<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 June 30, 2001


                                      OR

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

                 For the transition period from ____ to ____.

                       Commission File Number 001-15715


                               NETPLIANCE, INC.


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

           7501B North Capital of Texas Highway, Austin, Texas 78731
                         Telephone No. (512) 681-8300


     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 July 2, 2001.

                      Class                             Number of Shares
                      -----                             ----------------
          Common Stock, $0.01 par value                    60,653,217
<PAGE>

                               NETPLIANCE, INC.

                                     INDEX
<TABLE>
<CAPTION>


                                                                                    Page
                                                                                   Number
                                                                                   ------
<S>             <C>                                                                <C>

PART I.         FINANCIAL INFORMATION:...........................................       1

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

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

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

                Condensed Statements of Cash Flows
                  for the six months ended June 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..............................................      10

     Item 3.    Quantitative and Qualitative Disclosure About Market Risk........      24

PART II.        OTHER INFORMATION:...............................................      24

     Item 1.    Legal Proceedings................................................      24

     Item 4.    Submission of Matters to a Vote of Security Holders..............      25

     Item 6.    Exhibits and Reports on Form 8-K.................................      25

     Signatures..................................................................      26
</TABLE>
<PAGE>

PART I.   FINANCIAL INFORMATION.

ITEM 1.   FINANCIAL STATEMENTS.

                               NETPLIANCE, INC.
                           CONDENSED BALANCE SHEETS
                                  (UNAUDITED)

<TABLE>
                                                                                    June 30,           December 31,
                           ASSETS                                                     2001                2000
                                                                                 -------------        -------------
<S>                                                                              <C>                  <C>
Current assets:
  Cash and cash equivalents and short-term investments....................       $  53,030,181        $  68,123,618
  Prepaid expenses........................................................           1,140,250              290,583
  Other...................................................................             129,523              627,357
                                                                                 -------------        -------------
     Total current assets.................................................          54,299,954           69,041,558
                                                                                 -------------        -------------
Property and equipment, net...............................................           6,403,813            6,774,182
Net assets from discontinued operations...................................             739,452            8,195,579
Other.....................................................................           2,053,577            2,309,277
                                                                                 -------------        -------------
                                                                                 $  63,496,796        $  86,320,596
                                                                                 =============        =============

                  LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
  Trade accounts payable..................................................       $   1,069,928        $   1,284,948
  Accrued liabilities.....................................................           5,550,263           13,382,685
  Current portion of capital lease obligations............................             100,555              637,873
                                                                                 -------------        -------------
     Total current liabilities............................................           6,720,746           15,305,506
                                                                                 -------------        -------------
     Total liabilities....................................................           6,720,746           15,305,506
                                                                                 -------------        -------------

Stockholders' equity:
Common stock..............................................................             606,462              604,948
Additional paid-in capital................................................         304,513,208          311,308,895
Deferred stock-based compensation.........................................          (2,822,571)         (10,081,501)
Stockholder notes receivable..............................................            (652,800)            (652,800)
Accumulated other comprehensive loss......................................            (273,447)            (582,100)
Accumulated deficit.......................................................        (244,594,802)        (229,582,352)
                                                                                 -------------        -------------

     Total stockholders' equity...........................................          56,776,050           71,015,090
                                                                                 -------------        -------------

                                                                                 $  63,496,796        $  86,320,596
                                                                                 =============        =============
</TABLE>

      See accompanying notes to unaudited condensed financial statements.

                                       1
<PAGE>

                               NETPLIANCE, INC.
                      CONDENSED STATEMENTS OF OPERATIONS
                                  (UNAUDITED)

<TABLE>
<CAPTION>
                                                                       Three Months                       Six Months
                                                                          Ended                             Ended
                                                                         June 30,                          June 30,
                                                              ------------------------------    ------------------------------
                                                                  2001             2000             2001             2000
                                                              -------------    -------------    -------------    -------------
<S>                                                           <C>           <C>             <C>            <C>
Operating expenses:
  Research and development..................................  $   2,527,744    $   1,387,606    $   4,666,881    $   2,527,037
  General and administrative................................      1,976,912          437,406        4,084,692        5,676,859
                                                              -------------    -------------    -------------    -------------

     Total operating expenses...............................      4,504,656        1,825,012        8,751,573        8,203,896
                                                              -------------    -------------    -------------    -------------

     Operating loss.........................................     (4,504,656)      (1,825,012)      (8,751,573)      (8,203,896)

Interest income, net........................................        763,740        2,110,855        1,727,029        2,723,774
                                                              -------------    -------------    -------------    -------------
  Income/(loss) from continuing operations..................     (3,740,916)         285,843       (7,024,544)      (5,480,122)
  Discontinued operations:
     Loss from operations of a discontinued business........              -      (41,216,370)      (3,697,206)     (77,136,288)
     Loss on disposal of a discontinued business,
       including provision for operating losses during
       phase-out period.....................................     (2,090,700)               -       (4,290,700)               -
                                                              -------------    -------------    -------------    -------------

     Net loss...............................................  $  (5,831,616)   $ (40,930,527)   $ (15,012,450)   $ (82,616,410)
                                                              =============    =============    =============    =============

Per share data:
  Net loss..................................................  $  (5,831,616)   $ (40,930,527)   $ (15,012,450)   $ (82,616,410)

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

  Net loss applicable to common stock.......................  $  (5,831,616)   $ (40,930,527)   $ (15,012,450)   $(124,705,672)
                                                              =============    =============    =============    =============

  Net basic and diluted loss from continuing operations
  (net of effect of beneficial conversion feature of
  convertible preferred stock) per common share.............  $       (0.06)   $           -    $       (0.12)   $       (0.85)

  Net basic and diluted loss from discontinued operations
  per common share..........................................  $       (0.03)          $(0.68)   $       (0.13)   $       (1.38)
                                                              -------------    -------------    -------------    -------------

   Net basic and diluted loss per common share..............  $       (0.09)          $(0.68)   $       (0.25)   $       (2.23)
                                                              -------------    -------------    -------------    -------------

Weighted average common shares outstanding..................     60,633,242       60,372,263       60,608,854       55,935,817
                                                              =============    =============    =============    =============
</TABLE>

      See accompanying notes to unaudited condensed financial statements.

                                       2
<PAGE>

                               NETPLIANCE, INC.
                      CONDENSED STATEMENTS OF CASH FLOWS
                                  (UNAUDITED)

<TABLE>
<CAPTION>
                                                                                                Six Months
                                                                                                   Ended
                                                                                                  June 30,
                                                                                      ---------------------------------
                                                                                          2001                 2000
                                                                                      ------------         ------------
<S>                                                                            <C>                   <C>
Cash flows from continuing operating activities:
  Loss from continuing operations............................................         $ (7,024,544)        $ (5,480,122)
  Adjustments to reconcile loss from continuing operations to net cash
   provided by/(used in) continuing operating activities:
     Depreciation and amortization...........................................            1,559,465              722,675
     Accretion of investment securities......................................           (1,420,721)            (285,303)
     Loss on sale of fixed assets............................................               28,840                    -
     Stock-based compensation expense........................................              435,082            4,724,397
     Changes in operating assets and liabilities:
       Prepaid expenses......................................................             (849,667)                   -
       Other.................................................................              272,024           (1,531,361)
       Accounts payable and accrued liabilities..............................           (8,047,437)          11,499,200
                                                                                      ------------         ------------
  Net cash provided by/(used in) continuing operating activities.............          (15,046,958)           9,649,486
                                                                                      ------------         ------------

Cash flows used in investing activities:
  Purchases of property and equipment........................................           (1,217,936)          (1,531,502)
  Purchases of investment securities.........................................          (41,437,647)         (68,698,686)
  Investment securities sold.................................................            4,942,639                    -
  Investment securities matured..............................................           29,684,058           10,000,000
                                                                                      ------------         ------------
  Net cash used in investing activities......................................           (8,028,886)         (60,230,188)
                                                                                      ------------         ------------

Cash flows from financing activities:
  Decrease/(increase) in restricted cash related to capital leases...........              481,511           (1,000,000)
  Principal payments on capital lease obligations............................             (537,318)            (456,162)
  Proceeds from issuance of common stock.....................................               30,933          132,722,255
  Proceeds from exercise of stock options and warrants.......................               15,747            1,337,844
  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........................               (9,127)         191,646,223
                                                                                      ------------         ------------
Cash used in discontinued operations.........................................             (548,791)         (80,876,611)
                                                                                      ------------         ------------

Net (decrease)/increase in cash and cash equivalents.........................          (23,633,762)          60,188,910
                                                                                      ------------         ------------

Cash and cash equivalents at beginning of period.............................           27,352,409            9,563,362
                                                                                      ------------         ------------

Cash and cash equivalents at end of period...................................            3,718,647           69,752,272

Short-term investments.......................................................           49,311,534           58,698,686
                                                                                      ------------         ------------
Cash, cash equivalents and short-term investments............................         $ 53,030,181         $128,450,958
                                                                                      ============         ============
</TABLE>

      See accompanying notes to unaudited condensed financial statements.

                                       3
<PAGE>

                         NOTES TO FINANCIAL STATEMENTS

(1)  Incorporation and Nature of Business

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

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

     In January 2001, the Company decided to exit the consumer Internet
appliance and service business due to, among other things, its continued losses
and inability to raise additional capital to fund such business. The
accompanying financial statements have been restated to present the Company's
consumer Internet appliance and service business as a discontinued operation for
all historical periods presented. See Note 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 is suggested
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. The Company reduced
headcount by approximately 38%, primarily in the consumer sales and marketing
departments and in administration. In January 2001, the Company announced its
decision to discontinue its Internet appliance and service business. The Company
terminated all marketing and sales efforts related to the consumer Internet
appliance and service business, although the Company continues to provide
Internet access service to certain customers who had previously purchased an
Internet appliance from the Company. In February 2001, the Company reduced

                                       4
<PAGE>

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. The agreement calls
for EarthLink to pay the Company $175 for each customer who transfers to the
EarthLink service and who remains an EarthLink customer through two monthly
billing cycles. Through June 30, 2001, the Company had received approximately
$6.0 million in payments from EarthLink, which constitutes most 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 4,000 customers of third parties
through November 2001. After that date, the Company expects to discontinue
providing any services 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 Company recorded a charge of approximately $2.1 million during the
second quarter of 2001 related to a leased facility that is not being utilized
by the Company. The loss estimate includes the actual loss incurred during the
first six 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 six 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 six months ended
June 30, 2001:

<TABLE>
<CAPTION>
                                                                                                          Accrual at
                                 Accrual at June 30,        Expensed in           Cash payments          December 31,
                                        2001                   2001                  in 2001                 2000
                                 -------------------    -------------------    -------------------    -------------------
<S>                              <C>                    <C>                    <C>                    <C>
Lease termination costs........        $2,384,100               $2,530,700            $  (440,000)            $  293,400
Employee severance.............            10,000                        -               (252,777)               262,777
Other..........................                 -                        -                (39,384)                39,384
                                 -------------------    -------------------    -------------------    -------------------
Total..........................        $2,394,100               $2,530,700            $  (732,061)             $  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.

                                       5
<PAGE>

     In January 2001, the Company's Board of Directors adopted a proposed new
business strategy for the Company, which resulted in additional reductions in
the Company's workforce totaling 76 employees in 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 June 30, 2001, the
Company had accrued approximately $200,000 for terminations scheduled to occur
after June 30, 2001.

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

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

<TABLE>
<CAPTION>
                                                  Three Months Ended                       Six Months Ended
                                                       June 30,                                June 30,
                                           --------------------------------        --------------------------------
                                               2001                2000                2001                2000
                                           ------------        ------------        ------------        ------------
<S>                                        <C>                 <C>                 <C>                 <C>
Subscription revenue............           $          -        $  1,667,643        $  2,878,489        $  2,299,700
Cost of subscription revenue....                      -          (6,980,776)         (4,222,265)        (11,599,335)
Income/(loss) on appliance and
other peripheral sales..........                      -         (16,770,641)             37,354         (24,433,823)
Stock-based compensation........                      -            (144,805)             11,900          (1,849,323)
Sales and marketing.............                      -         (15,040,011)         (1,189,193)        (34,809,462)
General and administrative......                      -          (2,673,006)           (429,909)         (4,118,567)
Research and development........                      -          (1,274,774)           (343,482)         (2,625,478)
Reserve for future estimated
losses..........................                      -                   -          (2,200,000)                  -
Restructuring charge............             (2,090,700)                  -          (2,530,800)                  -
                                           ------------        ------------        ------------        ------------
Loss from discontinued
operations......................           $ (2,090,700)       $(41,216,370)       $ (7,987,906)       $(77,136,288)
                                           ------------        ------------        ------------        ------------
</TABLE>

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

<TABLE>
<CAPTION>
                                                               June 30,                  December 31,
                                                                 2001                       2000
                                                             ------------                ------------
<S>                                                          <C>                         <C>
Current assets, net..........................                $          -                $  2,837,917
Non-current assets...........................                   6,055,802                   5,357,662
Current liabilities, net.....................                  (5,316,350)                          -
                                                             ------------                ------------

Net assets of discontinued operations........                $    739,452                 $ 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 options and warrants are anti-dilutive.
The calculation of net loss per share excludes potential common

                                       6
<PAGE>

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

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

Restricted Stock

     On May 3, 2001, the Company reserved for issuance 353,850 shares of
restricted common stock ("Restricted Stock") under the Company's stock incentive
plan as a result of an offer by the Company to exchange shares of Restricted
Stock for certain of its outstanding options, on a one-for-five basis. The
shares of Restricted Stock will vest in three equal annual increments beginning
May 3, 2002. Upon certain change of control events, to the extent shares of
Restricted Stock are not fully vested, one-third of the 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"). 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 221,400 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 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. The Series D
were convertible at the option of the holder into shares of common stock at a
conversion ratio of one-for-one.

     On February 4, 2000, the Company entered into an irrevocable agreement to
sell 1,127,675 shares of Series E Convertible Preferred Stock ("Series E") for
$30.00 per share in a private placement. The closing for the sale of these
shares was on February 7, 2000. Net proceeds to the Company approximated $33.8
million.

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

                                       7
<PAGE>

common stockholders by approximately $13.5 million. The Series E were
convertible at the option of the holder into shares of common stock at a
conversion ratio of one-for-one.

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

(5)  Stock Options

Stock Incentive Plan

     In January 2001, the Company granted to non-employee directors options to
purchase an aggregate of 210,000 shares of common stock at an exercise price of
$0.53 per share, which were fully vested at the time of the grant. In the six
months ended June 30, 2001, the Company granted to employees options to purchase
an aggregate of 7,144,074 shares of common stock at exercise prices ranging from
$0.31 to $0.56 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. Included in these employee options were options to purchase 6,739,074
shares of common stock granted to continuing and new employees at exercise
prices ranging from $0.31 to $0.47 per share, which were granted subject to
availability of shares of unreserved common stock in the option plan pool.
Currently, there are outstanding options with the right to purchase
approximately 9,992,328 shares of common stock. In addition, there are reserved
for issuance 352,200 shares of Restricted Stock that are subject to forfeiture.
The Company estimates that it will have approximately 412,741 shares of common
stock available under its stock incentive plan after the employee terminations
scheduled to occur after June 30, 2001.

     The Company has recorded approximately $210,000 and $435,000 of
compensation expense for the three and six months ended June 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. The Company also recorded approximately $138,000 of deferred stock
compensation related to the issuance of shares of Restricted Stock. Also, the
Company eliminated approximately $7.0 million of unrecognized deferred stock
compensation as a result of employee terminations and voluntary departures
during the first six months of 2001. Remaining deferred compensation of
approximately $2.8 million will be amortized over the applicable vesting period.

(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 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
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 answered the suit and denied the Company's claims. The action is
currently pending in the United States District Court for the Western District
of Texas, Austin Division. In addition, DEX has filed suit against the Company
in the United States District Court for the Central District of California, over
the same dispute, asserting claims for fraudulent misrepresentation, negligent
misrepresentation, breach of contract, unjust enrichment, and declaratory
judgment.

                                       8
<PAGE>

     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 it discontinued business, including a $3.5 million commitment under a
facility lease expiring in 2005.

(7)  Subsequent Events

     On June 7, 2001, at a hearing before a Nasdaq Listing Qualifications Panel
to determine if the Company's common stock would continue to be listed on the
Nasdaq National Market, the Company, among other things, indicated its
willingness to effect a reverse stock split, pending stockholder approval, to
increase the market price of the Company's common stock. On August 9, 2001, the
Company held a special meeting of its stockholders, at which the stockholders
approved a proposal to amend the Company's certificate of incorporation to
effect, at the discretion of the Company's Board of Directors, a reverse stock
split of the outstanding shares of the Company's common stock at a ratio of not
less than one-for-three and not more than one-for-twenty, with the Company's
Board of Directors having the authority to determine which ratio within this
range to implement. Immediately following the special meeting, the Company's
Board of Directors held a meeting and determined to implement a reverse stock
split at a ratio of one-for-fifteen, to be effective on August 20, 2001.

     The reverse stock split will not affect the par value of the Company's
common stock. As a result, on August 20, 2001, the stated capital on the
Company's balance sheet attributable to the Company's common stock will be
reduced by approximately $566,031, and the additional paid-in-capital account
will be credited with the amount by which the stated capital is reduced. The
Company anticipates that, as a result of the reverse stock split, the per share
net income or loss and net book value of the Company's common stock will
increase because there will be fewer shares of common stock outstanding. As a
result of the reverse stock split, the number of issued and outstanding shares
of the Company's common stock will be reduced from approximately 60.7 million
shares to approximately 4.1 million shares.

     On August 9, 2001, the Company's Board of Directors also authorized
changing the name of the Company to TippingPoint Technologies, Inc. The name
change will be effected on or before August 20, 2001 through a "short form"
merger with a wholly owned subsidiary of the Company with that name. The Company
has applied to change its trading symbol on the Nasdaq National Market to TPTI.

                                       9
<PAGE>

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.

     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

     Since our organization in 1999, we have primarily offered consumers
Internet access through devices commonly known as Internet appliances, which we
also marketed and sold to our customers. However, in the first quarter of 2001,
we changed our strategic focus and are exiting this consumer business. We are
now developing a business plan to launch a hardware and software offering
designed to enable broadband service providers to provide premium services over
their telecommunications networks.

     In November 2000, we began shifting our business model to focus on
providing broadband infrastructure and services and away from our consumer
Internet offering. In connection with this shift in focus, we restructured our
operations. We reduced our headcount by approximately 38%, primarily in our
consumer sales and marketing departments and in administration. In January 2001,
we terminated all marketing and sales efforts related to our consumer Internet
appliances, although we continued to service customers who had previously
purchased our Internet appliances. 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. The
agreement calls for us to receive payments from EarthLink at a rate of $175 for
each of our customers who transferred to the EarthLink service and who remain an
EarthLink customer through two monthly billing cycles. To date, we have received
approximately $6.0 million in payments from EarthLink, which constitutes most of
the funds we expect to receive from the transfer to EarthLink.

                                       10
<PAGE>

     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 4,000 customers of
third parties through November 2001. After that date, we expect to discontinue
providing any services 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 an
EarthLink portal in the future. In general, we are in the process of exiting our
consumer-focused business entirely, but will continue to have significant
obligations and potential liabilities relating to this business.

     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.

Results of Continuing Operations

Revenues

     We are still in the development stage of our initiative. We are currently
developing a prototype to test the feasibility of our new business plan. We are
also developing new software for our planned products. We have no sales
contracts with potential customers for our suite of potential products and
services. We had no revenue from continuing operations for the three and six
months ended June 30, 2001 and 2000.

Expenses

     Research and development expenses. Our research and development expenses
from continuing operations consist primarily of salaries of employees in this
area who remained with us to assist in developing our broadband initiative, and
other expenses relating to the development of that initiative. Research and
development expenses from continuing operations totaled approximately $2.5
million and $1.4 million for the quarters ended June 30, 2001 and 2000,
respectively, including stock-based compensation totaling approximately $147,000
and $188,000, respectively. Research and development expenses from continuing
operations totaled approximately $4.7 million and $2.5 million for the six
months ended June 30, 2001 and 2000, respectively, including stock-based
compensation totaling approximately $314,000 and $317,000, respectively. Our
research and development expenses increased in 2001 due primarily to an increase
in employment costs and depreciation expense on development equipment.

     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. Our general and administrative expenses from
continuing operations were approximately $2.0 million and $400,000 for the
quarters ended June 30, 2001 and 2000, respectively, including stock-based
compensation totaling approximately $63,000 and $50,000, respectively. Our
general and administrative expenses from continuing operations were
approximately $4.1 million and $5.7 million for the six months ended June 30,
2001 and 2000, respectively, including stock-based compensation totaling
approximately $120,000 and $4.4 million, respectively. The increase in these
expenses that do not include 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 six months ended June 30, 2001 due to the
termination or resignation of administrative, finance and

                                       11
<PAGE>

information systems personnel and the termination of their options that had
exercise prices below the fair market value of our common stock at the date of
grant.

     Interest income. Our interest income, net of interest expense, totaled
approximately $800,000 for the quarter ended June 30, 2001, as compared to
approximately $2.1 million for the quarter ended June 30, 2000. Interest income,
net of interest expense, totaled approximately $1.7 million for the six months
ended June 30, 2001, as compared to approximately $2.7 million for the same
period in 2000. The decrease in interest income is due to a general decrease in
the average cash balances in interest-bearing accounts we held at banking and
financial institutions throughout the entire first six months of 2001.

Discontinued Operations

     We have experienced operating losses since inception as a result of selling
our Internet appliance at a significant loss, trying to build and support our
Internet service offering for our Internet appliance customers and trying to
expand our customer base. In November 2000, we shifted our business model to
focus on providing broadband infrastructure and services and away from our
consumer Internet offering. In connection with this shift in focus, we
restructured our operations. We reduced our headcount by approximately 38%,
primarily in the consumer sales and marketing departments and in administration.
In January 2001, we announced our decision to discontinue our Internet appliance
and service business. At that time, we terminated all marketing and sales
efforts related to the consumer Internet appliance and service business,
although we continued to service customers who had previously purchased an
Internet appliance from us. 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. The agreement requires EarthLink to pay us $175 for each of our
customers who transferred to the EarthLink service and who remain an EarthLink
customer through two billing cycles. To date, we have received approximately
$6.0 million in payments from EarthLink, which constitutes most 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 4,000 customers of third parties through November
2001. After that date, we expect to discontinue providing any services 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 estimate that we will incur a net loss from the discontinuance of the
Internet appliance and service business totaling approximately $8.0 million. We
recorded a charge of approximately $2.1 million during the second quarter of
2001 related to a leased facility that is not being utilized by us. The loss
estimate includes the actual loss incurred during the first six 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 $2.1 and $41.2 million for the quarters ended June 30,
2001 and 2000, respectively. Net loss from our discontinued Internet appliance
and service business totaled approximately $8.0 million and $77.1 million for
the six months ended June 30, 2001 and 2000, respectively. The net loss from
discontinued operations for the quarter ended June 30, 2001 includes a reserve
for costs associated with the closing of a leased facility of $2.1 million. The
net loss from discontinued operation for the six months ended June 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

                                       12
<PAGE>

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 six months ended June 30, 2000
includes approximately $2.3 million of revenues from the Internet appliance
service business, sales and marketing costs of approximately $34.8 million,
network operation cost of approximately $11.6 million and loss on subsidized
appliance and peripheral sales of approximately $24.4 million.

     Except for the additional facility restructuring charge, operating results
of the discontinued business during the second quarter of 2001 were consistent
with our estimates established as of the end of the first quarter of 2001, and
as such, we have made no other material changes to the estimated losses to be
incurred in future periods.

     The increase in Internet appliance services revenues for the comparable six
month periods is attributable to an increase in the number of subscribers to
approximately 55,000 during the first quarter of 2001, as compared to
approximately 44,000 as of June 30, 2000. 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 a $3.5 million commitment 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 June 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 June 30, 2001, we had approximately $53.0
million in cash, cash equivalents and short-term investments, compared to
approximately $128.5 million as of June 30, 2000. Although we have taken steps
to decrease our future operating expenses, our new strategic focus will require
significant capital to fund operating losses, research and development expenses,
capital expenditures and working capital needs until such time as we achieve
positive cash flows from operations. We estimate that we have adequate cash to
meet our needs for the next 12 months. We cannot give any assurance that any
additional financing will be available, that we can ever achieve positive
operating cash flows or that we will have sufficient cash from any source to
meet our needs. It is possible that we will exhaust all available funds before
we reach the positive cash flow phase of our proposed business model.

     Working capital decreased by approximately $65.1 million, to $47.6 million
as of June 30, 2001 from $112.7 million as of June 30, 2000. The decrease in
working capital is primarily the result of losses incurred in both our
continuing and discontinued operations during the past year.

                                       13
<PAGE>

     Net cash used in continuing operating activities was approximately $15.0
million for the six months ended June 30, 2001, compared to net cash provided of
approximately $9.6 million for the same period in 2000. The decrease in cash
provided by operating activities is primarily the result of a reduction of
accounts payable and accrued liabilities of approximately $8.0 million during
the first half of 2001 and an increase in accounts payable and accrued
liabilities of approximately $11.5 million during the first half of 2000.

     Net cash used in investing activities was approximately $8.0 million and
$60.2 million for the six months ended June 30, 2001 and 2000, respectively.
Cash used in investing activities consists of the purchase of property and
equipment and the purchase, sale and maturity of certain investment securities.

     Net cash used in financing activities was approximately $9,000 for the six
months ended June 30, 2001, compared to net cash provided by financing
activities of approximately $191.6 million for the same period in 2000. The
$191.6 million provided during the six months ended June 30, 2000 includes
approximately $132.7 million of net proceeds from the sale of 8,000,000 shares
of our common stock in our initial public offering and approximately $58.9
million of net proceeds from the private sale of shares of our preferred stock.

     Net cash used in discontinued operations was approximately $550,000 for the
first six months of 2001, as compared to approximately $80.9 million for the
first six months of 2000. The increase in cash provided by discontinued
operations during the first six months of 2001 is primarily due to the receipt
of approximately $6.0 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.

Factors Affecting Operating Results

     There are numerous risks affecting our proposed business and our
discontinued operations, some of which are beyond our control. These risks
relate to our efforts in transitioning to our new strategic focus, the launch of
our new broadband initiative and the discontinuation of our old line of
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 broadband solutions in order to meet customer
demand patterns in the telecommunications industry. Inherent in this process

                                       14
<PAGE>

are a number of factors that we must successfully manage if we are to achieve
positive future operating results in the future. Potential risks and
uncertainties that could affect our operating results and financial condition
include, without limitation, the following:

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

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

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

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

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

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

          . reliance upon unproven products and technology;

          . our unproven and evolving business model;

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

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

          . the effect of competitive pressures in the marketplace;

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

          . uncertainties concerning our strategic direction and financial
            condition;


                                       15
<PAGE>

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

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

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

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

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

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

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

     As a result of our reorganization, it is extremely difficult to forecast
our future financial performance. We are now in the initial stages of pursuing a
new business plan. Therefore, we have not achieved profitability and expect to
continue to incur net losses at least through 2001. We expect to incur
significant research and development, product development, administrative and
operating expenses in the future. Only if we are able to successfully develop
our proposed products, bring them to market before our competitors and our
target market accepts our solutions will we be able to generate any significant
revenues from our proposed business model. It is possible that we will exhaust
all available funds before we reach the positive cash flow phase of our proposed
business model.

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

     Our future success depends on our ability to attract, hire, train and
retain a number of highly skilled employees and on the service and performance
of our senior management and other key personnel. The loss of the services of
our executive officers or other key employees could adversely affect our
business. Recently, a significant number of our employees have been terminated
in cost-cutting and restructuring activities or voluntarily departed to pursue
other opportunities. Our facilities are located in Austin, Texas, which 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

                                       16
<PAGE>

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

     We have recently lost key personnel who we will need to replace. Moreover,
we will need to hire a number of additional research and development, business
development, support and marketing employees in 2001 and beyond to develop and
grow our proposed business. If we fail to attract qualified personnel or retain
current employees we need, including our executive officers and other key
employees, we may not be able to generate revenues. Our relationships with these
officers and key employees are "at will." Moreover, we do not have "key person"
life insurance policies covering any of our employees.

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

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

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

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

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

                                       17
<PAGE>

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

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

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

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

     If developed, our proposed line of broadband products and services must be
able to be integrated with the third party network and routing devices used by
our potential customers. If our products are unable to integrate with these
third-party technologies, our business 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 broadband service providers use custom-made systems
for their general network management software. Custom-made systems are typically
very difficult to integrate with new infrastructure products, such as the
products we hope to develop for this market.

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

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

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

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

                                       18
<PAGE>

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 planned
            line of products and services;

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

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

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

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

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

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

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

                                       19
<PAGE>

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

     We believe that, due in part to the recent turbulence in the financial
markets and market skepticism about the stability of technology companies like
us, some companies 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 proposed business due to
such requirements.

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

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

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

     We intend to rely on a combination of 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 new broadband solutions business in the
United States. We anticipate filing additional patent and trademark applications
relating to our new 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.

     On August 9, 2001, our Board of Directors authorized changing our corporate
name to TippingPoint Technologies, Inc. The name change will be effected on or
before August 20, 2001 through a "short form" merger with a wholly owned
subsidiary with that name. We anticipate applying for trademark protection
relating to our new name, but we cannot assure you that such protection will be
available or effective.

     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.

                                       20
<PAGE>

     Our continued Nasdaq National Market listing is not assured.

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

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

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

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

     On November 13, 2000 our stock price first closed below $1.00. From the
period of December 1, 2000 through August 9, 2001, our stock price has closed
below $1.00 at the end of each trading day, and on the last trading day of this
period our stock price closed at $0.41. On January 17, 2001, Nasdaq advised us
that our common stock had failed to maintain a minimum bid price of $1.00 per
share, and that we needed to be in compliance with the $1.00 minimum bid price
requirement for a minimum of ten consecutive trading days prior to April 17,
2001 or our common sock would be delisted. On April 18, 2001, we received notice
from Nasdaq that our stock price had failed to maintain the minimum bid price of
at least $1.00 for 30 consecutive trading days, that we had exhausted the
applicable grace period and that our common stock would be delisted on April 26,
2001 unless we appealed such determination and Nasdaq granted us a waiver of
such requirement. Pursuant to the Nasdaq rules, on April 19, 2001, we notified
Nasdaq that we would appeal such determination, and we requested and were
granted a hearing to oppose the delisting before a Nasdaq Listing Qualifications
Panel on June 7, 2001. Our appeal request automatically stayed the delisting
pending the hearing and the determination of the panel. At the hearing, we,
among other things, indicated our willingness to effect a reverse stock split,
pending stockholder approval, to increase the market price of our common stock.
On June 28, 2001, we received a letter from Nasdaq communicating the panel's
determination that our common stock could continue to be listed on the Nasdaq
National Market, provided that on or before August 28, 2001, we evidence a
minimum closing bid price of at least $1.00 a share, and immediately thereafter
maintain a minimum closing bid price of at least $1.00 a share for a minimum of
ten consecutive trading days.

     On August 9, 2001, we held a special meeting of our stockholders, at which
our stockholders approved a proposal to amend our certificate of incorporation
to effect, at the discretion of our Board of Directors, a reverse stock split of
the outstanding shares of our common stock at a ratio of not less than one-for-
three and not more than one-for-twenty, with our Board of Directors having the
authority to determine which ratio within this range to implement. Immediately
after the special meeting, our Board of Directors held a meeting and determined
to implement a reverse stock split at a ratio of one-for-fifteen, to be
effective on August 20, 2001.

     The purpose of a reverse stock split would be to increase the market price
of our common stock. However, the history of reverse stock splits for companies
in similar circumstances is varied. There can be no assurance that the market
price of our common stock will rise in proportion to the reduction in the number
of outstanding shares resulting from the reverse stock split, that the post-
split market price of our common stock can be maintained above $1.00 or that our
common stock will not be delisted from the Nasdaq National Market for other
reasons. If we lose our Nasdaq National Market status, we anticipate that our
common stock would trade in the over-the-counter market, which is viewed by most
investors as a less desirable, and less liquid, marketplace.

                                       21
<PAGE>

     The reverse stock split approved by our stockholders and Board of Directors
     may decrease the aggregate value of our common stock.

     Our Board of Directors, under authority granted by our stockholders, has
determined to implement a one-for-fifteen reverse stock split effective August
20, 2001. As a result of the reverse stock split, the number of issued and
outstanding shares of our common stock will be reduced from approximately 60.7
million shares to approximately 4.1 million shares. The market price of our
common stock is dependent upon our performance and other factors, some of which
are unrelated to the number of shares outstanding. Although the reverse stock
split will not, by itself, impact our assets or prospects, it could result in a
decrease in the aggregate market value of our common stock. If after the reverse
stock split the market price of our common stock declines, the percentage
decline as an absolute number and as a percentage of our overall market
capitalization may be greater than would occur in the absence of the reverse
stock split. The reverse stock split could also negatively impact our common
stock trading price by allowing additional downward pressure on the price as its
relative value becomes greater following the reverse stock split. That is to
say, our common stock, at a new, higher price, has farther to fall and,
therefore, more room for investors to short or otherwise trade the value of our
common stock downward. Furthermore, the reduced number of shares that will be
outstanding after the reverse stock split could significantly reduce the trading
volume and otherwise adversely affect the liquidity of our common stock.

     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 43% of our outstanding stock as of July 2, 2001.
These stockholders, if acting 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 July 2, 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 grow our
     business, which could seriously harm our proposed business. If we raise
     additional funds, our current stockholders may suffer substantial dilution.

     As of June 30, 2001, we had approximately $53.0 million in cash, cash
equivalents and short-term investments on hand, which we expect will meet our
working capital and capital expenditure needs for at least the next 12 months.
We may need to raise additional funds at any time, and given our history, we
cannot be certain that we will be able to obtain additional financing on
favorable terms, if at all. Due to the recent volatility of the U.S. equity
markets, particularly for smaller technology companies and

                                       22
<PAGE>

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 senior to those of our common stock.
If we do not obtain additional funds when needed, we could quickly cease to be a
viable going concern.

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

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

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

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

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

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

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

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

          . 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.

                                       23
<PAGE>

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

     In February 2001, we entered into an agreement with EarthLink, Inc., for
the transfer of our service obligations relating to most of our existing
customers. Approximately 50,000 of our customers were transferred to EarthLink's
Internet service on March 12, 2001. After the transfer of 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 4,000 customers of third parties through November 2001. After
that date, we expect to discontinue providing any Internet services. 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, or after we
have exited the Internet appliance and service business, our future financial
results will suffer.

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

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

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 answered the
suit and denied our claims. The action is currently pending in the United States
District Court for the Western District of Texas, Austin Division. In addition,
DEX has filed suit against the Company in the United States District Court for
the Central District of California, over the same dispute, asserting claims for
fraudulent misrepresentation, negligent misrepresentation, breach of contract,
unjust enrichment, and declaratory judgment.

                                       24
<PAGE>

     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.

     Our stockholders voted on one matter at our annual meeting of stockholders
held on May 8, 2001. Our stockholders re-elected John F. McHale, Michael R.
Corboy, Kevin A. Denuccio, Grant A. Dove, David S. Lundeen, James M. Mansour,
Steven G. Papermaster, Kent A. Savage, Francis S. Webster III and Paul S. Zito
to our Board of Directors. Voting tabulations for the election of the above
directors were as follows:

<TABLE>
<CAPTION>
        Name                          For              Withheld
        ----                          ---              --------
<S>                              <C>                   <C>
John F. McHale                   36,738,117            1,861,760
Michael R. Corboy                36,789,243            1,810,654
Kevin A. Denuccio                36,790,543            1,809,354
Grant A. Dove                    36,789,643            1,810,254
David S. Lundeen                 36,789,843            1,810,054
James M. Mansour                 36,789,243            1,810,654
Steven G. Papermaster            36,789,543            1,810,354
Kent A. Savage                   36,784,888            1,815,009
Francis S. Webster III           36,789,743            1,810,154
Paul S. Zito                     36,790,728            1,809,169
</TABLE>

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

     (a)  None.

     (b)  No Reports on Form 8-K were filed during the quarter for which this
report is filed.

                                       25
<PAGE>

                                  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.

                                 NETPLIANCE, INC.


Date:  August 10, 2001           /s/ Francis S. Webster III
                                 --------------------------------------
                                 Francis S. Webster III
                                 President, Chief Operating Officer and
                                 Chief Financial Officer

                                       26