<PAGE>

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

                              __________________

                                   FORM 10-K

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

                  For the Fiscal Year ended December 31, 2000

                                   001-15715
                           (Commission File Number)

                              __________________

                               NETPLIANCE, INC.

            (Exact name of Registrant as specified in its charter)

                              __________________

               Delaware                                No. 74-2902814
     (State or other jurisdiction of       (I.R.S. Employer Identification No.)
      incorporation or organization)

                       7501B N. Capital of Texas Highway
                              Austin, Texas 78731
                   (Address of principal executive offices)

                                (512) 681-8300
             (Registrant's telephone number, including area code)

       Securities registered pursuant to Section 12(b) of the Act:  None

          Securities registered pursuant to Section 12(g) of the Act:
                         Common Stock, $.01 par value
                               (Title of Class)

                              __________________

     Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X]  No [_]

     Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K: [X]

     The aggregate market value of the Registrant's voting stock held by non-
affiliates of the Registrant at February 28, 2001, based on the $0.4375 per
share closing price for our common stock on the Nasdaq National Market, was
approximately $11,336,976.

     The number of shares of the Registrant's common stock outstanding as of
February 28, 2001 was 60,587,647.

                      DOCUMENTS INCORPORATED BY REFERENCE

Certain information is incorporated by reference to the Proxy Statement for the
Registrant's 2001 Annual Meeting of Stockholders to be filed with the Securities
and Exchange Commission pursuant to Regulation 14A not later than 120 days after
the end of the fiscal year covered by this Form 10-K.
<PAGE>

Table of Contents

<TABLE>
<CAPTION>
                                                                                            Page
                                                                                            ----
     <S>                                                                                    <C>
     PART I
          Item 1.   Business...............................................................    1
          Item 2.   Properties.............................................................   15
          Item 3.   Legal Proceedings......................................................   15
          Item 4.   Submission of Matters to a Vote of Security Holders....................   15

     PART II
          Item 5.   Market for Registrant's Common Equity and Related Stockholder Matters..   16
          Item 6.   Selected Financial Data................................................   17
          Item 7.   Management's Discussion and Analysis of Financial Condition and
                    Results of Operations..................................................   18
          Item 7a.  Quantitative and Qualitative Disclosures About Market Risk.............   22
          Item 8.   Financial Statements and Supplementary Data............................   22
          Item 9.   Changes in and Disagreements with Accountants on Accounting and
                    Financial Disclosure...................................................   22

     PART III
          Item 10.  Directors and Executive Officers of the Registrant.....................   22
          Item 11.  Executive Compensation.................................................   22
          Item 12.  Security Ownership of Certain Beneficial Owners and Management.........   23
          Item 13.  Certain Relationships and Related Transactions.........................   23

     PART IV
          Item 14.  Exhibits, Financial Statement Schedules, and Reports on Form 8-K.......   24

     SIGNATURES............................................................................   25
</TABLE>
<PAGE>

                                    PART I

ITEM 1.  BUSINESS

Overview

     Since our organization in 1999, we have primarily offered consumers
Internet access through devices commonly known as Internet appliances, which we
also marketed and sold to our customers. Recently, however, we have changed our
strategic focus and are exiting this consumer business. We are now developing a
business plan to launch a hardware and software offering designed to enable
broadband service providers to provide premium services over their
telecommunications networks.

Internet Appliance Business

     We were formed in January 1999, and we began offering our Internet
appliance and service in November 1999. Since that time, our operating history
has consisted primarily of offering consumers Internet based content,
applications and services through Internet appliances. Our offering of Internet
appliances and related services to consumers generated extensive operating
losses and negative cash flow because consumer demand for our consumer Internet
offering was relatively weak, requiring us to sell our Internet appliance for a
price well below our cost in order to gain customers. Therefore, in order to
acquire the subscriber base necessary to generate enough revenue to make this
business profitable, we required a great deal of capital over a fairly short
period of time. Shortly after the initial public offering of our common stock in
March 2000, the U.S. equity markets entered a period of increased volatility in
which the stocks of many technology companies were negatively impacted. As a
result, the trading price of our common stock declined dramatically, and it
became apparent that it would be very difficult for us to raise additional
financing in the capital markets. Without that additional financing, our
consumer Internet offering could not be successful.

     In November 2000, we began shifting our business model to focus on
providing broadband infrastructure and services and away from our consumer
Internet offering. In connection with this shift in focus, we restructured our
operations. We reduced our headcount by approximately 38%, primarily in our
consumer sales and marketing departments and in administration. In January 2001,
we terminated all marketing and sales efforts related to our consumer Internet
appliances, although we continued to service customers who had previously
purchased our Internet appliances. Also in January 2001, we reduced our
headcount by an additional 76 employees, and certain members of senior
management who were dedicated to our consumer Internet offering resigned.

     In February 2001, we entered into an agreement with EarthLink, Inc. for the
transfer of our service obligations relating to most of our existing customers.
Pursuant to this agreement, these customers were offered continued Internet
access only through EarthLink. Approximately 50,000 of our customers were
transferred to EarthLink's service on March 12, 2001. The agreement calls for us
to receive payments from EarthLink at a rate of $175 for each of our customers
who transferred to the EarthLink service and who remains an EarthLink customer
through two monthly billing cycles.

     After the transfer of our Internet service obligations to EarthLink, we
continue to provide Internet access service to approximately 6,000 customers. We
have the obligation to provide service to approximately 5,000 of these customers
through November 2001. After that date, we expect to discontinue providing any
Internet access service. We have network services agreements that we anticipate
terminating or restructuring, which could result in significant termination fees
or other charges.

                                       1
<PAGE>

We also have continuing warranty obligations, through January 2002, relating to
the Internet appliances we sold to our customers. We have an inventory of
approximately 20,000 Internet appliances that we expect to sell to a third party
for that inventory's scrap value. We currently are continuing to operate our
Internet portal, but we expect the EarthLink customers to be transitioned to an
EarthLink portal in the future. In general, we are in the process of exiting our
consumer-focused business entirely, but will continue to have significant
obligations and potential liabilities relating to this business.

Broadband Initiative

     Currently, we are developing a business plan to launch an offering that
will include hardware and software designed to enable broadband service
providers to provide premium services over their telecommunications networks to
businesses and consumers. In entering this untested and rapidly changing sector
of telecommunications, we will face a variety of obstacles and challenges.

     Our first attempt at achieving profitability, by developing and marketing
our Internet appliance and related services, was unsuccessful. Therefore, it may
be more difficult for us to make an effective transition into an infrastructure
technology company in the telecommunications market, especially in the areas of
raising capital, attracting and retaining talented employees, attracting
research analyst coverage of our common stock and gaining the confidence of
possible strategic relationships, substantial investors and customers for our
proposed new business.

     We plan on focusing our efforts on developing an offering that helps
broadband service providers enable premium services over their
telecommunications networks. These service providers understand that companies
conducting business using broadband will not tolerate poor performance, which
can create dissatisfied users and result in lost customer goodwill and revenue
opportunities. As these service providers continue to receive increasing demand
for premium broadband services that allow for access to optimum levels of
performance, we believe they will need to turn to better technology in order to
meet these new demands. This new technology could be hardware, software, or a
combination of both that creates a way to predict or control the network path
over which data will travel. Such control would, among other things, help avoid
network congestion or bottlenecks that degrade performance and, therefore,
provide more optimum levels of service. This technology may have the potential
to enable simultaneous multiple applications or service access, such as Internet
access at the same time as telephone or cable access. We cannot be sure,
however, that we will be able to develop such technology, or that the increase
in demand for broadband services that we anticipate will materialize or be
sufficient to support the marketability of any of our possible products.

     We believe, but can give no assurance, that there will be a significant
need for a well-designed, cost-effective overlay technology that enables the
better deployment of premium broadband services. We believe that the current
broadband infrastructure is evolving to meet the need for these premium
services, and we hope to capitalize on this evolution with our broadband
initiative. We plan first to develop and, if successful, deliver integrated
hardware, software and service solutions based upon technology that will allow
broadband service providers to more efficiently create and provide premium
services. Our objective is to become an early provider of technology solutions
in the broadband sector. In order to achieve this objective, we intend to focus
our efforts in year 2001 and beyond on the planning and development of our
potential broadband products and services. However, we are still in the planning
stages of our initiative and can give no assurance that we will achieve any of
our objectives. Currently, we are developing a prototype to test the feasibility
of our new business plan. We have not developed new software for our planned
products, and have no sales contracts with potential customers for our suite of
potential products and services.

                                       2
<PAGE>

     If we are successful in our development efforts, for which we can give no
assurance, our target markets in telecommunications will include broadband
service providers, local exchange carriers, multiple system operators and inter-
exchange carriers, along with other similar service providers.

     We are taking steps to develop a product offering that generally can be
described as a smart switch or policy enforcement engine, which will provide a
process to enhance the ability of service providers to deliver and manage
content and various other media over broadband. If developed, this process will
be the core of our full line of broadband solutions that we hope to develop and
market. Our product offering may take the shape of a technology that processes
and switches network traffic at multi-gigabit speed, is based on state-of-the-
art silicon and is digital subscriber line and cable compatible.

     At this early stage of our efforts with our broadband initiative, and given
the dynamic nature of the industry we hope to serve, we cannot be sure as to the
final form that our solutions will take. Our policy enforcement engine or smart
switch, if successfully developed, will be the first in what we hope will be our
continuing line of business for broadband applications and solutions. We hope
that, if we are successful in our planning and developing of these products and
our target markets accept these products, each generation of products will be
packaged and marketed with a complementing suite of applications and services.
We can give no assurance that any of these efforts will be successful.

Research and Development

     Our research and development expenses totaled $10.3 million and $6.5
million for the year ended December 31, 2000, and the period from January 12,
1999 (inception) to December 31, 1999, respectively. Although some of the
technology we developed during those years may be applied to our proposed
business plan, much of that technology will not be useful to us going forward.

     We believe that strong product development capabilities will be essential
to our strategy of developing our proposed product and service offerings. We may
invest significant time and resources in creating a structured process for
undertaking all product development projects. We are actively recruiting key
existing management and other personnel to remain with us. We need to hire
engineers and software developers with expertise in the areas of hardware
design, software and system implementation, and hope to complement these
individuals by hiring additional senior management with extensive backgrounds in
the network infrastructure, enterprise software and telecommunications and
broadband industries. We can give no assurances that we will be successful in
retaining or recruiting any of this personnel.

     We plan to focus our ongoing research and development efforts on developing
our new suite of technology products and applications for broadband, developing
stronger integration among those applications and modifying and adapting any
developed products and services for use with enterprise networks. We intend to
expend a large portion of our resources on these research and development
efforts. We cannot give any assurance that any of these efforts will be
successful.

Competition

     If we are successful in developing our proposed offerings, we will have to
compete in markets that are new, intensely competitive, highly fragmented and
rapidly changing. We expect to experience strong competition from current and
potential competitors in our target markets, many of whom are already bringing
new solutions to market, focusing on specific segments of our target markets and
establishing alliances and Original Equipment Manufacture (OEM) relationships
with larger companies who will bundle our competitor's products into their
product and service solutions. In some cases, our potential competitors are
implementing aggressive pricing and other strategies that are focused on

                                       3
<PAGE>

building customer bases, name recognition in the market and capturing market
share in the short term. This may cause price pressure on our potential products
and services in the future.

     We expect that, if we can develop our proposed offerings, we will compete
directly against a number of companies in the broadband solutions market,
including Akamai Technologies, Inc., CacheFlow, Inc., Cisco Systems, Inc.,
InfoLibria Incorporated, Lucent Technologies, Inc., Microsoft Corporation,
Netscape, Inc., Network Appliance, Inc., Nortel Networks, Inc., Novell, Inc.,
RealNetworks, Inc., Spyglass, Inc., Riverstone Networks, Inc., BackWeb
Technologies, Inc., RiverDelta Networks, iXL Enterprises, Inc., ActiVia Networks
SA, Mirror Image/Xcelera, Inc., Digex, Inc., iBEAM Broadcasting Corporation, XO
Communications, Inc. and Internap Network Services Corporation. We also are
aware of numerous other major broadband solutions developers, as well as smaller
entrepreneurial companies, who are focusing significant resources on developing
and marketing products and services that will compete with our anticipated suite
of products and services. We also believe that we may face competition from
other providers of competing solutions to network infrastructure problems,
including networking hardware and software manufacturers, traditional hardware
manufacturers, telecommunications providers, cable television/communications
providers, software database companies and large diversified software and
technology companies. Many of these companies provide or have announced their
intentions to provide a range of software and hardware products to compete in
the broadband market, as well as in the specific broadband solution markets in
which we hope to compete. In addition, we may face competition from companies
that we are not currently aware will enter our targeted markets.

     Our potential competitors may be able to respond more quickly than we can
to new or emerging technologies and changes in customer requirements. In
addition, our potential competitors may bundle their products with other
software or hardware in a manner that may discourage our potential customers
from purchasing the products and services we may offer. Also, most of our
potential competitors have greater name recognition, more financial resources,
more extensive customer bases and better access to proprietary content than we
do. Competition in our target markets could result in price reductions, fewer
customer orders, fewer broadband service providers as potential customers, less
online traffic, reduced gross margins and loss of any market share we may
achieve.

Intellectual Property

     We anticipate filing patent applications for several inventions that we
believe will be key to our proposed broadband initiative. We can give no
assurance that we will obtain any such patents, or that any patents we obtain
will be useful in our new business. If we are not successful in obtaining the
patent protection we will seek, our competitors may be able to replicate our
technology and more effectively compete with us.

     We have filed patent applications for several inventions that we have used
as key enablers to our consumer Internet offering. We are analyzing these
applications to determine whether we will continue to pursue patent protection
for these inventions. We anticipate continuing to pursue protection for those
patents that may be applicable to our new broadband initiative and for those
inventions that we can profitably license to third parties.

Employees

     We had 101 full-time employees as of February 28, 2001, the substantial
majority of whom are non-management personnel. Eventually, we expect to reduce
the number of full-time employees to approximately 50. None of our employees is
represented by a labor union. We have not experienced any work stoppages, and we
believe that we have satisfactory employee relations.

                                       4
<PAGE>

          SPECIAL NOTE ON FORWARD-LOOKING STATEMENTS AND RISK FACTORS

     This report contains "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934, both as amended. All statements other than statements of
historical fact are "forward-looking statements" for purposes of federal and
state securities laws, including: any projections of earnings, revenues or other
financial items; any statements of the plans, strategies and objectives of
management for future operations; any statements concerning proposed new
products, services or developments; any statements regarding future economic
conditions or performance; any statements of belief; and any statements of
assumptions underlying any of the foregoing. Forward-looking statements may
include the words "may," "will," "estimate," "intend," "continue," "believe,"
"expect" or "anticipate" and other similar words. Such forward-looking
statements may be contained in the sections "Factors Affecting Operating
Results," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business," among other places.

     Although we believe that the expectations reflected in any of our forward-
looking statements are reasonable, actual results could differ materially from
those projected or assumed in any of our forward-looking statements. Our future
financial condition and results of operations, as well as any forward-looking
statements, are subject to change and to inherent risks and uncertainties, such
as those disclosed in this report. We do not intend, and undertake no
obligation, to update any forward-looking statement.

Factors Affecting Operating Results

     There are numerous risks affecting our proposed business and our
discontinued operations, some of which are beyond our control. These risks
relate to our efforts in transitioning to our new strategic focus, the launch of
our new broadband initiative and the discontinuation of our old line of products
and services. An investment in our common stock involves a high degree of risk
and may not be appropriate for investors who cannot afford to lose their entire
investment. In addition to the risks outlined below, risks and uncertainties not
presently known to us or that we currently consider immaterial may also impair
our business operations. Our future operating results and financial condition
are heavily dependent on our ability to successfully develop, manufacture and
market technologically innovative broadband solutions in order to meet customer
demand patterns in the telecommunications industry. Inherent in this process are
a number of factors that we must successfully manage if we are to achieve
positive future operating results in the future. Potential risks and
uncertainties that could affect our operating results and financial condition
include, without limitation, the following:

     We cannot predict our future results because we have a limited operating
     history and have recently changed our strategic focus.

     We have a limited operating history and no history operating our proposed
broadband solutions line of business. We were incorporated in January 1999 and
we began offering our Internet appliance and service in November 1999. We began
exploring our proposed broadband initiative in November 2000. Our proposed
broadband solutions are in the planning and early stage and are a new strategic
focus for us. There are significant risks and costs inherent in our efforts to
undertake our proposed broadband initiative and to transition to a new business
model. These include the risk that we may not be able to develop a viable
broadband product, achieve market acceptance for our proposed line of products
and services or earn revenues from the sale of such products and services, that
our proposed operations, if started at all, may not be profitable and other
significant risks related to the changes in our business model described below.
Our prospects must be considered in light of the uncertainties and difficulties
frequently encountered by companies in their early stages of development. These
risks are heightened in new and rapidly evolving industries, such as


                                       5
<PAGE>

broadband, specifically, and telecommunications, generally. It is possible that
we will exhaust all available funds before we reach the positive cash flow phase
of our proposed business model.

     We may have difficulty in raising capital and making an effective
     transition because of our history.

     Our first attempt at achieving profitability, by developing and marketing
our Internet appliance and related services, was unsuccessful. Therefore, it may
be more difficult for us to make an effective transition into an infrastructure
technology company in the telecommunications market, especially in the areas of
raising capital, attracting and retaining talented employees, attracting
research analyst coverage of our common stock and gaining the confidence of
possible strategic relationships, substantial investors and new customers for
our proposed new business.

     The transition to our proposed business model is risky and expensive. We
     expect to incur operating losses throughout at least the remainder of 2001,
     and it is possible that we may never become profitable.

     As part of our restructuring effort begun in late 2000, we changed our
strategic focus. Successful implementation of our reorganization continues to
involve several risks. These risks include:

          .    reliance upon unproven products and technology;

          .    our unproven and evolving business model;

          .    market acceptance of any new products and services we are able to
               develop;

          .    our ability to anticipate and adapt to a developing market and to
               rapidly changing technologies;

          .    the effect of competitive pressures in the marketplace;

          .    our need to structure our internal resources to support the
               development, marketing, and future growth of our potential
               products and service offerings;

          .    uncertainties concerning our strategic direction and financial
               condition;

          .    our need for broadband service providers to launch and maintain
               services that create a need for the new products and services we
               intend to develop;

          .    the uncertainty of market acceptance of broadband services
               utilizing our proposed line of products and services;

          .    our need to introduce reliable products and services that meet
               the demanding needs of broadband service providers; and

          .    our need to realign and enhance our business development,
               research and development, product development, consulting and
               support organizations, and expand our distribution channels, to
               develop our proposed business plan.

                                       6
<PAGE>

     Even if our new business model is successfully implemented, there can be no
assurance that it will effectively resolve the various issues we currently face
in our transition. In addition, although we believe that the actions that we are
taking under our reorganization plan will help us become profitable, there can
be no assurance that such actions will succeed in the long or short term.

     Internal and external changes resulting from our reorganization and
transition towards our new strategic focus may concern our potential customers,
strategic relationships, distributors and employees, and create a prolonged
period of uncertainty, which could have a material adverse affect on our
business.  Our new strategy requires substantial changes, including pursuing new
strategic relationships, increasing our research and development expenditures,
adding employees who possess the skills we believe we will need going forward,
investing in new technologies, establishing leadership positions in new high-
growth markets and realigning and enhancing our sales and marketing departments.
Many factors may impact our ability to implement this strategy, including our
ability to finalize agreements with other companies, manage the implementation
internally, sustain the productivity of our workforce, introduce innovative new
products in a timely manner, manage operating expenses and quickly respond to,
and recover from, unforeseen events associated with our transition and
realignment.

     As a result of our reorganization, it is extremely difficult to forecast
our future financial performance. We are now in the initial stages of pursuing a
new business plan. Therefore, we have not achieved profitability and expect to
continue to incur net losses at least through 2001. We incurred net losses
related to our discontinued business of approximately $135.8 million for the
year ended December 31, 2000, and $23.8 million for the period from January 12,
1999 (inception) to December 31, 1999. As of December 31, 2000, we had an
accumulated deficit of approximately $229.6 million. We expect to incur
significant research and development, product development, administrative and
operating expenses in the future. Only if we are able to successfully develop
our proposed products, bring them to market before our competitors and our
target market accepts our solutions will we be able to generate any significant
revenues from our proposed business model. It is possible that we will exhaust
all available funds before we reach the positive cash flow phase of our proposed
business model.

     We will not be able to develop or continue our business if we fail to
     attract and retain key personnel.

     Our future success depends on our ability to attract, hire, train and
retain a number of highly skilled employees and on the service and performance
of our senior management and other key personnel. The loss of the services of
our executive officers or other key employees could adversely affect our
business. Recently, a significant number of our employees have been terminated
in cost-cutting and restructuring activities or voluntarily departed to pursue
other opportunities. Our facilities are located in Austin, Texas, which has a
high demand for technical and other personnel and a relatively low unemployment
rate. Competition for qualified personnel possessing the skills necessary for
success in the competitive market of broadband and telecommunications related
services is intense, and we may fail to attract or retain the employees
necessary to execute our new business model successfully.

     Our potential customers' use of our planned line of products will require
implementation services. Although we plan to provide implementation services
sufficient to meet our expected business level, our growth will be limited in
the event we are unable to hire or retain implementation services personnel or
subcontract these services to qualified third parties.

     We have recently lost key personnel that will need to replaced. Moreover,
we will need to hire a number of additional research and development, business
development, support and marketing employees in 2001 and beyond to develop and
grow our proposed business. If we fail to attract qualified personnel or retain
current employees we need, including our executive officers and other key
employees,

                                       7
<PAGE>

we may not be able to generate revenues. Our relationships with these officers
and key employees are "at will." Moreover, we do not have "key person" life
insurance policies covering any of our employees.

     Some members of our management team have joined us only recently.  Our
success depends to a significant degree upon the continued contributions of our
key management, engineering, research and development, business development and
marketing and other personnel, many of whom would be difficult to replace.  In
particular, we believe that our future success is highly dependent on John F.
McHale, our chairman and chief executive officer.

     The market potential for our proposed product lines is unproven, and may
     not develop as we hope, which could result in our failure to achieve sales
     and profits from our proposed business model.

     Our proposed business model involves an emerging market. Therefore, our
financial performance and any future growth will depend upon the rapid growth of
new markets for the broadband products and services we hope to develop, and our
ability to establish a leadership position in those markets. We intend to invest
a significant proportion of our resources in the emerging broadband markets that
we anticipate will grow at a significantly higher rate than the networking
industry on average. At the present time, the markets for broadband solutions
are in their infancy, and we are not certain that our target customers will
widely adopt and deploy our technology. Even if are able to develop solutions
that are effective, our target customers may not choose to use them for
technical, cost, support or other reasons. Industry standards for these
technologies are yet to be widely adopted and the market potential remains
unproven. If the markets for broadband solutions do not develop as we hope, and
our potential products and services do not meet the demand in these markets, we
may never achieve revenues and profits from the sale of our anticipated
broadband solutions. We cannot be certain that a broad-based market for our
products or services will ever emerge or be sustainable if it does emerge. We
also cannot be certain that, if the market develops, new technology may replace
broadband. If this market does not develop, develops more slowly than we expect
or does not retain acceptance, our business, results of operations and financial
condition will be seriously harmed.

     If we are unable to develop our proposed line of products and services, our
     proposed business will suffer.

     We hope to develop and then deliver to market an integrated hardware,
software and service solution based on technology that will allow broadband
service providers to rapidly create premium services. If we are unsuccessful in
developing this new technology, we will have no products or services to bring to
market and, therefore, will never be able to generate revenues from our proposed
line of products and services, and our business will suffer. Also, if we exhaust
all available funds before we can develop our proposed line of products and
services, we will not have a product or complimenting services to bring to
market, and our proposed business will suffer.

     If we are unable to develop and introduce new products and services
     quickly, our proposed business will suffer.

     Products and services in the markets in which we intend to compete have
short life cycles. Therefore, our success will depend upon our ability to
identify new market and product opportunities, to develop and introduce new
products and services in a timely manner and to gain market acceptance of any
new products and services developed, particularly in our targeted high-growth,
emerging markets.

                                       8
<PAGE>

     Any delay in new product and service introductions or lower than
anticipated demand for the new products and services we hope to develop could
have an adverse affect on our operating results or financial condition.

     If we are unable to integrate our products with third-party technology, our
     proposed business may suffer.

     If developed, our proposed line of broadband products and services must be
able to be integrated with the third party network and routing devices used by
our potential customers. If our products are unable to integrate with these
third-party technologies, our business would suffer materially. For example, if,
as a result of technology enhancements or upgrades of these systems, we are
unable to integrate our products with these systems, we could be required to
redesign our products or they would be considered obsolete by our potential
customers. Moreover, many broadband service providers use custom-made systems
for their general network management software. Custom-made systems are typically
very difficult to integrate with new infrastructure products, such as the
products we hope to develop for this market.

     Marketing to most of our potential customers is difficult because they are
     large organizations.

     We will market our potential line of products and services primarily to
large organizations. The adoption and integration of products and services by
large organizations is complex, time consuming and expensive. In many cases, our
potential customers must consider a wide range of issues before committing to
use our proposed line of products and services, including benefits, ease of use,
ability to work with existing systems, functionality and reliability.
Furthermore, we must educate our potential customers on the use and benefits of
our products and services. In addition, we believe that the purchase of our
proposed line of products and services often will be discretionary. It will
frequently take several months to develop any potential customer relationship
and will require approval at a number of management levels within the potential
customer's organization. These long cycles may cause delays in any potential
sale and we may spend a large amount of time and resources on potential
customers who decide not to use our proposed line of products and services,
which could materially and adversely affect our business.

     Our proposed business will suffer if our target customers do not accept our
     broadband technology enhancement solutions.

     If we can develop our proposed product line, our future revenues and
profits, if any, will depend upon the widespread acceptance and use of broadband
enhancement technology by our target market, and use of broadband technology as
an effective medium of commerce and communication by the customers of broadband
service providers. Growth in the use of and interest in broadband access has
occurred only recently. As a result, acceptance and use may not continue to
develop at historical rates, and a sufficiently broad base of consumers may not
adopt, and continue to use, broadband services as a medium of commerce and
communication. Our success will depend, in large part, on the acceptance of
broadband technology in the commercial marketplace and on the ability of
broadband service providers to provide reliable access and services. To the
extent that broadband technology continues to experience increased numbers of
users, increased frequency of use or increased bandwidth requirements of users,
service providers may not be able to support the demands placed on them and the
performance or reliability of their service could suffer.

     Substantially all of our anticipated revenues, if any, may come from sales
of one or two product and service lines, making us dependent on widespread
market acceptance of these products and services. We may be more dependent on
the market acceptance of individual product and service lines than our

                                       9
<PAGE>

competitors with broader offerings. Factors that may affect the market
acceptance of our anticipated line of products and services include:

          .    adoption of advanced routing and switching products and
               technologies;

          .    the performance, price and total cost of ownership of our planned
               line of products and services;

          .    the availability and price of competing products and
               technologies; and

          .    the success and development of our business development and
               marketing organizations.

     If our products do not comply with complex governmental regulations and
     evolving industry standards, our products may not be widely accepted, which
     may prevent us from earning revenues or achieving profitability.

     The market for broadband solutions is characterized by the need to support
industry standards as different standards emerge, evolve and achieve acceptance.
To be competitive, we will need to develop and introduce new products and
product enhancements that meet these emerging standards. We may have to delay
the introduction of new products to comply with third party standards testing.
We may be unable to address compatibility issues that arise from technological
changes and evolving industry standards.

     Our proposed products will have to comply with various governmental
regulations and industry regulations and standards, including those defined by
the Federal Communications Commission, Underwriters Laboratories and Networking
Equipment Building Standards. If we do not comply with existing or evolving
industry standards or fail to obtain timely regulatory approvals or
certificates, we will be unable to sell any products that we are able to develop
where these standards or regulations apply, which may prevent us from generating
revenues or achieving profitability.

     Competition in the broadband solutions market may reduce the demand for, or
     price of, our intended products and services.

     The telecommunications market is intensely competitive and rapidly
changing. We expect that competition in this market will intensify in the near-
term because of the attention broadband is currently receiving and because there
are very limited barriers to entry. Our primary long-term competitors may not
have entered the market yet because the broadband market is new. Competition
could result in price reductions, fewer customer orders, reduced gross margin
and loss of market share, any of which could cause our business to suffer. We
may not be able to compete successfully, and competitive pressures may harm our
business. Many of our potential competitors have greater name recognition,
longer operating histories, larger customer bases and significantly greater
financial, technical, marketing, public relations, sales, distribution and other
resources than we do. Some of our potential competitors are among the largest
and most well-capitalized technology companies in the world.

     We are likely to experience delays in revenue recognition and be required
     to encumber available funds in order to secure certain business
     relationships, which may cause our proposed business to suffer.

     We believe that, due in part to the recent turbulence in the financial
markets and market skepticism about the stability of technology companies like
ours, some companies have begun to, and

                                       10
<PAGE>

may in the future, require companies such as us to post bonds, obtain letters of
credit or otherwise encumber available funds as a pre-requisite for entering
into business relationships with as suppliers, vendors, co-marketers, tenants
and other types of conventional business relationships. If we are required to
encumber our resources in order to establish or maintain our current or future
business relationships, our cost to establish and maintain such relationships
will increase and the profitability we may achieve, if any, will be reduced or
delayed as a result, or we may not enter into some relationships that would
otherwise benefit the development of our proposed business due to such
requirements.

     If we are unable to acquire key components or are unable to acquire them on
     favorable terms, our proposed business will suffer.

     Some key components of our proposed line of products and services on which
we will rely are currently available only from single or limited sources and are
in the development stage. In addition, some of these suppliers will also be our
competitors. We cannot be certain that we will be able to meet our demand for
components in a timely and cost-effective manner. For example, due to strong
world-wide demand, the electronics industry is facing shortages on various
memory devices and passive components. Due to these shortages, our ability to
procure these components and meet potential delivery requirements in a cost-
effective manner could be impacted. Our operating results, financial condition,
or relationships with potential customers could be adversely affected by these
shortages. These adverse effects could result from an inability to fulfill
customer demand or increased costs to acquire key components or services.

     We may not be able to compete effectively if we are not able to protect our
     intellectual property.

     We intend to rely on a combination of trademark, trade secret and copyright
law and contractual restrictions to protect the intellectual property we
develop. We have applied to register several trademarks relating to our
discontinued operations in the United States.  We have not yet attempted to
register other marks that may become important to us in the future.  We have
several United States patent applications relating to our discontinued
operations currently pending.  We anticipate filing additional patent
applications relating to our proposed broadband solutions business. If we are
not successful in obtaining the patent protection we need, our competitors may
be able to replicate our technology and compete more effectively against us. The
legal protections described above would afford only limited protection.
Unauthorized parties may attempt to copy aspects of our products and services,
or otherwise attempt to obtain and use our intellectual property. Enforcement of
trademark rights against unauthorized use, particularly in the technology sector
and in other countries, may be impractical or impossible and could generate
confusion and diminish the value of those rights.

     Litigation may be necessary to enforce our intellectual property rights, to
protect our trade secrets and to determine the validity and scope of the
proprietary rights of others. Any litigation could result in substantial costs
and diversion of our resources and could seriously harm our business and
operating results. In addition, our inability to protect our intellectual
property may harm our business and financial prospects.

     Our continued Nasdaq National Market listing is not assured.

     Our common stock is presently authorized for quotation on the Nasdaq
National Market. Accordingly, we are subject to all requirements of our listing
agreement with Nasdaq. Among the events that could cause us to have our status
as a National Market Issuer terminated are:

                                       11
<PAGE>

          .    failure to maintain a minimum bid price for the common stock of
               either $1.00 per share or $5.00 per share, depending on, among
               other things, whether or not our tangible net assets are greater
               than or less than $4 million;

          .    failure to maintain an audit committee that comports to the
               independence and other standards of the Nasdaq and the SEC; and

          .    failure to timely hold annual meetings of stockholders and comply
               with other corporate governance requirements.

     On November 13, 2000 our stock price first closed below $1.00. From the
period of December 1, 2000 through March 23, 2001 our stock price has closed
below $1.00 at the end of each trading day, and on the last day of this period
our stock price closed at $0.4375. On January 17, 2001, we received notice from
Nasdaq that our stock price had failed to maintain the minimum bid price of at
least $1.00 for 30 consecutive trading days. As a result, our common stock is
subject to being delisted on April 17, 2001 unless the bid price for our stock
closes above $1.00 for ten consecutive trading days before that day or we
receive a waiver of such requirement from Nasdaq. We intend to pursue
discussions with the Nasdaq regarding such a waiver and secure continued listing
on the Nasdaq National Market. However, we can give no assurances that we will
be granted such a waiver. If we lose our Nasdaq National Market status, our
common stock would trade in the over-the-counter market, which is viewed by most
investors as a less desirable, and less liquid, marketplace.

     Our officers, directors and affiliated entities own a large percentage of
     our outstanding stock and could significantly influence the outcome of
     actions.

     Our executive officers, directors and entities affiliated with them, in the
aggregate, own approximately 57% of our outstanding stock as of February 28,
2001. These stockholders, if acting together, would be able to determine all
matters requiring approval by our stockholders, including the election of
directors and the approval of mergers or other business combination
transactions.

     Our chairman and chief executive officer, John F. McHale, entered into
management buyout agreements with each of Kent A. Savage, Kenneth A. Kalinoski,
David S. Lundeen and Watershed Capital I L.P.  Together, this group beneficially
owns approximately 52% of our outstanding stock as of February 28, 2001, and
pursuant to these agreements Mr. McHale could initiate or block significant
matters affecting us.  In January 2001, this group terminated discussions with
our board of directors relating to a possible management buyout.  However, given
that the management buyout agreements are still in effect, it is possible that
this group or a portion thereof may initiate discussions for a going private
transaction with respect to us in the future.

     The large number of shares eligible for public sale could cause our stock
     price to decline.

     The market price of our common stock could further decline as a result of
sales by our existing stockholders of a large number of shares of our common
stock in the market, or the perception that such sales could occur. This
circumstance could become a more significant issue at such time as shares sold
in past or future private placements are either registered or may be resold in
reliance on Rule 144 of the Securities Act of 1933.

                                       12
<PAGE>

     We may be unable to obtain the additional capital required to grow our
     business, which could seriously harm our proposed business. If we raise
     additional funds, our current stockholders may suffer substantial dilution.

     As of December 31, 2000, we had approximately $68.1 million in cash, cash
equivalents and short-term investments on hand, which we expect will meet our
working capital and capital expenditure needs for at least the next 12 months.
We may need to raise additional funds at any time, and given our history, we
cannot be certain that we will be able to obtain additional financing on
favorable terms, if at all. Due to the recent volatility of the U.S. equity
markets, particularly for smaller technology companies, we may not have access
to new capital investment when we need to raise additional funds.

     Our future capital requirements will depend upon several factors, including
whether we are successful in developing our products and services, and our level
of expenditures for operating expenses. Our expenditures are likely to rise as
we begin our technology and business development efforts in earnest. If our
capital requirements vary materially from those currently planned, we may
require additional financing sooner than anticipated. If we cannot raise funds
on acceptable terms, we may not be able to develop our products and services,
take advantage of future opportunities or respond to competitive pressures or
unanticipated requirements, any of which could have a material adverse effect on
our ability to develop and grow our business.

     Further, if we issue equity securities, our existing stockholders will
experience dilution of their ownership percentage, and the new equity securities
may have rights, preferences or privileges senior to those of our common stock.
If we do not obtain additional funds when needed, we could quickly cease to be a
viable going concern.

     We do not intend to declare dividends and our stock could be subject to
     volatility.

     We have never declared or paid any cash dividends on our common stock. We
presently intend to retain future earnings, if any, to finance the development
of our new business and do not expect to pay any dividends in the foreseeable
future.

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

          .    variations in the magnitude of our losses from operations from
               quarter to quarter;

          .    changes in market valuations of companies in the broadband
               infrastructure and services sectors;

          .    announcements by us or our competitors of new technology,
               products, services, significant contracts, acquisitions,
               strategic relationships, joint ventures, capital commitments or
               other material developments that affect our prospects and our
               relative competitive position in our prospective markets;

          .    our inability to locate or maintain suppliers of our planned line
               of broadband infrastructure products at prices that will allow us
               to attain profitability;

          .    product or design flaws, or our inability to bring functional
               products to market, product recalls or similar occurrences, or
               failure of a substantial market to develop for our planned
               products;

                                       13
<PAGE>

          .    additions or departures of key personnel;

          .    sales of capital stock in the future;

          .    stock liquidity or cash flow constraints; and

          .    fluctuations in stock market prices and volume, which are
               particularly common for the securities of highly volatile
               technology companies pursuing untested markets and new
               technology.

     We have attempted to transfer our obligations from our old line of business
     and if we are unsuccessful in making the transition, our business will
     suffer.

     In February 2001, we entered into an agreement with EarthLink, Inc., for
the transfer of our service obligations relating to most of our existing
customers. Approximately 50,000 of our customers were transferred to EarthLink's
Internet service on March 12, 2001. After the transfer of our existing customers
to EarthLink's service, we continue to provide Internet access service to
approximately 6,000 customers. We continue to have the obligation to provide
service to approximately 5,000 of these customers through November 2001. We have
network services agreements that we anticipate terminating or restructuring,
which could result in significant termination fees or other charges. We also
have continuing warranty obligations, through January 2002, relating to the
Internet appliances we sold to our customers. If we are unable to successfully
complete the transition from our old line of business, or incur significant
liability related to that business in the transition, or after we have exited
the Internet appliance and service business, our future financial results will
suffer.

     Any failure of EarthLink to provide services to our former customers could
     result in liability or adverse financial consequences for our future
     business.

     EarthLink agreed to provide Internet service to most of our former Internet
appliance customers after discontinuation of that business.  If EarthLink fails
to honor its commitment and those customers are unable to have Internet access
using their Internet appliances we sold them, we could be subject to claims from
such customers that may adversely impact our future business and financial
results.

     If we are unable to meet our contractual commitments, our financial results
     may be adversely affected.

     We have entered into minimum quantity and other non-cancelable commitments
in support of our old business. As we transition out of our former consumer
business we will need to reach agreement with such parties to terminate our
contractual relationships on acceptable terms. We may be unable to meet our
commitments under our contract or reach agreement with those parties or any
other minimum quantity or other non-cancelable commitments we may enter into in
the future. This may result in renegotiation of the contracts on less favorable
terms, or we could incur contract termination fees or other charges under
existing or future contracts, that would adversely affect our financial results.

                                       14
<PAGE>

ITEM 2.   PROPERTIES

     Our principal properties consist of:

     A.   Our headquarters located in a leased facility (40,000 square feet) at
          7501B North Capital of Texas Highway in Austin, Texas; and

     B.   Our currently vacant facility (30,000 square feet) at 7600A North
          Capital of Texas Highway in Austin, Texas, which we are attempting to
          sub-lease.

ITEM 3.   LEGAL PROCEEDINGS

     In 2000, the Federal Trade Commission initiated an investigation of certain
of our practices in marketing our Internet appliances and related services,
including whether we were in compliance with the FTC's Trade Regulation Rule
Concerning the Sale of Mail or Telephone Merchandise. As a result of the
investigation and discussions between us and the FTC, we and the FTC staff
conducting the investigation have entered into a tentative settlement. The
settlement is in the form of a Consent Decree and Order for Injunctive Relief,
Consumer Redress, Civil Penalties, and Other Relief. If the draft Complaint and
Consent Decree are approved by the FTC and the court in which the Complaint and
Consent Decree will be filed, we, without admitting liability for any of the
matters alleged in the Complaint, will be required, among other things, to pay a
civil penalty of $100,000 for the alleged violations.

     On December 26, 2000, Donald L. Semone, one of our stockholders, filed a
class action lawsuit in the Court of Chancery of the State of Delaware, New
Castle County, against us and certain of our directors relating to a possible
buyout transaction that was proposed by a buyout group led by our founders. The
plaintiff sought, among other things, to enjoin the consummation of the buyout;
compensation for alleged damages and losses; and recoupment of costs and
attorneys' fees for the lawsuit. In January 2001, the buyout group terminated
its discussions with our board of directors relating to a possible buyout
transaction. Therefore, we are now negotiating a dismissal of this lawsuit.

     We have commenced litigation in Austin, Texas, against our former
advertising agency, BBDO Worldwide, Inc., for actions arising from the agency's
handling of our advertising account. The lawsuit asserts causes of action for
breach of contract, breach of fiduciary duties, conversion, business
disparagement and fraud.  BBDO Worldwide has answered the suit and denied our
claims, and has counterclaimed seeking damages.  The action is currently pending
in the United States District Court for the Western District of Texas, Austin
Division.

     On March 1, 2001, Spyglass, Inc. filed a lawsuit against us seeking in
excess of $300,000 in damages for the alleged breach of a contract relating to
software development by Spyglass for our discontinued business.  We intend to
counterclaim against Spyglass for breach of contract.  The case is pending in
state court in DuPage County, Illinois.

     At this time, we are not involved in any other legal proceedings that our
management currently believes would be material to our business, financial
condition or results of operations.

ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS

     Not Applicable.

                                       15
<PAGE>

                                    PART II

ITEM 5.   MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

     Our common stock has been quoted on the Nasdaq National Market under the
symbol "NPLI" since our initial public offering on March 17, 2000. Prior to that
time, there was no public market for our common stock. The following table shows
the high and low daily closing sale prices per share of our common stock on the
Nasdaq National Market for the periods indicated. We have not declared any
dividends from the time of the initial public offering until the filing date of
this report.

                                                        Price Range
                                                  ----------------------
2000                                               High            Low
------------                                      -------        -------
First quarter (Beginning on March 17, 2000)...   $22 1/16       $12 1/4
Second quarter................................    16              4 6/16
Third quarter.................................     8 5/8          1 1/2
Fourth quarter................................     1 15/16         11/32

     As of February 28, 2001, there were approximately 10,000 beneficial holders
of our common stock.

     Our board of directors intends to retain any of our earnings to support
operations and to finance expansion and does not intend to pay cash dividends on
our common stock in the foreseeable future.  Any future determinations as to the
payment of dividends will be at the discretion of our board of directors, and
will depend on our financial condition, results of operations, capital
requirements, and such other factors as our board of directors deems relevant.

     On January 17, 2001, we received notice from Nasdaq that our stock price
had failed to maintain the minimum bid price of at least $1.00 for 30
consecutive trading days. As a result our common stock is subject to being
delisted on April 17, 2001 unless the bid price for our common stock closes
above $1.00 for ten consecutive trading days before that day or we receive a
waiver of such requirement from Nasdaq. We intend to pursue discussions with the
Nasdaq regarding such a waiver and secure continued listing on the Nasdaq
National Market. However, we can give no assurances that we will be granted such
a waiver. If we lose our Nasdaq National Market status, our common stock would
trade in the over-the-counter market, which is viewed by most investors as a
less desirable, and less liquid, marketplace. On March 23, 2001, the closing
sale price per share of our common stock was $7/16.

                                       16
<PAGE>

ITEM 6.   SELECTED FINANCIAL DATA

     The selected financial data set forth below should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our audited financial statements and the notes thereto included
elsewhere in this report.

<TABLE>
<CAPTION>
                                                                            Period from
                                                                            January 12,
                                                                               1999
                                                                            (Inception)
                                                           Year ended        through
                                                          December 31,      December 31,
Statements of Operations Data:                                2000             1999
                                                         --------------    --------------
<S>                                                      <C>               <C>
Operating expenses:

  Research and development............................   $   4,732,750     $  1,880,864
  Stock-based compensation............................       5,211,790           22,551
  General and administrative..........................       4,121,248        1,740,610
                                                         -------------     ------------

Total operating expenses..............................      14,065,788        3,644,025
                                                         -------------     ------------

Operating Loss........................................     (14,065,788)      (3,644,025)

Interest income, net..................................       5,928,213          164,843
                                                         -------------     ------------

Loss from continuing operations.......................      (8,137,575)      (3,479,182)

Loss from discontinued operations.....................    (135,827,699)     (23,806,513)
                                                         -------------     ------------

Net loss..............................................    (143,965,274)     (27,285,695)

Effect of beneficial conversion feature of
   convertible preferred stock........................     (42,089,262)     (16,242,121)
                                                         -------------     ------------

Net loss applicable to common stock...................   $(186,054,536)    $(43,527,816)
                                                         =============     ============

Net basic and diluted loss from continuing
   operations (net of effect of beneficial
   conversion feature of convertible
   preferred stock) per common share..................   $       (0.97)    $      (1.26)

Net basic and diluted loss from discontinued
   operations per common share........................           (2.63)           (1.53)
                                                         -------------     ------------
Net loss per common share - basic and diluted.........   $       (3.60)    $      (2.79)
                                                         =============     ============
</TABLE>

<TABLE>
<CAPTION>
                                                              As of             As of
                                                          December 31,      December 31,
                                                              2000              1999
                                                         -------------     ------------
<S>                                                      <C>               <C>
Balance Sheet Data:

   Working capital.....................................  $  53,736,052     $   4,642,017

   Total assets........................................     86,320,596        20,625,183

   Stockholders' equity................................     71,015,090        12,917,086
</TABLE>

                                       17
<PAGE>

ITEM 7.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
          RESULTS OF OPERATIONS

     The following discussion and analysis should be read in conjunction with
the section "Selected Financial Data" and the financial statements and related
notes included elsewhere in this report.

     The information contained below may be subject to risk factors.  We urge
you to review carefully the section "Factors Affecting Operating Results" in
this report for a more complete discussion of the risks associated with an
investment in our securities.  See "Special Note on Forward-Looking Statements
and Risk Factors" above under Item 1.

Overview

     Since our organization in 1999, we have primarily offered consumers
Internet access through devices commonly known as Internet appliances, which we
also marketed and sold to our customers.  Recently, however, we have changed our
strategic focus and are exiting this consumer business.  We are now developing a
business plan to launch a hardware and software offering designed to enable
broadband service providers to provide premium services over their
telecommunications networks.

     In November 2000, we began shifting our business model to focus on
providing broadband infrastructure and services and away from our consumer
Internet offering. In connection with this shift in focus, we restructured our
operations.  We reduced our headcount by approximately 38%, primarily in our
consumer sales and marketing departments and in administration.  In January
2001, we terminated all marketing and sales efforts related to our consumer
Internet appliances, although we continued to service customers who had
previously purchased our Internet appliances.  Also in January 2001, we reduced
our headcount by an additional 76 employees, and certain members of senior
management who were dedicated to our consumer Internet offering resigned.

     In February 2001, we entered into an agreement with EarthLink, Inc. for
the transfer of our service obligations relating to most of our existing
Internet appliance customers. Pursuant to this agreement, these customers were
offered continued Internet access only through EarthLink. Approximately 50,000
of our customers were transferred to EarthLink's service on March 12, 2001. The
agreement calls for us to receive payments from EarthLink at a rate of $175 for
each of our customers who transferred to the EarthLink service and who remains
an EarthLink customer through two monthly billing cycles.

     After the transfer of our service obligations to EarthLink, we continue to
provide Internet access service to approximately 6,000 customers. We have the
obligation to provide service to approximately 5,000 of these customers through
November 2001. After that date, we expect to discontinue providing any Internet
access service. We have network services agreements that we anticipate
terminating or restructuring, which could result in significant termination fees
or other charges. We also have continuing warranty obligations, through January
2002, relating to the Internet appliances we sold to our customers. We have an
inventory of approximately 20,000 Internet appliances that we expect to sell to
a third party for that inventory's scrap value. We currently are continuing to
operate our Internet portal, but we expect the EarthLink customers to be
transitioned to an EarthLink portal in the future. In general, we are in the
process of exiting our consumer-focused business entirely, but will continue to
have significant obligations and potential liabilities relating to this
business.

                                       18
<PAGE>

     As a result of our change in business strategy, the results of operations
for the year ended December 31, 2000 and the period from January 12, 1999
(inception) to December 31, 1999 have been restated for the effect of
discontinued operations related to the Internet appliance and service business.

Results of Continuing Operations

Revenues

     We are still in the planning stages of our initiative.  We are currently
developing a prototype to test the feasibility of our new business plan.  We
have not developed new software for our planned products, and have no sales
contracts with potential customers for our suite of potential products and
services.  We had no revenue from continuing operations for the year ended
December 31, 2000 or for the period from January 12, 1999 (inception) through
December 31, 1999 (each referred to herein as the "year").

Expenses

     Research and development expenses.  Our research and development expenses
from continuing operations consist primarily of salaries of employees in this
area who remained with us to assist in developing our broadband initiative, and
other expenses relating to the development of that initiative.  Research and
development expenses from continuing operations totaled approximately $4.7
million and $1.9 million for the years ended December 31, 2000, and 1999,
respectively.  Our research and development expenses increased in 2000 due to
the increase in the number of these employees during 2000.  Although some of the
technology we developed during those years can be applied to our proposed
business plan, much of that technology will not be useful to us going forward.

     Stock-based compensation.  Stock-based compensation for continuing
operations totaled approximately $5.2 million for the year ended December 31,
2000, as compared to approximately $23,000 for the year ended December 31, 1999.
These expenses are attributable to stock options granted during 2000 and 1999
with exercise prices that were less than the estimated fair value of the
underlying common stock on the date of grant. Additional deferred stock-based
compensation totaled approximately $10.1 million as of December 31, 2000. This
amount will be amortized over the remaining vesting period of the options that
were outstanding as of December 31, 2000.

     General and administrative expenses.  General and administrative expenses
consist primarily of employee salaries and related expenses for the executive,
administrative, finance and information systems departments, and facility costs,
professional fees and recruiting.  General and administrative expenses from
continuing operations were approximately $4.1 million and $1.7 million for the
years ended December 31, 2000 and 1999, respectively.  The increase in these
expenses was primarily as a result of an increased number of employees.  We
expect that general and administrative expenses will decrease in 2001 primarily
as the result of reductions in administrative personnel in late 2000 and early
2001.

     Interest income.  Interest income, net of interest expense, totaled
approximately $5.9 million for the year ended December 31, 2000, as compared to
approximately $165,000 for the year ended December 31, 1999.  The increase in
interest income is due to the increase in the average cash balances held at
banking and financial institutions from the sale of common stock in our initial
public offering, which was closed in March 2000, and previous sales of
convertible preferred stock sold in private offerings.

                                       19
<PAGE>

Discontinued Operations

     We have experienced operating losses since inception as a result of selling
our Internet appliance at a significant loss, trying to build and support our
Internet service offering for our Internet appliance customers and trying to
expand our customer base.  In November 2000, we shifted our business model to
focus on providing broadband infrastructure and services and away from our
consumer Internet offering.  In connection with this shift in focus, we
restructured our operations.  We reduced our headcount by approximately 38%,
primarily in the consumer sales and marketing departments and in administration.
In January 2001, we announced our decision to discontinue our Internet appliance
and service business.  At that time, we terminated all marketing and sales
efforts related to the consumer Internet appliance and service business,
although we continued to service customers who had previously purchased an
Internet appliance from us.  Also in January 2001, we reduced our headcount by
an additional 76 employees, and certain members of senior management who were
dedicated to the consumer Internet offering resigned.  We estimate that the
costs of this reduction in workforce will be approximately $876,000 and will be
recorded in 2001.

     In February 2001, we entered into an agreement with EarthLink, Inc. to
transfer our service obligations relating to approximately 50,000 of our
Internet appliance customers.  Those customers were transferred to EarthLink on
March 12, 2001. The agreement requires EarthLink to pay us $175 for each of our
customers who transfers to the EarthLink service and who remains an EarthLink
customer through two billing cycles. After the transfer of our service
obligations to EarthLink, we continue to provide Internet access service to
approximately 6,000 Internet service customers. We are obligated to provide
service to approximately 5,000 of these customers through November 2001. After
that date, we expect to discontinue providing any Internet access service.

     We estimate that we will recognize a net gain of approximately $1.0 million
in 2001 in connection with the discontinuance of our Internet appliance and
service business. This estimated gain includes the estimated income of this
business until its ultimate disposal of this business in 2001, and the estimated
payment to us by EarthLink for transferred customers. The net gain will be
deferred and recognized upon the ultimate disposition of the Internet appliance
and service business. Our estimate of the net gain is based on certain
estimates, including the ultimate amounts paid by EarthLink, the estimated
Internet appliance service revenue and related costs and estimated costs to
terminate or restructure various network service agreements and other contracts
and agreements related to this business. Any differences between our estimates
and the actual amounts will change the net gain accordingly.

     Net loss from our discontinued Internet appliance and service business
totaled approximately $135.8 million and $23.8 million for the years ended
December 31, 2000 and 1999, respectively. The net loss from discontinued
operations for the year ended December 31, 2000 includes sales and marketing
costs of approximately $49.2 million, network operation costs of $25.1 million,
loss on subsidized appliance and peripheral sales of $28.8 million and a write-
down of inventory to net realizable value totaling $13.8 million. In addition,
we recorded a restructuring charge of $1.1 million in the fourth quarter of
2000, primarily consisting of costs associated with closing of facilities and
employee severance and benefits, under a restructuring plan designed to reduce
our cost structure by consolidating facilities and reducing our workforce. In
comparison, the net loss from discontinued operations for the year ended
December 31, 1999 includes sales and marketing costs $14.1 million, network
operation cost of $1.3 million and loss on subsidized appliance and peripheral
sales of $1.7 million. The higher costs in 2000 reflect the increase in our
customers after the introduction of our Internet appliance and service offering
in November 1999.

                                       20
<PAGE>

     We have continuing material commitments under several contracts related to
this discontinued business, including a $2.4 million commitment under a facility
lease expiring in 2005. In July 2000, we entered into a network service
agreement with AT&T Corp. to provide Internet service to our customers. Under
this agreement, we are obligated to pay minimum commitment amounts over the term
of the agreement equaling approximately $405,000, $7.3 million, $14.3 million
and $10.4 million for calendar years 2000, 2001, 2002 and 2003, respectively. In
July 2000, we also entered into a network services agreement with Genuity
Solutions, Inc. to provide dial-up Internet service to our customers. Under this
agreement, we are obligated to pay minimum commitment amounts over the three
year term of the agreement equaling $200,000 per month. We may terminate either
of these network services agreements for any reason upon 60 days prior written
notice upon the payment of a termination fee. The termination fee for both
network services agreements are based upon a percentage of the commitment level
at the time of termination and the remaining term of the agreement.

Liquidity and Capital Resources

     From inception in January 1999 through December 31, 2000, we financed our
operations and met our capital expenditure requirements primarily from the net
proceeds of the private and public sale of equity securities totaling
approximately $230 million.  As of December 31, 2000, we had approximately $68.1
million in cash, cash equivalents and short-term investments, compared to
approximately $9.6 million at December 31, 1999.  Although we have taken steps
to decrease our future operating expenses, our new strategic focus will require
significant capital to fund operating losses, research and development expenses,
capital expenditures and working capital needs until such time as we achieve
positive cash flows from operations.  We estimate that we have adequate cash to
meet our needs for the next 12 months.  We cannot give any assurance that any
additional financing will be available, that we can ever achieve positive
operating cash flows or that we will have sufficient cash from any source to
meet our needs.  It is possible that we will exhaust all available funds before
we reach the positive cash flow phase of our proposed business model.

     Working capital increased by approximately $49.1 million, to $53.7 million
as of December 31, 2000 from $4.6 million as of December 31, 1999.  The increase
in working capital is primarily the result of approximately $193.0 million we
received from the private and public sale of our common and preferred stock,
including approximately $132.7 million of net proceeds from the sale of
8,000,000 shares of common stock in our initial public offering on March 17,
2000, during the year ended December 31, 2000.

     Net cash provided by continuing operating activities was approximately $7.8
million for the year ended December 31, 2000, compared to net cash provided of
approximately $1.2 million for the year ended December 31, 1999. The increase in
cash provided by continuing operating activities is primarily the result of an
approximately $9.7 million increase in accrued liabilities.

     Net cash used in investing activities was approximately $46.6 million and
$536,000 for the years ended December 31, 2000 and 1999, respectively. Cash used
in investing activities consists of the purchase of property and equipment and
the purchase of certain investment securities.

     Net cash provided by financing activities was approximately $190.5 million
and $36.4 million for the years ended December 31, 2000 and 1999, respectively.
The $190.5 million provided during the year ended December 31, 2000 includes
approximately $132.7 million of net proceeds from the sale of

                                       21
<PAGE>

8,000,000 shares of our common stock in our initial public offering and
approximately $58.9 million of net proceeds from the private sale of shares of
our preferred stock.

Recently Issued Accounting Standards

     Effective January 1, 2001, we adopted Statement of Financial Accounting
Standards No. 133, Accounting for Derivative Instruments and Hedging Activities,
as amended ("FAS 133").  This statement establishes a new model for accounting
for derivatives and hedging activities.  Under FAS 133, all derivatives must be
recognized as assets and liabilities and measured at fair value.  The impact of
the adoption will be based on factors such as specific derivative and hedging
activities, market conditions and contractual arrangements at the date of
adoption.  The effect of the adoption will not have a significant impact on our
financial position or results of operations in 2001.

ITEM 7a.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     We do not use derivative financial instruments to hedge interest rate and
foreign currency exposure. We limit our interest rate risks by placing our
marketable securities investments with high quality issuers principally the
United States government, and corporate debt securities with terms of less than
one year. We do not expect any material losses from our marketable securities
investments and believe that our interest rate exposure is modest. We do not
currently have, or hedge against, foreign currency exposure.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     The financial statements and supplementary data required by Item 8 are
listed in Item 14(a)(1) and begin at page F-1 of this report.

ITEM 9.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
          FINANCIAL DISCLOSURE

     Not Applicable.


                                   PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     Incorporated herein by reference to our proxy statement for the May 18,
2001 Annual Meeting of Stockholders under the caption "Management-Directors and
Executive Officers."

ITEM 11.  EXECUTIVE COMPENSATION

     Incorporated herein by reference to our proxy statement for the May 18,
2001 Annual Meeting of Stockholders under the caption "Executive Compensation
and Other Information", provided that the Performance Graph and the Compensation
Committee Report on Executive Compensation expressly are not incorporated
herein.

                                       22
<PAGE>

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     Incorporated herein by reference to our proxy statement for the May 18,
2001 Annual Meeting of Stockholders under the caption "Security Ownership of
Certain Beneficial Owners and Management."

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     Incorporated herein by reference to our proxy statement for the May 18,
2001 Annual Meeting of Stockholders under the caption "Certain Relationships and
Related Transactions."

                                       23
<PAGE>

                                    PART IV

ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a)  The following documents are filed as part of this Report:

     (1)  Financial Statements:

<TABLE>
<CAPTION>
                                                                             Page
                                                                             ----
          <S>                                                                <C>
          Independent Auditors' Report....................................   F - 2

          Balance Sheets as of December 31, 2000 and 1999.................   F - 3

          Statements of Operations for the year ended December 31, 2000
          and the period from January 12, 1999 (inception) through
          December 31, 1999...............................................   F - 4

          Statements of Stockholders' Equity for the year ended
          December 31, 2000 and the period from January 12, 1999
          (inception) through December 31, 1999...........................   F - 5

          Statements of Cash Flows for the year ended December 31,
          2000 and the period from January 12, 1999 (inception)
          through December 31, 1999.......................................   F - 6

          Notes to Financial Statements...................................   F - 7
</TABLE>

     (2)  Financial Statement Schedules:

          All schedules are omitted because they are not applicable or the
          required information is shown in financial statements or notes
          thereto.

     (3)  Management Contract or Compensatory Plan

          See Index to Exhibits.  Each of the following Exhibits described on
          the Index to Exhibits is a management contract or compensatory plan:
          Exhibits 10.3 through 10.6 and 10.8 and 10.12.

(b)  Reports on Form 8-K

     No reports on Form 8-K have been filed during the last quarter of the
     fiscal year for which this report is filed.

(c)  Exhibits

     See Index to Exhibits.

(d)  Schedules

     See financial statements and the accompanying notes.

                                       24
<PAGE>

                                  SIGNATURES

     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Netpliance has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.

                               NETPLIANCE, INC.

                               By: /s/ JOHN F. MCHALE
                                   -----------------------------------------
                                   John F. McHale
                                   Chairman of the Board and Chief Executive
                                   Officer

Date:  March 26, 2001

                               POWER OF ATTORNEY

     KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below hereby constitutes and appoints John F. McHale, Francis S. Webster
III and James E. Cahill, and each of them individually, as his attorney-in-fact,
each with full power of substitution, for him in any and all capacities, to sign
any and all amendments to this Report on Form 10-K, and to file the same, with
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, hereby ratifying and confirming all that
said attorney-in-fact, or his substitutes, may do or cause to be done by virtue
hereof.

     Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.

<TABLE>
<CAPTION>
                NAME                             TITLE                  DATE
     ------------------------------     -----------------------    --------------
     <S>                                <C>                        <C>
     /s/ JOHN F. MCHALE                 Chairman of the Board      March 26, 2001
     ------------------------------
     John F. McHale                      and Chief Executive
                                          Officer (Principal
                                         Executive Officer)

     /s/ FRANCIS S. WEBSTER III         Chief Financial Officer    March 26, 2001
     ------------------------------
     Francis S. Webster III             and Director (Principal
                                         Financial Officer and
                                         Accounting Officer)

     /s/ MICHAEL R. CORBOY                   Director              March 26, 2001
     ------------------------------
     Michael R. Corboy

     /s/ KEVIN DENUCCIO                      Director              March 26, 2001
     ------------------------------
     Kevin Denuccio

     /s/ GRANT A. DOVE                       Director              March 26, 2001
     ------------------------------
     Grant A. Dove
</TABLE>

                                       25
<PAGE>

<TABLE>
     <S>                                <C>                        <C>
     /s/ DAVID S. LUNDEEN               Director                   March 26, 2001
     ------------------------------
     David S. Lundeen

     /s/ JAMES M. MANSOUR               Director                   March 26, 2001
     ------------------------------
     James M. Mansour

     /s/ STEVEN G. PAPERMASTER          Director                   March 26, 2001
     ------------------------------
     Steven G. Papermaster

     /s/ KENT A. SAVAGE                 Director                   March 26, 2001
     ------------------------------
     Kent A. Savage

     /s/ PAUL S. ZITO                   Director                   March 26, 2001
     ------------------------------
     Paul S. Zito
</TABLE>

                                       26
<PAGE>

                               INDEX TO EXHIBITS

  Exhibit
  Number     Description
  ------     -----------

   3.1*      Certificate of Incorporation of Netpliance.

   3.2*      Bylaws of Netpliance.

   4.1*      Specimen Certificate for Common Stock.

   4.2*      Amended and Restated Rights Agreement among Netpliance and
             Watershed Capital L.L.P. and John F. McHale dated as of December 3,
             1999.

   4.3*      Amended and Restated Series D and Series E Rights Agreement among
             Netpliance and the purchasers of Series D and Series E preferred
             stock dated February 7, 2000.

  10.1*      Sublease Agreement by and between Netpliance and Powershift
             Ventures, L.L.C. dated June 15, 1999.

  10.2*      Office Lease by and between Netpliance and SV Bull Creek Limited
             Partnership dated February 16, 2000.

  10.3*      Netpliance's Amended and Restated 1999 Stock Option and Restricted
             Stock Plan.

  10.4*      Netpliance's Employee Stock Purchase Plan.

  10.5*      Employment Agreement by and between Netpliance and Kent A. Savage
             dated February 1, 1999.

  10.6*      Form of Indemnity Agreement between Netpliance and its Directors
             and Officers.

  10.7*      Voting Agreement among Netpliance, U S WEST Internet Ventures,
             Inc., John F. McHale and Kent A. Savage dated December 22, 1999.

  10.8**     Employment Agreement by and between Valerie Walden and Netpliance
             dated June 26, 2000.

  10.9**     Facility Lease by and between Hub Properties Trust and Netpliance,
             dated May 30, 2000.

 +10.10***   Internet working Services Agreement, as amended, by and between
             Genuity Solutions, Inc. and Netpliance dated July 31, 2000.


______________________

*   Incorporated herein by reference to Netpliance's Registration Statement on
    Form S-1, as amended, filed with the Commission on December 23, 2000.

**  Incorporated herein by reference to Netpliance's Quarterly Report on Form
    10-Q filed with the Commission on August 14, 2000.

                                       27
<PAGE>

 +10.11***   Internet Services Agreement, as amended, by and between AT&T Corp.
             and Netpliance dated July 28, 2000.

  10.12***   Employment Agreement by and between Francis S. Webster III and
             Netpliance dated as of August 22, 2000.

  10.13      Acquisition Agreement dated February 1, 2001 by and between
             Netpliance and EarthLink, Inc.

  21         There are no principal subsidiaries of Netpliance.

  23         Consent of KPMG LLP.


_____________________

***  Incorporated herein by reference to Netpliance's Quarterly Report on Form
     10-Q filed with the Commission on November 13, 2000.

+    Portions of this exhibit have been omitted pursuant to a request for
     confidential treatment. The omitted information has been filed separately
     with the Securities and Exchange Commission.

                                       28
<PAGE>

                               NETPLIANCE, INC.
                         INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                                              Page
                                                                              ----
<S>                                                                            <C>
Independent Auditors' Report.................................................  F-2
Balance Sheets as of December 31, 2000 and 1999..............................  F-3
Statements of Operations for the year ended December 31, 2000
and the period from January 12, 1999 (inception) through December 31,1999....  F-4
Statements of Stockholders' Equity for the year ended December 31, 2000
and the period from January 12, 1999 (inception) through December 31, 1999...  F-5
Statements of Cash Flows for the year ended December 31, 2000
and the period from January 12, 1999 (inception) through December 31, 1999...  F-6
Notes to Financial Statements................................................  F-7
</TABLE>

                                      F-1

<PAGE>

                         INDEPENDENT AUDITORS' REPORT


The Board of Directors
Netpliance, Inc.:

     We have audited the accompanying balance sheets of Netpliance, Inc. as of
December 31, 2000 and 1999 and the related statements of operations,
stockholders' equity and cash flows for the year ended December 31, 2000 and the
period from January 12, 1999 (inception) through December 31, 1999.  These
financial statements are the responsibility of the Company's management.  Our
responsibility is to express an opinion on these financial statements based on
our audits.

     We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

     In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Netpliance, Inc. as of
December 31, 2000 and 1999, and the results of its operations and its cash flows
for the year ended December 31, 2000 and the period from January 12, 1999
(inception) through December 31, 1999, in conformity with accounting principles
generally accepted in the United States of America.


                                                  /s/ KPMG LLP


Austin, Texas
March 23, 2001

                                      F-2
<PAGE>

                               NETPLIANCE, INC.
                                BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                                                December 31,
                                   ASSETS                                                2000                1999
                                                                                    ---------------------------------
<S>                                                                                 <C>                  <C>
Current assets:
  Cash and cash equivalents...............................................          $  27,352,409        $  9,563,362
  Short-term investments..................................................             40,771,209                   -
  Prepaid expenses........................................................                290,583                   -
  Other...................................................................                627,357             150,450
                                                                                    -------------        ------------
     Total current assets.................................................             69,041,558           9,713,812
                                                                                    -------------        ------------
Property and equipment, net...............................................              6,774,182           1,922,553
Net assets from discontinued operations...................................              8,195,579           7,913,337
Other.....................................................................              2,309,277           1,075,481
                                                                                    -------------        ------------
                                                                                    $  86,320,596        $ 20,625,183
                                                                                    =============        ============
                LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
  Trade accounts payable..................................................          $   1,284,948        $  1,909,487
  Accrued liabilities.....................................................             13,382,685           2,208,087
  Current portion of capital lease obligations............................                637,873             954,221
                                                                                    -------------        ------------
     Total current liabilities............................................             15,305,506           5,071,795
Capital lease obligations, net of current portion.........................                      -             636,302
                                                                                    -------------        ------------
     Total liabilities....................................................             15,305,506           5,708,097
                                                                                    -------------        ------------
Deposit received on Series D preferred stock..............................                      -           2,000,000

Commitments and contingencies.............................................

Stockholders' equity:
Convertible preferred stock, $0.01 par value; 5,000,000 shares
 authorized;  (Series A, B and C).........................................                      -          29,492,885
Common stock, $0.01 par value; 250,000,000 shares authorized; 60,494,786
 shares issued and outstanding in 2000 and 18,907,071 in 1999.............                604,948             189,071
Additional paid-in capital................................................            311,308,895          41,749,006
Deferred stock-based compensation.........................................            (10,081,501)        (14,164,611)
Stockholder notes receivable..............................................               (652,800)           (821,449)
Accumulated other comprehensive loss......................................               (582,100)                  -
Accumulated deficit.......................................................           (229,582,352)        (43,527,816)
                                                                                    -------------        ------------
  Total stockholders' equity..............................................             71,015,090          12,917,086
                                                                                    -------------        ------------
                                                                                    $  86,320,596        $ 20,625,183
                                                                                    =============        ============
</TABLE>


                See accompanying notes to financial statements.

                                      F-3
<PAGE>

                               NETPLIANCE, INC.
                           STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                                                   Period from
                                                                                                January 12, 1999
                                                                             Year                  (Inception)
                                                                            ended                    through
                                                                         December 31,             December 31,
                                                                            2000                      1999
                                                                        --------------          ----------------
<S>                                                                     <C>                      <C>
Operating expenses:
 Research and development....................................           $   4,732,750             $  1,880,864
 Stock-based compensation....................................               5,211,790                   22,551
 General and administrative..................................               4,121,248                1,740,610
                                                                        -------------             ------------
   Total operating expenses..................................              14,065,788                3,644,025
                                                                        -------------             ------------
   Operating loss............................................             (14,065,788)              (3,644,025)
Interest income, net.........................................               5,928,213                  164,843
                                                                        -------------             ------------
 Loss from continuing operations.............................              (8,137,575)              (3,479,182)
 Loss from discontinued operations...........................            (135,827,699)             (23,806,513)
                                                                        -------------             ------------
   Net loss..................................................            (143,965,274)             (27,285,695)
                                                                        =============             ============

 Per share data:
   Net loss..................................................            (143,965,274)             (27,285,695)
                                                                        -------------             ------------
   Effect of beneficial conversion feature of convertible
    preferred stock..........................................             (42,089,262)             (16,242,121)
                                                                        -------------             ------------

   Net loss applicable to common stock.......................           $(186,054,536)            $(43,527,816)
                                                                        ============              ===========
   Net basic and diluted loss from continuing operations
    (net of effect of beneficial conversion feature of
    convertible preferred stock) per common share............           $       (0.97)            $      (1.26)

   Net basic and diluted loss from discontinued operations
    per common share.........................................                   (2.63)                   (1.53)
                                                                        -------------             ------------

   Net basic and diluted loss per common share...............           $       (3.60)            $      (2.79)
                                                                        =============             ============

Weighted average common shares outstanding...................              51,705,163               15,588,420
                                                                        =============             ============
</TABLE>


                See accompanying notes to financial statements.

                                      F-4
<PAGE>

                               NETPLIANCE, INC.
                      STATEMENTS OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                          Convertible                    Common
                                        preferred stock                   stock           Additional     Deferred
                                   --------------------------    ---------------------      paid-in     stock-based
                                      Shares        Amount         Shares      Amount       capital     compensation
                                   -----------   ------------    ----------   --------   ------------   ------------
<S>                                <C>           <C>             <C>          <C>         <C>           <C>
Balances at inception              $         -   $          -             -   $      -   $          -   $          -
Issuance of common stock                     -              -    22,870,131    228,701      6,986,004              -
Repurchase of common stock                                       (3,981,060)   (39,810)       (26,541)
Exercise of common stock
 options                                     -              -        18,000        180          3,240              -
Issuance of preferred stock            841,981     29,492,885             -          -              -              -
Beneficial conversion
 feature on convertible
 preferred stock                             -              -             -          -     16,242,121              -
Deferred stock-based
 compensation                                -              -             -          -     14,318,861    (14,318,861)
Amortization of deferred
 stock-based compensation                    -              -             -          -              -        154,250
Issuance of warrants to
 purchase shares of
 common stock                                -              -             -          -      4,225,321              -
Net loss                                     -              -             -          -              -              -
                                   -----------   ------------    ----------   --------   ------------   ------------
Balances at December 31, 1999          841,981     29,492,885    18,907,071    189,071     41,749,006    (14,164,611)

Issuance of common stock                     -              -     8,000,000     80,000    132,642,255              -
Exercise of common stock
 options                                     -              -       264,500      2,645        770,325              -
Issuance of preferred
 stock                               2,557,675     60,873,637             -          -              -              -
Conversion of preferred
 stock                              (3,399,656)   (90,366,522)   32,932,455    329,324     90,037,198              -
Deferred stock-based
 compensation                                -              -             -          -     28,636,110    (28,636,110)
Amortization of deferred
 stock-based compensation                    -              -             -          -                     7,482,767
Beneficial conversion
 feature on convertible
 preferred stock                             -              -             -          -     42,089,262              -
Exercise of warrants to
 purchase shares of
 common stock                                -              -       390,760      3,908        621,192              -
Collection of stockholder
 notes receivable                            -              -             -          -              -              -
Forfeitures due to employee
 terminations                                -              -             -          -    (25,236,453)    25,236,453
Comprehensive loss:
 Net loss                                    -              -             -          -              -              -
 Unrealized investment
   loss                                      -              -             -          -              -              -
   Total comprehensive loss                  -              -             -          -              -              -
                                   -----------   ------------    ----------   --------   ------------   ------------
Balances at December 31, 2000                -   $               60,494,786   $604,948   $311,308,895   $(10,081,501)
                                   ===========   ============    ==========   ========   ============   ============

<CAPTION>
                                        Stockholder       Other                             Total
                                           notes      comprehensive     Accumulated      stockholders'
                                        receivable        loss            deficit           equity
                                        ----------    -------------    -------------    --------------
<S>                                     <C>           <C>              <C>              <C>
Balances at inception                   $       -       $       -      $           -    $           -
Issuance of common stock                 (892,800)              -                  -        6,321,905
Repurchase of common stock                 71,351               -                               5,000
Exercise of common stock
 options                                        -               -                  -            3,420
Issuance of preferred stock                     -               -                  -       29,492,885
Beneficial conversion
 feature on convertible
 preferred stock                                -               -        (16,242,121)               -
Deferred stock-based
 compensation                                   -               -                  -                -
Amortization of deferred
 stock-based compensation                       -               -                  -          154,250
Issuance of warrants to
 purchase shares of
 common stock                                   -               -                  -        4,225,321
Net loss                                        -               -        (27,285,695)     (27,285,695)
                                        ---------       ---------      -------------    -------------
Balances at December 31, 1999            (821,449)              -        (43,527,816)      12,917,086

Issuance of common stock                        -               -                  -      132,722,255
Exercise of common stock
 options                                        -               -                  -          772,970
Issuance of preferred
 stock                                          -               -                  -       60,873,637
Conversion of preferred
 stock                                          -               -                  -                -
Deferred stock-based
 compensation                                   -               -                  -                -
Amortization of deferred
 stock-based compensation                       -               -                  -        7,482,767
Beneficial conversion
 feature on convertible
 preferred stock                                -               -        (42,089,262)               -
Exercise of warrants to
 purchase shares of
 common stock                                   -               -                  -          625,100
Collection of stockholder
 notes receivable                         168,649               0                  -          168,649
Employee terminations                           -               -                  -                -
Comprehensive loss:
 Net loss                                       -               -       (143,965,274)    (143,965,274)
 Unrealized investment
   loss                                         -        (582,100)                 -         (582,100)
                                                                                        -------------
   Total comprehensive loss                     -               -                  -     (144,547,374)
                                        ---------       ---------      -------------    -------------
Balances at December 31, 2000           $(652,800)      $(582,100)     $(229,582,352)   $  71,015,090
                                        =========       =========      =============    =============
</TABLE>


                See accompanying notes to financial statements.

                                      F-5
<PAGE>

                               NETPLIANCE, INC.
                           STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                                        Period from
                                                                                        January 12,
                                                                       Year          1999 (Inception)
                                                                       ended             through
                                                                   December 31,        December 31,
                                                                       2000                1999
                                                                   ------------        ------------
<S>                                                                <C>               <C>
Cash flows from continuing operating activities:
  Loss from continuing operations                                  $  (8,137,575)      $ (3,479,182)
  Adjustments to reconcile loss from continuing operations to
   net cash provided by continuing operating activities:
     Depreciation and amortization............................         2,090,887            552,639
     Accretion of investment securities.......................          (784,268)                 -
     Stock-based compensation expense.........................         5,211,790            633,097
     Changes in operating assets and liabilities:
       Prepaid expenses.......................................          (290,583)                 -
       Other..................................................             6,049           (199,408)
       Accounts payable and accrued liabilities...............         9,667,747          3,671,961
                                                                   -------------       ------------
  Net cash provided by continuing operating activities........         7,764,047          1,179,107
                                                                   -------------       ------------
Cash flows used in investing activities:
  Purchases of property and equipment.........................        (6,060,208)          (536,005)
  Purchases of investment securities..........................      (127,927,056)                 -
  Investment securities sold..................................        35,968,671                  -
  Investment securities matured...............................        51,389,332                  -
                                                                   -------------       ------------
  Net cash used in investing activities.......................       (46,629,261)          (536,005)
                                                                   -------------       ------------
Cash flows from financing activities:
  Increase in restricted cash related to capital leases.......        (1,716,752)          (445,231)
  Principal payments on capital lease obligations.............          (952,650)          (348,664)
  Principal payments on note payable..........................                 -           (220,546)
  Proceeds from issuance of common stock......................       132,722,255          5,936,905
  Proceeds from exercise of stock options and warrants........         1,398,070              3,420
  Proceeds from issuance of preferred stock, net..............        58,873,637         29,492,885
  Collection of stockholder notes receivable..................           168,649                  -
  Deposit received on Series D preferred stock................                 -          2,000,000
  Payment of deferred offering costs..........................                 -            (36,900)
                                                                   -------------       ------------
  Net cash provided by financing activities...................       190,493,209         36,381,869
                                                                   -------------       ------------
Cash used in discontinued operations..........................      (133,838,948)       (27,461,609)
                                                                   -------------       ------------
Net increase in cash and cash equivalents.....................     $  17,789,047       $  9,563,362
                                                                   -------------       ------------
Cash and cash equivalents at beginning of period                       9,563,362                  -
                                                                   -------------       ------------
Cash and cash equivalents at end of period                            27,352,409          9,563,362
                                                                   =============       ============
Supplemental disclosure:
  Interest paid during period.................................     $     199,281       $    139,918
Supplemental disclosure of noncash investing and financing
 activities:
  Acquisition of computer equipment through capital leases....     $           -       $  1,939,187
  Issuance of common stock for notes receivable...............     $           -       $    821,449
  Accrual of deferred offering costs..........................     $           -       $    445,613
</TABLE>


                See accompanying notes to financial statements.

                                      F-6


<PAGE>

                               NETPLIANCE, INC.
                         NOTES TO FINANCIAL STATEMENTS


(1)  Incorporation and Nature of Business

     Netpliance, Inc. ("Netpliance" or the "Company") was incorporated in the
State of Texas in January 1999 as Shbang! Inc. In May 1999, the Company's name
was changed to Netpliance, Inc.  On March 15, 2000, the Company was
reincorporated in the State of Delaware.  The Company, after exiting the
consumer Internet appliance and service business in January 2001, operates in
one business segment.

     Currently, the Company is developing a business plan to launch an offering
that will include hardware and software designed to enable broadband service
providers to provide premium services over their telecommunications networks
that will be initially funded by the Company's existing capital.  As a result of
this shift in business model, the Company expects that it will not generate any
revenue in 2001 from the new business and expects to report significant
operating losses through at least the end of 2001.  There can be no assurance
that the Company will ever achieve positive cash flow from its operations and
faces numerous risks associated with this proposed transition.

     In January 2001, the Company decided to exit the consumer Internet
appliance and service business due to, among other things, its continued losses
and inability to raise additional capital to fund such business.  The
accompanying financial statements have been restated to present the Company's
consumer Internet appliance and service business as a discontinued operation for
all historical periods presented.  See Note 3, Discontinued Operations.

     To date, the Company has funded its activities primarily through private
equity offerings, which have included sales of its common stock and preferred
stock, and its initial public offering of its common stock on March 17, 2000.
In the future, the Company expects to seek additional funding through private or
public equity offerings, credit facilities or other financing arrangements,
until such time as it achieves positive cash flow from operations; however,
there can be no assurance that such financing will be available or that positive
operating cash flows will be achieved.

(2)  Summary of Significant Accounting Policies

(a)  Cash Equivalents and Short-Term Investments

     For purposes of the statement of cash flows, the Company considers all
short term, highly liquid investments with an original maturity of three months
or less at the date of acquisition to be cash equivalents. At December 31, 2000,
the Company's cash equivalents principally consisted of investment grade
commercial paper, money market funds and repurchase agreements.

     Short-term investments consist primarily of investments in commercial paper
with original maturities greater than ninety days and less than one year.
Available-for-sale securities are carried at their estimated fair market value
based on current market quotes. The Company classifies these investments as
available-for-sale and has recognized a $582,100 unrealized loss in the value of
those investments as a component of the Company's comprehensive income for the
period ending December 31, 2000. At December 31, 2000, short-term investments
consist of the following:

<TABLE>
<CAPTION>
                                                                          Estimated Fair
                         Cost        Unrealized Gain   Unrealized Loss     Market Value
                         ----        ---------------   ---------------     ------------
<S>                   <C>            <C>               <C>                <C>
Commercial paper      $41,353,309         $4,308          $(586,408)        $40,771,209
</TABLE>

                                      F-7
<PAGE>

                               NETPLIANCE, INC.
                         NOTES TO FINANCIAL STATEMENTS


(b)  Property and Equipment

     Property and equipment are stated at cost and depreciated using the
straight-line method over the estimated useful lives of the assets, which are
generally three years for computers and computer related equipment and five to
seven years for non-computer furniture and equipment. Leasehold improvements are
depreciated using the straight-line method over the shorter of their estimated
lives or the term of the lease, which is currently five years.

     The Company leases certain of its data communication and other equipment
under capital lease agreements.  The assets and liabilities under capital lease
are recorded at the lesser of the present value of aggregate future minimum
lease payments or the fair value of the assets under lease.  Assets under
capital lease are depreciated over the lesser of their estimated useful lives of
three to five years or the term of the lease.

(c)  Revenue Recognition

     With respect to the Company's discontinued consumer Internet appliance and
service business (See Note 3), subscription revenue is recognized ratably over
the applicable period.  Subscriptions to the Internet service are available on a
monthly, semi-annual and annual basis and are generally charged to customers'
credit cards in advance on a monthly basis.

(d)  Advertising Costs

     With respect to the Company's discontinued consumer Internet appliance and
service business (See Note 3), production costs are expensed as incurred and
communication costs are expensed the first time the ad is run.  Advertising
costs approximated $30.5 million and $5.7 million for the year ended December
31, 2000 and the period from January 12, 1999 (inception) through December 31,
1999, respectively.

(e)  Fair Value of Financial Instruments

     The Company's financial instruments, including cash equivalents and
accounts payable, are carried at historical cost which approximate their fair
value because of the short-term maturity of these instruments.

(f)  Impairment of Long-Lived Assets

     Long-lived assets and certain identifiable intangibles are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to undiscounted future net cash flows expected to be generated by the asset.  If
such assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceeds the
fair value of the assets.  Assets to be disposed of are reported at the lower of
the carrying amount or fair market value less costs to sell.

(g)  Income Taxes

     Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and operating

                                      F-8
<PAGE>

                               NETPLIANCE, INC.
                         NOTES TO FINANCIAL STATEMENTS


loss and tax credit carry forwards.  Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled.  The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.

(h)  Use of Estimates

     Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period to
prepare these financial statements in conformity with generally accepted
accounting principles.  Actual results could differ from those estimates.

(i)  Stock-Based Compensation

     The Company applies the intrinsic value-based method of accounting
prescribed by Accounting Principles Board ("APB") Opinion No. 25, "Accounting
for Stock Issued to Employees," and related interpretations, in accounting for
its fixed plan stock options. As such, compensation expense is recorded on the
date of grant only if the current fair value of the underlying stock exceeds the
exercise price.  The disclosure option of Statement of Financial Accounting
Standard ("SFAS") No. 123, "Accounting for Stock-Based Compensation," requires
that companies which do not choose to account for stock-based compensation as
prescribed by this Statement shall disclose the pro forma effects on earnings
and earnings per share as if SFAS No. 123 had been adopted.

(j)  Comprehensive Income

     The Company has adopted the provisions of SFAS No. 130, "Reporting
Comprehensive Income." SFAS No. 130 establishes standards for reporting and
presentation of comprehensive income and its components in the financial
statements.  Comprehensive income includes all changes in equity during a period
except those resulting from investments by and distributions to owners.  For the
period ended December 31, 1999, there were no components of comprehensive income
other than net loss.  For the year ended December 31, 2000, comprehensive income
includes an unrealized loss on available for sale securities of $582,100.

(k)  Reclassifications

     Certain amounts in prior years have been reclassified to conform to current
year presentation.

(3)  Discontinued Operations

     The Company has experienced operating losses since inception as a result
of:  selling its Internet appliance at a significant loss; trying to build and
support its Internet service offering for Internet appliance customers; and
expanding its subscriber base.  In November 2000, the Company shifted its
business model to focus on providing broadband infrastructure and services and
away from its consumer Internet offering.  In connection with this shift in
focus, the Company restructured operations.  The Company reduced headcount by
approximately 38%, primarily in the consumer sales and marketing departments and
in administration.  In January 2001, the Company announced its decision to
discontinue its Internet appliance and service business.  The Company terminated
all marketing and sales efforts related to the consumer Internet appliance and
service business, although the Company continues to provide Internet access to
service customers who had previously purchased an Internet appliance from the

                                      F-9
<PAGE>

                               NETPLIANCE, INC.
                         NOTES TO FINANCIAL STATEMENTS


Company.  Also in January 2001, the Company reduced headcount by an additional
76 employees, and certain members of senior management, who were dedicated to
the consumer Internet offering, resigned. The Company estimates the costs for
this reduction in workforce will be approximately $876,000 and will be recorded
in discontinued operations for fiscal 2001.

     In February 2001, the Company entered into an agreement with EarthLink,
Inc. to transfer the Company's service obligations relating to most of the
Company's existing Internet appliance customers.  Pursuant to this agreement,
these Internet appliance customers were offered continued Internet access only
through EarthLink.  Approximately 50,000 of the Company's customers were
transferred to EarthLink's service on March 12, 2001.  The agreement calls for
EarthLink to pay the Company $175 for each customer who transfers to the
EarthLink service and who remains an Earthink customer through two monthly
billing cycles. After the transfer of the Internet appliance service obligations
to EarthLink, the Company continues to provide Internet access service to 6,000
Internet service customers.  The Company is obligated to provide service to
approximately 5,000 of these customers through November 2001.  After that date,
the Company expects to discontinue providing any Internet access service.

     The Company estimates that it will recognize a net gain of approximately
$1.0 million in 2001 in connection with the discontinuance of the Internet
appliance and service business.  This estimated gain includes the estimated net
income of this business from December 31, 2000 to the ultimate disposal of this
business in 2001, and the estimated payment by EarthLink for transferred
customers.  The net gain will be deferred and recognized upon the ultimate
disposition of the Internet appliance and service business.  The Company's
estimate of the net gain is based on certain estimates including the ultimate
amounts paid by EarthLink, the estimated Internet appliance service revenue and
related costs and estimated costs to terminate or restructure various network
service agreements and other contracts and agreements related to this business.
Any differences between these estimates and their actual amounts will change the
gain accordingly.

Restructuring

     On October 25, 2000, the Company's Board of Directors approved a
restructuring plan designed to reduce the Company's cost structure by
consolidating facilities and reducing the Company's workforce by approximately
38%. As a result, the Company recorded a restructuring charge of $1.1 million in
the fourth quarter of 2000, primarily consisting of costs associated with
closing of facilities and employee severance and benefits. The following table
provides a detail of the charges as well as the amounts accrued as of December
31, 2000:

                               Expensed in 2000   Accrual at December 31, 2000
                               ----------------   ----------------------------
Lease termination costs.....      $  293,400                $293,400
Employee severance..........         745,236                 262,777
Other.......................          39,384                  39,384
                                  ----------                --------
Total.......................      $1,078,020                $595,561
                                  ==========                ========

     All employees terminated in the restructuring received severance equal to
60 days of compensation plus $1,000 if they executed a release of claims against
the Company.  The reduction in workforce included 93 employees in sales and
marketing, technical support, network operations and the general and
administrative groups.

     As the majority of the Company's restructuring charges in 2000 are
estimates, the actual amounts paid could differ from those estimates.

                                      F-10
<PAGE>

                               NETPLIANCE, INC.
                         NOTES TO FINANCIAL STATEMENTS


     Operating results of the discontinued Internet appliance and service
business are as follows for the years ended 2000 and 1999:

<TABLE>
<CAPTION>
                                                         2000              1999
                                                         ----              ----
<S>                                                <C>                <C>
Subscription revenue.............................  $   8,868,639      $     25,716
Cost of subscription revenue.....................    (25,104,867)       (1,253,799)
Loss on appliance and other peripheral sales.....    (28,835,498)       (1,678,814)
Write-down of inventory..........................    (13,814,527)                -
Losses on purchase commitment....................     (6,340,830)                -
Stock-based compensation.........................     (2,295,754)                -
Sales and marketing..............................    (49,223,220)      (14,069,426)
General and administrative.......................    (12,401,621)       (2,253,921)
Research and development.........................     (5,602,001)       (4,576,269)
Restructuring charge.............................     (1,078,020)                -
                                                   -------------      ------------
  Loss from discontinued operations                $(135,827,699)     $(23,806,513)
                                                   =============      ============
</TABLE>

     Assets and liabilities of the discontinued Internet appliance and service
business are as follows as of 2000 and 1999:

<TABLE>
<CAPTION>
                                                         2000              1999
                                                         ----              ----
<S>                                                  <C>                <C>
Current assets..................................     $3,325,917         $6,348,181
Property and equipment, net.....................      4,967,036          1,180,076
Non-current assets..............................        390,626            385,080
Other liabilities...............................       (488,000)                 -
                                                     ----------         ----------
Net assets of discontinued operations...........     $8,195,579         $7,913,337
                                                     ==========         ==========
</TABLE>

Subsidized Appliance and Peripheral Sales

     During 2000 and 1999, the Company offered its Internet appliance at a price
below cost, as an incentive for new customers to subscribe to its Internet
service.  The loss on the sale of the appliances and other peripherals for the
years ended 2000 and 1999 are as follows:

<TABLE>
<CAPTION>
                                                         2000              1999
                                                         ----              ----
<S>                                                  <C>                <C>
Appliance and peripheral revenue................     $ 13,470,133       $ 1,193,780
Cost of appliance and peripheral sales..........       42,305,631         2,872,594
                                                     ------------       -----------
Net loss on subsidized appliance and peripheral
 sales..........................................     $(28,835,498)      $(1,678,814)
                                                     ============       ===========
</TABLE>

Warrants

     On December 22, 1999, the Company entered into a nonbinding Memorandum of
Understanding ("MOU") with U S WEST !nterprise Networking Services ("U S WEST")
to form a strategic alliance for the distribution of the Company's Internet
appliance.  As consideration for signing the MOU, the Company granted to US West
for $5,000 an immediately exercisable warrant to purchase 600,000 shares of the
Company's common stock at $6.67 per share.  The exercise price of the warrant is
subject to adjustment under certain conditions, and expires on December 31,
2003.  The fair value of the warrant on the measurement date was $4,126,544,
which has been recognized as sales and marketing expense as a component of the
loss from discontinued operations for the period ended December 31, 1999 as
there were no remaining performance

                                      F-11
<PAGE>

                               NETPLIANCE, INC.
                         NOTES TO FINANCIAL STATEMENTS


obligations on behalf of the warrant holder. The fair value of the warrant was
estimated using the Black-Scholes model using an assumed volatility of 50%, a
risk-free interest rate of 6%, a weighted-average expected life of one year, and
a dividend rate of 0%.

Write-down of Inventory and Loss on Purchase Commitment

     In September 1999, the Company entered into an agreement with Quanta
Computer for Quanta to manufacture the Company's Internet appliance.  Due to the
Company's change in focus from its consumer Internet offering to providing
infrastructure software and hardware and other related services to broadband
service providers, the Company instructed Quanta to cease producing devices in
September 2000.  The early cancellation of this order with the manufacturer
resulted in a $6.3 million settlement payment to Quanta.  Additionally, during
the third quarter of 2000, the Company recorded a $11.4 million charge to reduce
inventory to the lower of cost or market and recorded a $2.4 million charge for
loss on the remaining negotiated purchase commitment based on the settlement
with Quanta.

Commitments

     In July 2000, the Company entered into a network service agreement with
AT&T Corp. to provide Internet service to its customers.  Under the agreement,
the Company is obligated to pay minimum commitment amounts over the term of the
agreement equaling $405,000, $7.3 million, $14.3 million and $10.4 million for
calendar years 2000, 2001, 2002 and 2003, respectively.  The agreement may be
terminated by the Company for any reason upon 60 days prior written notice upon
the payment of a termination fee, which is based on a percentage of the then
current commitment level and the remaining term of the agreement.

     In July 2000, the Company entered into a network services agreement with
Genuity Solutions, Inc. to provide dial-up Internet service to its customers.
Under this agreement, the Company is obligated to pay minimum commitment amounts
over the three year term of the agreement equaling $200,000 per month.  The
agreement may be terminated by the Company for any reason upon 60 days prior
written notice upon the payment of a termination fee which is based on a
percentage of the then current commitment level and the remaining term of the
agreement.

(4)  Net Loss Per Share

     Basic and diluted net loss per share are presented in conformity with SFAS
No. 128, "Earnings Per Share."  In accordance with SFAS No. 128 and SEC Staff
Accounting Bulletin No. 98, basic loss per share is computed using the weighted
average number of common shares outstanding during the period. Diluted loss per
share is equivalent to basic loss per share because outstanding stock options,
warrants and convertible preferred stock are anti-dilutive.  At December 31,
1999, potentially dilutive securities that were excluded from the calculation of
loss per share because their effect was antidilutive were options to purchase
4,686,882 shares of common stock, warrants to purchase 845,634 shares of common
stock and shares of preferred stock convertible into 25,259,430 shares of common
stock.  At December 31, 2000, potentially dilutive securities that were excluded
from the calculation of loss per share because their effect was antidilutive
were options to purchase 8,550,063 shares of common stock and warrants to
purchase 600,000 shares of common stock.

                                      F-12
<PAGE>

                               NETPLIANCE, INC.
                         NOTES TO FINANCIAL STATEMENTS


(5)  Property and Equipment

     Property and equipment as of December 31, 2000 and 1999 consists of:

                                                        2000          1999
                                                        ----          ----

Computer equipment...............................   $ 5,794,800    $2,268,950
Furniture and fixtures...........................     1,009,850         4,547
Leasehold improvements...........................     1,854,368             -
Office and other equipment.......................       403,781         2,646
Software.........................................       354,909       199,049
                                                    -----------    ----------

                                                      9,417,708     2,475,192
Less accumulated depreciation and amortization...    (2,643,526)     (552,639)
                                                    -----------    ----------

Net property and equipment.......................   $ 6,774,182    $1,922,553
                                                    ===========    ==========

     The Company's depreciation expense on equipment used in continuing
operations for the year ended December 31, 2000 and the period from January 12,
1999 (inception) through December 31, 1999 totaled $2,090,887 and $552,639,
respectively.  Included in property and equipment at December 31, 2000 and 1999
are $1,939,187 related to equipment on capital lease.  Accumulated depreciation
for equipment under capital lease was $1,433,327 and $473,240 at December 31,
2000 and 1999, respectively.  Amortization of assets leased under capital lease
arrangements is included in depreciation expense.

     Terms of one of the Company's equipment leases calls for a letter of credit
in an amount equal to 25% of the value of the equipment.  The Company has
pledged a certificate of deposit (included in other current assets at December
31, 2000) in the amount of $445,231 as collateral for the letter of credit
issued by a financial institution.

     During 2000, the Company acquired leasehold improvements on one of its
facilities through a landlord lease allowance in the aggregate amount of
$882,000. This amount is being amortized over the term of the facility lease.

(6)  Accrued Liabilities

Accrued liabilities as of December 31, 2000 and 1999 consists of the following:

                                                        2000          1999
                                                        ----          ----

Payroll and employee benefits...................    $   704,376    $  460,376
Professional services...........................              -       725,000
Marketing and promotions........................              -       242,752
Outsourced technical support....................      1,409,718             -
Network usage...................................      4,113,042             -
Other...........................................      7,155,549       779,959
                                                    -----------    ----------

Total...........................................    $13,382,685    $2,208,087
                                                    ===========    ==========

(7)  Notes Receivable

     From January 12, 1999 (inception) through December 31, 1999, the Company
issued shares of its common stock in exchange for promissory notes to five
employees of the Company.  The aggregate amount of the notes totaled $892,800.
In conjunction with the resignation of one of the Company's founders, one of the
notes was forgiven as part of the consideration for the repurchase of the
founder's shares.  During the year ended December 31, 2000, two of the notes
receivable were paid in full.  At

                                      F-13
<PAGE>

                               NETPLIANCE, INC.
                         NOTES TO FINANCIAL STATEMENTS


December 31, 2000, the aggregate outstanding balance of the two remaining notes
receivable was $652,800. The notes are secured by the common stock, bear
interest at 7% and mature in 2004. The notes have been reflected as a reduction
of stockholders' equity on the accompanying balance sheet. The Company issued
300,000 shares of common stock to an employee at a price below the estimated
fair value on the date of issuance and recognized $390,000 of expense that is
included in general and administrative expenses for the period ended December
31, 1999.

(8)  Capital Stock

Common Stock

     In March 1999, the Company repurchased approximately 3.9 million shares of
its common stock from one of its original founders in exchange for cash of
approximately $250,000 and a $220,546 note payable. The note payable bore
interest at 7% per annum and was paid in December 1999.  The repurchased shares
were subsequently reissued to other stockholders.  As the founder's shares were
issued in exchange for a note receivable that was never paid, the subsequent
repurchase of the shares, together with certain other costs related to the
founder's separation from the Company, was accounted for as compensation
expense.  Such expense aggregated $472,000, and is included in general and
administrative expenses for the period ended December 31, 1999.

     On February 6, 2000, the Board of Directors approved a three-for-one stock
split of common stock and reincorporation of the Company in the State of
Delaware, to be effective immediately prior to the effective date of the
Company's initial public offering.  The reincorporation was completed on March
15, 2000.  All common stock information has been adjusted to reflect the stock
split as if such split had taken place at inception.  On the same date, the
Board of Directors authorized an increase in the number of shares reserved for
issuance under the Company's stock option plan to 10,500,000.

     On March 17, 2000, the Company completed its initial public offering of
8,000,000 shares of common stock and realized net proceeds of approximately
$132.7 million.  As of the closing date of the offering, all outstanding shares
of the Company's convertible preferred stock were converted into shares of
common stock.

Convertible Preferred Stock

     From inception through December 31, 1999, the Company issued 658,647 shares
of Series A preferred stock ("Series A") at prices ranging from $5.71 to $60 per
share, 116,666 shares of Series B preferred stock ("Series B") at $60 per share
and 66,668 shares of Series C preferred stock ("Series C") at $90 per share.
Net proceeds to the Company approximated $16.9 million, $6.8 million and $5.8
million for the issuance of Series A, Series B and Series C, respectively.

     The Series A was convertible at the option of the holder into ten shares of
common stock for each share of Series A.  Additionally, each share of Series A
would automatically convert into ten shares of common stock upon the Company's
consummation of a public offering of its common stock or a consolidation or
merger of the Company with or into any other corporation or the sale or other
transfer of all or substantially all of the assets of the Company.

     The Series B and Series C were convertible at the option of the holder into
shares of common stock at a rate equal to the product of the number of shares of
preferred stock and initial purchase price for such shares, divided by the
Conversion Price, as defined.  The Conversion Price per share was $2.00 and
$3.00 for the Series B and Series C, respectively.  Additionally, each share of
Series B and Series C

                                      F-14
<PAGE>

                               NETPLIANCE, INC.
                         NOTES TO FINANCIAL STATEMENTS


would automatically convert at the Conversion Price into shares of common stock
upon the Company's consummation of an initial firm underwritten public offering
of its common stock raising gross proceeds to the Company of $15 million or more
at an offering price per share greater than or equal to 150% of the initial
Conversion Price, upon a consolidation or merger of the Company with or into any
other corporation or the sale or transfer of all or substantially all of the
assets of the Company.

     In the event of any liquidation or dissolution or winding up of the
Company, voluntary or involuntary, the holders of each series of preferred stock
would have been entitled to receive, subject to rights of any other class of
stock which ranks senior to the applicable series of preferred stock but before
any distribution is made on any class of stock ranking junior to the applicable
series of preferred stock, a liquidation preference plus any declared and unpaid
dividends.  At December 31, 1999, the Series A, B and C carried a liquidation
preference equal to $5.71, $60.00 and $90.00 per share, respectively.

     During the time the preferred stock was outstanding, the Company could not,
and did not, declare or pay any dividends on any share of common stock unless a
dividend (including previously accrued, but unpaid dividends) was paid with
respect to all outstanding shares of the preferred stock.  The holders of the
preferred stock were entitled to receive dividends on each share of common stock
into which the preferred stock was convertible.  Any accrued dividends on the
preferred stock were payable upon the conversion of the preferred stock or
liquidation of the Company.  No dividends were declared, accrued or paid for the
year ended December 31, 2000 or for the period from January 12, 1999 (inception)
through December 31, 1999.

     Each share of Series A, B and C converted into 30 shares of common stock
upon the Company's consummation of its public offering of its common stock in
March of 2000, or 19,759,410, 3,499,980, and 2,000,040, respectively, totaling
25,259,430 shares of common stock as a result of the conversion provision of
such stock and the stock split effectuated with the Company's initial public
offering.

     On December 22, 1999, the Company entered into an irrevocable agreement to
sell 1,430,000 shares of its Series D Convertible Preferred Stock ("Series D")
for $20.00 per share in a private placement.  On January 5, 2000, the Company
consummated the Series D offering and issued the Series D. Net proceeds to the
Company approximated $27.1 million.  The holders of Series D were entitled to
the same voting and dividend rights as Series B and Series C and had a
liquidation preference equal to the original purchase price of $20.00 per share
and in preference to the Series A, Series B and Series C.  The Series D were
convertible at the option of the holder into shares of common stock at a
conversion ratio of one-for-one.  In December 1999, a purchaser of Series D paid
$2.0 million for its shares in advance of the Company issuing the shares.

     The 66,668 shares of Series C, the 1,430,000 shares of Series D and the
warrants to purchase 221,400 shares of common stock issued in conjunction with
Series D were issued with beneficial conversion features approximating $16.2
million, $27.2 million and $1.4 million, respectively.  The beneficial
conversion features were calculated as the difference between the conversion
price and the fair value of the warrants and common stock into which the
preferred stock was convertible.  These amounts are accounted for as an increase
in additional paid-in capital and in-substance dividends to the preferred
stockholders on the dates of issuance.  The $16.2 million relating to Series C
was recognized in 1999 and the amount relating to Series D was recognized in the
first quarter of 2000, and accordingly increased the loss applicable to common
stockholders by approximately $28.6 million.

     On February 4, 2000, the Company entered into an irrevocable agreement to
sell 1,127,675 shares of Series E Convertible Preferred Stock ("Series E") for
$30.00 per share in a private placement. The

                                      F-15
<PAGE>

                               NETPLIANCE, INC.
                         NOTES TO FINANCIAL STATEMENTS


closing for the sale of these shares was on February 7, 2000. Net proceeds to
the Company approximated $33.8 million.

     The 1,127,675 shares of Series E were issued with a beneficial conversion
feature approximating $13.5 million.  The beneficial conversion feature was
calculated as the difference between the conversion price and the fair value of
the common stock into which the preferred stock was convertible.  This amount is
accounted for as an increase in additional paid-in capital and an in-substance
dividend to the preferred stockholders in the first quarter of 2000, and
accordingly increased the loss applicable to common stockholders by
approximately $13.5 million.  The Series E were convertible at the option of the
holder into shares of common stock at a conversion ratio of one-for-one.

     Each share of Series D and E converted into three shares of common stock
upon the Company's consummation of its public offering of its common stock, or
4,290,000 and 3,383,025, respectively, totaling 7,673,025 shares of common stock
as a result of the conversion provision of such stock and the stock split
effectuated with the Company's initial public offering.

(9)  Stock Options and Warrants

Stock Option Plan

     In January 1999, the Company established its 1999 Stock Option and
Restricted Stock Plan (the "Plan").  The Plan provides for the grant to
employees of the Company of incentive stock options to purchase shares of the
Company's common stock.  The Plan also provides for the grant to certain
employees, officers, directors and consultants of the Company of non-qualified
options to purchase shares of the Company's common stock or shares of restricted
stock.  The total number of shares authorized to be issued under the Plan is
10,500,000.  The Plan is administered by a committee appointed by the Board of
Directors which determines the terms of the options granted, including the
exercise price, the number of shares subject to option, and the option vesting
period and the terms of any restricted stock granted.  Options generally have a
maximum term of ten years and vest in equal annual increments over a four year
period beginning one year from the date of grant.  As of December 31, 2000 and
1999, there were 1,685,437 and 782,250 shares available for future option grants
under the Plan, respectively.  As of December 31, 2000, no shares of restricted
stock had been granted under the Plan.

     Pro forma information assuming the Company had accounted for its employee
stock options granted under the fair value method prescribed by SFAS 123 is
presented below.  The per share weighted-average fair value of stock options
granted during the period from January 12, 1999 (inception) through December 31,
1999, and during the twelve months ended December 31, 2000 was $3.37 and $4.50,
respectively, on the date of grant using the Black-Scholes option pricing
model.  The fair value of options was estimated using a risk-free interest rate
of 6.2% and 5.2%, respectively, a dividend yield of zero, 50% volatility and a
weighted average expected life of four years.

     For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting periods.  The
Company's historical and pro forma net loss and net loss per share for the
period from January 12, 1999 (inception) through December 31, 1999 and for the
year ended December 31, 2000 are as follows:

                                     F-16
<PAGE>

                               NETPLIANCE, INC.
                         NOTES TO FINANCIAL STATEMENTS


                                                    2000              1999
                                                    ----              ----
Net loss:
  As reported...............................    $(186,054,536)    $(43,527,816)
  Pro forma.................................    $(189,207,262)    $(43,681,019)
Basic and diluted net loss per share:
  As reported...............................    $       (3.60)    $      (2.79)
  Pro forma.................................    $       (3.66)    $      (2.80)

     A summary of changes in common stock options is as follows:

<TABLE>
<CAPTION>
                                                             Weighted average
                                                            exercise price per    Range of exercise
                                               Shares             share                prices
                                             ----------     ------------------    -----------------
<S>                                          <C>            <C>                   <C>
Options granted............................   5,315,382           $1.22             $0.19 - $2.55
Options exercised..........................     (18,000)           0.19                      0.19
Options forfeited..........................    (610,500)           0.34               0.19 - 1.40
                                             ----------           -----             -------------

Options outstanding at December 31, 1999...   4,686,882            1.34               0.19 - 2.55
                                             ==========           =====             =============

Options granted............................   8,243,415            5.66              0.34 - 18.50
Options exercised..........................    (264,500)           2.92               0.19 - 6.67
Options forfeited..........................  (4,115,734)           5.00              0.19 - 18.50
                                             ----------           -----             -------------

Options outstanding at December 31, 2000...   8,550,063            3.70              0.19 - 18.50
                                             ==========           =====             =============
</TABLE>

     Thirty thousand options with an exercise price of $2.55 were exercisable as
of December 31, 1999.  As of December 31, 2000, there were 675,063 options
exercisable at exercise prices ranging between $0.19 and $2.55 per share.

     At December 31, 2000, the range of exercise prices and weighted average
remaining contractual life of outstanding options was $0.19 to $18.50 and 9.2
years, respectively.  A summary of outstanding stock options as of December 31,
2000 follows:

<TABLE>
<CAPTION>
                       Number of outstanding         Weighted average
 Range of exercise    options at December 31,   remaining contractual life     Weighted average
       prices                 2000                      (in years)            exercise price ($)
-------------------   -----------------------   --------------------------    ------------------
<S>                   <C>                       <C>                           <C>
$0.19 - $0.99......            980,875                     8.4                       0.22
$1.00 - $2.99......          3,521,250                     9.2                       1.58
$3.00 - $5.99......          1,751,500                     9.6                       5.19
$6.00 - $8.99......          2,020,350                     9.1                       6.80
$9.00 - $11.99.....            220,088                     9.1                       9.97
$12.00 - $18.50....             56,000                     9.2                      14.83
                             ---------
                             8,550,063                     9.2                       3.70
                             =========
</TABLE>

     The Company had $10,081,501 and $14,164,611 of deferred stock-based
compensation related to employee stock options as of December 31, 2000 and 1999,
respectively, and recognized stock-based compensation expense of $5,211,790 and
$22,551 during the year ended December 31, 2000 and the period ended December
31, 1999, respectively, as a result of granting stock options with exercise
prices below the estimated fair value of the Company's common stock at the date
of grant. Included in the $5,211,790 of stock-based compensation expense for the
year ended December 31, 2000 is $4,320,000 of expense recorded as a result of
grants of options to members of the Company's Board of Directors with

                                     F-17
<PAGE>

                               NETPLIANCE, INC.
                         NOTES TO FINANCIAL STATEMENTS


exercise prices below the estimated fair value of the Company's common stock at
the date of grant. During the year ended December 31, 2000, the Company
eliminated approximately $25.2 million of deferred stock-based compensation and
corresponding additional paid-in capital as a result of employee terminations
and resignations that occurred during the year. Deferred stock-based
compensation has been presented as a component of stockholders' equity and is
being amortized as a charge to expense over the vesting period of the applicable
options.

Warrants

     On October 1, 1999 and December 3, 1999, the Company issued warrants to
purchase 215,634 and 30,000 shares of common stock warrants, respectively, to a
third party in connection with the private placement of the Company's preferred
stock.  The warrants enabled the holder to purchase shares of the Company's
common stock at $2.00 and $3.00 per share, respectively.  The warrants' fair
value on the date of grant was estimated to be $275,320.  Additionally,
subsequent to December 31, 1999, in connection with the Series D offering, the
Company issued warrants to purchase 221,400 shares of the Company's common stock
at $6.67 per share.  At the time of the Company's initial public offering, these
warrants were exercised by the holders, resulting in the issuance of 390,760
shares of common stock, with net proceeds to the Company totaling $625,100.

(10) Income Taxes

     As a result of net operating losses, the Company has not recorded a
provision for income taxes. The components of the deferred tax assets
(liabilities) and related valuation allowance at December 31, 2000 and 1999 are
as follows:

                                                      2000          1999
                                                      ----          ----

Net operating loss carryforwards..............   $ 58,130,000   $  6,090,000
Start-up costs capitalized for tax purposes...      3,050,000      3,655,000
Stock-based compensation expense..............      4,203,000      1,795,000
Other.........................................        263,000        544,000
                                                 ------------   ------------
Total deferred tax assets.....................     65,646,000     12,084,000
Valuation allowance...........................    (65,646,000)   (12,084,000)
                                                 ------------   ------------
Net deferred tax assets.......................   $          -   $          -
                                                 ============   ============

     In assessing the potential realization of deferred tax assets, management
considers whether it is more likely than not that some portion or all of the
deferred tax assets will be realized. The ultimate realization of deferred tax
assets is dependent upon the Company attaining future taxable income during the
periods in which those temporary differences become deductible. Due to the
uncertainty surrounding the realization of the benefits of its tax attributes,
including net operating loss carry forwards, in future tax returns, the Company
has provided a 100% valuation allowance on its deferred tax assets.

     At December 31, 2000 and 1999, the Company had net operating losses for
federal income tax purposes of approximately $138,456,000 and $15,820,000,
respectively, and research tax credits of approximately $515,000 and $229,000,
respectively.  The net operating loss carryforwards plus tax credit
carryforwards will expire at various dates beginning in 2019, if not utilized.

                                     F-18
<PAGE>

                               NETPLIANCE, INC.
                         NOTES TO FINANCIAL STATEMENTS


     The Internal Revenue Code Section 382 limits net operating loss and tax
credit carryforwards when an ownership change of more than fifty percent of the
value of the stock in a loss corporation occurs within a three year period.  In
the year 2000, the Company completed its initial public offering.  Accordingly,
the ability to utilize remaining net operating loss and tax credit carryforwards
may be significantly restricted.

(11) Commitments and Contingencies

     The Company leases its office space and certain equipment under non-
cancelable operating leases expiring in various years through 2005.  The Company
also leases equipment, primarily computer equipment, under capital leases.
Total rent expense for all operating leases for the year ended December 31, 2000
and from January 12, 1999 (inception) through December 31, 1999 was $1,956,239
and $408,381, respectively.  Minimum lease commitments under non-cancelable
leases at December 31, 2000 are as follows:

Years ended December 31:                                  Operating    Capital

2001....................................................  $1,473,094  $675,702
2002....................................................   1,218,268         -
2003....................................................   1,216,969         -
2004....................................................   1,216,969         -
2005....................................................     405,657         -
                                                          ----------  --------
Total lease payments....................................  $5,530,957   675,702
                                                          ==========
Interest at rates ranging from 9% to 18%................                37,829
                                                                      --------
Obligations under capital leases at December 31, 2000...              $637,873
                                                                      ========

     Terms of the Company's facility leases call for letters of credit
totaling approximately $1.7 million.  The Company has pledged certificates of
deposit (included in other noncurrent assets at December 31, 2000) as
collateral.

     The Company is involved in certain legal proceedings as a part of its
normal course of business.

     In 2000, the Federal Trade Commission initiated an investigation of
certain of the Company's marketing practices, including whether the Company was
in compliance with the FTC's Trade Regulation Rule Concerning the Sale of Mail
or Telephone Merchandise.  As a result of the investigation and discussions
between the Company and the FTC, the Company and the FTC staff conducting the
investigation have entered into a tentative settlement.  The settlement is in
the form of a Consent Decree and Order for Injunctive Relief, Consumer Redress,
Civil Penalties, and Other Relief.  If the draft Complaint and Consent Decree
are approved by the FTC and the court in which the Complaint and Consent Decree
will be filed, the Company, without admitting liability for any of the matters
alleged in the Complaint, will be required, among other things, to pay a civil
penalty of $100,000 for the alleged violations.

     On December 26, 2000, a class action lawsuit (Civil Action No. 18570-NC)
was filed by Donald L. Semone, a stockholder of the Company, in the Court of
Chancery of the State of Delaware, New Castle County, against the Company as
well as certain of its directors relating to a possible buyout transaction
proposed by a buyout group led by the Company's founders.  The plaintiff sought,
among other things, to enjoin the consummation of the buyout, compensation for
alleged damages and losses, and recoupment of costs and attorneys' fees for the
lawsuit.  In January 2001, the buyout group terminated its discussions

                                     F-19
<PAGE>

                               NETPLIANCE, INC.
                         NOTES TO FINANCIAL STATEMENTS


with the Company's board of directors relating to a possible buyout transaction.
Therefore, the Company is now negotiating a dismissal of this lawsuit.

     The Company has commenced litigation in Austin, Texas, against its former
advertising agency BBDO Worldwide, Inc., for actions arising from the agency's
handling of the Company's advertising account.  The lawsuit asserts causes of
action for breach of contract, breach of fiduciary duty, conversion, business
disparagement and fraud.  BBDO Worldwide has answered the suit and denied the
Company's claims, and has counterclaimed seeking damages.  The action is
currently pending in the United States District Court for the Western District
of Texas, Austin Division, Action Number 00CV613SS.

     On March 1, 2001, Spyglass, Inc. filed a lawsuit against the Company
seeking in excess of $300,000 in damages for the alleged breach of a contract
relating to software development by Spyglass for the Company's discontinued
business.  The Company intends to countersue Spyglass for breach of the
contract.  The case is pending in state court in DuPage County, Illinois.

     The Company believes that the results of the above noted litigation will
not have a material adverse effect on the financial condition, results of
operations or liquidity of the Company.

(12) Employee Benefit Plans

     The Company has a savings plan (the "Savings Plan") that qualifies as a
deferred salary arrangement under section 401(k) of the Internal Revenue Code.
Under the Savings Plan, participating employees may defer a portion of their
pretax earnings, up to the Internal Revenue Service annual contribution limit.
The Company currently is not making any matching contributions to the Savings
Plan.

     During February 2000, the Board of Directors approved the 2000 Employee
Stock Purchase Plan (the "Purchase Plan").  The Company initially reserved for
issuance to, and purchase by, qualified employees under the Purchase Plan an
aggregate of 600,000 shares of common stock. The annual increase in the number
of shares reserved for issuance pursuant to the Purchase Plan shall be the least
of the following: (1) 1% of issued and outstanding shares as of the last day of
the prior fiscal year; (2) 900,000 shares; or (3) a smaller number as determined
by the Board of Directors. Such annual increase shall occur automatically on the
first trading day in January of each year.  The purchase price for each share of
common stock shall be 85% of the lesser of (i) the fair market value of such
share on the last business day in June and December during the life of the
Purchase Plan or (ii) the fair market value of such share on the first day of
the Purchase Period. The Purchase Period is defined as each six-month period
beginning on January 1 or July 1.

(13) Subsequent Events

     In February 2001, the Company issued options to 52 employees who are the
employees associated with the Company's continuing operations and new business
strategy. These options were issued effective February 2, 2001 and total
4,403,754 with a three year vesting schedule, one year change of control
acceleration, and with an exercise price of $0.31, the fair market value of the
stock on that date. These options were granted subject to the availability of
options in the unissued option pool. The fair market value of the underlying
stock on the date these options become available may not be equal to the
exercise price of $0.31 per share. As such, the Company may record additional
deferred stock-based compensation at that time. All options granted after
February 2, 2001 will be subject to the same availability clause as the options
issued on February 2, 2001, and may be subject to deferred stock-based
compensation when the options are available in the pool.

                                     F-20