condensed consolidated financial statements included in this
Form 10-Q reflect all adjustments, consisting only of normal recurring
adjustments which in our opinion are necessary to fairly present our
consolidated financial position, results of operations and cash flows for the
periods presented. These condensed consolidated financial statements should be
read in conjunction with our consolidated financial statements included in our
Annual Report on Form 10-K and other filings with the United States Securities
and Exchange Commission. The consolidated results of operations for the period
ended June 30, 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 balance sheet or
statement of operations.

     In July 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible
Assets. SFAS No. 142 establishes accounting and reporting standards for goodwill
and intangible assets that were acquired singly, as part of a group, or in a
business combination. The Company will be required to adopt SFAS No. 142 in its
fiscal first quarter of 2002. As a result of the adoption, the Company will
discontinue its amortization of goodwill and other intangible assets related to
its previous business combinations.

     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 statement of operations and a
$1.6 million increase in deferred revenue to its 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 $0.2
million and $0.7 million was recognized during the three and nine months ended
June 30, 2001, respectively. Detail of the Company's deferred revenue related to
the adoption of SAB 101 is as follows (in thousands):

                                                                     SAB 101
                                                                    Deferred
                                                                     Revenue
                                                                  --------------

     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
        Three months ended June 30, 2001.........................          201
                                                                  --------------
          Subtotal...............................................          697
                                                                  --------------
        Net SAB 101 deferred revenue as of June 30, 2001.........      $   858
                                                                  ==============

                                                                               5
<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>
                                                                           June 30,           September 30,
                                                                             2001                 2000
                                                                        ----------------     ----------------
<S>                                                                        <C>                  <C>
         Raw materials and work in process........................          $     5,250          $     4,723
         Finished goods...........................................                4,396                5,561
                                                                        ----------------     ----------------
                                                                            $     9,646          $    10,284
                                                                        ================     ================
</TABLE>

(4)    Net Income (Loss) Per Share
       ---------------------------

     Basic net income (loss) per share (EPS) is based on the weighted average
number of shares of common stock outstanding during the period. Diluted net
income (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 income (loss) per share:
(in thousands, except per share amounts)

<TABLE>
<CAPTION>
                                                             Three months ended           Nine months ended
                                                                  June 30,                    June 30,
                                                          --------------------------  --------------------------
                                                             2001          2000          2001          2000
                                                          --------------------------  --------------------------
<S>                                                        <C>             <C>         <C>           <C>
         Net income (loss).............................    $  (5,392)      $   656     $ (22,060)    $  (9,881)
         Weighted average number of common stock
             outstanding...............................       17,882        17,239        17,769        16,612
         Basic and diluted net income (loss) per common
             share.....................................     $  (0.30)     $   0.04      $  (1.24)     $  (0.59)
</TABLE>

     Potentially dilutive common shares have been excluded from the computation
of diluted net income (loss) per share for the three and nine months ended June
30, 2001 and 2000 since their effect on net income (loss) per share is
antidilutive, based on losses from continuing operations as the control number.
Consequently, the number of shares in the computations of basic and diluted net
income (loss) per share is the same for each period. Potentially dilutive common
shares which were excluded from the computation of diluted net income (loss) per
share consisted of options to purchase common stock totaling 3,322,895 shares
for the three and nine months ended March 31, 2001; 4,110,245 shares for the
three and nine months ended June 30, 2000; and a warrant to purchase common
stock totaling 5,000 shares for the three and nine months ended June 30, 2001.

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

     Segment Information

     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. Netopia's Chief
Executive Officer (CEO) is considered the Company's 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.

                                                                               6
<PAGE>

     The Company generates revenue from two groups of products and services.
Disaggregated financial information regarding the operating segments for the
three and nine months ended June 30, 2001 and 2000 is as follows (in thousands):

<TABLE>
<CAPTION>
                                                             Three months ended June 30,
                                    -------------------------------------------------------------------------------
                                                    2001                                     2000
                                    --------------------------------------  ---------------------------------------
                                      Internet       Web                      Internet        Web         Total
                                     Equipment     Platform      Total       Equipment     Platform
                                    -----------  -----------  ------------  ------------- ------------ ------------
<S>                                   <C>          <C>        <C>            <C>          <C>          <C>
Revenue...........................    $ 14,478     $  4,483    $ 18,961       $ 22,134     $  6,381     $ 28,515
Cost of revenues..................       9,653          182       9,835         15,461          222       15,683
                                      --------     --------    --------       --------     --------     --------
  Gross profit....................       4,825        4,301       9,126          6,673        6,159       12,832
  Gross margin....................        33.3%        95.9%       48.1%          30.1%        96.5%        45.0%
Unallocated operating expenses....                               15,027                                   14,453
                                                               --------                                 --------
  Operating loss..................                             $ (5,901)                                $ (1,621)
                                                               ========                                 ========

<CAPTION>
                                                              Nine months ended June 30,
                                    -------------------------------------------------------------------------------
                                                    2001                                     2000
                                    --------------------------------------  ---------------------------------------
                                      Internet       Web                      Internet        Web
                                     Equipment     Platform       Total      Equipment     Platform       Total
                                    -----------   ----------    ----------  ------------- ------------ ------------
<S>                                   <C>          <C>         <C>           <C>          <C>          <C>
Revenue...........................     $45,781     $ 14,401    $ 60,182       $ 48,633     $ 17,970     $ 66,603
Cost of revenues..................      30,293          608      30,901         33,949          468       34,417
                                       -------     --------    --------       --------     --------     --------
  Gross profit....................      15,488       13,793      29,281         14,684       17,502       32,186
  Gross margin....................        33.8%        95.8%       48.7%          30.2%        97.4%        48.3%
Unallocated operating expenses....                               50,856                                   47,211
                                                               --------                                 --------
  Operating loss..................                             $(21,575)                                $(15,025)
                                                               ========                                 ========
</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 nine months ended June 30, 2001 and 2000 is as follows (in
thousands):

<TABLE>
<CAPTION>
                                                                      Three months ended          Nine months ended
                                                                           June 30,                    June 30,
                                                                  --------------------------- ---------------------------
                                                                      2001          2000          2001          2000
                                                                  --------------------------- ---------------------------
                <S>                                                  <C>           <C>           <C>           <C>
                United States....................................    $ 17,178      $ 23,646      $ 51,191      $ 53,949
                Europe...........................................       1,310         4,197         7,307        10,605
                Asia Pacific.....................................         119           127           632           647
                Canada and other.................................         263           494           921         1,178
                Latin America....................................          91            51           131           224
                                                                  --------------------------- ---------------------------
                                                                     $ 18,961      $ 28,515      $ 60,182      $ 66,603
                                                                  =========================== ===========================
</TABLE>

                                                                               7
<PAGE>

     Customer Information

     For the three months ended June 30, 2001 and 2000:

          .   Covad Communications, a competitive local exchange carrier (CLEC)
              that purchases the Company's Internet equipment products,
              accounted for 22.8% and 24.6%, respectively, of the Company's
              total revenues and accounted for 12.8% and 32.7%, respectively, of
              the Company's accounts receivable. Covad announced on August 7,
              2001 that it expects to file for protection under the Bankruptcy
              Act by mid-August 2001.

          .   Ingram Micro, a distributor that purchases both the Company's
              Internet equipment and Web platform products, accounted for 12.8%
              and 6.1%, respectively, of the Company's total revenues and
              accounted for 17.7% and 9.0%, respectively, of the Company's
              accounts receivable.

     No other customers during the three months ended June 30, 2001 and 2000
accounted for 10.0% or more of the Company's total revenues or accounts
receivable.

     For the nine months ended June 30, 2001 and 2000:

          .   Covad Communications accounted for 13.7% and 16.7%, respectively,
              of the Company's total revenues and accounted for 12.8% and 32.7%,
              respectively, of the Company's accounts receivable. Covad
              announced on August 7, 2001 that it expects to file for protection
              under the Bankruptcy Act by mid-August 2001 as part of a capital
              restructuring plan. On August 7, 2001, the Company had no accounts
              receivable balance for Covad.

          .   Rhythms NetConnections accounted for 13.6% and 5.5%, respectively,
              of the Company's total revenues and accounted for 4.0% and 3.4%,
              respectively, of the Company's accounts receivable. During the
              three months ended June 30, 2001, Rhythms prepaid for all
              purchases of the Company's Internet equipment products, and
              consequently Rhythms accounted for no additional amounts of the
              Company's accounts receivable. Rhythms filed for protection under
              the Bankruptcy Act on August 2, 2001, and announced on August 10,
              2001 it expects to cease operations in September 2001.

          .   NorthPoint Communications accounted for 0.0% and 12.1%,
              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 March 2001, the Company does not
              believe it will recover any amounts from the bankruptcy estate.

                                                                               8
<PAGE>

(6)      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
                                                                    Intangible     Accumulated
                                               Acquisition Date       Assets       Amortization     Net Value
                                               ----------------    ------------    ------------     ---------
<S>                                            <C>                 <C>             <C>              <C>
         WebOrder.............................       March 2000       $  17,119       $   5,812       $ 11,307
         Starnet Technologies.................     October 1999          21,165          11,592          9,573
         Serus................................    December 1998           2,161           1,333            828
         netOctopus...........................    December 1998             960             539            421
                                                                      ---------       ---------       --------
                                                                      $  41,145       $  19,016       $ 22,129
                                                                      =========       =========       ========
</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.

(7)      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>
                                                      Employee    Internet
                                                      severance     portal     Facility
                                                      benefits    exit costs     costs       Total
                                                     ----------  ------------ -----------  ---------
         <S>                                         <C>         <C>          <C>          <C>
         Total charge...............................     $  475      $  510      $   88      $ 1,073
         Less:
            Amounts paid............................        242          38           9          289
            Non-cash charges........................         63         413          --          476
                                                      ------------ ----------- ----------- -----------
         Balance at March 31, 2001..................     $  170      $   59      $   79      $   308
         Less:
            Amounts paid............................         69          57          27          153
                                                      ------------ ----------- ----------- -----------
         Accrued balance at June 30, 2001...........     $  101      $    2      $   52      $   155
                                                      ============ =========== =========== ===========
</TABLE>

(8)      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,

                                                                               9
<PAGE>

certain shared merger costs, and other related expenses. Details of the non-
recurring charge are as follows (in thousands):


<TABLE>
<CAPTION>
                               Accounting                         Joint
                               and legal                       research and   Shared
                                advisory    Joint marketing    development    merger
                                services      commitments         costs        costs       Other       Total
                              ------------- ----------------- --------------- ----------  ---------  ----------
<S>                           <C>           <C>               <C>             <C>         <C>        <C>
Total charge..................   $  1,257         $   572         $   429     $  150      $  232      $2,640
Less:
   Amounts paid...............      1,169             165             229         --         138       1,701
   Non-cash charges...........         --              --              --         --          16          16
                              ------------- ----------------- --------------- ----------  ----------  ---------
Balance at March 31, 2001.....   $     88         $   407         $   200     $  150      $   78      $  923
Less:
   Amounts paid...............        171             395             200         --         112         878
                              ------------- ----------------- --------------- ----------  ----------  ---------
Balance at June 30, 2001......   $    (83)        $    12         $    --     $  150      $  (34)     $   45
                              ============= ================= =============== ==========  ==========  =========
</TABLE>

                                                                              10
<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

     Netopia, Inc. ("Netopia", the "Company", "we" or "us") develops, markets
and supports broadband Internet equipment and Web platforms for small, medium
and distributed 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, medium and distributed enterprise customers. These bundled service
offerings often include broadband 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 Mpower
Communications, Onsite Access and Business Telecomunication; distributors such
as Ingram Micro, Softway; and Tech Data and incumbent local exchange carriers
(ILECs) such as Bell South, SBC and Verizon. We depend upon the ability of the
competitive telecommunications service providers and ISPs to offer broadband
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
broadband 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. 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 March
2001. Similarly, Rhythms Netconnections, which has been an important customer,
filed a voluntary petition under the Bankruptcy Act on August 2, 2001, and
announced on August 10, 2001 that it expects to cease operations in September
2001. Covad Communications, which currently is our largest customer, announced
on August 7, 2001 that it expects to file a voluntary petition under the
Bankruptcy Act by mid-August 2001 as part of a capital restructuring plan.
PSInet, which has been an important customer, filed a voluntary petition under
the Bankruptcy Act on June 1, 2001, and most of its Canadian subsidiaries filed
for protection under similar Canadian statues called the Companies' Creditors
Arrangement Act.

                                                                              11
<PAGE>

Results of Operations for the Three and Nine Months Ended June 30, 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           Nine months ended
                                                                     June 30,                    June 30,
                                                             ------------------------    --------------------------
                                                                2001          2000           2001           2000
                                                             ------------------------    --------------------------
<S>                                                          <C>           <C>           <C>            <C>
Revenues:
   Internet equipment......................................        76.4%         77.6%          76.1%          73.0%
   Web platform licenses and services......................        23.6          22.4           23.9           27.0
                                                             ------------------------    --------------------------
       Total revenues......................................       100.0         100.0          100.0          100.0

Cost of revenues:
   Internet equipment......................................        50.9          54.2           50.3           51.0
   Web platform licenses and services......................         1.0           0.8            1.0            0.7
                                                             ------------------------    --------------------------
       Total cost of revenues..............................        51.9          55.0           51.3           51.7
                                                             ------------------------    --------------------------

   Gross profit............................................        48.1          45.0           48.7           48.3

Operating expenses:
   Research and development................................        18.2          12.3           17.2           14.5
   Selling and marketing ..................................        34.7          24.1           35.3           28.2
   General and administrative..............................        10.6           3.8           10.8            6.0
   Restructuring costs.....................................          --            --            1.8             --
   Terminated merger costs.................................          --            --            4.4             --
   Acquired in-process research and development............          --            --             --           13.0
   Amortization of goodwill and other intangible assets....        15.8          10.5           14.9           10.1
                                                             ------------------------    --------------------------
       Total operating expenses............................        79.3          50.7           84.4           70.9
                                                             ------------------------    --------------------------

       Operating loss......................................       (31.2)         (5.7)         (35.7)         (22.6)

Other income (loss):
   Loss on impaired securities.............................          --            --           (1.7)            --
   Other income, net.......................................         2.7           3.3            3.4            4.0
                                                             ------------------------    --------------------------
       Total other income..................................         2.7           3.3            1.7            4.0
                                                             ------------------------    --------------------------

   Loss from continuing operations before cumulative
   effect from adoption of Staff Accounting Bulletin 101...       (28.5)         (2.4)         (34.0)         (18.6)

Cumulative effect from adoption of Staff Accounting
Bulletin 101...............................................          --            --           (2.6)            --

Gain on sale of discontinued operation, net of taxes.......          --           4.7             --            3.7
                                                             ------------------------    --------------------------

            Net income (loss).............................        (28.5%)         2.3%         (36.6%)        (14.8%)
                                                             ========================    ==========================
</TABLE>


REVENUE

     For the three months ended June 30, 2001, our revenues decreased 33.5% to
$19.0 million from $28.5 million in the three months ended June 30, 2000.
Revenue declined primarily due to decreased sales of our DSL Internet routers in
the United States and decreased licensing of our Web platform products
worldwide. Sales of our DSL Internet routers and Web platform products decreased
primarily as a result of the financial and operational difficulties encountered
by the customers to whom and channels through which we sell these products.

                                                                              12
<PAGE>

     For the nine months ended June 30, 2001, our revenues decreased 9.6% to
$60.2 million from $66.6 million in the nine months ended June 30, 2000. Revenue
declined primarily due to decreased sales of our Internet equipment products,
particularly our DSL Internet routers in the United States and our ISDN Internet
routers in Europe as well as decreased sales of our Web platform products
worldwide. This decrease was partially offset by increased sales of our DSL
Internet routers in Europe. Sales of our DSL Internet routers and Web platform
products decreased primarily as a result of the financial and operational
difficulties encountered by the customers to whom and channels through which we
sell these products. Sales of our ISDN Internet routers decreased in Europe and
sales of our DSL Internet routers increased in Europe primarily as a result of
growing demand for DSL Internet services that is replacing the use of ISDN
Internet services in the European markets in which we distribute our Internet
equipment 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           Nine months ended
                                                                June 30,                     June 30,
                                                       ------------------------     ------------------------
                                                           2001          2000           2001          2000
                                                       ------------------------     ------------------------
     <S>                                               <C>             <C>          <C>            <C>
     Europe..........................................        6.9%         14.7%          12.1%         15.9%
     Asia Pacific....................................        0.6           0.4            1.1           1.0
     Canada and other................................        1.4           1.7            1.5           1.8
     Latin America...................................        0.5           0.3            0.2           0.3
                                                       ------------------------     -----------------------
         Subtotal international revenues.............        9.4          17.1           14.9          19.0
     United States...................................       90.6          82.9           85.1          81.0
                                                       -----------------------      -----------------------
                                                           100.0%        100.0%         100.0%        100.0%
                                                       =======================      =======================
</TABLE>

     For the three months ended June 30, 2001, international revenues decreased
63.4% to $1.8 million from $4.9 million in the three months ended June 30, 2000.
For the nine months ended June 30, 2001, international revenues decreased 28.9%
to $9.0 million from $12.7 million in the nine months ended June 30, 2000.
International revenues decreased for the three and nine months ended June 30,
2001 primarily due to decreased sales of our ISDN Internet routers as a result
of increased deployment of DSL services internationally to connect to the
Internet as well as decreased sales of our Web platform products. The decline in
international revenues for the nine months ended June 30, 2001 was partially
offset by increased sales of our DSL Internet routers internationally. Although
international revenues decreased as a percentage of revenue in the three and
nine months ended June 30, 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 June 30, 2001, our gross margin increased to
48.1% from 45.0% in the three months ended June 30, 2000. For the nine months
ended June 30, 2001, our gross margin increased to 48.7% from 48.3% in the nine
months ended June 30, 2000. Gross margins increased for the three and nine
months ended June 30, 2001 primarily due to the average cost of our Internet
equipment products decreasing more quickly than the average prices at which we
sell these products.

                                                                              13
<PAGE>

     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. 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 June 30, 2001, our research and development
expenses decreased 1.6% to $3.4 million from $3.5 million for the three months
ended June 30, 2000. Research and development expenses decreased primarily due
to decreased product prototyping expenses, facility costs and employee related
expenses. These decreases were partially offset by increased depreciation
expense as a result of increased capital expenditures related to the purchase of
development equipment for our Internet equipment products and increased beta
testing expenses related to the development of new voice and data integrated
access devices (IADs) and router products.

     For the nine months ended June 30, 2001, our research and development
expenses increased 7.6% to $10.4 million from $9.6 million for the nine months
ended June 30, 2000. Research and development expenses increased primarily due
to:

     .  Increased product prototyping expenses related to the development
        of new IAD and router products;

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

     .  Increased use of third party contractors primarily related to
        development of 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 nine
months ended June 30, 2001, we capitalized $0.3 million and $0.9 million,
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 June 30, 2001, our selling and marketing
expenses decreased 4.5% to $6.6 million from $6.9 million for the three months
ended June 30, 2000. Selling and marketing expenses decreased primarily due to
reduced advertising and promotion expenses and decreased use of third party
contractors. These decreases were partially offset by increased headcount and
employee related expenses related to our efforts to expand the number of
channels through which we sell our products.

     For the nine months ended June 30, 2001, our selling and marketing expenses
increased 13.1% to $21.3 million from $18.8 million in the nine months ended
June 30, 2000. Selling and marketing expenses increased primarily due to
increased headcount and employee related expenses related to our efforts to
expand the number of channels through which we sell our products. These
increases were partially offset by reduced advertising and promotion expenses.

                                                                              14
<PAGE>

GENERAL AND ADMINISTRATIVE

     For the three months ended June 30, 2001, our general and administrative
expenses increased 88.7% to $2.0 million from $1.1 million for the three months
ended June 30, 2000. General and administrative expenses increased primarily due
to a $0.9 million special provision for doubtful accounts related to customers
that have filed (or are anticipated to file) for bankruptcy protection or have
extended payments beyond our normal terms. Excluding the special provision for
doubtful accounts, general and administrative expenses remained relatively
unchanged at $1.1 million for the three months ended June 30, 2001 and 2000.

     For the nine months ended June 30, 2001, our general and administrative
expenses increased 94.0% to $6.5 million from $3.4 million for the nine months
ended June 30, 2000. This increase was primarily due to a $2.8 million special
provision for doubtful accounts, of which approximately $1.7 million was related
to the outstanding accounts receivable of NorthPoint Communications. Excluding
the special provision for doubtful accounts, general and administrative expenses
increased 12.0% to $3.8 million for the nine months ended June 30, 2001 from
$3.4 million for the nine months ended June 30, 2000. This increase is primarily
due to increased employee related costs and increased insurance costs.

RESTRUCTURING COSTS

     During the nine months ended June 30, 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 7 of Notes to Condensed Consolidated Financial Statements.)

TERMINATED MERGER COSTS

     During the nine months ended June 30, 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 8 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 nine 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 nine months ended June 30, 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 6 of Notes to Condensed
Consolidated Financial Statements.)

     For each of the three month periods ended June 30, 2001 and 2000, we
amortized:

     .  $1.1 million 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 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.

     .  $0.1 million in goodwill and other intangible assets related to our
        acquisition of Serus. We are amortizing the goodwill and other
        intangible assets over four years.

                                                                              15
<PAGE>

       .  $0.1 million 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 nine months ended June 30, 2001 and 2000, we amortized:

       .  $3.3 million and $1.2 million, respectively, in goodwill and other
          intangible assets related to our acquisition of WebOrder.

       .  $5.1 million and $4.9 million, respectively, in goodwill and other
          intangible assets related to our acquisition of StarNet.

       .  $0.4 million, in each period, in goodwill and other intangible assets
          related to our acquisition of Serus.

       .  $0.2 million, in each period, in goodwill and other intangible assets
          related to our acquisition of netOctopus.

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 June 30, 2001, other income decreased 46.0% to
$0.5 million from $0.9 million for the three months ended June 30, 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.

     For the nine months ended March 31, 2001, other income decreased 59.8% to
$1.1 million from $2.7 million for the nine 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 as well as 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.

PROVISION FOR INCOME TAXES

     We did not record an income tax provision during the three or nine months
ended June 30, 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
balance sheet.

Gain on Sale From Discontinued Operations.

     For the three months ended June 30, 2000, the gain on sale of discontinued
operations, net of taxes, was $1.3 million and is related to our sale of the
Farallon LAN Division. Farallon bought out its royalty obligation for an amount
in excess of the receivable on our balance sheet. In addition, we exercised and
sold our warrant in

                                                                              16
<PAGE>

Farallon that we received as consideration for the sale in August 1998, and sold
the shares received upon exercise of the warrant. Each item generated a gain on
sale of the discontinued operation during our fiscal third quarter of 2000.

     For the nine months ended June 30, 2000, the gain on sale from discontinued
operations, net of taxes was $2.5 million and is related to our sale of the
Farallon LAN Division. For the nine months ended June 30, 2000, the gain on
sales is primarily due to Farallon's buyout of the royalty obligation and our
exercise and sale of the warrant as discussed above as well as the reversal of a
$1.2 million 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 our business because such
factors currently may have a significant impact on our 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 our other filings
with the United States Securities and Exchange Commission 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 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 competitive telecommunications service carriers and providers
such as Rhythms NetConnections, Covad Communications and McLeodUSA and Internet
service providers (ISPs) such as Megapath Networks, Onsite Access, Business
Telecommunications, Inc., UUNet (a division of MCI WorldCom), 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. 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 March 2001. Rhythms NetConnections, which has
been an important customer, filed a voluntary petition under the Bankruptcy Act
on August 2, 2001, and announced on August 10, 2001 that it expects to cease
operations in September 2001. Covad Communications, which currently is our
largest customer, announced on August 7, 2001 that it expects to file a
voluntary petition under the Bankruptcy Act by mid-August 2001 as part of a
capital restructuring plan. PSInet, which has been an important customer, filed
a voluntary petition under the Bankruptcy Act on June 1, 2001, and most of its
Canadian subsidiaries filed for protection under similar Canadian statues called
the Companies' Creditors Arrangement Act.

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 CLECs and 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. During the last twelve
months, four of our largest CLEC customers, Covad Communications, Rhythms
NetConnections, NorthPoint Communications, and Jato Communications, have
demonstrated the following market difficulties:

                                                                              17
<PAGE>

       .  Covad Communications has reduced its breadth of network build-out and
          significantly scaled back its operations. In addition, Covad
          Communications, which currently is our largest customer, announced on
          August 7, 2001 that it expects to file a voluntary petition under the
          Bankruptcy Act by mid-August 2001 as part of a capital restructuring
          plan;

       .  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. In addition, on August 2,
          2001, Rhythms filed a voluntary petition under the Bankruptcy Act and
          announced on August 10, 2001 that it expects to cease operations in
          September 2001;

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

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

     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 also 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 largest ISP
customers during the last twelve months, Mpower Communications, PSInet, Onsite
Access and Business Telecomunications, Inc., have all experienced business
difficulties and some have filed for bankruptcy or ceased operations. PSInet,
which had been one of our important ISP customers for more than three years,
filed a voluntary petition under the Bankruptcy Act on June 1, 2001, and most of
its Canadian subsidiaries filed for protection under similar Canadian statues
called the Companies' Creditors Arrangement Act. The pricing pressure for ISPs
continues to date, and, accordingly, sales of our products to ISPs remain
difficult.

     Our products are generally intended for use by small, medium and
distributed enterprises. 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 recently have committed resources that are
focused on penetrating the ILEC market domestically and overseas in response to
changing market conditions. 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, and if we fail to successfully penetrate the ILEC
market for our products and services, our business may be materially and
adversely affected.

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 June 30, 2001, our top four customers who
each individually represented at least 5% of our total revenues, accounted for
approximately 50.6% of our total revenues. In this period, sales to Covad
Communications and Ingram Micro represented approximately 22.8% and 12.8%,
respectively, of our total revenues. Covad Communications has incurred operating
losses and negative cash flows as it establishes its network and operations.
Accordingly, Covad is dependent on continued access to new sources of capital.
As a result, Covad announced on August 7, 2001 that it expects to file a
voluntary petition under the Bankruptcy Act by mid-August 2001 as part of a
capital restructuring plan. To the extent Covad is unable to emerge successfully
from the bankruptcy proceedings and to secure new sources of capital, our
revenues and profitability may be materially and adversely affected.

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.

                                                                              18
<PAGE>

     Our failure to significantly increase our revenues or sufficiently reduce
our operating expenses would result in continuing losses. We incurred losses
from continuing operations of $5.4 million and $22.1 million for the three and
nine months ended June 30, 2001, respectively. Our operations have provided $2.0
million of cash during the three months ended June 30, 2001 and used $3.3
million of cash during the nine months ended June 30, 2001, respectively. Even
if we reach profitability and maintain 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
maintain positive cash flow from operations.

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

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

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

     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
          customers such as Rhythms NetConnections or Covad Communications;

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

       .  The growth rate in the number of Web sites and e-stores that are built
          using our Web platform 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, medium and
          distributed enterprises for DSL to entities with whom we do not have
          historical relationships;

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

       .  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;

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<PAGE>

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

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

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

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

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

     .    Costs associated with future litigation, including securities
          litigation or 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 broadband 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 IADs 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 our Timbuktu Pro
product.

     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.

                                                                              20
<PAGE>

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

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

We expect our revenues to become increasingly dependent on the market for
broadband Internet equipment, and we may incur losses if we cannot continue to
successfully introduce, market and sell our broadband Internet equipment.

     A portion of our revenues from Internet equipment is derived from
non-broadband routers. We anticipate that in the future the market for such
non-broadband products will decrease and that sales of our non-broadband
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 broadband 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 designed
and manufactured 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.

                                                                              21
<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, Virtual
Private Networks (VPNs), 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.

We expect our revenues to become increasingly dependent on our ability to sell
our broadband Internet equipment to ILECs, and we may incur losses if we cannot
successfully market and sell our products through ILEC channels.

     ILECs have been aggressively marketing DSL services principally focusing on
residential services. Historically, we have not sold meaningful quantities of
our DSL Internet equipment 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, a long-term contract cycle and intense price
pressures. ILECs currently obtain equipment from our competitors, such as
Siemens (Efficient Networks and its FlowPoint product line), who have proven to
be strong competitors. With the challenging environment for CLECs and ISPs and
the slow growth in sales to businesses by ISPs, we recently have committed
resources that are focused on penetrating the ILEC market domestically and
overseas in response to changing market conditions. There is no guarantee we
will be successful in penetrating the ILEC market, and if we fail to
successfully penetrate the ILEC market for our products and services, our
business may be materially and adversely affected.

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

     We have released 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 compete with a variety of different broadband services,
including cable, satellite and other wireless technologies. Many of these
technologies 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
DSL products and services and our revenues and gross margins will 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.

                                                                              22
<PAGE>

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
relies on components that are supplied by independent contractors and
specialized suppliers. We generally do not have guaranteed supply arrangements
with these third parties and they could cease selling components to us at any
time. Moreover, the ability of independent contractors and specialized suppliers
to provide us with sufficient components for our Internet equipment 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 purchased from 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 develop and market successfully IADs 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 is relatively new. 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

                                                                              23
<PAGE>

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.

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.

To be successful, use of our Web platform must become widespread, and this will
require us to expand our sales and distribution channels, 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
expand our sales and distribution channels 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 our 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,

                                                                              24
<PAGE>

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.

Our Web platform products have a lengthy sales cycle.

     We license a substantial portion of our Web platform products to a limited
number of large customers, and the sales cycle for these licenses 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 obtain 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 have been 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.

                                                                              25
<PAGE>

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

We may not be able to license necessary software, firmware and hardware designs
from third parties.

     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 on which our business depends may be affected
by changes in tariffs and regulations. For example, we depend on
telecommunications service providers for sales of our broadband Internet
equipment, and companies in the telecommunications industry must comply with
numerous regulations and pay numerous tariffs. If our industry or industries on
which we depend 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.

                                                                              26
<PAGE>

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 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 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.

                                                                              27
<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 public
offerings of our common stock. As of June 30, 2001, we had cash, cash
equivalents and short-term investments of $51.8 million, representing 49.1% of
our total assets.

     Our operating activities used $3.3 million of cash for the nine months
ended June 30, 2001. This use of cash was primarily due to supporting our
regular operating activities, paying the expenses related to our terminated
merger with Proxim as well as the reduction of our accounts payable and other
liabilities. These costs were partially offset by increased accounts receivable
collections. Our operating activities provided $1.2 million of cash for the nine
months ended June 30, 2000 primarily due to cash generated from our regular
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 $0.8 million of cash for the nine months
ended June 30, 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, the purchase of capital equipment and certain long-term
investments. Our investing activities used $26.2 million of cash for the nine
months ended June 30, 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 $1.5 million and $5.4 million of cash for
the nine months ended June 30, 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 fiscal 2002 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

                                                                              28
<PAGE>

and, in March 2000, we acquired WebOrder. The success of these acquisitions
depend upon our ability to timely and successfully develop, manufacture and gain
market acceptance for the products we acquired. If we engage in additional
acquisitions or divestitures in future periods, we may not be able to address
these risks and our business may be harmed.

     During 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 medium size 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 is not less than $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 is not less than $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 have been 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.

                                                                              29
<PAGE>

Interest Rate Risk

     The table below presents the market value and related weighted-average
interest rates for our investment portfolio at June 30, 2001 and 2000. All of
our investments mature in twelve months or less.

<TABLE>
<CAPTION>
                                                          June 30, 2001                            June 30, 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>          <C>           <C>
Cash equivalents - fixed rate (a)...........   $   35,421  $     35,545       4.1%     $    39,438  $     39,657     6.1%
Short-term investments - fixed rate (b).....       14,810        14,923       4.3%          19,604        19,802     6.4%
                                               ----------  ------------                -----------  ------------
                                               $   50,231  $     50,468                $    59,042  $     59,459
                                               ==========  ============                ===========  ============
</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 June 30, 2001 and 2000. These
accounts receivable are valued at the United States/Euro exchange rate as of
June 30, 2001. The carrying value approximates fair value at June 30, 2001 and
2000.

<TABLE>
<CAPTION>
                                                          June 30, 2001                   June 30, 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.......     $  1,543        0.8503          $  1,225        0.9513
</TABLE>

     The table below presents the carrying value of our currency exchange
forward contracts, in United States dollars, at June 30, 2001 and 2000. The
carrying value approximates fair value at June 30, 2001 and 2000.

<TABLE>
<CAPTION>
                                                 June 30, 2001                           June 30, 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................         $ 878      0.8676      July 2001          $575       0.9578      July 2000
Currency exchange forward
   contract # 2................         $ 761      0.8805     August 2001         $384       0.9598     August 2000
Currency exchange forward
   contract # 3................         $ 315      0.8407    September 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.

                                                                              30
<PAGE>

PART II. OTHER INFORMATION

Item 5.   Other Information

     Effective April 26, 2001, Harold S. Wills was appointed to serve on our
Board of Directors.

     Effective July 24, 2001, William D. Baker was appointed Senior Vice
President and Chief Financial Officer of the Company.

Item 6.   Exhibits and Reports on Form 8-K

(b)  Reports on Form 8-K

     .    On May 1, 2001, we filed a Form 8-K reporting Item 5 - Other Events;
          announcing that our board of directors authorized a stock option
          exchange program for employees of Netopia. There were no financial
          statements filed with this Form 8-K.

                                                                              31
<PAGE>

SIGNATURE
--------------------------------------------------------------------------------

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


Date:  August 13, 2001                      NETOPIA, INC.
                                     (Registrant)



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


                                     By: /s/ William D. Baker
                                         ---------------------------
                                         William D. Baker
                                            Senior Vice President and Chief
                                             Financial Officer

                                                                              32