<PAGE>

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

                                   FORM 10-Q

(Mark One)

                [X]Quarterly Report Pursuant to Section 13 or 15(d)
                     Of The Securities Exchange Act of 1934

                      For Quarter Ended September 30, 2001

                                       OR

                [_]Transition Report Pursuant to Section 13 or 15(d)
                     Of the Securities Exchange Act of 1934

                  For the transition period from ____ to ____.

                        Commission File Number 001-15715

                         TIPPINGPOINT TECHNOLOGIES, INC.

                       Organized in the State of Delaware
                        Tax Identification No. 74-2902814

            7501B North Capital of Texas Highway, Austin, Texas 78731
                          Telephone No. (512) 681-8000

         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 [_]

         The number of shares outstanding of each of the issuer's classes of
common stock as of October 31, 2001.

                   Class                               Number of Shares
                   -----                               ----------------
         Common Stock, $0.01 par value                   4,045,986

<PAGE>

                         TIPPINGPOINT TECHNOLOGIES, INC.

                                      INDEX

<TABLE>
<CAPTION>
                                                                                                      Page
                                                                                                     Number
                                                                                                     ------
<S>                                                                                                  <C>
PART I.        FINANCIAL INFORMATION: .............................................................       1

      Item 1.  Financial Statements (unaudited) ...................................................       1

               Condensed Balance Sheets
                  as of September 30, 2001 and December 31, 2000 ..................................       1

               Condensed Statements of Operations
                  for the three and nine months ended September 30, 2001 and 2000 .................       2

               Condensed Statements of Cash Flows
                  for the nine months ended September 30, 2001 and 2000 ...........................       3

               Notes to Condensed Financial Statements ............................................       4

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

      Item 3.  Quantitative and Qualitative Disclosure About Market Risk ..........................      23

PART II.       OTHER INFORMATION: .................................................................      23

      Item 1.  Legal Proceedings ..................................................................      23

      Item 4.  Submission of Matters to a Vote of Security Holders ................................      23

      Item 6.  Exhibits and Reports on Form 8-K ...................................................      24

      Signatures ..................................................................................      25
</TABLE>

<PAGE>

PART I.  FINANCIAL INFORMATION.

ITEM 1.  FINANCIAL STATEMENTS.

                         TIPPINGPOINT TECHNOLOGIES, INC.
                            CONDENSED BALANCE SHEETS
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                                              September 30,       December 31,
                                     ASSETS                                       2001               2000
                                                                              -------------      -------------
<S>                                                                           <C>                <C>
Current assets:
   Cash and cash equivalents ...........................................      $  25,675,682      $  27,352,409
   Short-term investments ..............................................         22,494,118         40,771,209
   Prepaid expenses and other current assets ...........................          1,676,410            917,940
                                                                              -------------      -------------
       Total current assets ............................................         49,846,210         69,041,558
                                                                              -------------      -------------

Property and equipment, net ............................................          7,122,085          6,774,182
Net assets from discontinued operations ................................                  -          8,195,579
Other ..................................................................          1,799,374          2,309,277
                                                                              -------------      -------------
                                                                              $  58,767,669      $  86,320,596
                                                                              =============      =============
               LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
   Trade accounts payable ..............................................      $   1,244,955      $   1,284,948
   Accrued liabilities .................................................          4,665,335         13,382,685
   Current portion of capital lease obligations ........................                  -            637,873
                                                                              -------------      -------------
       Total current liabilities .......................................          5,910,290         15,305,506
                                                                              -------------      -------------
   Net liabilities from discontinued operations ........................            523,679                  -
                                                                              -------------      -------------
       Total liabilities ...............................................          6,433,969         15,305,506
                                                                              -------------      -------------
Stockholders' equity:
Common stock ...........................................................             40,459             40,330
Additional paid-in capital .............................................        305,165,184        311,873,513
Deferred stock-based compensation ......................................         (2,602,986)       (10,081,501)
Stockholder notes receivable ...........................................           (652,800)          (652,800)
Accumulated other comprehensive gain/(loss) ............................             60,187           (582,100)
Accumulated deficit ....................................................       (249,676,344)      (229,582,352)
                                                                              -------------      -------------
       Total stockholders' equity ......................................         52,333,700         71,015,090
                                                                              -------------      -------------
                                                                              $  58,767,669      $  86,320,596
                                                                              =============      =============
</TABLE>

       See accompanying notes to unaudited condensed financial statements.

                                        1

<PAGE>
                         TIPPINGPOINT TECHNOLOGIES, INC.
                       CONDENSED STATEMENTS OF OPERATIONS
                                   (UNAUDITED)
<TABLE>
<CAPTION>
                                                                            Three Months                     Nine Months
                                                                               Ended                           Ended
                                                                            September 30,                   September 30,
                                                                   ------------------------------    -----------------------------
                                                                       2001             2000             2001             2000
                                                                   ------------    --------------    ------------     ------------
<S>                                                                <C>              <C>              <C>              <C>
Operating expenses:
     Research and development ..................................   $   3,535,815    $     835,648    $   8,202,696    $   3,362,685
     Sales and marketing .......................................         393,933               --          393,933               --
     General and administrative ................................       1,701,326        1,176,036        5,786,018        6,852,895
                                                                   -------------    -------------    -------------    -------------
         Total operating expenses ..............................       5,631,074        2,011,684       14,382,647       10,215,580
                                                                   -------------    -------------    -------------    -------------
         Operating loss ........................................      (5,631,074)      (2,011,684)     (14,382,647)     (10,215,580)

Interest income, net ...........................................         549,532        1,921,149        2,276,561        4,644,923
                                                                   -------------    -------------    -------------    -------------
     Loss from continuing operations ...........................      (5,081,542)         (90,535)     (12,106,086)      (5,570,657)
     Discontinued operations:
         Loss from operations of a discontinued business........              --      (41,792,012)      (3,697,206)    (118,928,300)
         Loss on disposal of a discontinued business,
         including provision for operating losses during
         phase-out period......................................               --               --       (4,290,700)              --
                                                                   -------------    -------------    -------------    -------------
         Net loss ..............................................   $  (5,081,542)   $ (41,882,547)   $ (20,093,992)   $(124,498,957)
                                                                   =============    =============    =============    =============
Per share data:
     Net loss ..................................................   $  (5,081,542)   $ (41,882,547)   $ (20,093,992)   $(124,498,957)
     Effect of beneficial conversion feature of
     convertible preferred stock ...............................              --               --               --      (42,089,262)
                                                                   -------------    -------------    -------------    -------------
     Net loss applicable to common stock .......................   $  (5,081,542)   $ (41,882,547)   $ (20,093,992)   $(166,588,219)
                                                                   =============    =============    =============    =============
     Net basic and diluted loss from continuing
     operations (net of effect of beneficial conversion
     feature of convertible preferred stock) per common
         share .................................................   $       (1.26)   $       (0.02)   $       (2.99)   $      (12.44)
     Net basic and diluted loss from discontinued
     operations per common share ...............................              --    $      (10.37)   $       (1.98)   $      (31.05)
                                                                   -------------    -------------    -------------    -------------
     Net basic and diluted loss per common share ...............   $       (1.26)   $      (10.39)   $       (4.97)   $      (43.49)
                                                                   =============    =============    =============    =============
Weighted average common shares outstanding .....................       4,044,447        4,029,465        4,041,890        3,829,923
                                                                   =============    =============    =============    =============
</TABLE>

       See accompanying notes to unaudited condensed financial statements.

                                       2

<PAGE>

                         TIPPINGPOINT TECHNOLOGIES, INC.
                       CONDENSED STATEMENTS OF CASH FLOWS
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                                                                Nine Months
                                                                                                   Ended
                                                                                               September 30,
                                                                                      -------------------------------
                                                                                          2001              2000
                                                                                      ------------      -------------
<S>                                                                                   <C>              <C>
Cash flows from continuing operating activities:
     Loss from continuing operations ..........................................       $(12,106,086)     $  (5,570,657)
     Adjustments to reconcile loss from continuing operations to net cash
     provided by/(used in) continuing operating activities: ...................
         Depreciation and amortization ........................................          2,235,676          1,370,052
         Accretion of investment securities ...................................         (1,831,182)        (1,414,677)
         Loss on sale of fixed assets .........................................             28,840                  -
         Stock-based compensation expense .....................................            721,486          4,954,471
         Changes in operating assets and liabilities:
              Prepaid expenses and other current assets .......................           (730,077)         1,000,568
              Trade accounts payable and accrued liabilities ..................         (8,757,343)        17,291,358
                                                                                      ------------      -------------
     Net cash provided by/(used in) continuing operating activities ...........        (20,438,686)        17,631,115
                                                                                      ------------      -------------

Cash flows used in investing activities:
     Purchases of property and equipment ......................................         (2,612,419)        (6,322,374)
     Purchases of investment securities .......................................        (41,437,647)       (96,079,099)
     Investment securities sold ...............................................          4,942,639                  -
     Investment securities matured ............................................         57,245,568         31,190,553
                                                                                      ------------      -------------

     Net cash provided by/(used in) investing activities ......................         18,138,141        (71,210,920)
                                                                                      ------------      -------------

Cash flows from financing activities:
     Decrease/(increase) in restricted cash related to capital leases .........            481,511         (2,129,241)
     Increase in restricted cash related to contractual agreement with
     manufacturer .............................................................                  -        (11,876,472)
     Principal payments on capital lease obligations ..........................           (637,873)          (699,145)
     Proceeds from issuance of common stock ...................................             33,148        132,722,255
     Proceeds from exercise of stock options and warrants .....................             32,685          1,398,072
     Proceeds from issuance of preferred stock, net ...........................                  -         58,873,637
     Collection of stockholder notes receivable ...............................                  -            168,649
                                                                                      ------------      -------------

     Net cash provided by/(used in) financing activities ......................            (90,529)       178,457,755
                                                                                      ------------      -------------
Cash provided by/(used in) discontinued operations ............................            714,347       (122,689,071)
                                                                                      ------------      -------------
Net (decrease)/increase in cash and cash equivalents ..........................         (1,676,727)         2,188,879
                                                                                      ------------      -------------
Cash and cash equivalents at beginning of period ..............................         27,352,409          9,563,362
                                                                                      ------------      -------------
Cash, cash equivalents at end of period .......................................       $ 25,675,682      $  11,752,241
                                                                                      ============      =============
</TABLE>

       See accompanying notes to unaudited condensed financial statements.

                                        3

<PAGE>
                          NOTES TO FINANCIAL STATEMENTS

(1)      Incorporation and Nature of Business

         TippingPoint Technologies, Inc. ("TippingPoint" 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, and on August 20, 2001, the
Company's name was changed to TippingPoint Technologies, Inc. The Company, after
exiting the consumer Internet appliance and service business in January 2001,
operates in one business segment.

         Currently, the Company is developing an offering that will include
hardware and software designed to enable broadband service providers to provide
premium services over their telecommunications networks. The development of this
offering will be funded initially by the Company's existing capital. As a result
of the Company's shift in business focus, the Company expects that it will not
generate any revenue in 2001 from its current business, and expects to report
significant operating losses through at least late 2002. There can be no
assurance that the Company will ever achieve positive cash flow from its
operations and it faces numerous risks associated with this 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 2, 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 the 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, at least 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.

         In the opinion of management, the accompanying unaudited condensed
financial statements contain all adjustments, consisting only of normal
recurring adjustments and accruals, necessary for a fair presentation of such
information. The balance sheet at December 31, 2000, has been derived from the
audited financial statements at that date. While the Company believes that the
disclosures are adequate to make the information not misleading, it suggests
that these financial statements be read in conjunction with the audited
financial statements and accompanying notes included in the Company's Annual
Report on Form 10-K for the year ended December 31, 2000. Interim results are
not necessarily indicative of results expected in future periods.

(2)      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 Internet service 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 and 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 consumer Internet appliance and service business. At that time,
the Company terminated all of its marketing and sales efforts related to this
business. In February 2001, the Company

                                        4

<PAGE>

reduced headcount by an additional 76 employees, and certain members of senior
management who were dedicated to the consumer Internet offering resigned.

         Also 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. Through September 30,
2001, the Company had received approximately $7.7 million in payments from
EarthLink, which constitutes virtually all of the funds the Company expects to
receive from the transfer to EarthLink. After the transfer of the Internet
appliance service obligations to EarthLink, the Company continued to provide
certain services to approximately 7,000 customers. The Company is obligated to
provide service to approximately 3,000 customers of third parties through
November 2001. After that, the Company expects to discontinue providing any
services directly to consumers. As of June 30, 2001, the Company discontinued
providing Internet access service to its remaining customers to whom it was not
obligated to provide such service.

         The Company estimates that it will incur a net loss from the
discontinuance of the Internet appliance and service business totaling
approximately $8.0 million. The loss estimate includes the actual loss incurred
during the first nine months of 2001, but continues to be based upon certain
estimates, including the estimated amount of any remaining payments by
EarthLink, the estimated costs of operating the Internet appliance and service
business until fully discontinued and estimated costs to terminate or
restructure various network service agreements, facility leases and other
contracts and agreements related to this business. Any differences between the
Company's estimates and the actual amounts incurred in future periods will
change the estimated net loss 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 approximately
$1.1 million in the fourth quarter of 2000, primarily consisting of costs
associated with closing of facilities and employee severance and benefits, of
which approximately $596,000 was accrued at December 31, 2000. The Company
recorded approximately $2.5 million of additional restructuring charges during
the first nine months of 2001, relating to a leased facility that the Company is
not utilizing. The following table provides a summary of the charges, by
category, and changes in this restructuring accrual for the nine months ended
September 30, 2001:

<TABLE>
<CAPTION>

                                      Accrual at                                            Accrual at
                                     September 30,        Expensed in     Cash payments    Deccember 31,
                                         2001                2001            in 2001          2000
                                     -------------       -------------    --------------   -------------
<S>                                  <C>                 <C>              <C>               <C>
Lease termination costs ......       $  2,151,125        $  2,530,800     $  (673,075)      $  293,400
Employee severance ...........              4,000                   -        (258,777)         262,777
Other ........................                  -                   -         (39,384)          39,384
                                     ------------        ------------     -----------       ----------
Total ........................       $  2,155,125        $  2,530,800     $  (971,236)      $  595,561
                                     ============        ============     ===========       ==========
</TABLE>

         All employees terminated in the restructuring received severance
payments equal to 60 days of salary, 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.

         In January 2001, the Company's Board of Directors adopted a new
business strategy for the Company, which resulted in additional reductions in
the Company's workforce, totaling 76 employees in

                                        5

<PAGE>

sales and marketing, technical support, network operations and the general and
administrative groups. All employees terminated in the reduction in workforce
received severance payments equal to 60 days of salary, plus $1,000 if they
executed a release of claims against the Company. As a result, the Company
estimates that it will incur approximately $933,000 of severance costs during
2001. As of September 30, 2001, the Company had accrued approximately $4,000 for
terminations scheduled to occur after that date.

         As the majority of the Company's restructuring charges recorded in 2000
and 2001 are estimates, the actual amounts incurred could differ from those
estimates.

         Operating results of the discontinued Internet appliance and service
business are as follows for the three and nine months ended September 30, 2001
and 2000:

<TABLE>
<CAPTION>
                                                     Three Months Ended                      Nine months Ended
                                                        September 30,                          September 30,
                                                -------------------------------      ---------------------------------
                                                     2001                2000                2001                2000
                                                -----------      --------------      -------------      --------------
<S>                                             <C>              <C>                 <C>                <C>
Subscription revenue ........................   $         -      $    3,401,459      $   2,878,489      $    5,701,159
Cost of subscription revenue ................             -          (8,021,185)        (4,222,265)        (19,620,520)
Income/(loss) on appliance and other
peripheral sales ............................             -          (2,314,182)            37,354         (26,748,005)
Stock-based compensation ....................             -            (270,202)            11,900          (2,119,525)
Contract settlement with manufacturer .......             -          (6,340,830)                 -          (6,340,830)
Write down of inventory .....................             -         (11,358,147)                 -         (11,358,147)
Loss on purchase commitment .................             -          (2,456,380)                 -          (2,456,380)
Sales and marketing .........................             -          (8,503,416)        (1,189,193)        (43,312,878)
General and administrative ..................             -          (3,206,780)          (429,909)         (7,325,347)
Research and development ....................             -          (2,722,349)          (343,482)         (5,347,827)
Reserve for future estimated losses .........             -                   -         (2,200,000)                  -
Restructuring charge ........................             -                   -         (2,530,800)                  -
                                                ------------     --------------      -------------      --------------
Loss from discontinued operations ...........   $         -      $  (41,792,012      $  (7,987,906)     $ (118,928,300)
                                                ============     ==============      =============      ==============
</TABLE>

         Assets and liabilities of the discontinued Internet appliance and
service business are as follows as of September 30, 2001 and December 31, 2000:

<TABLE>
<CAPTION>
                                                             September 30,               December 31,
                                                                 2001                        2000
                                                             -------------               ------------
<S>                                                          <C>                         <C>
Current assets, net .........................                $          -                $  2,837,917
Non-current assets, net .....................                   5,029,386                   5,357,662
Current liabilities, net ....................                  (5,553,065)                          -
                                                             ------------                ------------
Net assets/(liabilities) of discontinued
operations ..................................                $   (523,679)               $  8,195,579
                                                             ============                ============
</TABLE>

(3)      Net Loss Per Share

         Basic and diluted net loss per share are presented in conformity with
Statement of Financial Accounting Standard No. 128, "Earnings Per Share." In
accordance with Statement of Financial Accounting Standard No. 128 and
Securities and Exchange Commission 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

                                        6

<PAGE>

options and warrants are anti-dilutive. The calculation of net loss per share
excludes potential common shares if their effect is anti-dilutive. Potential
common shares consist of common shares issuable upon the exercise of stock
options and warrants, and the lapsing of restrictions on shares of restricted
common stock.

(4)      Capital Stock

Common Stock

         On February 6, 2000, the Board of Directors approved a reincorporation
of the Company in the State of Delaware, which also effected a three-for-one
stock split of all of the Company's outstanding common stock, to be effective
immediately prior to the Company's initial public offering. The reincorporation
was completed on March 15, 2000.

         On March 17, 2000, the Company completed its initial public offering of
533,333 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 automatically converted into shares
of common stock.

         On August 9, 2001, the Company's stockholders approved an amendment to
the Company's Certificate of Incorporation to effect a reverse stock split of
all of the outstanding shares of common stock at a ratio of not less than
one-for-three and not more than one-for-twenty, to be determined at the
discretion of the Board of Directors. On August 9, 2001 the Board of Directors
determined to implement a one-for-fifteen reverse stock split, to be effective
August 20, 2001. On August 20, 2001, every fifteen shares of common stock
outstanding were converted into one share of common stock.

         On August 9, 2001, the Board of Directors authorized an increase in the
number of shares of common stock reserved for issuance under the Company's stock
incentive plan to 1,033,000. The increase was approved by the Company's
stockholders on October 24, 2001.

         All common stock information has been adjusted to reflect the stock
split and reverse stock split as if both splits had taken place at inception.

Restricted Stock

         The Company has reserved 99,207 shares of restricted common stock
("Restricted Stock") for issuance under the Company's stock incentive plan as a
result of the exchange of those shares of Restricted Stock for certain
outstanding options. The shares of Restricted Stock will vest over various
increments depending on the vesting schedule of the stock options exchanged,
with unvested shares being subject to forfeiture under certain circumstances.
Upon certain change of control events, to the extent certain shares of
Restricted Stock are not fully vested, one-third of such shares will immediately
vest.

Convertible Preferred Stock

         On January 5, 2000, the Company issued 1,430,000 shares of Series D
Convertible Preferred Stock ("Series D") for $20.00 per share in a private
placement. Net proceeds to the Company approximated $27.1 million.

         The 1,430,000 shares of Series D were issued with a beneficial
conversion feature approximating $27.2 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.
In connection with the Series D, the Company issued warrants to purchase 14,760
shares of common stock with a beneficial conversion feature approximating $1.4
million, the difference between the exercise price of the warrants and the fair
value of the common stock purchasable upon exercise of the warrants. These

                                        7

<PAGE>

amounts were accounted for as an increase in additional paid-in capital and
in-substance dividends to the preferred stockholders on the dates of issuance,
and accordingly increased the loss applicable to common stockholders by
approximately $28.6 million. The shares of Series D were convertible at the
option of the holder into shares of common stock.

         On February 7, 2000, the Company sold 1,127,675 shares of Series E
Convertible Preferred Stock ("Series E") for $30.00 per share in a private
placement. 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 was accounted for as an increase in additional paid-in capital and
an in-substance dividend to the preferred stockholders on the dates of issuance,
and accordingly increased the loss applicable to common stockholders by
approximately $13.5 million. The shares of Series E were convertible at the
option of the holder into shares of common stock.

         Upon the consummation of the Company's initial public offering of its
common stock, each share of Series D and Series E automatically converted into
one-fifth of one share of common stock, taking into account the stock split and
reverse stock split occurring in March 2000 and August 2001, respectively, or
286,000 and 225,535 shares, respectively, totaling 511,535 shares of common
stock, as a result of the conversion provisions of such stock.

(5)      Stock Options

Stock Incentive Plan

         In January 2001, the Company granted to its non-employee directors
options to purchase an aggregate of 14,000 shares of common stock at an exercise
price of $7.97 per share, which were fully vested at the time of the grant. In
the nine months ended September 30, 2001, the Company granted to employees
options to purchase an aggregate of 458,917 shares of common stock at exercise
prices ranging from $4.65 to $8.44 per share, which will vest over a period of
three or four years. Certain of these options also have a one year change of
control acceleration clause. Currently, there are outstanding options with the
right to purchase 598,861 shares of common stock. In addition, there are 99,207
shares of Restricted Stock reserved for issuance, which are subject to
forfeiture under certain circumstances.

         The Company has recorded approximately $290,000 and $720,000 of
compensation expense for the three months and nine months ended September 30,
2001, respectively, primarily as a result of granting stock options in 1999 and
2000 with exercise prices below the estimated fair value of the stock at the
date of grant, and also as a result of grant of shares of Restricted Stock
during 2001. The Company also recorded approximately $535,000 and $673,000 of
deferred stock compensation during the three months and nine months ended
September 30, 2001, respectively, related to the issuance of shares of
Restricted Stock. Also, the Company eliminated approximately $7.4 million of
unrecognized deferred stock compensation as a result of employee terminations
and voluntary departures during the first nine months of 2001. Remaining
deferred compensation of approximately $2.6 million will be amortized over the
applicable vesting period of outstanding options.

(6)      Commitments and Contingencies

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

         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

                                        8

<PAGE>

for the Company's discontinued business. The Company has filed a denial and
counterclaim against Spyglass for breach of contract. The case is pending in
state court in DuPage County, Illinois.

         The Company has commenced litigation in Austin, Texas, against Data
Exchange Corporation ("DEX") for actions arising from DEX's refusal to release
to the Company the remaining inventory of the Company's Internet appliances held
by DEX. The lawsuit asserts causes of action for breach of contract and
conversion. DEX has denied the Company's claims and has filed a counterclaim
asserting fraudulent misrepresentation, negligent misrepresentation, breach of
contract, unjust enrichment and declaratory judgment. The action is currently
pending in the United States District Court for the Western District of Texas,
Austin Division.

         On July 11, 2001, a purported class action lawsuit against the Company
was filed in Texas state court in Travis County, Texas on behalf of all persons
who purchased an Internet appliance and subscribed to the Company's Internet
service. The complaint alleges that, among other things, the Company
disseminated false and misleading advertisements, engaged in unauthorized
billing practices and failed to provide adequate technical and customer support
and service with respect to its Internet appliance and service business. The
complaint seeks an unspecified amount of damages. The Company believes that the
claims have no merit and that the Company has meritorious defenses available to
it. The Company intends to defend this action vigorously.

         The Company could be forced to incur material expenses with respect to
these legal proceedings, and in the event there is an outcome in any that is
adverse to the Company, the Company's financial position and prospects could be
harmed.

         During the first quarter of 2001, the Company entered into an agreement
with AT&T Corp. that released the Company from its obligations to purchase
Internet dialup services under a contract entered into in July 2000. The terms
of this agreement required the Company to pay a $250,000 termination penalty,
and committed the Company to purchasing an additional $750,000 of products
and/or services from AT&T Corp. before March 1, 2002.

         In July 2001, the Company entered into an agreement with Genuity
Solutions, Inc. that released the Company from its obligations to purchase
Internet dialup services under a contract entered into in July 2000. The terms
of this agreement committed the Company to purchasing an aggregate of $2.0
million of products and/or services from Genuity before July 31, 2003.

         The Company has continuing material commitments under several contracts
related to its discontinued business, including approximately $3.4 million under
a facility lease expiring in 2005.

ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
         FINANCIAL CONDITION.

         This report, including the discussion in Management's Discussion and
Analysis of Results of Operations and Financial Condition, contains trend
analysis and other forward-looking statements within the meaning of Section 27A
of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. 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.

                                        9

<PAGE>

         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.

         Actual results could differ materially from those set forth in such
forward-looking statements as a result of the "Factors Affecting Future
Operating Results" and other risks detailed in this report and our other reports
filed with the Securities and Exchange Commission. 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.

Overview

         From our organization in 1999 through 2000, we primarily offered
consumers Internet access through devices commonly known as Internet appliances,
which we also marketed and sold to our customers. However, in the first quarter
of 2001, we changed our strategic focus and have now substantially exited this
consumer business. We are now developing 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. In February 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.

         Also 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. To date, we have received approximately $7.7 million in payments
from EarthLink, which constitutes virtually all of the funds we expect to
receive from the transfer to EarthLink.

         After the transfer of most of our service obligations to EarthLink, we
continued to provide certain services to approximately 7,000 customers. We have
the obligation to provide these services to approximately 3,000 customers of
third parties through November 2001. After that, we expect to discontinue
providing any services directly to consumers. As of June 30, 2001, we
discontinued providing Internet access service to our remaining customers to
whom we were no longer obligated to provide such service. We have terminated our
obligations under two network services agreements and anticipate terminating or
restructuring other agreements, including the lease for a facility we are not
using, 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 are continuing to operate our
Internet portal, but we expect the EarthLink customers to be transitioned to a
portal provided by EarthLink in the future. In general, we are exiting our
consumer-focused business entirely, but will continue to have significant
obligations and potential liabilities relating to this business.

         As a result of our change in business strategy, the results of
operations for all prior periods presented have been restated for the effect of
discontinued operations related to the Internet appliance and service business.

                                       10

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Results of Continuing Operations

Revenues

         We are still in the development stage of our business initiative. We
are currently developing prototype products and software. We have no sales
contracts with potential customers for our anticipated suite of products and
services. We had no revenue from continuing operations for any period during
2001 or 2000.

Expenses

         Research and development expenses. Research and development expenses
from continuing operations consist of salaries of employees in this area who
remained with us to assist with our broadband initiative, salaries of new
employees in this area and other expenses relating to that initiative. Research
and development expenses from continuing operations totaled approximately $3.5
million and $800,000 for the quarters ended September 30, 2001 and 2000,
respectively, including stock-based compensation totaling approximately $151,000
and $171,000, respectively. Research and development expenses from continuing
operations totaled approximately $8.2 million and $3.4 million for the nine
months ended September 30, 2001 and 2000, respectively, including stock-based
compensation totaling approximately $465,000 and $488,000, respectively.
Research and development expenses increased in 2001 due primarily to an increase
in employment costs and expenses incurred in the development of product
prototypes.

         Sales and marketing expenses. Sales and marketing expenses consist
primarily of salaries of employees responsible for the marketing efforts for our
initial suite of products and services, and related expenses for our launch
activities. Sales and marketing expenses from continuing operations totaled
approximately $400,000 for the three months and nine months ended September 30,
2001. These expenses compare with no expenses incurred during the three months
and nine months ended September 30, 2000. The increase is the result of the
initiation of marketing efforts of our current strategic initiative during the
third quarter of 2001.

         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 $1.7 million and $1.2
million for the quarters ended September 30, 2001 and 2000, respectively,
including stock-based compensation totaling approximately $135,000 and $59,000,
respectively. General and administrative expenses from continuing operations
were approximately $5.8 million and $6.9 million for the nine months ended
September 30, 2001 and 2000, respectively, including stock-based compensation
totaling approximately $256,000 and $4.5 million, respectively. The increase in
these expenses other than stock-based compensation was primarily a result of an
increased number of employees, an increase in corporate facility costs and an
increase in depreciation expense on corporate assets. Stock-based compensation
decreased significantly for the nine months ended September 30, 2001 due to the
termination or resignation of administrative, finance and information systems
personnel and the termination of their options, and the granting of certain
vested options during the nine months ended September 30, 2000, that had
exercise prices below the fair market value of our common stock at the date of
grant.

         Interest income. Interest income, net of interest expense, totaled
approximately $550,000 for the quarter ended September 30, 2001, as compared to
approximately $1.9 million for the quarter ended September 30, 2000. Interest
income, net of interest expense, totaled approximately $2.3 million for the nine
months ended September 30, 2001, as compared to approximately $4.6 million for
the same period in 2000. The decrease in interest income is due to a general
decrease in the average cash balances in

                                       11

<PAGE>

interest-bearing accounts we held at banking and financial institutions
throughout the entire first nine months of 2001, as well as a general reduction
in the average yield earned on invested funds.

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. At that time, 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. In February 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.

         Also 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. To date, we have received approximately $7.7 million in payments
from EarthLink, which constitutes virtually all of the funds we expect to
receive from the transfer to EarthLink. After the transfer of most of our
service obligations to EarthLink, we continued to provide certain services to
approximately 7,000 customers. We have the obligation to provide these services
to approximately 3,000 customers of third parties through November 2001. After
that, we expect to discontinue providing any services directly to consumers. As
of June 30, 2001, we discontinued providing Internet access service to our
remaining customers to whom we were no longer obligated to provide such service.
We are continuing to operate our Internet portal, but we expect the EarthLink
customers to be transitioned to a portal provided by EarthLink in the future.

         We estimate that we will incur a net loss from the discontinuance of
the Internet appliance and service business totaling approximately $8.0 million.
The loss estimate includes the actual loss incurred during the first nine months
of 2001, but continues to be based upon certain estimates, including the
estimated amounts of any remaining payments by EarthLink, the estimated costs of
operating the Internet appliance and service business until fully discontinued
and estimated costs to terminate or restructure various network service
agreements, facility leases and other contracts and agreements related to this
business. Any differences between these estimates and the actual amounts
incurred in future periods will change the estimated net loss accordingly.

         Net loss from our discontinued Internet appliance and service business
totaled approximately $41.8 million for the quarter ended September 30, 2000.
Net loss from our discontinued Internet appliance and service business totaled
approximately $8.0 million and $118.9 million for the nine months ended
September 30, 2001 and 2000, respectively. The net loss from discontinued
operations for the nine months ended September 30, 2001, includes a reserve for
future estimated losses of $2.2 million and approximately $2.9 million of
revenues from the Internet appliance service business, sales and marketing costs
of approximately $1.2 million, network operation costs of approximately $4.2
million, restructuring charges of approximately $2.5 million, consisting of
costs associated with the closing of a leased facility and approximately
$933,000 of severance costs relating to our reduction in workforce in February
2001. In comparison, the net loss from discontinued operations for the nine
months ended September 30, 2000 includes approximately $5.7 million of revenues
from the Internet appliance service business, sales and marketing costs of
approximately $43.3 million, network operation cost of approximately $19.6
million and loss on subsidized appliance and peripheral sales of approximately
$26.7 million.

                                       12

<PAGE>

         Operating results of the discontinued business during the third quarter
of 2001 were consistent with our estimates established as of the end of the
second quarter of 2001, and as such, we have made no additional changes to the
estimated net loss to be incurred in future periods.

         The decrease in Internet appliance services revenues for the comparable
nine month periods is attributable to the transfer of our Internet customers to
EarthLink during March 2001. The decrease in the loss on subsidized appliance
and peripheral sales is due to our discontinuance of all Internet appliance and
peripheral sales in January 2001. The decrease in sales and marketing costs is
due to a general reduction in sales and marketing personnel and a complete
suspension of all marketing and media campaigns during the first quarter of
2001.

         We have continuing material commitments under several contracts related
to this discontinued business, including approximately $3.4 million under a
facility lease expiring in 2005.

         During the first quarter of 2001, we entered into an agreement with
AT&T Corp. that released us from our obligations to purchase Internet dialup
services under a contract entered into in July 2000. The terms of this agreement
required us to pay a $250,000 termination penalty, and committed us to
purchasing an additional $750,000 of products and/or services from AT&T Corp.
before March 1, 2002.

         In July 2001, we entered into an agreement with Genuity Solutions, Inc.
that released us from our obligations to purchase Internet dialup services under
a contract entered into in July 2000. The terms of this agreement committed us
to purchasing an aggregate of $2.0 million of products and/or services from
Genuity before July 31, 2003.

Liquidity and Capital Resources

         From inception in January 1999 through September 30, 2001, 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 $230.0 million. As of September 30, 2001, we had approximately
$48.2 million in cash, cash equivalents and short-term investments, compared to
approximately $68.1 million as of December 31, 2000. Although we have taken
steps to decrease our operating expenses, our current 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, cash equivalents and short-term investments to meet our needs for at least
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 business model.

         Working capital decreased by approximately $9.8 million, to $43.9
million as of September 30, 2001 from $53.7 million as of December 31, 2000. The
decrease in working capital is primarily the result of losses incurred in both
our continuing and discontinued operations during the past year.

         Net cash used in continuing operating activities was approximately
$20.4 million for the nine months ended September 30, 2001, compared to net cash
provided of approximately $17.6 million for the same period in 2000. The
decrease in cash provided by operating activities is primarily the result of
increased operating losses and a reduction of accounts payable and accrued
liabilities of approximately $8.8 million during the first nine months of 2001,
compared with an increase in accounts payable and accrued liabilities of
approximately $17.3 million during the same period in 2000.

         Net cash provided by investing activities was approximately $18.1
million for the nine months ended September 30, 2001. Net cash used in investing
activities was approximately $71.2 million for the nine months ended September
30, 2000. Cash used in investing activities consists of the purchase of property
and equipment and the purchase, sale and maturity of certain investment
securities.

                                       13

<PAGE>

         Net cash used in financing activities was approximately $91,000 for the
nine months ended September 30, 2001, compared to net cash provided by financing
activities of approximately $178.5 million for the same period in 2000. The
$178.5 million provided during the nine months ended September 30, 2000 includes
approximately $132.7 million of net proceeds from the sale of 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.

         Net cash provided by discontinued operations was approximately $700,000
for the first nine months of 2001, as compared to net cash used of approximately
$122.7 million for the first nine months of 2000. The increase in cash provided
by discontinued operations during the first nine months of 2001 is primarily due
to the receipt of approximately $7.7 million from EarthLink in payments under
the agreement for the transfer of our service obligations relating to most of
our Internet appliance customers, and the discontinuance of our Internet
appliance and peripheral sales in January 2001.

Recent Accounting Pronouncements

         In June 2001, the Financial Accounting Standards Board ("FASB") issued
two new pronouncements: Statement of Financial Accounting Standards ("SFAS") No.
141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible
Assets. SFAS 141 is effective as follows: a) use of the pooling-of-interest
method is prohibited for business combinations initiated after June 30, 2001;
and b) the provisions of SFAS 141 also apply to all business combinations
accounted for by the purchase method that are completed after June 30, 2001
(that is, the date of the acquisition is July 2001 or later). There are also
transition provisions that apply to business combinations completed before July
1, 2001, that were accounted for by the purchase method. SFAS 142 is effective
for fiscal years beginning after December 15, 2001 for all goodwill and other
intangible assets recognized in an entity's statement of financial position at
that date, regardless of when those assets were initially recognized. SFAS 142
requires that an intangible asset that is acquired shall be initially recognized
and measured based on its fair value. This statement also provides that goodwill
should not be amortized, but shall be tested for impairment annually, or more
frequently if circumstances indicate potential impairment, through a comparison
of fair value to its carrying amount. We do not expect the adoption of either
SFAS No. 141 or 142 to have a significant impact on our financial condition or
results of operation.

         In June 2001, the FASB issued SFAS No. 143, Accounting for Asset
Retirement Obligations, which addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. This statement applies to all entities that
have legal obligations associated with the retirement of long-lived assets that
result from the acquisition, construction, development or normal use of the
asset. SFAS 143 is effective for fiscal years beginning after June 15, 2002. We
do not expect the adoption of SFAS 143 to have a significant impact on our
financial condition or results of operation.

         In October, 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, which addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
While SFAS No. 144 supersedes SFAS Statement No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, it
retains many of the fundamental provisions of that Statement. SFAS 144 also
supersedes the accounting and reporting provisions of APB Opinion No. 30,
Reporting the Results of Operations-Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions, for the disposal of a segment of a business. However,
it retains the requirement in Opinion No. 30 to report separately discontinued
operations and extends that reporting to a component of an entity that either
has been disposed of (by sale, abandonment, or in a distribution to owners) or
is classified as held for sale. SFAS 144 is effective for fiscal years beginning
after December 15, 2001 and interim periods within those fiscal years. We do not
expect the adoption of SFAS 144 to have a significant impact on our financial
condition or results of operation.

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<PAGE>

Factors Affecting Operating Results

         There are numerous risks affecting our current business and our
discontinued operations, some of which are beyond our control. These risks
relate to our efforts in transitioning to our current strategic focus, the
launch of our broadband initiative and the discontinuation of our old line of
business. 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 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
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.

         We have a limited operating history and little history operating our
broadband network 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 broadband initiative in November 2000. Our broadband
network solutions are still in the early stage. There are significant risks and
costs inherent in our efforts to undertake this initiative and to transition to
a new business model. These include the risk that we may not be able to develop
a viable product, achieve market acceptance for our line of products and
services or earn revenues from the sale of such products and services, that our
business model 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 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 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 current business.

         The transition to our business model is risky and expensive. We expect
         to incur operating losses through at least late 2002, 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;

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<PAGE>

                .  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 products and
                   service offerings;

                .  uncertainties concerning our strategic direction and
                   financial condition;

                .  our need for telecommunications service providers to launch
                   and maintain services that create a need for the new products
                   and services we are developing;

                .  uncertainties concerning the economy in general, and
                   telecommunications specifically, that may effect capital
                   spending by our potential customers;

                .  the uncertainty of market acceptance of telecommunication
                   services utilizing our developing line of products and
                   services;

                .  our need to introduce reliable products and services that
                   meet the demanding needs of telecommunication 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 business plan.

         Even if our 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 business 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 to our current 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 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 early stages of our
business plan. Therefore, we have not achieved profitability and expect to
continue to incur net losses at least through late 2002. 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 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 business model. It is possible that we will exhaust all available funds
before we reach the positive cash flow phase of our business model.

                                       16

<PAGE>

         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. During the last year, 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 still has a relatively 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 telecommunications
related services remains 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 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 lost certain key personnel who we may need to replace.
Moreover, we may 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 business. If we fail to attract qualified personnel or
retain current employees we need, including our executive officers and other key
employees, 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 product lines is unproven, and may not
         develop as we hope, which could result in our failure to achieve sales
         and profits from our business model.

         Our 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 products and services we are developing, 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 we 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 network solutions do not develop as we
hope, and our products and services do not meet the demand in these markets, we
may never achieve revenues and profits from the sale of our 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. 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 line of products and services, our
         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

                                       17

<PAGE>

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 line of products and services, and our business will
suffer. Also, if we exhaust all available funds before we can fully develop our
line of products and services, we will not have a product or complimenting
services to bring to market, and our business will suffer materially.

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

         Products and services in the markets in which we will 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.

         Any delay in new product and service introductions, or lower than
anticipated demand for the new products and services we are developing, 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 business will suffer.

         The line of broadband products and services that we are developing 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 will 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 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 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, including benefits,
ease of use, ability to work with existing systems, functionality and
reliability, before committing to use our line of products and services.
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 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. As a result of recent economic developments, many of our potential
customers have greatly reduced their capital spending budgets for at least the
remainder of 2001. As a result, there may be a further delay before we can begin
to realize revenues from our current business. 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 line of products and
services, which could materially and adversely affect our business.

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

         Our future revenues and profits, if any, will depend upon the
widespread acceptance and use of broadband enhancement technology by our target
market, and the use of broadband technology as an effective medium of commerce
and communication by the potential customers of broadband service

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<PAGE>

providers. Growth in the use of and interest in broadband access has occurred
only fairly 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
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 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 telecommunications 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 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 telecommunications market may reduce the demand for,
         or price of, our 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 relatively new.
Competition could result in price reductions, fewer customer orders, reduced
gross margin and/or 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,

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<PAGE>

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 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
us, some businesses now require companies like us to post bonds, obtain letters
of credit or otherwise encumber available funds as a pre-requisite for entering
into business relationships with them 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 business due to such
requirements.

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

         Some key components on which we will rely in developing our line of
products and services 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. Our operating
results, financial condition, or relationships with potential customers could be
adversely affected. 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 patent, trademark, trade secret
and copyright law and contractual restrictions to protect the intellectual
property we develop. We have filed several patent applications and applied to
register several trademarks relating to our business in the United States. We
anticipate filing additional patent and trademark applications relating to our
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 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 51% of our outstanding stock as of October 31,
2001. These stockholders, if acting

                                       20

<PAGE>

together, would be able to significantly influence, or actually 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 October 31, 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.

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

         As of September 30, 2001, we had approximately $48.2 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 from time to 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 and companies
in the telecommunications market, 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 more favorable than 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.

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<PAGE>

         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
                   telecommunications 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 line of
                   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;

                .  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 limit 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 most of our service
obligations to EarthLink, we continued to provide certain services to
approximately 7,000 customers. We have the obligation to provide these services
to approximately 3,000 customers of third parties through November 2001. After
that, we expect to discontinue providing any Internet services directly to
consumers. As of June 30, 2001, we discontinued providing Internet access
service to our remaining customers to whom we were no longer obligated to
provide such service. We have terminated our obligation under two network
services agreements and anticipate terminating or restructuring others,
including the lease for a facility we are not using, 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, 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
         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

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<PAGE>

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.

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.

      All of our current contracts are denominated in United States dollars and
we do not currently invest in derivative financial instruments. However, we
invest our excess cash balances in short-term, interest bearing,
investment-grade securities, certificates of deposit or direct or guaranteed
U.S. government obligations, such as Treasury bills, that are subject to market
risk. We believe the effect on our financial position, results of operations and
cash flows as the result of any reasonably likely changes in interest rates
would not be material.

PART II. OTHER INFORMATION.

ITEM 1.  LEGAL PROCEEDINGS.

      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 have filed a
denial and counterclaim against Spyglass for breach of contract. The case is
pending in state court in DuPage County, Illinois.

      We have commenced litigation in Austin, Texas, against Data Exchange
Corporation ("DEX") for actions arising from DEX's refusal to release to us our
remaining inventory of Internet appliances held by DEX. The lawsuit asserts
causes of action for breach of contract and conversion. DEX has denied our
claims and filed a counterclaim asserting for fraudulent misrepresentation,
negligent misrepresentation, breach of contract, unjust enrichment and
declaratory judgment. The action is currently pending in the United States
District Court for the Western District of Texas, Austin Division.

      On July 11, 2001, a purported class action lawsuit was filed against us in
Texas state court in Travis County, Texas on behalf of all persons who purchased
an Internet appliance from us and subscribed to the related Internet service.
The complaint alleges that, among other things, we disseminated false and
misleading advertisements, engaged in unauthorized billing practices and failed
to provide adequate technical and customer support and service with respect to
our Internet appliance and service business. The complaint seeks an unspecified
amount of damages. We believe that the claims have no merit and that we have
meritorious defenses available. We intend to defend this action vigorously.

      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. We could be forced to incur material
expenses with respect to these legal proceedings, and in the event there is an
outcome in any that is adverse to us, our financial position and prospects could
be harmed.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

      On August 9, 2001, we convened a special meeting of the holders of our
common stock. At the meeting, our stockholders approved an amendment to our
Certificate of Incorporation to effect a reverse stock split of all of the
outstanding shares of common stock at a ratio of not less than one-for-three and
not more than one-for-twenty to be determined at the discretion of our board of
directors (with 41,672,357 shares voting for, 290,846 against and 1,300
abstaining). The vote reported does not reflect the effect of the August 20,
2001 reverse stock split whereby every fifteen shares of common stock
outstanding were converted into one share of common stock.

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<PAGE>

ITEM 6.    EXHIBITS AND REPORTS ON FORM 8-K.

      (a)

      3.1  Certificate of Amendment to the Certificate of Incorporation of
           Netpliance, Inc. effective August 20, 2001

      3.2  Certificate of Ownership and Merger of TippingPoint Technologies,
           Inc. into Netpliance, Inc. effective August 20, 2001

      3.3  Restated Certificate of Incorporation of TippingPoint Technologies,
           Inc.

      (b)  On August 20, 2001, we filed a Current Report on Form 8-K regarding
           the effectiveness of the August 20, 2001 reverse stock split whereby
           every fifteen shares of common stock outstanding were converted into
           one share of common stock and the change of our corporate name to
           TippingPoint Technologies, Inc. from Netpliance, Inc.

           No other Reports on Form 8-K were filed during the quarter for which
           this Report is filed.

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                                   SIGNATURES

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

                                          TIPPINGPOINT TECHNOLOGIES, INC.


Date: November 9, 2001                    /s/ Francis S. Webster III
                                          --------------------------------------
                                          Francis S. Webster III
                                          President, Chief Operating Officer and
                                          Chief Financial Officer



<PAGE>

                                  EXHIBIT INDEX

     3.1 Certificate of Amendment to the Certificate of Incorporation of
         Netpliance, Inc. effective August 20, 2001

     3.2 Certificate of Ownership and Merger of TippingPoint Technologies, Inc.
         into Netpliance, Inc. effective August 20, 2001

     3.3 Restated Certificate of Incorporation of TippingPoint Technologies,
         Inc.